Thailand : Adjusting to Success: Current Policy Issues

David Robinson, Ranjit Teja, Yangho Byeon, and Wanda Tseng

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1991
• ISBN:
  9781557752215

NONE

Contents

Preface

I. Introduction

II. Overview of Economic Developments Since 1950

A Market-Based Industrial Strategy. 1950–72

External Shocks and Domestic Adjustment, 1973–85

The Boom Years. 1986–90

Policy Challenges for the 1990s

Box 1: A Profile of Thailand

Box 2: A Historical Retrospective

Box 3: Poverty and Income Distribution

Box 4: Environmental Issues

III. Fiscal Adjustment in the 1980s and Beyond

Overview of Adjustment Effort

Medium-Term Issues in Public Sector

Infrastructural Bottlenecks

Tax Reform

Size of Fiscal Surplus

Box 5: Infrastructural Issues

IV. Financial Reform

The Financial System

Financial Institutions

Financial Markets

Conduct of Monetary Policy

Financial Reform

Restructuring Commercial Banks and Finance and Securities Companies

Further Deregulation

Strengthening Prudential Supervision

Developing Financial Instruments and Markets

Improving Payments and Information Management System

Box 6: The 1983 Financial Crisis

V. Trade Policies

Structure of Nominal Tariffs and Effective Protection in the 1980s

Trade Liberalization in 1990 and Beyond

VI. The Economy in a Regional Perspective

Common Policy Issues in the Core Region

Regional Interdependence

Regional Cooperation

Appendices

I. Capital Mobility and Monetary Policy

II. Statistical Appendix

Bibliography

Tables

Section

I.

1. Social Indicators

2. Summary Data. 1985–90

II.

3. Poverty and Income Distribution. 1975–88

III.

4. Accounts or the Central Government, 1980/81–1989/90

5. Estimation of Fiscal Stance and Impulse, 1980/81–1989/90

6. Regional Comparison of Revenue Performance and Tax Rates. 1989

IV.

7. Financial Institutions

8. Size of Primary Markets

V.

9. Tariff Rates and Effective Protection

10. Tariff Structure

11. Structure of Effective Protection

12. Manufacturing Industry Classified by Sales Orientation and Effective Protection Rate (ERP). 1985

VI.

13. Regional Economic Indicators, 1989

14. Regional Trade of Core Developing Countries, 1980–90

15. Foreign Direct Investment in Core Region, 1985–89

16. East Asian Foreign Direct Investment in Core Region, 1989

Appendix

I.

17. Estimations Using the Edwards-Khan Approach

18. Estimates of the Openness Coefficient

19. Estimations Using the Haque-Montiel Approach

II.

20. Domestic Expenditure and Product

21. Investment and Savings

22. Monetary Survey

23. Accounts of the Bank of Thailand

24. Balance of Payments Developments

25. External Debt and Debt Service

Charts

Section

II.

1. Selected Economic Indicators, 1953–90

2. Investment and Savings, 1950–90

3. External Developments, 1953–90

4. Indicators of Structural Change, 1950–90

5. Interest Rates and Exchange Rates, 1978–90

III.

6. Central Government Revenue and Expenditure. 1980/81–1990/91

VI.

7. Macroeconomic Trends in Core Region, 1985–90

8. Composition of Trade, 1986–89

9. Pattern of Trade in Core Region, 1985–90

The following symbols have been used throughout this paper:

• … to indicate that data are not available;
• — to indicate that the figure is zero or less than half the final digit shown, or that the item docs not exist;
• – between years or months (e.g., 1990–41 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
• / between years (e.g., 1990/91) lo indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country.” as used in this paper, does not in all cases refer to a territorial entity that is a slate as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

I. Introduction

Thailand’s economic performance over the past several decades is an excellent example of successful development, combining adjustment with growth. The achievements of the 1980s continue this record. Early in the decade, like many other developing countries, Thailand was hit hard by the global recession and the downturn in commodity prices. However, a prompt and pragmatic policy response restored macro-economic balance and poised the economy to take full advantage of the improved international environment by 1986. Since then, spurred by rapid increases in investment and exports, Thailand has experienced a sustained economic boom that is spectacular even by the standards of a region renowned for its economic dynamism. While Thailand’s recent success can be attributed to many factors, three in particular predominate: a commitment to an outward-oriented, market-based economic system; a development strategy centered on the private sector; and a tradition of cautious financial policies.

The success of Thailand’s recent economic performance has, however, led to increasing strains on the economy, manifested in the emergence of infrastructure bottlenecks, a sharp increase in the current account deficit, and a pickup in inflation. The challenge facing policymakers now is how best to sustain the momentum of the economy while keeping demand pressures in check. This in turn will require measures to reduce a variety of structural impediments to growth. In particular, the need for substantial infrastructure! investment in both physical and human capital is widely recognized, and, to support this, a strengthening of domestic savings is required. The deregulation of domestic markets is seen as essential to improve economic efficiency and enhance the potential for growth, particularly in the areas of tax reform, liberalization of the financial system, and tariff reduction. At the same time, policymakers have increasingly stressed the need to improve the quality of growth, which has been adversely affected by both environmental problems and a deterioration in income distribution. This paper addresses some of these current policy issues.

The next section provides an overview of Thailand’s postwar economic development, outlining the reasons for its economic success and the main policy issues facing the authorities. The paper then focuses on the role of fiscal policy, reviewing the fiscal adjustment of the 1980s and considering the implications of infrastructural investment and tax reform for fiscal policy in the 1990s. Next it discusses plans for liberalization of the financial sector designed to boost domestic savings to support future growth, to enhance its ability to compete in international markets, and ultimately to develop Thailand as a regional financial center. The paper then examines the need for tariff reform to reduce the level and dispersion of effective protection and improve the efficiency of investment. The final section sets Thailand’s economic development in a regional context, assessing both the commonality of experience in Thailand, Indonesia, and Malaysia, and the role that the region has played in these three countries’ recent economic success.

Box 1. A Profile of Thailand

Thailand, literally the “Land of the Free,” is situated in the western part of the Indochinese peninsula, bordered by Myanmar, the Lao People’s Democratic Republic, Cambodia, and Malaysia, The Thai people migrated southward and westward from China around the tenth century A.D., although archaeological evidence indicates that the area has been inhabited almost continuously for the last 20,000 years. With an area of about 513,000 square kilometers—a little smaller than France—the country can be divided broadly into four regions: the cool and mountainous North, comprising a series of steep mountain ranges incised by steep valleys and rivers; the semiarid Northeast; the fertile central plain, chiefly consisting of the Chao Phraya River delta; and the densely forested southern isthmus. The climate is tropical and cool, with high temperatures and humidity: the rainy season is June-October, the cool season, November-February, and the hot season, March-May.

Since 1932, Thailand has been a constitutional monarchy. The monarch, currently King Bhumibol Adulyadej, is the head of state and commander of the armed forces. The head of government is the Prime Minister, appointed by the king on the advice of the National Assembly. The military has traditionally played a major role in Thailand’s political life: in February 1991, the civilian government headed by Prime Minister Chatichai Choonhaven was overthrown in a military coup and replaced by the military-dominated National Peacekeeping Council (NPC). In early March, the NPC appointed an interim government headed by Prime Minister Anand Panyarachun and consisting primarily of civilians, in advance of elections scheduled to be held in the first half of 1992.

Thailand has a population of about 56 million, with population growth averaging about 2 percent a year during the 1980s. Almost one half of the population is Thai, with sizable Lao, Chinese, and Malay minorities: 99 percent of the population is Buddhist, while the remainder includes Moslems, Hindus, Sikhs, and Christians. Despite heavy rural to urban migration, only 19 percent of the population lives in urban areas, of which almost half live in and around Bangkok, now the fourteenth largest city in the world.

Thailand is generously endowed with natural resources. About 40 percent of the total land area is cultivated, and some 29 percent is under forest. Rice remains the staple cash crop, although its dominance has declined in recent years: other major crops include maize, sugar, tapioca, rubber, tobacco, bananas, pineapples, and kenaf (a jutelike fiber). Until the ban on commercial logging (see Box 4), Thailand was also a major producer of timber, particularly teak. Thailand’s mineral resources include tin, brown coal, iron, and manganese, with substantial deposits of sapphires, rubies, and other gems. There are also considerable reserves of natural gas (which now accounts for nearly one third of Thailand’s energy needs) and, to a lesser extent, crude oil.

Thailand’s per capita income of $1,454 (1990) places it in the ranks of lower middle-income countries. Although 60 percent of the population still earns its living from agriculture, growth in recent years has increasingly come from industry and services, which now account for more than 80 percent of GDP. Manufacturing output, formerly dominated by agroindustrial production and textiles, has become increasingly diversified, with especially rapid growth in the production of construction materials, transport equipment, electrical appliances and components, and machinery and equipment. The financial sector, although still relatively underdeveloped, has expanded rapidly; and, with the number of foreign visitors more than tripling, to over 5 million during the 1980s, Thailand has also become an important tourist destination.

Table 1. Social Indicators

Sources: Data provided by the Thai authorities; and World Bank, Social Indicators of Development, 1990.

¹ Over the period 1980–90.

Table 2. Summary Data, 1985–90

Source: Data provided by the Thai authorities.

¹ Including stockbuilding.

² Fiscal year ended September 30.

³ International Monetary Fund, Information Notice System index (1980 = 100).

A Market-Based Industrial Strategy, 1950–72

During the first two decades of its postwar history, Thailand’s economic development was generally very successful. GDP growth averaged 5.2 percent in the 1950s, and. with the adoption of a comprehensive industrialization strategy at the turn of the decade, accelerated to an average 7.4 percent during 1960–72. Thus, despite rapid population growth, real GDP per capita doubled over the period, and the proportion of the population below the poverty line fell dramatically (Box 3). At the same time, inflation remained low, and—at least until the latter part of the 1960s-—the current account deficit remained at a moderate level.

The focus of the authorities’ development strategy during this period was to build up the manufacturing sector. At the same time, investments in irrigation and the transport network contributed to high rates of growth in agricultural output and exports. After a brief—and generally unsuccessful—flirtation with state enterprises in the early 1950s,¹ from 1959 the authorities adopted an industrial strategy based on the private sector. The Board of Investment (BOI) was created to administer a package of investment incentives designed initially to promote import-substituting industries,² while the role of the public sector was limited to providing basic infrastructure. This strategy was in turn supported by conservative financial policies. The government deficit averaged below 2 percent of GDP over the period, while monetary growth was limited to 10–15 percent annually. From 1963 onward, the exchange rate was formally linked to the U.S. dollar, to which it remained fixed—albeit with some changes in the par value—until the mid-1980s. In the tradition of Thailand’s prewar development the economy continued to be very open, with current account transactions generally free, and capital controls essentially limited to outflows: at the same time, despite an increase in tariff protection, trade accounted for an increasing share of GDP.

Box 2. A Historical Retrospective

As of the early 1850s, Thailand was an independent and self-sufficient kingdom with a population of about 5 million. (Until 1939, it was known as Siam, but for simplicity Thailand is used throughout.) The economy, which was essentially agrarian, operated almost entirely on a subsistence basis: farmers and their families “worked just hard enough to supply themselves with the necessities of life, and custom, habit and climate kept their requirements at a modest level” (Ingram (1971), p, 19). Internal trade was mostly local, and carried out through barter, whereas, as Thailand had been virtually closed to the outside world since the seventeenth century, trade with the outside world was both extremely limited and strictly controlled.

Thailand’s modern economic history really began with the accession of King Mongkut to the throne in 1851. In 1855, Thailand and Great Britain signed the Bowring Treaty, under which Thailand agreed to allow free trade in almost all products, including silver and gold; to keep tariffs at or below 3 percent; and to limit export duties. For Thailand, the treaty involved a substantial surrender of sovereignty, particularly in fiscal policy. In contrast to similar treaties imposed on China and Japan at about the same time, it seems to have been signed voluntarily, in part to head off the implicit threat...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I. Introduction
• II. Overview of Economic Developments Since 1950
• III. Fiscal Adjustment in the 1980s and Beyond
• IV. Financial Reform
• V. Trade Policies
• VI. The Economy in a Regional Perspective
• Appendices
• Bibliography
• Tables
• Footnotes