Labor-intensive industries in middle-income countries: traps, challenges, and the local garment market in Thailand

Abstract

How can labor-intensive industries in middle-income countries avoid the ‘middle-income trap’ and evolve as dynamic industries? This article addresses this question by focusing on the local garment industry in Thailand. Thailand's garment industry became fully integrated into international production networks in the 1980s, and was once among the main drivers of its manufacturing-based export growth. However, with rising wages and labor shortages, there is strong need to upgrade and shift from labor-intensive assembly to higher value-added functions. In contrast to the export-oriented sector, the local garment markets are primarily served by small informal garment suppliers. Nevertheless, some of the suppliers undertake functions that are typically more knowledge intensive, including designing and marketing. In this context, this paper discusses what implications this local-based industry has in overcoming possible middle-income traps, and suggests that domestic oriented policies could play key roles.

Keywords:

• labor-intensive industry
• middle-income trap
• upgrading
• garment industry
• Thailand

• JEL Classifications: L67
• O14
• O53

Acknowledgements

The authors are grateful to Duangsamorn Jatupornpimol (Nok), Jutarat Dangtummachat (Ploy), and Chanon Suwanmontri (Non) for assistance with the interviews with garment wholesalers in the Pratunam and Bobae markets in Bangkok. Non was also instrumental for setting up in-depth interviews with garment suppliers in and around Bangkok. The authors benefited greatly from discussions with and support from Donna L. Doane and Daonoi Srikajon at the initial stages of this research project. The authors also want to thank an anonymous referee for very supportive comments which were highly useful in revising the paper.

Notes

1. Increasingly, garment suppliers in Thailand are producing products for exports under an ‘FOB’ contract, which means that garment suppliers procure input materials such as fabrics and yarn on their own. Functionally, however, there is no significant difference in this form of export production and CMT operation because most of the input materials used in the production are pre-specified by buyers. We therefore do not distinguish between CMT and FOB in this paper.

2. For more details, see Goto and Endo (2014).

3. In Vietnam, the more advanced garment suppliers are increasingly starting to replace the PBS with the UPS. Such suppliers tend to have among the highest productivity in Vietnam's garment industry with relatively skilled workers, or are foreign-invested suppliers.

4. There are two other large markets: the Chatuchak and Samphen (China Town) markets; however, as the former is more oriented towards retail and the latter is more oriented towards textiles, we have focused for our survey on Bobae and Pratunam markets.

5. It should be noted that it was quite common that a wholesaler in one market also had an outlet in the other.

6. From interviews of officials of the Bobae Garment Association.

7. This includes both ‘direct exports’ in which case the wholesaler receives an order by phone or mail and delivers the product to the designated freight forwarder and also ‘indirect exports’ which are sold on the spot to private traders, who arrange their own export logistics. When the quantity traded is reasonably small, the garments are typically hand-carried by such traders.

8. This does not include overhead costs such as the salaries of workers and rents.

Additional information

Funding

Financial support from the Suntory Foundation (FY 2010–2011) is gratefully acknowledged.

Notes on contributors

Kenta Goto

Kenta Goto is an associate professor at Kansai University in Osaka, Japan. His research interests include economic development and global value chains. His recent publications have appeared in international journals including Asian-Pacific Economic Literature, European Journal of Development Research, Global Networks, Journal of Contemporary Asia, Journal of International Development, and in the Journal of the Asia Pacific Economy.

Tamaki Endo

Tamaki Endo is an associate professor at the Faculty of Economics, Saitama University, Japan. Her research interests include the informal economy, urban development, and global value chains. Her main publication is Toshi wo ikiru hitobito (Living with Risk: Precarity & Bangkok's Urban Poor), in Japanese, Kyoto University Press, 2011. An English version will be published in 2014 from NUS and Kyoto University Press.