In 2025, Thailand’s growth rate of real GDP per capita was 2.2 per cent, according to the Bank of Thailand and the Thai Ministry of Finance. Even lower growth is projected for 2026. The problem of low growth is not recent. Since the disastrous Asian Financial Crisis (AFC) of 1997–99, Thailand’s economic performance has steadily worsened.
Having been Southeast Asia’s star economic performer over the decades immediately preceding the AFC, Thailand’s growth rate is now among the lowest in ASEAN. Over the four decades preceding the AFC, the average annual rate of growth of real GDP per person was almost 5 per cent. Since 2000, it has been roughly half that and falling. The share of gross fixed capital formation in Thailand’s GDP has remained roughly half of its pre-AFC level. The immediate cause has been dwindling business investment, driven by the expectation, on the part of Thai businesses, of low rates of return.
Several factors have contributed to business pessimism. As the income growth rate has declined, Thai households have not adjusted their expenditures accordingly. Household debt has skyrocketed and now constrains consumer spending. Demography is also part of the story. Due to steadily falling birth rates, Thailand’s net population growth was slightly negative in 2025, with implications for future labour supply. Migration of unskilled workers from neighbouring Myanmar and Laos has only partially compensated.
Ongoing political uncertainty partially explains low business investment, but political turmoil is nothing new for Thailand. Increased international competition from Chinese manufactured goods is another important factor, but other East Asian countries have faced the same problem and have performed better. Though US President Donald Trump’s 2025 tariffs present an additional problem, Thailand’s growth performance was already poor and, in any case, many of Thailand’s international competitors have been treated more harshly. The appreciation of the Thai baht throughout 2025 has hindered export performance.
But one explanation dominates all others. Successive Thai governments have inadequately prioritised productivity-raising economic reforms. A succession of short-term crises and domestic political turmoil has diverted attention from the country’s crucial long-term issues in favour of ineffective short-term measures, especially economic stimulus packages. Low productivity, not unemployment, is Thailand’s enduring problem. The continuing policy emphasis on economic stimulus ignores that essential fact.
Since World War Two, Thailand has transformed from a poor, heavily rural backwater to a middle-income, semi-industrialised and globalised economy. This transition required market-friendly policy reforms — promoting a stable business environment (not necessarily equivalent to stable politics), relatively open trade and foreign investment policies and public provision of basic physical infrastructure, including roads, ports, reliable electricity, telecommunications and policing. The central policy imperative was to support the market-driven shift from low-productivity agriculture to higher-productivity services and export-oriented manufacturing.
The principal economic driver of this growth process was expansion of the physical capital stock — buildings and machines — raising the productivity of labour, largely financed by private domestic investment. The private financial system facilitated the link between private savings and business investment by lending to firms wishing to invest. Government investment and foreign investment were still important, but secondary.
The process is self-limiting. As labour moves from low-productivity agriculture to more rewarding alternatives, wages rise and the supply of cheap labour is gradually depleted. This is, of course, desirable, but as wages rise, the profitability of labour-intensive activities declines. Rising wages lower the return to investment in physical capital, private investment slackens and growth slows. The frontier for further expansion of labour-intensive export-oriented development moves to other, lower-wage countries.
Development based on abundant cheap labour can raise a country from low income to middle income levels, but not further. Reliance on the cheap labour and private investment mode of development leads to the seldom-understood ‘middle-income trap’.
Escape from the middle-income trap requires addressing a key market failure — underinvestment in human capital. By raising labour productivity, investment in human capital raises the return to physical capital, encouraging greater investment in physical capital as well. But unlike physical capital, investing in people does not generate the collateral required by the private financial system. Individual families invest in the education of their own children, but this is insufficient to resolve the overall underinvestment in human capital.
The problem lies in the quality of primary and secondary education, which Thai scholars have identified as an ongoing problem for several decades. Massive public investment and reform of the antiquated education curriculum is needed. General elections took place on 8 February 2026. It remains to be seen whether the new Thai government has what it takes to address these long-term issues.
Peter Warr is John Crawford Professor of Agricultural Economics Emeritus at the Crawford School of Public Policy, The Australian National University and Visiting Professor of Development Economics at the National Institute for Development Administration, Bangkok.