Readings in Thailand's Political Economy

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Readings in Thailand’s Political Economy

READINGS

IN

THAILAND'

S POLITICAL

Edited- by Vichitvong

ECONOMY

na

Pombhejara

First Edition

Bangkok

Printing'

May

Enterprise

38 Chalermkhet 2 Bangkok , Thailand

1978

Co., Ltd.

I

CONTENTS L

j i l

4

i

3

'

-■ i

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A Introduction

f

.

>

t

* xi

J -r

PART I

:

TRENDS IN THE THAI ECONOMY • J •" 1. Recent Performance and Economic Interdependence Amnuay Viravan

,» V

.X 3

-

Ji

.. t

4

2. Basic Trend in the Thai Economy Sura Sanittanont

i 12

3. The Thai Economy 1975 Bangkok Bank

22

4. The Fourth Five-Year National Economic and Social Development Plan Bangkok Bank

30

5. Regional Planning and Development : The 'Case ’of Thailand Phaichitr Uathavikul

?

"

37

6. Thai Development Policy and External Assistance Shigeru Sugitani

60

7. Effects of Population Control and Per Capita Income Yong Hengtrakul Suthiporn Chirapanda

72

PART II

: t

AGRICULTURE : THE ECONOMIC CORNERSTONE ■ ' '

’

8. Comparative Advantage in Rice Production in Thailand Narongchai Akrasanee Atchana Wattawanukit

81

9. Aggregate structures of Production and Domestic Demand for "Rice in Thailand : A Time Series Analysis, 1951-1973 Olarn Chaipravat , (

lo6

s10.. Background

144

to the Introduction of .High Yielding Varieties of Rice in Thailand Sopin Tongpan Delane E. Welsch . ,

11. Agricultural Exportsa and Economic Development : A Case Study of Thailand Sopin Tongpan

1(

161

vi

12. Agricultural Credit in Thailand Prateep Sondysuwan

169

13. Farm Credit in Thailand : An Incomplete Answer Bangkok Bank

175

14. Current Land Reform in Thailand , 1977 Chamlong Attanatho Suthiporn Chirapanda

183 •>

15. Evaluation of the Asian Rice Trade Fund: A Thai Viewpoint Phisit Setthawong, . * ,

193

16. A Model of Thai Rice Export Phisit Setthawong

PART III

:

202 u

INDUSTRY : THE DEVELOPMENT OF A MODERN SECTOR

17. Foreign Investment in Thailand Amnuay‘Vlravan

,

0.4 6.2 7.5 ' ' 16.8 15.1 2.8 1.9 2.2 2.9 3.8 4.6 9.1 9.7 ’ 100.0 100.0 37.01 21.46

♦

* J*

w-

I

c

2.1 16.4 5.7 1.3 6;1 18.2 4.4 2.0 1 4.6 10.6 100.0 41.30 a

1

t

,

's

9

APPENDIX,2

,

'1

BALANCE OF PAYMENTS

* 4

J

I

(USJ5 mn.)M

> 1965

f

Merchandise exports FOB Merchandise imports CIF Trade Balancei Service receipts _ Service payments Net services1 * 1 Net transfers Private Government Net capital Inflow Private sector , Direct Investment j Long-term Ioans & credits Other Public sector ' Loans to central government Loans & credits to State Enterprise t Other Errors & Omissions Change in reserves (Increase = —) Year’s end reserve (net) (Equivalent to months imports

s

1970 «!' t

1972p. u. t 609 1,052 d, ' 4 1 i 732 1,275 1,461 -123 -589 -409 156 485 554 195 89 230 ! 67 -290 f ‘324 ’ •* r.49 38 3.9 . (7.) , (3) (io), (46) (31) (29) 80 118 186 67 146 in €42) (42) ' (71) (50) " (48) ’ (15) (25) (21) (10) ’13 7 40 ’ (14) (21) (21) (32) (-2). f (2) (-13) 31 36 »•< A, -95 128.-177 705 969 t. t n 11.6 8.0) 7.2 i 685

t

;,

** > / *} I til

*

10

APPENDIX 3 FOREIGN EXCHANGE EARNINGS (Average 1970-1972) Merchandise Exports Rice Maize Rubber Tin Tapica Products KENAF Industrial Products O tliers Total

USP mn. 162 97 98 77 64 45 94 208 845

*

Income from Tourism

US)5

116

Income from US military expenditures

US£

200

% 19.2 11.5 11.6 9.2 7.5 5.3 11. 1 24.6 100.0

Debt service as % of foreign exchange earnings

Public debt, incl. Government guaranteed Private debt (non-guaranteed) Total

% 3.4 14.1 17.5

GOVERNMENT FINANCES (1971) %

SOURCE O F REVENUE Income tax Personal Corporate Import duties Export duties Business taxes Excise taxes Others

100.0 12.5 (7.5) (5-0) 27.2 * 2.1 20.6 17.4 20.2

11

J

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>‘

APPENDIX 4

i *

*

GOVERNMENT EXPENDITURES

1

By functional classification as % of total

Economic Services Education Defence Health & Community Services Administration Internal Security Debt Services Others

'

FY 1960

FY 1965

FY 1972

actual

actual

rev. budget

26.3 ’ 17.0 15.7 ' 14.8 6.3 7.7 5.4 6.8

22.7 ,18.8 19.4 11.5 ? 4.6 ’ 6,7 11.8 , 4.5 , I

19.4 17.2 18.4 ' 9.4 8.3 8.8 14.8 3.7

'

(end period) 197 r
i

1

Since the first majon, international monetary crisis of 1971 which resulted in the devaluation and suspension of convertability of the dollar, the world economic order and international financial system evolving around the United States and Western Europe that had been in existence since the end of the last World War has fast crumbled, culminating in the. world-wide, prolonged stagflation touched off by the oil crisis towards the end of 1973. Now that recovery seems to be taking root in the industrial world, a new order is also gradually emerging in the world economy and monetary system. In the emerging new structure, not only will there be new institutions, new codes of behaviour, new rules to the game, and changed relative bargaining positions, perhaps most important of all, there will be a re-alignment of the countries in this region that will reflect new economic and political relationships. The following notable developments will be of great significance to the future economic pattern in this region. 1. The Western military powers are pulling out of Asia, perhaps permanently. Their economic role and importance in this region will decline relatively, if not absolutely. 2. In Asia, the political change in Indochina and the increasing respect for and acceptance of the People's Republic of China by other Asian countries has changed not only the political equilibrium but also gradually changed the economic outlook in this region vis-a-vis the rest of the world. 3. With the withdrawal of the West from Asia, the economic power of Japan looms even larger than in the past. At the same time, Japan seems to attach a high degree of importance to economic cooperation with countries in this region. An article published in "Trends in Thailand II", Institute of Southeast Asian Studies, Singapore, 1976.

13'

4. The non-socialist countries in Southeast Asia have come ,to realize the need for closer cooperation among themselves on the one hand, and with other Asian countries on the other. Thus, the five ASEAN countries have stepped up their efforts to activate ASEAN as a regional organ to promote economic cooperation among member countries. At this juncture, the new ..economic pattern and structure are still in the process of evolution, and a definite shape has not yet emerged. However, one thing seems certain, that is, the past pattern of trans-continental economic relationships between Asian, and European-American countries will gradually be replaced by closer, economic relations among Asian countries. r

1

ASEAN in the Context of Asia .... »d. . Because of their geographical proximity and a similarity in their socio-political and economic systems with more or less similar domestic and international problems, the five regional countries that constitute ASEAN have found it expedient to try to find a common stand to cope with the drastically changed and still ambivalent political-economic environment in the region. Thus government leaders and top officials of these countries have put in much effort trying to inject life and meaning to the long dormant organization of ASEAN. These efforts culminated in the Summit Meeting in Bali in late February 1976. At this juncture, it can be said that ASEAN countries as a group are still in the process of searching for their identity, defining the proper relationship among member countries and vis-a-visother countries in. the region, particularly with Japan — the dominant economic power in Asia, and the major trade and investment partner in the past, present and, perhaps even more so, in the future. ASEAN is also in the process of trying to define what role it ought .to play in. economic policy formulation. All this will take a lot of time and effort, and a lot of vision and foresight from government leaders and top officials of member countries. The following facts about*ASEAN may usefully be borne in mind by those who want to shape ASEAN into a viable and active organ: 1. Historically, the economic and political interdependence among the five ASEAN member countries has been limited. Looking at their present economic structures and future industrialization patterns, there seems to be more competitiveness than complementarity. Whether it is possible to foster a higher degree of interdependence, and how this objective can be achieved is, to say the least, a formidable task. 2. ASEAN countries do not constitute a viable, self-sufficient economic bloc. Each and every country must continue to rely on regional as well as non-regional developed countries for trade, capital, investment, and technology indefinitely. 3. The inherent strength rof ASEAN lines in the fact that as a group, the countries can become a very strong bargaining bloc uis-a-vis developed cpuntriesin order to obtain better terns of trade and higher quality investment projects, and, eyen more, better official economic assistance. It would not be realistic, and can be counter-productive, to set overly-ambitious goals for this still infant organization. Thailand in the ASEAN Context *

/ r

,

Like most ASEAN countries, Thailand is an exporter of raw materials and basic commodities, mainly to industrial countries. While it is basically a rich and fertile country, Thailand compares rather unfavourably with Indonesia, the Philippines, or even Malaysia which has recently discovered oil sources, in tenns of rich forestry .and underground resources, However, it- possesses one unique compensating asset, namely, it is the only food-surplus (more specifically, rice-surplus) country. In its position as a traditional rice supplier to regional countries, particularly Malaysia and Singapore,, it has enjoyed sizeable surpluses in non-oil trade within the region.- The basic, strength of the Thai economy then lies in the, .fact that it is a more balanced economy and is therefore inherently more stable.

14 Basic Trends in the Thai Economy Since I960, the Thai economy has been able to achieve a respectable growth rate compared with other developing countries. Output of agricultural products and manufactured products has been growing at an average rate of about 5-6 per cent and 17-18 per cent respectively. It, is particixlarly significant to note that Thailand has been able to attain a healthy degree of diversification in its export mix, which has been one of the basic strengths in its export performance. While its balance of trade has suffered chronic and huge deficits, it has been able to register a balance of payments surplus for most of the years, thus resulting in a healthy level of international reserves and a fairly strong currency. Until 1973, the price level in Thailand had been remarkably stable. The basic weakness in the Thai economy over the years has been the extremely uneven growth rates between the capital city and the rest of the country, a widening disparity between the rich and the poor. Thre are also the not-so-often-mentioned problems of unrestrained conspicuous consumption amon the city rich, and a very slow increase in land and labour productivity against an alarmingly high fate of population growth. Production and Productivity During the past decade or so, the index for primary production (crops, forestry, livestock and fishery products) has risen to 180.9 in 1974 (1963 — 100), with livestock products showing the lowest rate of increase (11.8) and fishery the highest (329.7), while crops and forestry products are more or less in keeping with the total index. Among the crops, maize, tapioca, and sugar-cane have shown the most spectacular increases, rising by 197, 94, and 206 per cent respectively over the twelve-year period. Paddy, the nation’s most important crop, has shown a mere 29 per cent rise given normal weather conditions. Yield per acre is only about 0.70 — 0.75 ton on a national average basis, and even this can be obtained only under normal weather Conditions. The country’s major mineral product and one of its leading export items, tin concentrate, has registered only a marginal increase of 28 per cent over the past .12 years. On the other hand, lignite or soft coal production has increased three and a half fold over the same period, and fluorite ore has increased from about 50,000 tons in annual output up to the mid 1960’s to over 420,000 tons in 1074. It can be said that in the past, increased output in agricultural production has been brought forth mainly by bringing new land into cultivation. Now the extensive margin for potential agricultural cultivation has more ‘or less been exhausted. Unless fertilizers and other modem inputs are employed to raise land and labour productivity, output increases will drop further from the already modest rates of the past. Timber and forestry- products will probably decline as the country is already facing domestic shortages. The lack of forest preservation, under-reforestation, and unusually high incidence of illegal fellings in the country’s forest are showing the inevitable ‘damaging effects in more ways than one. The so far fast-expanding fishery industry too is reaching its present limits. Unless the industry takes more to deep-sea fishing, the size of the fish-catch is more likely to decline than increase. , * s The country’s primary production can be said to have reached a plateau under the existing resource endowments and technological level. On the other hand, there is still considerable room for further investments in the agricultural sector to raise productivity and output by -expanding its technological frontier. In the manufacturing sector, such export-oriented industries as textiles and sugar-refining were growing at phenomenal rates until the world recession in 1974-75. The textile industry .in Thailand has teen particularly hard-hit by the world recession and political change in the region. However, both the sugar and the'textile 'industries are expected to pick up 'in the near future. Other industries such as cement, iron and*steel are also affected by the economic recession, government price policy, and the slow-down in the government construction programmes resulting from political changes. However, these are also expected to revive as both government and private sector ( construction are gradually picking up. i

15

In the long run, Thailand needs an extensive rationalization in its industrial policy, structure and practices. Greater emphasis must be placed on efficiency and inherent comparative advantage in granting incentives to new industries, rather than fostering industries that only try to cash in on the short-term increase in world demand. Import-substitution industries that survive and thrive only behind the protective wall of tariffs must be exposed t o competition in order to induce greater efficiency. International Trade and Payments Over the years, the foreign sector has been the main source of strength to the Thai economy. It possesses a well-diversified mix of export products which by and large has been enjoying fairly strong demand. It has also been consistently enjoying sizeable surpluses in the services account of the balance of payments, thus offsetting by a large part the chronic and large trade balance deficits. During the 1960’s, the country’s imports were growing at a rate significantly "higher than that of exports, resulting in a very large trade gap. During 1970-1974, exports were growing at a higher rate than imports, despite the trebling and quadrupling of the country’s oil bill. However, exports suffered a negative growth rate in 1975 as a result o a sharp drop in major commodity prices, especially of rice and sugar. Grave concern has often been expressed about the ever-increasing trade deficits. Indeed it is a serious problem and there is little, hope that the trade gap can be closed in the foreseeable future. However, there has been a silver lining (unnoticed most of the. time) to the black cloud of trade deficits: the ratio of trade deficits to total exports has declined from the high ratios of 0.59-0.80 in the late 1960’s to only 0.28-0.35 in recent years. In fact this ratio had reached a peak of 0.86 only in 1970, since when there has been a steady decline. The improvement in this ratio reflects the strong performance of the country’s exports in recent years. In spite of the chronic and large trade balance deficits, the overall 'balance of payments of the country has. registered, surpluses in 12 out of the past 16 years. And of the deficit years, only the 1970 and 1975 balance of payment deficits could be described as large (U.S.$130 and U.S. $140 million respectively). Still, at the end of 1975, the country’s international reserves stood at a healthy level of ,U.S.$1,370 million, or approximately 5.1 months’, worth of imports. While no undue alarm need be' expressed' over the balance of payments deficits which occurred in 1975’, it' is -noteworthy that the Thai balance of payments has been highly volatile and unpredictable, and the factors that go to offset the large trade deficits of the country are varied and many. In the 1960’s, it was the net earnings in the services account, swelled by U.S. military spending, plus the substantial grant in aid from the U.S. In the early 1970’s, the trade deficits were turned into balance of payments surpluses by net earnings on the service' account that was swelled by the civilian tourist boom, mainly from Japan and Europe. Sizeable net capital inflow was also a major factor' in offsetting the- trade deficits. Another highly significant and interesting factor in the balance of payments in both the 1960’s and 1970’s is that there were almost invariably large, positive net errors and omission terms in this country’s favour: In the next few years, unless there is an unexpectedly favourable turn of events, Thailandinay have to expect a few more years of moderate to sizeable balance of payments deficits until exports and tourism again .pick up strength. On the other hand, the foreign sector is strong and resilient and the international reserves sizeable enough to weather a moderate level of payments deficits without affecting the external value of the currency, assuming there will be no capital flight from the country. The fundamental and permanent solution to the balance of trade and payments deficits lies in an improvement in the export performance and selective import promotion depends partly on the world market conditions and demand for exports from Thailand, which is beyond its control. On the other hand, the development and promotion of new export commodities, both agricultural and manufactured products, will represent the country’s own efforts in improving the balance of trade and payments of the country. This in turn will require investments from both the public and the private sectors.

16

Price Level

r

,

Up until 1973, Thailand could boast of a remarkable record of price stability, with the official price index showing an annual rate of increase below 5 per cent. When the rate of inflation in 1973 and 1974, rose respectively to 11.3 and 2 3 per cent, there was graveconcem over the prospect of a continued and runaway inflation developing in Thailand. Fortunately, the fear proved unnecessary as the inflation rate dropped back to about 5 per cent in 1975. Looking at the underlying factors contributing to inflation in Thailand, it can be said that inflation in Thailand is not an unmitigated evil. The price level in Thailand is influenced heavily by the prices of such commodities are rice, textiles, and sugar, which also, happen to be the country’s major exports. Thus a rise in the price of these commodities, though it contributes to the rate of inflation, also swells the country’s export earnings. This explains why the Thai economy was in a satisfactory condition in 1974 despite an, unusually high rate of inflation. Other factors that contribute to inflation are rising import prices, government deficit financing, and structural wage-price adjustments. These factors will weigh more and more heavily in the future and the rate of inflation is expected to be significantly higher than in the 1960’s and early 197O’s. although it is unlikely to be as high as that in 1974. Fiscal and Monetary Policies

,

It is significant to note that since 1973, government budgets have been expanding at a rate much higher than in the past, especially for fiscal years 1974, 1975, and 1976. The rates of government budget expansion during these three years were 21.9, 29.4, and 24.1 per cent respectively. One major factor that has made it necessary for substantial increases in the government budget, particularly for fiscals 1974 and 1975, has been the high rate of inflation which has made the costs of government programmes much higher. Another major factor is that due to changes in the country’s political atmosphere and orientation. The government has come under increasing political pressure to implement various costly market intervention programmes and social welfare programmes, some of which are of dubious value and questionable effectiveness. Regardless of which political party or parties that will come into power in the future, it will be difficult for the government to withstand such pressure, and the government, might find it politically necessary to undertake such programmes. As a result, the government will be forced to transfer resources from private to the public sector, thereby enlarging the size of government in the economy. As.long as the public sector remains less efficient and productive than the private sector, and there is no. indication to the contrary, this could mean serious losses and distortions to the economy and will generate inflationary pressure. In order to minimize such losses and distortions, it is imperative for the government to exercise fiscal self-restraint and.avoid inflationary and wasteful spending. ♦ Traditionally, the monetary authorities of Thailand have been pursuing a conservative but by and large sound and autonomous monetary, policy. However, when the government is under political pressure to increase public expenditure beyond its ability to increase revenue at a comparable, pace, the monetary authorities and the financial system may in turn be pressured into financing the government’s budget deficits beyond prudence and at the’ risk of being inflationary..,/ Here too it is the responsibility of the government and the monetary authorities to exercise self-restraint to maintain fiscal responsibility and monetary autonomy. Labour and Employment The traditionally docile labour in Thailand has become active and even problematic since 1973, stemming from changes in the country’s social and political atmosphere on the one hand, and from the economic pressure of rapidly rising costs of living on the other., As a result, the incidence of strikes and work stoppages has soared from a few score in the early ,1970s to the level of several hundred during 1973 and 1974. Although the number of strikes decreased during 1975, the overall labour problem did not improve substantially until the second half of the year. Looking into the

17 future, the labour problem could be expected to improve as both employers and employees are becoming more accustomed to the new concept and reality of industrial relations. Labour laws and regulations, and the process and procedure of collective bargaining, can be expected to improve over time, thereby reducing tension and violence in labour disputes. However, unemployment,especially graduate unemployment, looms large' as a major problem in Thailand in the next few years. This can be mitigated only through a higher rate of economic growth, which in- turn depends on a revival and acceleration of investments in both the agricultural and the industrial sectors. Investment Climate: Some Concluding Remarks

:

t

From the foregoing analysis, it can be concluded that the Thai economy is basically safe and sound, with a highly resilient and fairly dynamic foreign sector. The major problems it has to confront in the short and medium term future are possible renewed, inflation,' unemployment, balance of payments deficits, and low rates of economic growth due to the absence of major new 'investments. Considering the basic strength of the Thai economy, these problems are by no means Overwhelming nor even formidable. In fact, all these problems can be greatly mitigated or solved if investments can be revived in both primary production and manufacturing, emphasizing export orientation. In the past few years, investments in Thailand have been in the doldrums due to domestic and regional political uncertainty on the one hand, and the world economic recession on the other. The world economy is now gradully recoving, making the external environment conducive to new investments, especially investments in export-oriented projects. However, the regional and domestic political scene remains highly volatile and uncertain. Yet, political stability is by far the most important determinant for the revival of investments in this country. In view of the unpredictability of Thai politics at this juncture of history, it seems that one can do little other than to wait and see. v Beyond the need to restore political stability in the immediate future, the future government must move quickly to define a clear and definite policy towards investments, especially foreign / investment. Clear and rational guidelines must be established for both existing and potential investors. The administrative machinery responsible for the promotion and regulation of private investments must be vastly improved to rid it ofi inefficiency ; red-tape, and confusion. In. Thailand, a steady flow of private investments into productive enterprises is essential to long-term-social, political,':and economic stability.

18 .

u >

TABLE 1:

e

PRODUCTION OF MAJOR COMMODITIES * Paddy (million tons) Maize (million tons) Tapioca roots (million tons) Rubber (thousand tons) Jute & Kenaf (thousand tons) Tin (thousand tons) . Sugar (Thousand tons) Cement (million tons) Cotton fabrics (million sq. yards) Man-made fabrics (million sq. yards)

13.35 1.95 3.10 287 304 407 30 2.63 365 77


1974

1970

‘

a

t

1

s

BALANCE OF PAYMENTS AND INTERNATIONAL RESERVES (million baht) 1

■

Exports, f.o.b; Imports, c.i.f, Trade Balance Net service Unrequited transfers Capital movements? Net errors and omissions' Overall Balance .International reserves (million US dollars)

-

1970

1971

1972

14,270 16,698 26,515 ■' 26,633 -12,245 -9,935 6,036 5,404 1,012 904 2,463 1,736 82 1,257 -2,652 -335

21,750 30,635 -8,885 6,583 816 3,663 1,493 3,991

767

777

969

Source: Bank of Thailand e = estimate

1973* 31,253 42,055 -10,802 6,836 2,969 2,283 -412 864 1,082

1974 49,449 63,305 -13,856 8,088 5,500 6,708 1,572 8,012 1,564

1975

e

47,400 64,200 -16,800 5,400 3,200 5,100 306 -2,794 1,372

19

TABLE 3: VOLUME OF PRINCIPAL EXPORTS (thousand metric tons) » 1971

1970

1975 c

1972

1973

1974

2,112 1,844 318 1,311 255 737 A 408 22 274

849 1,386 390 1,836 264 881 275 23 275

1,046 932 2,032 2,291 335 363 2,245 2,394 246 * 151' 705 •914 '593' 445 * 20 16 200 304

■n

Rice ‘ Maize Rubber Tapioca products • t ■' •

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5

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Regarding the development of industry (issue no. 3), plans are- afoot to disperse industrial plants to the provinces through limiting, theprivileges granted to factories in .the Bangkok Metropolitan area and increasing the privileges.plus .other benefits (including financial credit) to those injhe, provinces. Meanwhile, industry will still be orientated towards import substitution and export promotion. Medium-size, industries that can hire comparatively .large, numbers of labourers, as well as those to process agricultural raw materials will be promoted.- The state will also explore-ways to accelerate co-operation among ASEAN countries to invest in joint ventures. t Thailand suffered huge trade balance deficits averaging Baht 2,367 million per year during the period of the First Plan. The red figures in the country’s trade account more than quadrupled to Baht 16,288 million and Baht 14,200 million yearly through the Second and Third Plans, respectively. Various, measures are therefore grouped under issue no. 4 (exports, imports and the promotion and tourism) with the objective of arresting the trend towards increasing trade deficits; and the more encompassing current account deficits. The target growth rate for commodity exports for the Fourth Plan is set. at 14 per cent per annum and that for commodity imports is limited to 1 1.5 per cent per annum. In the meantime, the number of tourists is projected to growth by .11 per cent yearly while the income derived from them will rise by 19 per cent per year. By the end of the Fourth Plan period (in 1981), the goods' and services balance .will lessen to minus Baht 8,767 million (declining from minus Baht 12,667 million projected for. 1977, the first year .of the Fourth Plan), putting the overall balance at minus Baht 2,482 million, minus Baht 1,508 million, Baht 1,263 million, Baht 3,605 million and Baht, 4,964 million in 1977, 1978, 1979, and 1981 respectively. International reserves will consequently accumulate to USljJ 1,61.7.3 at the, end.of the Fourth Plan. ,& C. J d X 2j

r

TARGETS FOR PRODUCTION OF MAIN AGRICULTURAL PRODUCTS ~ 1 c

T. CROPS 1.1 paddy i main crap second crop 1.2 rubber 1.3 sugar cane 1 .4 maize 1.5 Mung beans 1.6 cassava 1.7 tobacco (Virginia) 1.8 cotton 1.9 soy beans LIO kenaf

unit million tons million tons million tons thousand tons million tons million tons thousand tons million tons thousand tons thousand tons thousand tons thousand tons

*5

4

'“1976 s

14.7 13.4 1.3

1977 -15.4

20.3 2.5 255.9 ' 9.2 37.0 60.7 290.0 190.0

J 4 -0 1.4 407.0 21.9 3.5 292.5 9.8 44.7 63.0 310.0 220.0

770 334

820 336

394.0

Ji,1

’

1

.

1981 7 16.5 14.6 1.9 466.0 28.6 3.8 390.4 10.8 65.5 205.0 431.2 220.0

2. LIVESTOCK 2.1 oxen 2.2 buffaloes Source: NESDB

thousand thousand

1,080 415

36

* Needless to say/ much work,' was involved in preparing and formulating the Fourth Plan. NESDB Secretary-General Kris Sombatsiri describes its preparation as a “from-the-bottom-up” process, i.e., many government and private units in the field were'requested; to' present the problems and needs which they faced. ■ ' » 4 ?

tp

1

>

'■«

»

These were compiled, analysed and utilized in the formulation stages of the Plan. Besides, the country’s vital statistics were; so to say, at NESDB’s finger tips -i- if being a national office that has access to all related government units. The planners’ knowledge of the situation, then, is beyond question. Due to this fact it appears that most if not all of the planners’ efforts are concentrated on correcting undesirable situations, or — on a much smaller scale — maintaining the desirable’ ones. For instance, problems are presented all through, appearing in every chapter of the Fourth Plan, to be followed by policies remedial measures, targets, etc. There is, of course, nothing wrong with a national plan formed to correct undesirable situations as such. But "the fact that it is bent on limiting itself to correction and hardly attempting creation at all leaves much to be desired. The Fourth Plan, in other words, is more negative than positive in its approach, appearing to focus on keeping things on the frack at the expense of failing to build new paths that may lead to new and higher goals. To be sure, measures to move the country out of the current economic doldrums, to reduce the social and income gaps, to correct the imbalance in the country’s foreign economic sector, and other corrective measures are all well thought out. But where are tile blue-prints of plans that will build the just and vigorous society called for by the Prime Minister/ Mr. Thanin Krai• vichien himself, which is the Thai version of what pertains in social democratic countries like Sweden and Norway? Another point that needs careful attention is the question of implementation. As T.S. Eliot said, “between the idea and the reality falls the shadow”. Unless implementation is effective the odds against seeing the plan being realized will be long, so much so that the Plan, irrespective of how well it is conceived, will remain a dead letter. One has often heard comments and reports to the effect that, by reason of politics or set bureaucratic practice, past annual budgets seldom employed the National Economic and Social Development Plans as a guide hl their formulation and allocation of funds. Will the Fourth Plan be similarly neglected? The need for keeping in mind the remarks detailed above seems to be particularly acute now in view of the fact that some important programmes prescribed by the Fourth Plan, viz, direct taxation measures, have been left out of the 1977 budget. The writers of the Fourth Plan, in agreement with most pundits, hold direct taxation to be a necessary means' to narrow the economic gap, to effect fairer redistribution of income, as well, as to form a substantial source of funds for the country’s development and security programmes. The fact that direct taxation and some other prescriptions of the Fourth Plan and not incorporated in. the 1977 budget emphasises that there are missing links between the national planning process and bureaucratic procedures including budgeting.

37

Regional

Planning

and

Development: The Case of Thailand Phaichitr

Uathavikul

t

Interest in the problem of regional growth and, development is not of recent origin, 1 but, until quite recently, the subject has been largely ignored both by students of economic development and by those practitioners who have been actively engaged in development work. This lack of interest is not very surprising, considering the fact that, since the “rediscovery” of the problem of economic development at the end of the Second World War, the attention of most economists and planners has been focused primarily on the urgent need of national development and the problem of the growth disparities in economic welfare among nations. For the past decade or so, there has, however, been a growing realization of the: importance of regional development as an indispensable factor in any successful effort at national development. It is not the place to go into this question in any detail here, since in this paper we are concerned mainly with the problems of regional development in Thailand. Suffice it to say that the principle of specialization according t o comparative advantage is equally important at the regional level as internationally. Furthermore, regional specialization must be coordinated so that it will yield, theoretically at least, optimum benefits for the development of the country as a whole. 2 For these reasons, a national development plan is not likely to prove really satisfactory if it does not include adequate provisions for a “proper” pattern of. regional development. Inequity in regional development may also create serious social and political problems which, in extreme cases, may threaten the very existence of the nation-state itself. These social and political problems can become acute in developing countries with a heterogeneous population where regionalism or even tribalism can prove seriously disruptive to national development efforts. The Thai Government has, for some time now, recognized the importance of regional development as well as the various related problems mentioned above. But attempts to solve these problems have not, up to now, been very systematic. There has been a tendency to deal' with regional problems as they arise on an ad hoc basis. The lack of systematic treatment can readily be seen from the fact that there is no general agreement on regionalization or the areal definitions of individual regions. Regional statistics, so far as they exist; are kept on different bases of areal coverage and can be made comparable only with great difficulties. In this paper, two kinds of regions are used, namely, the Economic Regions and the Development Regions as defined by the National Economic Development Board.3 Several regional development committees have been established fo’supervise the activities of a large number of- government agencies involved in regional development programs. While these committees have, on the whole, been quite effective in dealing*with development problems in their respective regions, it is how generally agreed that even better results may be achieved through systematic regional development planning which includes procedures for the effective implemention of plan provisions. To this end, Northeastern Thailand has been selected as a trial area for testing the effectiveness Of comprehensive regional development planning. Before going on t o discuss government activities in this field, however, it would be useful to examine very briefly the questions of the growing disparity in regional economic well-being, and some major reasons for such a development. A paper presented Japan

Center

at the Third- International

for Area Development

Research,

Symposium on Regional Tokyo,

1970.

Development,

38 Regional Disparity in Production and Income Distribution For the past two decades, the Thai economy has shown, at the national level, a fairly rapid rate of growth. 4 At the regional level, the trends and patterns of development have been, however, much less satisfactory. The long-run o and substantial disparity in growth, and development among regions has persisted and has actually tended* to become even more pronounced. In I960,* the year before the beginning of the First National Economic Development Plan (1961-1966), Northeast Thailand, with over a third of total land area and population, accounted for less than 20%-of land area and less than one-third of total population, was responsible for almost half of the total GDP. And in spite of government planning and development efforts, the gap in income and -production has grown wider. By the end of the First Plan', in 1966,, the share in production’ of the Northeast dropped to less than 18%, while that of the Central Plain increased to over 52%. A similar situation prevailed in Southem Thailand, and the North showed only a very modest gain. The regional percentage distribution of DGP by industrial origin for 1960 and 1966 is shown in Table 1. The dominant position of the Central Plain in the national’economy can immediately be seen from an examination of this table. 5 1

Given the disparity in- regional production, it is not surprising to find a pronounced pattern of inequity in income distribution! among the regions. In 1963, almost 80% of village households- in the Northeast had an income- of less than U.S.$ 150 compared with 27% in the, Central Plain. At the same time, 40% of village households in the Central Plain had an income of over U.S. $300, while there was only 10% of the same income class in the Northeast. The disparity between urban and rural households' are even more pronounced, as can readily be seen from Table 2. Available data on regional production and income distribution indicate that most of the benefits of develop*ment have accrued to higher income classes in urban centers, especially those in the BangkokThonburi area. Without adequate historical data on income distribution and household expenditures, it is not possible To be more explicit about the effects of economic development on the various segments of the population.? / » Major Factors Affecting Growth and Development at the Regional Level A complex of interacting factors, has been at work in shaping the patterns of development in the various regions. In this paper,- we can only -touch on some of the more important variables and salient features of the regional economies., 1. Regional Structure

of Production and Employment

The regional economies, except in the case of the Central Plain, are dominated by the-agricultural sector. Table 3 shows the relative contribution of the various sectors to the GDP of the four regions in 1960 and 1966. Agriculture accounted for approximately one-half of regional GDP in the North and Northeast in 1960, almost 40% in .the South,- but only.27% in the Central Plain. By 1966, the relative contribution of this sector to the Central Plain economy dropped to less than 235, while the shares for the remaining three regions remained almost unchanged. Furthermore, between 1960 and 1966, the Central Plain region recorded substantial advances in such “leading

19.1

25.8 2.8 11.9 17.7 6.4 8.6 18.0 2.7 19.4 17.1 18.0

19,7 4.2 11.8 15.1 8.2 1 1 .9 15.0 4.9 15.3 13.0 14.1 15.6

33.6 34.2

Northeast

33.0 21.8

North I

48.7

34.6 33,5’ 66.9 55.9 76.5 68.4 49.0 87.3 45.6 60.9 53.9

19.9 31.5

Central

f

16.6

19.9 59.5 9.4 11.3 8.9 11.1 18.0 5.1 19.7 9.0 14.0

13.5 12.5

South

16.4

23.6 4.3 10.1 12.8 32.9 11.9 15.9 4.5 12.2 13.1 13.8

33.0 21.4

North

17.8

25.9 1.2 9.9 11.9 4.7 8.9 19.3 3.4 15.0 17.0 17.2

33.6 34.0

Northeast

1966

52.4

35.2 23.0 73.9 65.5 52.0 70.4 50.1 87.2 56.4 60.8 , 55.6

19.9 32.4

Central

'

13.4

15.3 71.5 6.1 9.8 - 10.4 • 8.8 14,7 4.9 16.4 9.1 13.4

13.5 12.2

South

' »

100.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

100.0 100.0

Whole Kingdom

Sources: Data on land areas from Department of Local Administration, Ministry of Interior, Compendium of Local Areas, 1967, Bangkok, 1967. Population data for 1960 from National Statistical Office, Census of Population, 1960, Bangkok, 1962. 1966 population data from registration data of the Department of Local Administration. Estimates of regional GDP by industrial origin were derived from unpublished data of the National income Division income Division, National Economic Development Board.

GROSS DOMESTIC PRODUCT

Land Area Population ’ Industry: Agriculture, Forestry, and Fisheries Mining and Quarrying Manufacturing Construction Electricity and Water Supply T ransportation and Communications Wholesale and Retail TradeJ .1 t Banking, Insurance, and Real Estate Ownership of Dwellings Public Administration and Defense Services

V I

1960

Regional Percentage Distribution

ESTIMATED REGIONAL PERCENTAGE DISTRIBUTION OF LAND AREA, POPULATION, AND GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN, 1960 AND 1966

Land Area, Population, and Industry

TABLE'!:

39

20 32 28 20 100

Under 6,000 baht 6,000-12;000 baht 12,000-24,000 baht Over 24,000 baht

Villages 78 16 5 1 100

Towns 36 34 20 10 100 Under 3,000 baht 3,000-6,000 baht Over 6,000 baht

Annual Income

64 20 16 100

North

79 11 10 100

Northeast

35 28 37 100

East

Village Households Only

Source: Lawrence D. Stifel, “Income Distribution in Thailand," The Economic Journal, Bangkok, Vol. II, No. 1 (1967), p. 128.

-Bangkok-Thonburi

Annual Income Class:

All Households

27 33 40 100

Central Plain

TABLE 2: ESTIMATED FREQUENCY DISTRIBUTION OF HOUSEHOLDS AND VILLAGE HOUSEHOLDS BY INCOME CLASS AND REGION, 1963 (MONEY INCOME ONLY).

35 34 31 100

South

57 22 21 100

All Village

40.

? s a 8

W q

SSS o S g v~

8

"t

O

8**P q o

3

,, cir*co g

1

8 j

J! t

J

[

A ™ q tJOw"OOOCNN u>

[ r ritDiD prg6cnoo qcoco iri § e > r l d o © * < # c n

100.00

0.11 2.52 0.46 0.17 0.78 4.66 2.88

88.42

HUI LI (

1 2

o g

5 S S US 8 5 S 8 g

ra n r. n « o w o o r-OOO WWCO q ; £ c$ S -rt O rt jC m g

.1

a J

1 gigZ-SSSHH I »

8

g

Bangkok, 1 962.

I

1966 JI S ? 8 8 8 8 S “ 5 o ouiui c■> 00

‘Includes insurance, banks, and other financial institutions, “Includes government Services. Sources; 1960 estimates derived from National Statistical Office, Census of Population, I960, 1 9 6 6 estimates based onindepondent projections,

Whole

Whole i

Construction, Repair, and Demolition Electricity, Water, end Sanitary Service Transportation, Storage, and Copimunications Commerce*

1960 1

.Agriculture, Forestry, Hunting; arid Fishing Mining and Quarrying 'Manufacturing

Industry

ESTIMATED PERCENTAGE DISTRIBUTION OF THE EMPLOYED LABOR FORCE BY INDUSTRY AND REGION, I960 AND 1966

O r-

CN rd q q q q q q

ALL INDUSTRIES

Whole Kingdom

T"

TABLE 4:

o o

CD

Unpublished data of the National Income Division, National Economic Development Board.

SSBSPgSSPSS

r*

o

Sendees"

9.69

South

1 ___________

. (*>cS Source: Preliminary data of the National Economic Development Board.

REGIONAL: TOTAL

Social Waifare Public Health Education Special Programs(b)

Agriculture and Water Resources Industry Transportation and Communications Power Commerce

Sectors

100.0

3.1 11.0 1.2

"

»

27.2

14.7 2.2 28,5 11.5 0.6

% Total

action programs, etc.-

33,964

1,063 3,732 384

9,245

5,(104 752 9,690 3,914 180

Amount

Other Regions

TABLE 8 : ESTIMATED REGIONAL* DEVELOPMENT BUDGETS BY SECTOR, 1967-1971

57,520

2,570 6,605 3,550

10,270

11,360 915 17,100 4,970 180

Amount

100.0

4.5 11.5 6.2

17.8

19.8 1.6 29.7 < 8.6 . 0.3

% Total

Whole Kingdom

(million baht)

%7

48 rapid development of the nation in the past two decades. It is, however, not possible to be very explicit about the role played by private enterprise in regional development because of the lack of empirical data. There is very little information about the private sector even at the national level, and the few regional estimates that exist on such basic parameters as private capital formation, receipts, costs and expenditures, and the number and size of new enterprises, 'are either out-of-date, incomplete, or patently unreliable. In this section we can, therefore, say only a few words about the role of private enterprises based on general observation rather than specific information. The first significant point which should be noted with regards to agricultural development is that the fairly rapid diversification in agricultural production that has taken place in recent years has been achieved primarily through private initiatives. It appears that, the widely held belief that peasants in underdeveloped countries are not very responsive to price changes does not really apply to the Thai peasantly. If anything, Thai farmers seem to be overresponsive to short-term price fluctuations. In the case of several cash crops, the problem is not. so much how to persuade farmers to take advantage of rising prices but to prevent them from overproduccing in response to temporary increases in demand. 1 5 The adoption of more efficient methods of production is, however, another matter. Traditionally, expansion of production has been achieved largely by bringing more land under cultivation and employing proportionally more labor. But even here, it is not quite clear whether the real problem is backwardness and inflexibility on the part of the peasants or simply a lack of incentives. It has, for instance, been said that rice farmers use very little fertilizer not because they are ignorant, but because the returns are simply not worth the effort. It is not the place here to discuss the problem of agricultural development which should, in any case, be left to agricultural experts. The foregoing brief discussion has been made simply to indicate that private initiatives may not be lacking even in the agricultural sector. If that is the case, it would seem to follow that the government can achieve substantial results by providing more incentives, especially in the field of better market information, expansion of marketing facilities, and removal of artificial marketing restrictions.

The private sector has also been very active in the development in the non-agricultural sectors in recent years 1 6 was again achieved mainly through private enterprise. This trend is in accordance with the basic government policy to concentrate on the provision of social overhead capital while leaving the private sector to exploit the resulting opportunities. Regional data on the growth of the non-agricultural sectors are not available. .From casual observations, however, it is fairly clear that most of the growth-has been confined to the large urban areas, especially, in the Bangkok-Thonburi area. There has been a growing belief among planners and development workers that this laissez-faire type of policy followed by the government is not adequate for the poorer regions. In order to stimulate more rapid growth, the government may find it necessary to adopt more positive promotional measures in the more backward areas. This basic policy question will be discussed in the section dealing with regional development strategies and problems. 5. International

Cooperation in Regional Development

An examination of Table 9 will indicate the important role played by foreign assistance in the development of the national economy in recent years. In the initial periods of the First Plan, foreign assistance accounted for a large part of total public spending for development purposes (68% and 84% of budget disbursements; in 1961 and 1962 respectively). As the country became more prepared to meet heavy expenditures' for development, the proportion of foreign funds began to decline rapidly to around 30% in later years. This percentage is still a very high one and, in absolute terms, the amount of foreign assistance has -increased steadily (from 917 million baht in FY 1961 to almost 2 billion baht in FY 1968). Of the total 11 billion baht of foreign assistance made

49.21

64.76

84.09

68.14 32.62

1,153.96 765.91 388.05 3,537.51 36.12

1,597.91 842.31 755.60 4,423.35

FY 1966

22.44

1,529.03 797.72 731.31 6,813.60

FY 1967

29.19

1,958.87 921.30 1,037.57 6,711.42

FY 1968

*Doe's not include counterpart funds and special-fund projects Source; Preliminary data of the National Economic Development Board and the Department of Technical and Economic Cooperation.

1,198.95 876.97 321.98 2,436.36

1,385.17 793.37 591.80 2,138.90

1,408.75 953.18 455.57 1,675.21

917.21 540.44 376.77 1,345.97

Foreign Assistance - Loans Grants Budget Appropriation* F o reign Assistance as Percentage of Budget Appriation

FY 1964 , FY 1965

FY 1963

FY 1962

FY 1961

Source of Funds

{million baht)

38.33

1,149.85 6,491.20 4,658.65 29,082.32

FY 1961.— FY 1968 Total

TABLE 9 : ACTUAL DISBURSEMENT OF BUDGET APPROPRIATIONS AND FOREIGN GRANT AND LOANS. , FOR DEVELOPMENT PURPOSES, FY 1961 - FY 1968

64

49

50 available between 1961 and 1968, 58% was in the form of loans and 42% was given as grants-in-aid. These funds have been used mainly for financing the heavy import requirements for machinery, equipment and materials, and the hiring of a large number of foreign technical personnel. While it may be argued that the expenditures on foreign technical experts may not always have been as fruitful as they might have been, there can b e little doubt that the financing of capital-goods import was a crucial element in the implementation of a large- number of development projects. 1 7 As for the regional distribution of foreign loans, it can be seen from Table 10 that there has been a wide disparity in regional shares. The distribution was, however, not a matter of policy because allocations have been made primarily on the merit of individual projects rather than regional criteria. The shares as presented in Table 10 were probably misleading anywayjjecause, in such a case as the Northeast, the low percentage share (8%) should be substantially augmented by a disproportionately high level of grants which have gone into the region. " In conclusion, we may say' that foreign assistance has been a major factor in regional as well as national development in recent years. Whether the assistance has been as effective as it might have been is a question which must, however, be postponed for a later examination because it depends to a large extent on the development strategies of the Thai Government itself. Regional Development and Planning Having examined briefly the pattern >of regional development and some major reasons behind such a pattern, we may now go on to discuss the question of what is being done to accelerate regional growth as a basic ingredient of national development. It would be useful to start the discussion by outlining some of the conceptual problems which should be taken into consideration in any discussion of regional development strategies. Short-term versus Long-term Optimality. Theoretically, it is quite clear that a series of shortterm optimization does not necessarily lead to optimization in the long run. This fact is well understood and generally accepted by planners, but there seems to be a rather strange gap between conceptual understanding on the one hand, and practical application on the other. A great deal of the heated debate going on among'Thai planners at this moment.1 8 is actually concerned with this conceptual problem, although it is not always possible to persuade every one involved that such is the case. It has, for instance, been seriously suggested that the government put a complete moratorium on all new highway and road construction projects unless it can be clearly established that the development of the regional concerned will be adversely affected. Apart from the impracticality of the suggestion, this melodramatic call for a halt in the “wasteful” spending is probably based on an impatient disire to see more visible “output” from the “tremendous inputs” that have gone into certain areas. While this impatience is, to a certain extent, understandable, it is by no means clear that the suggestion is very appropriate or even rational. Certainly new highways and roads are not, in themselves, a sufficient input for rapid development. Other inputs are also needed. But that does not necessarily mean that additional expenditures on highway construction will be useless or wasteful. A good care can, actually, be made that in the long run, one of the most fruitful investments that can be made in a region is the improvement of the transportation system. It is not being argued here that some resources cannot be diverted, with advantage, to investment in some other kind of infrastructure or development programs. But a complete moratorium is entirely another matter. The point of this discussion is that the question of short-and long-run optimality is not an idle academic invention, but a very real practical-problem which cannot be ignored in the design of regional development strategies. Efficiency, Equity and Expediency. Another inevitable conflict which is bound to crop up in the regional allocation of development’ resources is the question of efficiency, regional equity, and political expediency. The problem is really obvious, but here again, it does not seem to have much effect on the thinking of some regional planners.. If one is serious about closing the gap between the poorer and the richer regions, one. shouldbe prepared to sacrifice some efficiency for the sake of a more rapid development of the poorer regions Furthermore, economic growth is not the only

51 North Northeast Central East w

.Total.

.grant

y

Amount (B)

4

V

Si 4 Table 1 - . Public .Development" Expend: Ltures. by Sec tors .and Souirces for the Second Plan-

j Amount (C)

C/DZ

I Agriculture

ft cooperative

Industry & .mining

8,820.

f

Commerce

1,990

83.6

180

100.0

-J

11,650

Transport & communications Power Sub-total Community Facilities

11.6.

765

& Social Welfare

-

2,380

47.9

2,260

45.5

23,795

68.9

2,340

73.1

8,390 1,640

24.3

7,510

16.0

1,120

70.6

-

5,500

83.3

570

K.82S

~

7 6 .(Z 72.9

1,310 330

16.4

1. j

„

»13 .Nepal : .* Viet,— Nam 545 Thailand' r ] a r x 62 1 »f , s. » » y * Sources: OECD, Development f Average 1970(1971 1) > : n* J 451 50 81. ’ ‘ 7

Non ODA

> SubrTotal

653* 400 i 280 o ,1.94 < 14 1 ’22 17 1 ‘ 35 ’ 10’ — i r 7 » 4 2

;

’ ’1 i

2 2 iz

j 860 481 360 310 18 3 x 63 35 49 ' 31 3I .29 22 69 ’ 17 •453 * .'67

Co-operation, 1973 Review mi h

s jrf

167 996 25“ -561 > 103 503 33 > '585 ' 45 187 — 242 30 316 '■64 25 1 10 74 7 36 r 3 ’ 2J 46 3? 28 2 1 70 3 17 ’ f2 462 40 227 'i J o»r* > )

135 80 144 275 170 239 253 • 29 25 5 - * 17 5 1 s

9 ”160 ’ xI

i

it » i

t

’ Total. ? ’

>

Loans

K 1

>

from 1 Multilateral Agencies

‘ i i

i '

As""mentioned above, in contrast with the sharp fluctuation of. grants, Ioans have, been,steadily increasing in both private and public, sectors. We may add one ,more feature of the foreign: assistance to Thailand, that she receives fairly large amount of Joans frofn multilateral agencies, mostly, the World Bank arid recently the. Asian- Development Bank. The bilateral loans including Japanese ones., have been gradually eased in terms and conditions so that some of them charge considerably lower; interest rates than these internal development banks. Therefore, with increasing borrowing from multilateral sources, the softer bilateral loans are, in a sense, used to prevent the decline of the overall' grant -element, which,- as 'no ted before*, was kept at the same1level' of 29% J fpr eightyears. Recently the 'main* supplier of' bilateral loans has come to be Japan, which is performing' this role' directly' in 'joint financing* with* some of the multinational agencies, dr indirectly through coasing f 1 terms. a > ‘1 ' As the receipts *of loans increase ir/fecen years, tile external debt, bflThailand has Been,;also growing steadily. At the encCof 1973,' the extefnal'pubhc debt outstanding, amounted ?to,.8.5' billion,, baht (US$459.1 milfidn). constituting 16% of the total public debt. In*the private sector, the rej ceipfk of loans Have been increasing also with the growing external debt, but the suppliers’ credits1 mrked a sharp decline2 after the phenomenal increase up to 1970. The bulk of the suppliers’ credits are. provided from.JapaneseJsources’ and this decline*coincided' with the* drastic shrinkage of export !) t credits in the composition of Japan’s-outward financial resource, flows. 1 't • j

,

>

)

'I

I

if S j i

I

J

I

1 ' ■! * . 1

.

'

-

‘

' > I* 4

•

. Public .debt service .payments have, climbed- up gradually,, but their ratio, to. the, value of Thai ex- » • ports marked a significant? decline since ,[1969 . This, deb tseryice ratio,, as it is called, was:.4xl%:in 1969, then gradually decreased to/2.5% in, 1973;. .Corresponding' toi the behaviour ofi the private

70 external debt, private debt service payments aspercentage of exports increased from 5.6% in 1965 to the height of 14.5% in 1971, then declined somewhat to 11.5% in 1973. Among twelve Asian countries, for which the statistics are available, the public debt service ratio of Thailand is the lowest, if.Singapore and Viet Nam are excepted. ’It should be noticed that debt service ratios have been rapidly rising for many developing countries and caused deep anxiety among them as well as donor countries. In Asia, five countries exceed 10% level of debt service ratio, and especially for Pakistan and India, it has surpassed 20% line, reaching one-fourth of their exports. So far Thailand has relied not so heavily on external financing for her economic development, and had no serious problems’cdncefning external debt. For the prospect of future debt service payments, the amount of debt outstanding, both disbursed and undisbursed, would seiye as a rough indicator. Among thirteen*Asian countries, Thailand stood ninth in the public indebtedness for external Ioans already disbursed at the end of 1972. Even though the loans committed and undisbursed are added to them,* the amounts of external public debt of these countries reveal nearly the same pattern, Thailand ranking again ninth among them. Incidentally, Thailand’s public debt outstanding comprises relatively large multilateral loans, which reflect the past active part taken by the World Bank in the development financing of Thailand. Most of the Asian countries have received much more bilateral official loans than multilateral ones, the former being three times the latter in the amount of external public debt outstanding inclusive of the undisb'ursed Ioans. In sharp contrast with this, Thailand bilateral public debt amounts to less than one half of multilateral debt outstanding. Since Thailand has been in no serious trouble with external debt and balance of payments deficit, she has not received such types of assistance as refinancing or rescheduling and commodity aid. With the rapidly accumulated debt and balance of payments difficulties, a number of developing countries got into trouble since the middle of the 1960’s. Facing this situation, the donor countries including Japan have increased such types of assistance for those troubled debtors. In case of Japan, they exceed project aid in the committed amount of Yen loans from 1966 to 1970. External loans supplied to Thailand have been concentrated on-infrastructural sectors, especially power sector and transportation, and communications sector. The shift of policy priority from economic to social sectors has not so much resulted in the diversion of external Ioans from economic to social fields as the divergence of loans and grants, the former into infrastructure and the latter to social sectors and agriculture. The dependence of the infrastructural sectors on external loans- for their 'development is very heavy; take the current Third Plan targets as an example, the power sector depends 33.7% of its development expenditures on foreign loans, the transportation and communications sector 25.4%, etc. But this is not the whole story, for project Ioans entail local costs financing within the recipient country. Usually the local counterpart costs are included in the planned development budget. On an average, foreign assistance projects cost roughly as.much local expenses as foreign currency expenditures. As the external assistance is expected to finance 17% of the public, development expenditures as .a whole in the Third Plan, The share of foreign assistance projects including local costs in the total public capital investment amounts to 24%, or almost one-fourth. In some sectors such as power and transportation and communications, this percentage takes much higher proportions. In the case of‘ power, foreign assistance projects account for nearly 70%, which means most of the large development projects in this sector are foreign assistance projects. As for transportation and communication, 'the corresponding figure is 46%. Among the, social sectors, social development contains foreign assistance projects equivalent to one-fourth of its capital expenditure. While most of official loans to Thailand consists of project aid, the bulk of grants received by her are appropriated for technical assistance. This means that ,t he foreign assistance to Thailand is more directly connected with development efforts, and can be expected to be more effective in economic as well as social development than those to other countries. Thailand receives a large amount of technical assistance not only relatively in its proportion to financial assistance but also in absolute volume. According to the OECD statistics, though available only for one year 1971, Thailand

71 stood third in the value of technical assistance from DAC countries, the first and second being Vietnam and Zaire, among the 25 major recipients. Other Asian countries which received substantial technical assistance were Laos, India and Indonesia. While the number of the students and trainees sent for study was the second largest only next to India, Thailand accepted quite a few of education experts, but received many advisers from abroad. As explained above, Thailand is supplied with relatively large amount of grants and technical assistance, but Japan’s foreign aid takes the opposite pattern as a whole, mainly in the form of loans and comparatively less in grants and technical assistance. Therefore, several percentages of Japan’s yen loans so far supplied to developing countries constitute a large proportion of the financial' assistance received by Thailand. On the other hand, Thailand has been one of the largest recipients of Japan’s technical assistance, but seen from the Thai side, it was rather a minor one as compared with the technical assistance from US, UN and other donors until very recent years. Within the total flow of financial resources from Japan to developing countries, ODA accounts for about one-fourth or less, and most of the remaining part consists of private investment and export credit. Thailand has been accepting a large amount of non ODA loans and .encouraged inflow of foreign investment. In these respects, the patterns of both countries have been in accord or, so to speak, consonant with each other, resulting in the rapid expansion of Japan’s suppliers’ credits and investments in Thailand. This might have aroused the impression that export promotion and encouragement of overseas investment -take precedence and the1 genuine efforts of assistance tends to lag behind private interests. In recent years, however, export credit shows a tendency to shrink relatively, and securities investment as well as other official flows expand rapidly. >

of Population

Control on Per Capita Income Yong Hengtrdkul Suthiporn

Chirapanda

"

1

Introduction Needless to say, population explosion has been a subject under increasing attention in the past decade. Most countries have realized the neccj to control their population even up to the extent that financial awards are »paid to families* which forgo additional’ offsprings. From a national viewpoint population growth should be reduced mainly for the benefits of those already living so that their welfare is increased and their quality improved. Additional births will, at' least in' the first 10-15 years, only consume while contributing nothing’ to the total national output. Education,’ health and welfare for them present the society' a serious problem as resources are scarce. The present population must be content with the use of fewer resources if the additional births are to survive. Underdeveloped countries have indeed a far more urgent need to control population growth because, since death occur at a younger age, the benefit that additional population will yield is smaller when they reach a working age. As it may be clear, there are two basic issues involved in the subject of population control. The first issue is centered around the question of whether we should control our population. Doubtless, the degree of the need for population control depends on the strength of economic, social and religious forces that make up the society. Another issue is that, given that population growth is needed, how are we going to accomplish our goal? Here we are confronted with the selection of the means of controlling population- and of the particular segments of population that need be controlled. In our paper, we make no attempt to answer these issues specifically. Primarily, we are interested in the economic aspects of population control, that is, in how certain economic variables are affected if population growth is reduced to some preassigned level. . We shall employ the CoaleHoover model which has been applied to India (1 and 2) to examine possible effects of population control in Thailand. If Yt = national income in real terms in the t th year, then Yt = Yt-I + AY t (1 ) where.At is the increase in real national income in the t th year over the year before. AYt may be expressed as A Y t =

(2)

where AKt is the addition to the capital outlays and R is the capital-output ratio. t

AKj

If R is a function of time, i.e., R = m + nt, then Yt = Yt-k +

(3) j=t-k+l

m+nj

for any integer k> 1. Discussion

Paper No. 2 9 , Faculty 'of

Economics, Thammasaf University,

1972

73 The Coale-Hoover Model Restated.

. ,

*

with the problems of long-run 4 In general, models of economic growth are mainly concerned equilibrium. These models are designed to answer what rate of economic growth would be consistent with growth in capital and labor,, i.e:, to determine the optimal path on which the economy, should be steered in order to sustain full employment of labor at the full capacity level. In .these models, population growth is treated as exogenously given. However, the Coale-Hoover model which we shall briefly describe allows the rate of population growth to play ;an endogenous role. It assumes that the rate of population growth can be altered effectively by central authorities through family-planning programs. The primary purpose of the model is to quantify the effects of a decline in the rate of population growth on macroeconomic variables .such as.national income and per capita, income. As a planning tool, the model can be used to select a particular.rate of population growth under certain conditions, in order to, achieve a specified per capita income goal.

If R is a constant, Yt = Yt-k+ "

' —Ki j=t-k+l

s

(4)

A Kf can be expressed as « = e A Kt Ic + ( c Iwc + ci Iwi) L + (e c Wc + ej Wf)t-15 (1-L)t-15 -> where I c — invesment in capital goods Iwc = welfare outlays attributed to the needs of the current population I w i = welfare outlays attributed to the needs of the current addition to population L = the labor force participation rate. i s

> (5)

' r

' J

l-C !

* U

•

rt< '

Tapioca Products Value i % >

Maize Value % :

m

J

i

t

29.3 » 551* 36.0 ' 59934.0 , 516 35.4 857 35.6 1,388 33.5 1,004 28.4 1,577 .32.8 , t431 27.6 1'647 26:0 1’767 . 17.6 1,969 ‘ 16;8 2,286 19.7 2,085 11.2 I 2,969 19.4 :6,078

t

Sugar Value* % ’

t

-

s

i960 1961 1962 1963 1964 1965 1966 1967 * 1968 1’969 • 1970 7 1971’’ 1972 1973 19.74

-2'370 3,598' 3,240 3,424 4,389 4,334 4,001, 4,65*3 3,775 2,945 2,517 2,909 4,437 -•3,594 9,778

Source:

Bank of Thailand, Monthly Bulletin, V. XVI, No. 4 , April, 1976, , Table III. 7. ' ‘ ,' ' . “

6.4 288 3:3 446 ‘6.0 4.5 5.4 423: 3 4.4 8.9 439 4.5 11.2 53 653 7.8 6 7 6 . 5.2 11.3 644 £4 ; 6 ,726 5.1 1 1, 12.0 5.6 , 7Q72 12.6' ' 876 -6.0 13.3 1 J 1,223’- S . 3 1Z240 13’.2 7.2 9.3 -1,547 ’ 6.9 9.2 ‘ 2,537 7.9 7.6 12.1 J _ 3,836 1 r r »

"

Others Value % •


r

Thailand — Private and Social Profitability .Nominal and Effective Protection, and Domestic Resource Cost of Rice Production in Selected Areas (1973—1974 crop year)

n

DRC in

4 Areas/Te chniques SPa

NSP a

NSPE a

SPFX b / OERb

E?C a DRCa

NPCOa

NPCIa

.45 . . 3 7 .46 ' .40 .41 ,•46 .46 .42 .46 .43 .49 .43 .47 ’.45 .46* .46

7,64 8.21 8.36 8,65 8.78 8.78 .921 9.36'

w co w

ppa

DRC *

4

1

Second Crop

•

6.01 5.84 5.73 5.65 5.52 51'81 5.38 5.22

8.51 8.38 8.24 8.19 8.04 8.45 7.93 7.73

.52 .52 .52 .52 .52 .52 .52 .52

2155 7.78 2.84 8.08 J

6.79 7.10

9.44 *9.84

.52 .52

.80 180

.49 .49

.33 .31

6.7 6.26

.26 .25

Chainat Singburi

2.90 8.16 2.93 8.24

7.20 '' 9.87 7.32 10.02

.52 .52

.83 .88

.49 .49

.30 .29

6.08 6.0

* t ,.24 .23

-Ty, ( BFb ' Chainat Singburi

2.68 7.76 , 6 . 8 1 2.64, 7.70 6.77

r-5 .2 .52

.70 .69

.49 .50

,32 .33

6.54 6.7

.25 26

First Crop f TV, TF b ' Chainat , Singburi, M

y‘ TFb

!

-

.9.42, 9.38 J ji

w

1.82 1.64 1.55 1.48 1.43 1.57 1.28 1.06

Nqhthaburi Chainat Ayudhya Supariburi Chachoengsao Chiengmai Nakom Nay ok Pathumtanee

w w w to W W KJ to

7-08 6.9 6.78 6.75 6.64 6.8 6.51 6.-31

r .91 .89 .88 .89 .85 .81 .86 .89

Source: Appendix Table A-16. , a See text. ‘ TV, TF = Traditional varieties, transplanting farms. MV, RF = Modem' varieties, transplanting farms. TV, BF “Traditional varieties,’ibroadcasting'farms. SPFX = Social price of foreign exchange. OER = Official exchange rate.

Another important set of results shown in Table 3 is the differences between private and social profitability, which were very large in all cases under study. The differences ranged from $5.06 to ty 5.3 1 per kilogram of milled rice, which was about 5 0 percent of the f.o.b. price of rice at the time. The large differences was due to the high f.o.b. price and the export tax of rice. t

4.2 Sensitivity of Domestic Resource Cost The extent of comparative advantage as given by the DRC coefficients depends upon the price of rice, yield per rai, and various cost components. In this section we analyze sentivity of the DRC • coefficients with respect to these variables, using the elasticity concept. Since the price of rice is the most important variable in terms of its instability in the world market, we will demonstrate the relationship between the world price of rice and Thailand s comparative advantage as a major rice exporter.

50

a.

DRC elasticities

We have selected four different situations to illustrate our DRC elasticities, sChainat and Non taburi for dry season crop, and Chainat and Singburi for wet season crop using modern varieties on transplanting farms. The DRC elasticities to be presented ,show the percentage change in that particular variable needed to produce a one percent change in the DRC coefficient. For each variable the lower the value shown, the higher is DRC elasticity with respect to that variable. Table 4 shows variousTJRC elasticity values with respect to the opportunity cost of labor, land, domestic capital, fertilizer, processing and transportation, and to yield per rai. The elasticity of DRC with respect to each variable depends upon the significance of that variable in determining the value 'of DRC. With labor cost and 'the cost of processing and transportation being the largest cost components it can be expected that the elasticity of DRC,with respect to these costs would be highest. This is confirmed by the DRC elasticities ranging from 1.42 to,I.'85 for the cost of labor and 1.38 io 1.73 for processing and transportation cost. The cost of capital, is next in terms of the high degree of elasticity. And DRCs are more .elastic with respect to fertilizer cost than to land cost of the dry season crop and vice versa for the wet season crop. Finally the DRC elasticities were negative and very high with respect to yield per rai, ranging from. -2. 18 to -3.14. < The two provinces of the dry season crop have very similar values of DRC elasticities, with almost the same ranking with respect to each variable beginning with ;the cost of labor, then processing and transportation, yield pcr. rai, capital, fertilizer, rand land. The. DRC elasticity,- with. respect to labor cost in Chainat dry season crop, indicated that if the cost of labor increased by 1.46 percent DRC would increase by 1 percent. A similar reading could be made from the table regardr J ing other variables. ' '* , Both provinces of the wet season crop also have very similar patterns of DRC elasticities, running from the cost of processing and transportation to labor, yield per rai and*capital cost, land, and fertilizer. DRCs are particularly'ihsensitive to the cost- 6f fertilizer for the wet season crop, because of the relatively small usage of fertilizer. For example, the cost of fertilizer would have to increase by 201.2 percent in Chainat before DRC would increase by 1 percent. n DRC elasticities were different between dry season and ;rwet season, crop particularly with respect to the cost of land and of fertilizer. For wet season crop the elasticities with respect to land ranged from 7.01 to 8.09, whereas they were between ,17.99 to 23.70. for dry season crop. The opportunity cost of land was rather high during the wet season because bf the possibility of growing sugar cane in the area. In the case of the cost of fertilizer the elasticities were 15.85 to 19.82 for dry season crop, and 201.2 to 222.2 for wet season crop. The results show clearly the significance of fertilizer for the dry season crop, and that farmers used a very small amount of fertilizer during the wet season. This was due to technology as well as cost consideration. :J ? r 1

J i

T

1

n

J

91

Table 4 Thailand — DRC Elasticities Cost/Yield Labor

Land

Areas /Techniques

Domestic Capital

Nonthaburi a Chainata ;

1.42 1.46

17.99, 23.70

3.35 3.75

Chainatb Singburib

1.85 1.79

7.01 7.09

3.19 3.33

Fertilizer * 15.85 19.82 201.2 222.2

Processing and Transportation

Yield

1.59 1.73

-2.30 -2.18

1.38 1.38

,

—3.14 -2.96

r

Source; See Appendix and Tables A-2 - A-3,A-12--13. Second crop. b First crop, modem varieties on transplanting farms. a

b.

Relationship between comparative advantage and the world price of rice

We have selected two samples to demonstrate the relationship between comparative advantage and the world price of rice: the dry season crop in Nontaburi and the wet season crop in Singburi (modem varieties) provinces which show the highest degree, of efficiency in rice production. Using the technique suggested by Leon Mears, we have constructed two diagrams with the world price of rice on the horizontal axis and the ratio of DRC to the shadow price of foreign exchange on the vertical axis. The ratios were obtained from calculating DRC- at various levels of the world price of rice. Using the principle that the ratio of DRC to social price of foreign exchange equal to 1 being the value above which Thailand would no longer have comparative advantage, we could go on to find out the critical minimum world price of rice for Thailand. It can be seen that for the dry season crop;.the critical minimum world price was about $180 per metrictdn. The wet season crop was more efficient, and could withstand the world price as low as about $ 1 2 5 per metriction.1 The results shown above depend upon the shadow exchange rate used. If the shadow exchange rate was not as high as the calculated rate of 9 2 5 . 8 per U.S. $1, then the critical minimum world price will move up accordingly. The critical minimum world price would be about $ 150 per metricton for the wet season crop and $ 2 2 0 per metricton for the dry season crop. In view of the likely inaccuracy of the calculated shadow exchange rate it is therefore more appropriate to state the critical minimum world price of rice in a range of $125-150 per metricton for the wet season crop and $ 180-220 per metricton for the dry season crop. 4;3 Conclusions and Policy Implications

'

The findings presened above lead us to a number of major conclusions which will be discussed under this section.- We will also attempt to draw policy implications from these conclusions. 1 a.

Conclusions

t

The most important result though perhaps an obvious one was that Thailand has a very strong comparative advantage- in the production of rice. What was not obvious was that the comparative advantage was so. strong such that DRC at the shadow exchange rate was as low as .23 and the highest value was only .37. It can thus be said that Thailand has comparative advantage in rice production in both wet and dry season crops, in modem and traditional varietiesjiin transplanting and broadcasting farms, and finally in the, areas of the central plain as.well as the North.

92. Secondly the production of rice yielded both private and social profitability, although i t w a s not clear from our results at what level of production the private profitability lied. There has been a general belief that everyone but the farmers directly benefits from this profitability. But judging from the large difference of 5-6 per kilogram between private profitability andsocial profitability, it is doubtful that private profitability, to whoever it .might have gone, could be excessive. Thirdly, the taxation system has been discriminating against the expansion of rice production, as indicated by the negative effective rates of protection. Since other crops were not subject to the same extent of taxes except for sugar whose export became subject to taxes only in 1974, it can be concluded that the strong discrimination against rice acted as an incentive to grow or change to other crops. Fourthly, changes in cost components had different effects on the levels of DRC in different provinces, and technologies. While the increase in the labor cost would have a strong effect on DRCs in all cases, the increase in fertilizer cost would mostly affect DRCs of the dry season crop. The increase in capital cost through, for example, mechanization, would also generally have a strong effect on DRCs. Since a percentage increase in yield per rai would reduce DRCs by about a half percent, the total effect of the increased application of fertilizer; mechanization; or labor on DRC would depend upon the extent to which it would improve yield. Thus if the effect on yield is known we can use our results to calculate a “cross effect” between an input, yield per rai, and DRC. Fifthly, with the “critical minimum world price of rice “known we know at a moment of time how far Thailand was away from that level, assuming a similar cost structure. In 1974 the world price of rice was more than double the critical minimum price, indicating that Thailand had a comfortable comparative advantage price range. b.

Policy implications

’

The conclusions outlined above lead immediately to a number of policy implications. 1. The most obvious policy implication is that the expansion of rice production, by increasing areas and/or production of the second crop or the first crop, is justified on ground of comparative advantage. In fact the expansion is justified regardless of areas or technologies. But since modem varieties on transplanting farms yielded particularly low DRCs the adoption of modem varieties should be encouraged on this ground. 2. Because of the existence of private profitability the expansion of rice production should be possible. With a large difference between private and social profitability, an effort should be made to narrow the gap. 1 - T o accomplish that the recommendation such as the reduction or abolition of the export tax on rice is a well known one, and we do not intend to enter into any argument here. Our results simply suggest that there should be an effort .to bring private and social profitability closer together on economics ground. The likely outcome would be a higher private profita; bility, thus providing an incentive to expand rice production. 3. Following the above, the high degree of negative nominal and effective protection on rice production resulting from the taxation system suggests a distortion which affects resource allocation such that there will be a tendency for resources to be used for other crops. A more appropriate. taxation system on economics ground'would be to* have a more uniform incentive- for all crops. Obviously this is difficult to accomplish in the case of agricultural products whose prices fluctuate more frequently. If prices suddenly rise and if the government does not interfere, it is likely' that exporters would benefit from the rise. However; this docs not mean that the government should interfere in an ad hoc manner. With the objectives of providing a uniform incentive in mind, effort should be made to create mechanisms through which prices could be stabilized at the level which would provide an adequate incentive in line with other crops.

93 4. The. knowledge of DRC elasticities with respect to various cost components and yield can be used to provide economic parameters for evaluating rice-development programs'. It is recommended that these values be used in conjunction with other technological parameters. The high elasticities (low numerical values) imply that the programs should avoid using more of those- inputs. And finally since the increase; in different’ inputs would have different effects on the increase in yield, it. is suggested that the yield response be calculated for each input. This is in -order to evaluate the “cross effect” as mentioned earlier. ’ 5. Continuous assessment should be made on the critical minimum price of rice so that we know the range of prices within which Thailand would remain to have comparative advantage. The expansion of rice-export is economically justified as long as the-world price of rice is abovethe critical minimum level. Citations

• if 1. Narongchai Akrasanee and Atchana Wattananukit, “A Domestic Resource Cost Study of Rice Production in Thailand” (draft, manuscript, Faculty of Economics, Thammasat University, October 1975). 2. James C. Ingram, Economic Change in Thailand, 1850-1970, Stanford University Press, Stanford, 1971. ’ t'

3. Scott R. Pearson, Narongchai Akrasanee and Gerald Nelson, “Comparative Advantage in Rice Production: A Methodological Introduction,” Food Research Institute Studies, V. XV, No. 1, 1976. 4. Ammar Siamwalla, “A History of Rice Policies in Thailand,” Food Research Institute Studies, V. XIV, No. 3, 1975. Calculation of Costs of Production Resource Cost.

and Indicators

of Profitability,

Protection

and Domestic

1. Cost of processing and transportation (P & T) Data available are costs of production at the farm level and yield of paddy per rai. Since we need to have costs per unit of milled rice the P & T cost had to be estimated. This was obtained by first converting P & T cost per kilogram of milled rice shown in Section 3.1.2 per kilogram of paddy. Then for each area we multiplied yield per fai by it. Yields per rai were from the agricultural Survey of 1973/74. c 2. Costs of-tradable inputs, domestic-and foreign Following the methodology outlined in Section 3.1.2 and basic data in (1), costs of tradable inputs were calculated. Seed was treated as traded, thus appeared as foreign cost. Fertilizer, insecticide, and fuel are fully traded. Costs paid by farmers were divided into four components: material (foreign), added cost (domestic), taxes oh import (tariff and business tax on import), and business tax on domestic production. We have grouped insecticide and fuel together and call them “other.” Added to this category' was import content of the service of tractor and farm, machinery. The remaining other costs were treated as domestic cost. Finally, there was the foreign component of tlie cost of processing and transportation.

94 3. Market and social costs of rice production Using information from Section 3.1.2 and Appendix Section L I and 1.2 above, factor costs and costs of tradable inputs were calculated for 14 cases, both at market and social prices, Factor costs include costs of labor, land, domestic capital, and an item which was the summation of domestic costs of processing and transportation, fertilizer, other tradable inputs, service of tractor and agricultural machinery. This item was then allocated to labor and capital costs. Costs of tradable inputs include seed, fertilizer, other inputs, and the. foreign cost of processing and transportation. Finally, traiffs, or Import taxes, as well as business tax of domestic production, of all items were added up.. The results are shown in Tables A-2 — A-15. Table A-l

Thailand — Domestic Processing and Transportation Cost per Rai Unit: Baht P & T Cost per rai Areas/Techniques Labor

□

Capital T

Second crop Nontaburi Chainat Ayudhya Supanburi Chachoengsao Chiengmai Nakom Nayok Pathumtanee

411 477 ,444 362 329 296 329 370

First crop Traditional variesties, transplanting Chainat Singburi

344 395

229 263

Modem varieties, transplanting Chainat Singburi

498 512

332 341

Traditional varieties, broadcasting Chainat Singburi

336 331

224 220

,

274 318 293 241 212 197 220 247

4. Calculation of indicators of profitability, protection and domestic resource cost The calculation was made using information from Tables A-2 — A-15, the f.o.b. price of rice in 1974, the overall taxation on rice export, the official exchange rate of $20.40 per 1 U.S. dollar, and the shadow exchange rate of $25.8 per 1 U.S. dollar. Results and step-by-step calculation are shown in Table A-l 6.

95

II. Calculation of DRC elasticities r" DRC elasticities were calculated with respect to the costs of labor, land, domestic capital, fertilizer, and yield per rai. For each cost component, it -was assumed that it increased by 10 per cent. For factor cost, the increased cost was added to the total factor cost of the relevant area. DRC coefficient at the new factor cost was obtained, from which the change in DRC coefficient was calculated. Dividing the percentage change in the factor cost under consideration by the percentage change in DRC coefficient gave us the DRC elasticity. ’ In case of fertilizer, its cost was added to the cost of tradable inputs, thus reducing value added at world prices. DRC coefficient was obtained from this new value added and the existing factor costs. The procedure described above was then applied to calculate the DRC elasticity. Changes in the cost of processing and transportation affected both value added and factor cost. The factor cost part of the P & T cost, which was estimated at 80 per cent, was added to the existing factor cost. The remaining 2 0 per cent tradable input part was added to the cost of tradable inputs. The cost was in baht per kilogram of milled rice.

Table A-2 Thailand — Cost of Production for Paddy from Nontaburi, Second Crop Yield per rai: 500 kg. Unit: Baht/rai t

i

Costs

Factor Costs Labor Land Capital return depreciation (on NTa only) Nonallocated Tradable Inputs Seed Fertilizer Other Processing and Transportation Taxes: tariffs other S Source: See text in the Appendix. a NT = Non-tradcd.

Market Cost

Social Cost

363.22 66.40

363.22 66.40

33.49 15.64 790.44

33.49 15.64 790.44

22.50 198.63 72.46 170 8.18 5.12

80.1 198.63 72.46 170

Unspecified

481.72 308.72

96

Table A-3 Thailand — Cost of Production for Paddy from Chainat, Second Crop Yield per Rai: 5 8 0 kg. Unit: Baht/rai

Factor Costs Labor LandCapital s return ’ depreciation (on NT only) Nonallocated . ( Tradable Inputs’ Seed Fertilizer Other -Processing and Transportation Taxes: tariff other

Social Cost

Market Cost

Costs

Unspecified I

*

512.93 66.40

’

! .527.03

512.93 66.40

350.49 45.98 9.33. 877.5,2

45.98 9.33 , 877.52

*-

s


6.98 1.97

.

t

88.57' 197.27 ' 50.03. 19.7123 K

r— -I J

■ -!■

r

5

Source: See text in the Appendix.

Table A-4 Thailand — Cost of Production for Paddy from 'Ayudhya, Second'Cf op Yield per rai: 5 4 0 kg, Unit: Baht/rai Costs Factor Costs Labor Land Capital return depreciation (on NT only) Nonallocated Tradable Inputs Seed F ertilizer Other Processing and Transportation Taxes: tariffs other Source: See text in the Appendix.

Market n Cost

Social Cost

480.92 66.40

480.92 66.40

43.30 3.20 808.77

43.30 3.20 808.77

28.65 211.23 43.83 183.6 t 6.95 1.95

99.27 211.23 43.83 183.6

Unspecified

481.07 327.7

97

Table A-5 Thailand — Cost of Production for Paddy from 1Supanburi, Second Crop Yield per rai: 440 kg. Unit: Baht/rai p

Costs

Factor Costs Labor -Land Capital return . depreciation (on NT only) Nonallocated Tradable Inputs Seed Fertilizer Other Processing and Transportation Taxes: tariffs other

'Market Cost

Social Cost

400.62. 66.40

400.62 66.40

35.54 18.43 696.96

35.54 18.43 696.96

Unspecified

428.76 268.20

i

20.45 133.67 49.98 149.6 6.18 2.35

70.86 133.67 49.98 149.6

Source: See text in the Appendix.

Table A-6 Thailand — Cost of Production for Paddy from Chachoengsao, Second Crop Yield per rai: 400 kg. Unit: Baht/rai Costs

Market Cost

Social Cost

Factor Costs Labor Land Capital return depreciation (on NT only) Nonallocated

407.28 40.04

407.28 40.04

33.70 21.31 608.3

33.70 22.31 608.3

Tradable Inputs Seed Fertilizer Other Processing and Transportation Taxes: tariffs other

26.12 109.72 58.37 136 6.0 2.02

90.51 109.72 58.37 136

Source: See text in the Appendix.

Unspecified

364.7 243.6

98

Table A-7 Thailand — Cost of Production for Paddy from Chiengmai, Second Crop Yield pcr rai: 360 kg. Unit: Baht/rai Costs Factor Costs Labor Land Capital return depreciation (on NT only) Nonallocated Tradable Inputs Seed Fertilizer Other Processing and Transportation Taxes: tariffs other

Market Cost

Social Cost

483.23 39.36

483.23 39.36

36.48 3.58 521.52 t.

36.48 3.58 521.52

19.73 40.84 22.6 122.4 2.37 '.89

68.36 40.84 22.6 122.4

Unspecified

314.58 206.94

4

i

Source: See text in the Appendix.

Table A-8 Thailand — Cost of Production for Paddy from Nakorn Nayqk, Second Crop Yield per rai: 400 kg. Unit: Baht/rai Costs Factor Costs Labor Land Capital return depreciation (on NT only) Nonallocated Tradable Inputs Seed Fertilizer Other Processing and Transportation Taxes: tariffs other Source: See text in the Appendix.

Market Cost

Social Cost

448.20 66.40

448.20 66.40

36.47 23.86 605.44

36.47 23.86 605.44

22.76 110.30 39.46 136 4.91 1.77

78.86 110.30 39.46 136

Unspecified

363.62 241.82

99 Table A-9 Thailand - Cost of Production for Paddy from Pathumtanee, Second Crop Yield perrai: 450 kg.> , ’

,f

Costs

*

Factor Costs Labor Land Capital return depreciation (on NT only) Nonallocated

Market Cost

Social Cost

504,57 66.40

504.57 66.40

40.04' 12.40 709.33 i

40.04 12.40 709.33

22.55 182.64 .41:05 153 5.9 1.31

78.14 182.64 41.05 153

Unit: Baht/rai Unspecified

435.13 274.2

Tradable Inputs t Seed Fertilizer • Other Processing and Transportation t. T axes: tariffs 1 other

J

z.

J


• » * , s i ' ■>. < ' ’

r 'U't .j , ’ / ' i _ in t

r

= 3.39082 •+ .12913. (4.1.10) t TIME.. (.16910) (.02604) t = 20.052 4.959 , S J ' R2 = .68198, SE =‘.31141, N = 12 (1960-71) TIME = 0 , 1, 2, . . .' 11 for 1960, 1961$ 1962 (1971. The above equation can be rewritten as: . t* = 29.69029 e-12913t J .................................. (41.11) 7


5 S S S =

W? |

- 'll’ i ggggsgsggggssssss

Guaranteed Fam Minimum Gate Price of* No- 1 Paddy in Central Plains of Thailand in 1976 k

40 0 CO . bahU

Total Subsidy Enjoysd by Non-fannen la Yeir t+l

(os)

(baht/toa)

Control cd Wholesale Pries of SI Reserve Rite in Vear

(m)

sfclJl SBHs!

A»ht/lant'>

Average Retail Price of 32 Rice in Year t+l

(a?)

(as)

(39)

(«)

140

1,1 life

mil

Wife ffid Hill

« M« S £

I = s = s f•

3

I

I -d 5SSi> Jlj. i ®i

i 1

ill®!*

1S 1 £

!!H5

| =SS2 s.n s * s ii n s

mn

fe ift

1 lllil 1 11111 i IB. 3 n h i

! B 3 3 33

Hill Hill

3 ’3 35 B5 S2 S

hik 3bQQ'o5±

1

ht

i 11m

al 8 life *

5B J3.3

HSU g X * 5 !!

=8’ S?

141

S a =11

iii.il Hif g

mH

{ RF

Hm

I gpi 1

HHi

t

HH'i

!

mH

|

mH

l

i

! mH 1 ll!H ? urn 1 IhH f iHh t iim I mil

Rejcrve

s Y W t+J

HrH

S

smi Hi!

+ -!Y

"ilrfssE

f W fislil

8S

5 «l IB

“Eltlmated Total Domcttic Dliappearuce of Paddy la Year 1+1

1 irIM Ji 1 I 1BSB1 iShw.sia

i

ik

{mill, baht) 1 (mill. ton!

Table

7

(continued)

(mill, baht)

1X 0 1 * 1 Coniumpiion B«peeditu:c by Nontame* in Year t + l

(35) Com lotted Wholente Price Of 5X Reterve Rice In Year t+l

(baht/ion)

(m)

=ilk

i *

Jl I

s

3 t S S 5 2 S 3 3 2.

(mill, ton)

Estimated Do entitle Conromption Requirement of Rice by Non-farmert in Year t+J

h5«Z-S±

(dDL ton)

Total Export Eamlnt on Rica in Year t+l

(babt/toa)

(3ft) Unit Gov’t Profit from Sale* of ■St ReiervB Rice In Year’ t+l (“ — 1051)

1

(37)

(jft)

the private sector [14] . Although in recent years govemment-to-govemment sales have become more important, they rarely exceed more than 30 per cent of total exports. Even in govemment-to-govemment sales, after the agreement has been made, the actual export is carried out by the private sector. The private sector has developed and enforces a strong system of 38 distinct and clearly defined grades of milled rice. This permits order buying rather than buying on sample only, which contributes to export efficiency and to the reputation of Thailand as a reliable and quality rice exporter. The private sector has also been fairly aggressive in seeking additional sales, although during the downturn in the world market in the two years 1971-2, the government has increasingly assisted in export promotion, particularly in govemment-to-govemment and concessional sales. For seventeen years, from 1954 to 1971, Thailand also had the unique feature of a heavy export tax on rice exports[7]. This had the effect of depressing the domestic price of rice to about one-half of world prices. Although the tax was removed on all but the two highest-quality grades in April 1971, when world rice prices were at their very lowest, the tax has had a definite impact since the Second World War on the structure of rice production and consumption in Thailand, chiefly in assuring low-cost production and affecting resource use. The future of Thai rice exports, although mainly dependent upon domestic costs of production, will also depend upon the level of out-right gifts and concessional sales by developed countries, chiefly the United States and Japan. Com. The increase in corn (maize) production in Thailand has been an amazing development to all interested in agricultural growth. From a zero level in the early 1950s, corn production expanded very rapidly, until today Thailand.ranks as the world’s third or fourth largest corn exporter. In 1971 alone, Thailand exported 1.8 million metric tons with a value of more than 2 billion baht to the world market. This tremendous increase in export was entirely due to increase in production, since less than 10 per cent of annual production is utilised domestically. Planted area for maize increased from an average of 48,000 hectares during ,1951-5 to 600,000 hectares in 1961, to 670,000 in 1967, and to

163 approximately 720,000 hectares on the average during 1969-7.lt. Production increased from 54,000 metric tons during the 1951-5 period to. about 600,006 metric tons in 1961, 1 million metric tons in 1965, and reached 2.2 million metric tons in 1971. This tremendous increase in planted area and production was due to a number of things: malaria control which led to clearing of new land in the upper central plain (central highlands); the rapid increase in export demand; and, to a lesser extent, improvements in transportation [3] . Japan, Taiwan, Hong Kong, Singapore and Malaysia normally take almost the whole of the Thai com exports. Japan, as an expanding feedgrain market and a steady source of demand, has had an important influence in .establishing Thai com production .and exports. In the 1950s Japan took as much as 90 per cent of Thai com exports. The proportion going to Japan declined, however, during the 1960s, and it now fluctuates between one-third and one-half [41] . The domestic com trade in the early years was (and still is) conducted chiefly by merchants who also deal in other agricultural products, such as rice, mungbeans and peanuts. Firms exporting com also .tend to export other agricultural commodities; chiefly rice and* mungbeans. With the rapid expansion, of production and exports, the corn trade became fairly lucrative, and many small firms entered the business. The chief problems in exporting appeared to be quality, moisture content, and delayed shipments or non-fulfilment of contracts. The fault for the latter seemed to lie on both sides. On the Thai side, many of the small new firms, in trying to get established in the trade, would sign a .contract first and then try to buy the com to fill the contract. If production was less than expected, or the product moved to Bangkok more slowly than expected, then the domestic price might rise to a level above the contracted export price. The small exporter would then brjeak the contract rather than take a loss by fulfilling the contract., On the other hand, when supplies were’ greater than expected and domesic price dropped, the Japanese, importers, if they could buy at a lower price from other exporters, jvould break contracts already agreed at a higher price. For these reasons, from the 1959-60 (July-June) exporting season to the present, annual agreements between Thailand and Japan dealing with com exports have been negotiated. At first the. agreements.were between private traders’ associations, but from 1962 onwards the two governments have become increasingly involved. There were many problems in the early years and the agreements were frequently broken. But since 1966-7 the relationship. has stabilised.. From that year onwards, the price has been set by a formula involving the Chicago futures market price for No. 2 yellow com. At the beginning of each year the annual volume to be exported to Japan plus or minus 1'0 per cent is agreed. Then each month the quantity to be exported to Japan during the following month is agreed and the price is set, based on the formula. The Thai side then allocates this quantity among the Thai exporters, the quota given to each depending partly upon their requests and partly upon their past performances. The individual Japanese importers then negotiate directly with the individual Thai exporters. Starting with tire 1969-70 season; a.similar agreement has been signed each year with Taiwan. There are a great many arguments, too lengthy to present here, both for and against, as to whether the agreements with Japan help or hurt the Thai com industry. It would appear that the presence of an assured market may have encouraged com production in the early days, but now, with' the prospects of strong world demand for feedgrains during the next five years or so, and with the* emergence of Thailand, as a major com exporter, bilateral agreementsthat specify both quantity and price may restrict price and new market opportunities. The domestic quota feature of the agreements definitely has a detrimental effect on the growth of the com- industry, particularly the spreading of exports over more than >one hundred? small exporting firms; with no one firm getting more than 5 per cent of the total export quota. The main export problems today involve domestic marketing, problems, chiefly price, instability and lack of adequate drying and storage’ facilities. By keeping all firms small, n o one firm ever accumulates the capital necessary to invest in drying and storage facilities, not only in producing areas, but especially in the port area [11] . Rubber. This commodity has a long history of .production, with Thailand as the world’s third largest rubber exporter, but it also has a long, history of problems. Rubber is produced, in the extreme southern part of Thailand, near the Malaysian border, and.in a small area in the south-eastern comer near the border with Cambodia. For a number of 5yiears rubber ranked second behind rice

164

among agricultural products in foreign exchange earnings from export. But in 1971 it dropped to third place behind rice and corn. During the period 1961-70 the annual average tapped area was about 400,000 hectares, with average annual production and export of 226,000 and 215,000 metric tons respectively. However, the average annual value of exports has fluctuated severely from year to year, even with a. fairly steadily increasing volume of exports. The value of exports dropped from 2.1 billion baht in 1964 to 1.6 billion in 1967, went up again t o 2.6 billion in 1969 and back down to 1.9 billion baht in 1971, owing primarily to annual fluctuations around a declining trend in world markets [2] • There were fluctuations in quantity and value of exports of rubber during the period 1955-71. In nine of the seventeen years, quantity and price moved in opposite directions from each other. In seyen of the nine cases, quantity increased but total value of rubber exports' went down. The future of rubber in Thailand as an export earner is dim, not only because of strong competition from synthetic rubber but also from more efficient producers in other exporting countries. Most of the Thai rubber is produced by smallholders. Clones are of old and unproductive strains. A government-sponsored replanting scheme, financed by a cess on exports, has not been very effective. Initial processing of latex and preparation of smoked sheets for export are based on rather traditional technologies, and leave much to be desired in quality. It seems that Malaysia has quite a long start in rubber processing and production technology, and Thailand, even though a close neighbour, never quite catches up. Kenaf. Kenaf is another of the newly introduced crops that has shown rapid growth in production and export earnings. It also probably has the widest fluctuations and instabilities of any of the crops. Very little jute is grown in Thailand. Kenaf is a slightly inferior substitute for jute as a source of fibre for gunny bag and other fibre products. Thus, the quantity and value of Thailand’s kenaf fibre exports are entirely at the mercy of the world jute market. When India and Bangladesh have' big crops of jute, kenaf export prices and quantities demanded drop drastically. When jute production in those two countries is short, kenaf exports from Thailand jump in quantity and price. Kenaf is grown primarily as an upland crop in the dryer and poorer soils of the North-eastern region of Thailand. As such, it really only competes with grazing for land use, not with other crops. Moreover, pre-harvest costs represent only a small fraction of the total cost of production, so that large areas go unharvested in periods of depressed prices. Thaliland has, however, become selfsufficient in gunny bag production from kenaf, and even exports a few gunny bags. Area planted doubled to 270,000 hectares between 1960 and 1961, decined in 1962, and reached its highest level during the decade of 900,000 hectares in 1966. Production followed the same pattern, with 339,000 tons in 1961 and 661,000 tons in 1966. The quantity exported reached 473,000 tons in 1966, and declined to an average annual export of 261,000 tons during 1969—71, with export earnings declining from 1.6 billion baht to 775 million baht during the same period. Part of the decline in exports is due, however, to the expanding domestic gunny bag industry. The future of exports is again almost entirely dependent on world jute supplies and competition from plastic or synthetic fibre bags [2, 6] . Cassava (manioc). Cassava products, including pellets, flour and meal, accounted for about 14 per cent of the total value of agricultural exports in 1970. The chief markets are Western Europe and Japan, for use as livestock feed, with small amounts going for tapioca production. The value of export ranged from 600 to 700 million baht annually during the, period 1964—7, reaching 1.2 billion baht in 1970 and 1971 [ 2 , 6} . The future of exports depends on improvements in the quality of pellets, flour and meal exported, and on the policies of importing countries, particularly the E.E.C. and Japan. Other crops. In adidtion to the five crops described above, production of several other ‘upland’ crops has increased considerably during the past decade. These crops, grown under rain-fed conditions in upland areas, include cotton, sorghum, tobacco, mungbean, soybean, peanut and others. The value of exports of these crops increased from less than 200 million baht in 1955 to 1 billion baht in 1970. In addition, there have been large increases in domestic consumption and utilisation,, 1

165 and declines in imports of some of them. In general, Thailand can barely keep up with expansion of domestic demand for these crops, while, except for cotton, world demand prospects are good. Thai tobacco, for example, has 1 per cent nicotine content, while tobacco from most exporting countries has 4 per cent [8] . Thailand can export as much of this low-nicotine tobacco as it can produce in the near future. Oil from oilseeds represents another product with strong export demand. IV. CONSTRAINTS ON THAI AGRICULTURAL EXPORTS This review of the major commodities exported shows somewhat of a mixed picture, particularly as to whether supply constraints or demand constraints are the major problem. This question is crucial because formulation of an export-expansion policy that is likely to bring results depends upon a correct assessment of both past performance and future prospects. It would appear that kenaf faces a demand constraint; rice, corn and cassava face supply constraints; and rubber faces constraints on both supply and demand. Because jute is a superior fibre to kenaf, Thailand is likely to continue to be a ‘residual supplier’, in the sense that the quantity that can be sold abroad each year is almost wholly dependent upon world jute supplies, over which Thailand can exert absolutely no control. Improvements in domestic quality control and a pricing system which would transmit potential export premiums for quality directly back to the producer would perhaps help Thailand to realise greater foreign exchange earnings from a given quantity of exports in any one year; but the Thai share of the market is not likely to be affected. And in any case, gunny bags face continuing inroads from synthetic sacking materials. The rubber question is more complex, and world rubber prospects have been more deeply and competently discussed elsewhere. The supply constraint side on Thai rubber prospects comes on the quality side, because the steady expansion in exports appears to be due to a steady expansion of planted area, unfortunately not of high-yielding clones. The present trees are very low in productivity to the producer. Turning to the export of block rubber instead of smoked sheets offers some promise of increasing foreign exchange earnings from a given quantity of exports. Constraints on rice, com and cassava exports, although clearly on the supply side, also offer something of a mixed picture with respect to potential remedies. Several generalisations are, however, possible. First, expansion of production has been almost entirely due to increase in area cultivated. For rice; it has been calculated that the 2:9 per cent per year growth in total rice production from 1907 to 1964 consisted of a 2.5 percent per year growth in area harvested and a 0.4 per cent per year increase in yield. In 1970 rice yields were the same as in the 1920s [ 1 4 ] . Com yields have actually been declining during the past ten years, but indications are that yields are declining. How much new land is still available to clear and farm is an unsettled question. Fifty per cent of the total land area of the kingdom has for along time been reserved for forests. This policy appears to be open to change at the present time. Soil surveys and land-use classification work are under way. Agro-climatic zones are being delineated. Although there is concern that watersheds are being denuded, there is equal concern that elsewhere lands are being held in forest that would best be .used in upland crop production. Answering the question of how much additional land could be and should be brought into cultivation is a pressing practical question facing Thai agriculture [12] . Second, substantial improvement in the yield of the major export stops needs to be brought about, regardless of whether or not additional land is brought into cultivation. This is necessary not only to maintain or improve Thailand’s competitive position among competing exporters, but also to meet the demands of Thai farm families for increased incomes and a higher standard of living. It is clear that the area under rice has already expanded into areas not well suited to rice [13] . These areas would shift to other crops, if technically feasible and profitable other crops were available. It is both technically and economically impossible to extend irrigation facilities to cover some of the area now in rice, and consequently there is not much chance of increasing rice yields in those areas.

166 Third, the presently exported crops cannot carry the whole burden; new crops or products or increased supplies of products not at present produced in sufficient quantities to export will need to be found. Thai farmers have shown a remarkable capacity to adopt and expand production of new crops, and the private-sector marketing system has shown remarkable ability to move the new products into export. The examples of corn, kenaf and cassava have already been cited. Grapes and mushrooms are other examples. But means of achieving increased yields of existing crops and high-yielding new crops will not be easy to discover. Past expansion was not part of a governmentally planned programme, but on the other' hand was simply a response to export demand as transmitted to fanners through the private sector. Hence no national research capacity was developed, at least not of the kind geared To creating yield-increasing new technology. Moreover, because farmers and their families could increase their incomes (or at least keep’ their incomes from declining) by migrating and clearing new land to farm, they did not put pressure on the government to introduce yield-increasing new technology. Finally, given the rapid expansion of area cultivated and the general seasonality of agricultural production, severe seasonal labour shortages have developed. Part of the labour shortage has been alleviated through seasonal migration of the Thai people, who have traditionally1been very mobile. But the general result has been to adopt extensive methods of cultivation of each major crop, rather than the labour-intensive methods that arose in some of the labour-surplus economies in Asia [JO] . Thus, rapid increase of yield has not formed part of the Thai experience thus far. It should be made clear that he ‘supply constraint’ view of Thai export problems is not a popular or widely held view in Thailand. It is much' easier to blame all export problems on the world market and on The unethical behaviour of one’s competitors. The ‘malicious middlemen’ have also received their share of the blame from those looking for easy excuses. Initiating a resourceutilisation-based export development policy, with the research infrastructure to carry it out, just does not have the simplistic appeal that the sending abroad of official trade missions seems to possess. V. DEMAND CONSTRAINTS As already mentioned, Thailand is essentially a price-taker in the world market. For example, the Thai shares of the world rice and com trades are only 14 and 12 per cent respectively. Within the existing market, however, Thailand can do something to increase her shares, either by improving the servicing of markets or by searching for new markets. In order to strengthen her competitive position in existing markets, a lot can be done in improving and controlling quality and reducing marketing costs. But stricter quality control will not succeed unless intermediate and farm-leyel conditions in the domestic market are improved. Marketing costs for agricultural export commodities may be reduced by improving handling facilities, with deep-sea ports to facilitate bulk carriers and tankers. Inadequate export facilities have raised the freight rate from Bangkok to Japan to a high level. For example, the freight rate between the United States and Japan in 1971 for com was about U.S .$4—5 per metric ton; it was U.S.$ 7.5 peril metric’ton for Bangkok to Japan [5] . Searching for new markets is a difficult task for both the government and private sectors. Thailand has a long experience, in the, export of its traditional crop of rice to traditional markets. But for new crops or new markets, the old experience and export structure are not adequate. For example, the com trade with bilateral agreements and export quotas does not force Thai exporters to become more aggressive and more alertto compete in the world markets. VI. CONCLUSIONS There is strong pressure on the agricultural sector in Thailand to increase its export of agricultural products. This pressure derives from the general economic and development policy of the Thai government. The rate of growth in per capita G.D.P. has dropped during the past several years from the rate achieved during the mid-1960s; there is pressure to get the rate of growth up again. The

167 balance of trade for many years, and the balance of payments in several years, have been adverse. Military withdrawal rom Vietnam has reduced capital inflows of certain types. But a very conservative monetary policy leads to much official disquiet whenever the level of foreign exchange reserves drops below the equivalent of nine or ten months’ imports. (Actually, there is official unhappiness whenever exchange reserves*; do not increase in a given year.) But this same set of policies holds that stability of the baht is paramount, and that restriction of imports is not a feasible remedy for declining foreign exchange reserves. Thus, there emerges a very strong pressure to expand exports. It has been argued in this paper that the primary constraint on increased agricultural exports is on the supply side. I t is granted that certain products, mainly rubber, face some demand constraints, and that foreign exchange earnings from certain other products could be increased by improving domestic and export marketing. But the net effects of marketing improvements will be marginal, Any big increase in exports depends on solving supply problems, and these in tum.require substantial improvements in yields of crops with good demand prospects and shifting of resources into production of new products. REFERENCES [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14]

Bank of Thailand, Annual Report (Bangkok, 1971). ----- , Monthly Bulletin (Bangkok, June 1972). Behrman, Jese R., Supply Response in Underdeveloped Agriculture: A Case Study of Four Major Annual Crops in Thailand, 1937—1963 (Amsterdam: North-Holland, 1968). Corden, W.M., and Richter, H.V., ‘Trade and the Balance of Payments’, in T.H. Silcock (ed.),' Thailand: Social and Economic Studies in Development (Canberra: Australian, National Univ.’ Press, 1967) chap. 6. de Jesus, Rangsan, ‘Exporting Problems of Major Agricultural Exports’, in Sopin Tongpan (ed.), Agricultural Marketing Problems in Thailand, National Seminar Report No. 2 A/D/C (Bangkok, 1972). Division of Agricultural Economics, Agricultural Statistics of Thailand, 1970 (Bangkok: Ministry of Agriculture, 1972). Ingram, J.C., Economic Change in Thailand, 1850—1970 (Stanford Univ. Press, 1971). Mueller, R. G., ‘1971— 72 Fertilizer Situation in Thailand’, unpublished paper (Bangkok, 1971). National Economic Development Board, National Income of Thailand: 1968—1969 Edition (Bangkok, 1917). Silcock, T.H., The Economic Development of Thai Agriculture (Canberra: Australian National Univ. Press, 1970). Tongpan, Sopin, ‘Thai Com Export Problems’, in K.L. Turk (ed.). Some Issues Emerging from Recent Breakthroughs in Food Production (Ithaca, N.Y.: Cornell Univ. Press, 1971). pp. 231—52. Welsch, D.E., ‘Agricultural Problems in Thailand: Some Policy Alternatives’, Bangkok Bank Monthly Review, XII, 3 (Mar 1971). -----, ‘Some Speculations on the Long Run Future of Rice in Thailand’. Bangkok Bank Monthly Review, XIII, 3 (Mar 1972). -----, and Tongpan, Sopin, ‘Background to the Introduction of High Yielding Varieties of Rice in Thailand’, in R.T. Shand (ed.), The Impact of Technical Change in Asian Agriculture (Canberra: Australian National Univ. Press, 1972).

168 Table 1 VALUES OF EXPORTS OF CERTAIN AGRICULTURAL PRODUCTS FROM THAILAND, 1955-71 (million baht, at current prices) Year

1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

Rice

Rubber

3,143 2,861 . 3,622 2,968 2,576 2,570 3,598 • 3,240 3,424 4,389 4,334 4,001 4,653 3,775 2,945 2,516 2,901

1,802 1,527 1,406 1,326 2,336 2,579 2,130 2,111 1,903 2,060 1,999 1,861 1,574. 1,816 ' 2,664 2,232 1,901

Corn

Cassave

Kenaf and jute

Total value of agricultural, forestry and fisheries exports

Total value of domestic export

80 90 74 183 250 551 597 502 828 1,346 969 1,520 1,355 1,556 1,674 1,857 2,251

68 112 138 192 224 288 446 423 439 653 676 644 726 772 876 1,223 1,229

8 19 46 69 88 230 626 579 358 495 1,102 1,614 866 674 780 719 933

6,353 5,944 6,488 5,759 6,635 7,648 8,803 8,613 8,263 10,592 10,752 11,693 11,002 10,478 10,947 10,932 n.a.

7,010 6,717 7,292 6,193 7,258 8,422 9,717 9,255 9,420 11,987 12,641 13,798 13,798 12,987 14,101 14,250 16,747

Sources: [2] and [6] . Table 2 QUANTITIES OF EXPORTS OF CERTAIN AGRICULTURAL PRODUCTS FROM THAILAND, 1955-71 (thousand metric tons) Year

Rice

Rubber

Corn

Cassava

Kenaf and jute

1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

1,237 1,265 1,570 1,133 1,092 1,203 1,576 1,271 1,418 1,896 1,895 1,508 1,482 1,068 1,023 1,064 1,662

133 136 135 136 174 170 185 194 187 217 211 203 211 252 276 276 308

68 81 64 163 237 515 567 472 744 1,115 804 1,219 1,091 1,481 1,476 1,371 1,830

54 85 99 152 195 270 443 401 427 739 719 689 781 889 975 1,327 1,112

3 6 15 28 37 62 143 238 126 162 317 473 317 289 256 258 271

Sources: [2] and [6] .

Agricultural Credit in Thailand Prateep

,1.

Sondysuwan

Role of Agriculture in The Economy

Agricultural sector contributed between 28 to-37 percent to Thailand’s gross domestic product during 1965 and 1975. Only 8 to 9 percent of the gross domestic product were accounted for by livestock, fishery, and forestry. The bulk of the agricultural products were cash crops such as rice, maize, rubber, sugarcane, and cassava. Rice contributed about 5 8 percent of the total farm values in the 1974/1975 crop year. Thus, the majority of the population rely on agriculture as their main livelihood. In 1974, the number of workers in agricultural sector increased to 14.1 million, equivalent t o about 78 percent of total labour force while the agricultural population accounted for about 60 percent of the total population of 42 million. Since agriculture is the most important sector of the Thai economy, Thai exports are mostly derived from this sector. The major export commodities are rice, maize, raw sugar, tapioca products, rubber, shrimp, and kenaf. Agricultural products accounted for about 69 percent of the total export earnings in 1975. Aggregate agricultural output is reported to have increased by 19.5 percent during the Third National Economic and Social Development Plan (1972-1976), an average annual growth rate of 3.9 percent. This growth rate is, however, below the target annual growth rate for the agricultural sector of 5.1 percent. The increase in total agricultural output apparently originated from the expansion in the cultivated area alone. The land productivity (output per cultivated area) for paddy remains the same for the last decade despite improvements in the irrigation network and other extension work. With regard to the country’s plans for agricultural development over the years 1972-1976 (the third National Economic and Social Development Plan), there were several factors which restrained the achievement of the planned production targets-. The first limiting factor is the small distribution size of farm. This results in inefficient production. The second limiting factor is the lack of revolving funds or credit for farmers to buy input facilities such as better seeds and machineries, fertilizers, insecticides. Fanners tend to lose ownership of lands by mortgaging them to obtain funds from non-institutional sources. Some have, to pay rent which usually eats up a large part of total j yield. Farmers are then left with little incentive to increase production or to invest further since the return may not be worthwhile. The Government’s policy to keep the price of rice far below the world market price leads to low price of paddy and hence little incentive to increase production and productivity of paddy. Lack of production incentive is thus the third and probably the most important factor which deters agricultural development. The fourth limiting factor is the poor ‘ management of cooperatives and fanners’ associations. Not only does it lessen farmers’ bargaining power but it also weakens their credit worthiness and limit the access to institutional sources. Commercial banks are naturally unwilling to extend loans to poorly managed cooperatives and farmers’ associations. Other limiting factors are lack of adequate irrigation facilities, lack of adequate supervision of extension and technical knowledge, and Jack of storage facilities for agricultural products which tend to be easily perishable. Task Force on Agricultural Credit Development, Bank of Thailand, September 1977.

170 II.

Availability of Institutional Credit.

*

In Thailand, there are two major credit institutions which extend Ioans to farmers, i.e. commercial. banks and the Bank for Agriculture and Agricultural Cooperative. The BAAC is a special organization established by the Government for the purpose of extending financial assistance to fanners, agricultural cooperatives’1 and farmers’ association. Their sources of funds are mostly from commercial banks and the Government. Prior to 1975, the major sources of finance for farmers were the private lenders, primarily rela'tives and neighbours, who provided approximately 50 percent of the total rural credit. An additional 22 percent was provided by the commercial system consisting of the local store-owners, crop buyers, and money lenders. Institutional sources in the form of banks, credit associations and cooperatives accounted for the remaining 28 percent. As a result of the involvement of the Government and the Bank of Thailand in setting up and working towards the. goal for, agricultural credit since 1975, institutional sources of agricultural credit have been expanding, rapidly. An additional amount of over 3 billion. baht was advanced by the commercial banks to the agricultural sector in 1975: 1,860 million baht directly and 1,670 million baht deposited with the Bank for Agriculture and Agricultural Cooperatives. This compared favourably with the total agricultural credit of 833 million baht in 1975. Another 880 million baht was pledgee! by the commercial banks to the BAAC in order to fulfill the shortfall of the 1975 target of some banks. In 1976, commercial banks all together extended 3,811 million baht directly to fanners and 3,161 million Baht through the Bank for Agriculture and Agricultural Cooperatives. All these figures represent the outstanding amount at year end. In 1975, the' BAAC channelled about .3,352 million baht to agriculture: 1,246 million baht to fanners’ associations, and 2,106 million baht directly to farmers. In the following year, the amount of credit directly extended to individual farmers went up to 4,031 million baht, 1,926 million baht to agricultural cooperatives, 527 million baht to farmers’ associations, and 71 million baht to Credit Cooperatives Federation. Thus, in 1976, the total institutional' credit to the agricultural sector added up to a total of 11,265 million baht (6,555 million baht by the BAAC, 3,811 million baht directly by the commercial banks, and 899 million baht of promissory notes of the commercial banks rediscounted with the Bank of Thailand) . There are several studies relating to the credit need of farmers. The Bangkok Bank predicted the 1976 basic credit need of farmers in Thailand to be at least 20,000 million baht given that there were 4 million farm families needing a credit, of 5,000 baht each. The Bank of Thailand estimated the minimum cash credit need for agricultural production to be about 25,000 million baht for the year 1977 by calculating the cash expenditure needed per area of production by crops. Thus, the total institutional credit for .the year 1976 was approximately 5 3 percent of the estimated demand for credit of farmers for the same year. Although the estimated demand seemed to be quite well statisfied* compared with the years’ prior to 1975, credit for agricultural sector is still .urgently needed. Institutional financial institutions.may play the most constructive role in assisting in the promotion of a more widespread availability of agricultural credit by lending at a reasonable rate of interest. This fund may be used for medium or long-term agricultural credit, for investment in production assets or for improving agricultural productivity. Further technical and financial assistance from other international agencies and developed countries in the field of agricultural credit" are being sought,’ particularly from Switzerland, the,Netherlands, and the Federal Republic of Germany. Switzerland is, in fact, already supporting Thailand in the' promotion of farmers’ associations. The Netherlands is' helping the Northern Agricultural Development Centre, the Ministry of Agriculture and Cooperatives, in training a small number of

171 farmers’ associations. -> The Federal Republic of Germany has also assisted a number of self-help-. cooperatives in their development projects. Their further assistance in the field of agricultural credit will help materialize Bank of Thailand’s effort in .developing a better and more efficient system of agricultural credit in Thailand. SEACEN cooperation in the form of exchange of personnel particularly agricultural credit experts as well as the joint .training of the agricultural credit officers of the central banks also contributes in fostering the growth of agricultural credit in the SEACEN countries. l. ’ III,

■

•/’

.

Role of the Central Bank in Agricultural Financing

'

(a) "The Bank of Thailand has been involved in providing resources to the agricultural credit system since 1967' when amendments to'the Bank’s Regulating Decree made it possible for the’Bank* to rediscount promissory notes arising out of transactions in agriculture and other agriculture. ref 2 1 lated activities. *1 . 1 ' -' ’ ? * • ’ ’ i ' / 5 / ■ •' .■ Under the existing practice, four types of rediscount facilities are provided to all commercial . banks and the Bank for Agriculture and Agricultural Cooperatives by the Bank of Thailand, namely, rediscount of promissory notes arising from 'agricultural production, rediscount 1of promissory notes arising from loans secured by agricultural crops, rediscount of promissory* notes arising from, the livestock industry, and rediscount of promissory notes arising from the- purchase of agricultural-. ’ inputs. . “ ’ > i *i J

(1) Rediscount of promissory notes arising from agricultural production. -' • Commencing in 1968, promissory notes rediscounted under this facility are generally issued by fanners or farmers’ groups arid are transferred to the Bank of Thailand by the bank which- discounted the notes. These bilateral agreement's .between the Bank of Thailand and individual banks relate to" the amount of credit lines made available by the Bank of Thailand, crops eligible for discount, and areas of production. Mixihium maturity period is 12 months and the minimum'value of rediscount is 10,000 baht but riot to exceed 9 0 percent of the*debt incurred by the farmers. Interest rate charged for rediscount is 5 percent per arinum and the'maxiirium rate chargedby commercial 5 1 14 Banks is 10 percent per annum. * * ' . r The Bank of Thailand’s procedure for rediscount under this category is adqUatelv flexible and, if necessary, changes can be made to improve the usefulness p.f the scheme. , Iri implementing'the scheme, the Bank of Thailand continues.to emphasize the need t o ensure thd end-use of funds. The slow responsiveness of the commercial banks t o this rediscount facility is due mainly to the relatively high costs and low rates of returns on agricultural loans.

(2) Rediscount of promissory notes arising from’loans secure'd by agricultural crops? This type' of financing has been evailable since 1971. Its aim is’to, support the prices for agricul- ' tural crops during post-harvest periods by makirig it possible for farmers -to delay sales when prices are unfavourable. « « *• *i i t - Under the existing rules, promissory notes rediscounted by the Bank of Thailand have-the maxi- • . mum maturity of 180 days and the amount rediscourited not’ to exceed 90 percent o i the amount borrowed by farmers. Interest rate charged by the Bank- of Thailand is 5 percent per. annum and the maximum interest rate charged by commercial banks is 7 percent per annum. Thus far, only the Bank for Agriculture ‘and Agricultural Cooperatives has made use of this facility and the amount rediscounted up till December 1976 was 9.8 million baht. 5 (3) Rediscount of promissory notes arising from the livestock industry. This type of rediscount facility was introduced in January : 1974 with the aim of promoting

172 commercial livestock farms to meet growing demestic and export demands. Under the existing procedures, promissory notes redicounted, carrying a 5 year maturity, must have a minimum value of 10,000 baht and not to exceed 9 0 percent of the amount- considered necessary for the business. Interest charged by the Bank of Thailand is 5 percent per annum and the maximum interest rate charged by commercial banks is 7 percent per annum. Up till December 1976, the Bank of Thailand has rediscounted 120.7 million baht under this type of rediscount facility. (4) Rediscount of promissory notes arising from the purchase of agricultural inputs. This scheme was launched in October 1974 with the aim to provide low cost fund to agricultural cooperatives and fanners’ groups through the Bank for Agriculture and Agricultural Cooperatives, for the purchase of agricultural inputs and resale t o members. Promissory notes rediscounted must have a minimum value of 10,000 baht and not to exceed 90 percent of the amount used to purchase the inputs. Interest rate charged by the Bank of Thailand is 5 percent per annum and the interest charged the Bank for Agriculture and Agricultural Cooperatives is not to be more than 7 percent per annum. The Bank of Thailand has rediscounted 111.1 million baht as of December 1976. (b) Apart from the, given rediscount facilities to make credit- available to farmers, the Bank of Thailand became directly involved in setting the annual agricultural credit target by requesting commercial banks to fulfill the lending target since 1975. Prior to 1975, only 5 out of 29 commercial banks were involved to some noticeable degree in providing agricultural credit in the form of short-term loans, overdrafts, and bills. The proportion of loans for agricultural purposes in 1974 was only 1.8 percent of the total commercial bank lending. Since the response of the commercial banks to the rediscount facilities for agriculture offered by the Bank of Thailand has been rather limited, the Government and the Bank of Thailand, in 1975, decided to request all commercial banks to channel an additional 5 percent of their total outstanding volume of lending at the end of 1974 to farmers, either directly or indirectly through the Bank for Agriculture and Agricultural Cooperatives, or a combination of both. This requirement covered an amount of 3,500 million baht. The sum does not include loans to agri-businesses, warehouses, and imports of fertilizers and machineries used in agricultural activities because the purpose is to make the commercial bank fund available to small farmers. Each commercial bank was assigned an appropriate quota of lending to be fulfilled by the year end. Commercial banks, although not without some complaints, managed to increase the agricultural financing to 3,904 million baht during 1975. For the year 1976, the Central Bank pursued this policy further by setting the target at 7 percent of total deposits of the commercial banks at the end of 1975. Most commercial banks responded favourably by raising the lending, both directly and indirectly, to 6,972 million baht. The target was again raised to 9 percent of total deposits of the commercial banks for the year 1977, amounting to 9,647 million baht. If this target should be fulfilled, about half of the total production credit needed by the farmers would be met. (c) The Bank of Thailand also tries to strengthen the financial infra-structure of commercial banks. Commercial bank lending to the rural area is encouraged. The Bank of Thailand now permits the free opening of new branches of commercial banks in the rural areas. But to make these branches serve the rural area, the Central Bank stipulates that each new branch in the rural area .must lend out 60 percent or more of its deposit to the people in its area and at least one third of this amount must go to the farmers. This condition must be fulfilled within 18 months since the opening of the branch. (d) Another project, which has been completed jointly with the Bank of Agriculture and Agricultural Cooperatives, the Ministry of Agriculture and Cooperatives, and the commercial banks, is the classification of agricultural cooperatives according to their financial status and management capabilities. This information which will be useful to credit institutions in extending loans should be revised every one or two years due to the changing conditions of the cooperatives.

173 (e) Furthermore, the Bank, of Thailand is playing a lending role in resolving conflicts, if any, between sound banking principles arid the social objectives of agricultural credit programriie. A task force has already been set up within the Bank to consider the appropriate ways arid means of reallocating more financial resources to the agricultural sector, as well as providing a more positive leadership in this field. The Bank of Thailand is working closely with the commercial banks and is also strengthening its close collaboration with the BAAG with respect t o the BAAG’s policy and credit needs as well as its work programme. Seminars and meetings were organized b y the Bank in 1975 arid 1976 with the view of strengthening the coordination among the commercial banks, the BAAC, and the government agencies concerned. The Bank of Thailand ’is also in the process of mapping an integrated approach toward financing small farmers. The emphasis is on institutionalizing the credit structure as well as trying to bring in the farmers, the financial institutions, the agro-industries, and the government agencies concerned to work together. An experimental project of this type is now undertaken in the North. Some field trips to several provinces were also organized last year to encourage coordination in the operation of integrated approach by different institi turions with a clear-cut understanding of their respective } roles. (f) Recently, the Bank of Thailand has joined the Asian Regional Agricultural Credit Association (APACA), which is organized by the FAO to solicit the views of national agricultural credit programme with’ regard to the manner in which the regional agricultural credit programme should be formulated. The Bank of Thailand thus ’tries to strengthen the coordination of both national and international agencies concerned with agricultural credit. > * IV. Relationship Between Credit and Production There is no effective coordination framework in Thailand for maximizing the utilization of agricultural credit through ensuring the timely availability of extension services, agricultural inputs, and for the distribution arrangements for the marketing of agricultural produce. Extension services are provided for farmers by the Government, while agricultural inputs are supplied mostly by private traders, and the distribution arrangements for the marketing produce are done by individual farmers. r> From the experience of Thailand, the increased availability of agricultural credit has not achieved its objective of contributing to increased agricultural production. The increase in agricultural production, originated froin the additional areas, occurred at a slow pace even though institutional credit rose sharply during 1975 and 1976. Credit is a necessary but not sufficient factor for agricultural development. " Other factors such as timely availability of agricultural inputs and extension services, adequate irrigation, transportation, and marketing facilities are also required. V.

Institutional Credit and its Challenges

Accepting that the non-institutional sources of credit are generally closer t o the farmers and are able to respond to their needs more promptly than institutional financing, the Bank of Thailand has thus encouraged the opening of new branches of the commercial banks in the rural areas. Most commercial banks have assumed this role actively which strengthened the institutional credit system. Also, there are studies on the cropping season of each crop which should help indicate the time when credit is needed. Therefore, credit institutions may prepare themselves in advance in order to extend Ioans more promptly. An agricultural financing institution should not undertake resource mobilization through the offering of commercial banking facilities, given that this could divert the institution’s attention from its principal task of ensuring that its agricultural lending is properly and effectively utilized. The requirement that an agricultural financing institution operates according to generally accepted banking practices, with its consequent emphasis on procedures and collateral is not compa-

174 tible with, the need to establish a feeling of understanding ;and sympathy in. responding t o the requirements of farmers. The procedures needed in borrowing from commercial banks are usually lengthy. There are several forms to be filled and collateral to be putup. A large number of farmers, db not have the opportunity to invest and improve their agricultural production if they depend only • on commercial banks for. borrowings. Some resort to non-institutional sources arid become worse off since usurous interest rates are charged, about 60 percent per year,in soipe cases. The operations of BAAC provide a relief and a more promising future t o this group of fanners. Although the fanner does not own any tangible security, he is still eligible for a short-term borrow4 ing for agricultural production purposes not .exceeding 7,000 baht., The, BAAC requires, however, . ■ at least 10 members grouped together, to jointly guarantee, or hold joint responsibility for ? repayment of the loans of the whole group. Short-term loans are also available to farmers for other ‘purposes, e.g. livestock, poultry, arid fishery. Each fanner is.eligible for an additional 7,000 baht loan if one or two persons are willing to pledge guarantee. If a fanner wants to borrow more than, ■ the specified' -amount, then a tangible security is required as collateral. Only about 20 percent of ’ the. loans extended by commercial banks are supervised credit, requiring no collateral. Thus, the ” lending procedures of the BAAC correspond to a feeling of understanding and sympathy in catering for theftequirem ents of farmers. r Recognizing that one of the constraints to agricultural lending is the understandable inability of farmers to furnish collateral, it, would therefore be beneficial to introduce an insurance or Central Bank risk-sharing scheme against, bad debts in order to.permit the lowering of the collateral requirements. Presently, the idea of setting up an insurance scheme is being studied and discussed at the Bank of Thailand. This scheme is directly aimed’ at encouraging commercial banks- to extend more Ioans to farmers, and to lower the collateral requirements on these loans. Traditionally, the repayment performance of farmer-borrowers has not been particularly satisfactory as it is quite difficult to inculcate an attitude of financial discipline o n the part of farmers. An improvement might be made if the credit institution, would extend credit to. agricultural cooperatives or farmers’ associations which in turn lend credit-in-kind to farmers.. This may ascertain that credit is used for production rather than consumption purposes.; In this regard, credit should be more supervised. This emphasizes the importance of the integrated approach. If the whole agricultural production process works well, farmers should receive their fair share in production, and certainly be able to repay the loans. Since the repayment performance depends mainly on the farmers’ ability to produce and sell their products, the whole system must be accordingly arranged. In Thailand, there has been a dilemma arising from the heed to make agricultural Credit readily available to as many small farmers as possible in face of the high administrative costs involved in ■such operation. Presently, the Government and the Bank of Thailand request the commercial banks • to channel a fraction of their total deposits to the agricultural sector. This must be seen as a social , objective to secure the well-being of about 60 percent of the Thai population, although on economic and financial grounds, such use of capital vis-a-vis other uses cannot always be completely justified. This requirement can only sery.e as the starting point of the large-scale expansion of agricultural credit. The interest rate charged, is 12 percent. However, in.the future, some adjustments in the rate of interest may be necessary’.’

Farm Credit in Thailand:

An Incomplete

Answer

Bangkok Bank

“A man can be neither a saint, nor a lover, nor a poet, unless he has comparatively recently had something to eat.” ' * “I give you the toast of the Royal’ Economic Society, of economies and economists, who are the trustees not of civilization, but of the possibility of civilization”. rThese two quotations perhaps best illustrate the fundamental concepts behind the farm credit policy which has been pushed hard by the present as well as previous Thai' governments. The first quotation, of Philip H. Wicksteed a leading neoclassical economist, was written at the turn of this century. It implies that to take, one’s part in civilization one must first be granted the basic necessities of life The second is of Lord Keynes’ in 1945, not long before his death. It expresses the view of the twentieth-century liberal and humanist, who believed that progress- would be the normal state of affairs if only reason were allowed to prevail, and who recognized economic development as the necessary foundation for other forms of human advancement. Shortly after the turn of this century, the Thai government began to realize the “dualistic” character of the Thai economic structure. On the one hand there was the urban “money and market economy” that had been developed to a certain degree of self sustaining growth by the efforts of government and private enterprise. But this economy involved a very small minority of people and was confined to a small area of the country. On the other hand lay the over-whelmingly larger rural “traditional economy” long neglected, and taken advantage of by the other- with official sanction. It was perceived that the gap between the two economies was indeed wide, and that basic measures would have to be takenrif the gap was to be bridged and- those involved in the traditional economy were to be provided with a share in a common civilization and prosperity. In agreement with Keynes’ thinking, the means chosen by various governments since has fundamentally been that of economic development. Brief History of farm credit Within the context of the economic development of Thailand’s more backward agricultural sector, a strategy in the form of farm credit was launched. As far back as 1916, the government initiated “Village Credit Co-operatives” with the first unit or branch commencing operations in Phitsanulok Province. This initial effort was diversified into a variety of forms of co-operative organization. The latest headcount of these societies shows a membership of 418,204. To give the sector a shot in the' arm and with a view to hastening the watershed that would spell and end of the sector’s backwardness, the Bank for Agriculture and Agricultural Co-operatives (BAAC) was established in .1966 to take over from the Bank for Co-operatives. The intention behind the establishment of BAAC was to break the chain of indebtedness which bound fanners to loan sharks of various types in the unorganized' money market with BAAC itself extending credit to the farming populace. Then, in 1975, commercial banks were brought into the An article published in Bangkok Bank Monthly Review, -July, 1976. ’

176 scene. The man behind it all was the then Finance Minister, Mr. Boonchu Rojanastien, who, earlier, as Executive Vice-President of the Bangkok Bank had been responsible for that bank’s Farm Credit Scheme initiated in 1962. But the planning and implementation of the National farm credit programme itself was left to the Bangkok of Thailand. In June 1975, the Central Bank urged that commercial banks make available to farmers, loans equivalent to 5 per cent of total credit outstanding as of the end of the previous year. For fiscal 1976, the, directive of the Central Bank pushed the requirement to 7 per cent of total deposits at commercial banks. The agricultural sector’s credit needs The 1962/63survey of farmers’ debts — probably the first survey to be conducted on the country’s agricultural credit needs — was effected by the Faculty of Economics and Business Administration of Kasetsart University. The census revealed that 68 per cent of those questioned claimed to be in debt. The debt per farm household averaged out at Baht 3,7 16. The mean interest rate was a high 29 per cent per annum. Suprisingly, the Central Region, with most of its area in the fertile and irrigated Chao Phraya basin, led as the the country’s most debt-ridden section. Seventy five per cent of the people in the Central Region were in debt, averaging Baht 6,956 per family. Farmers in the South borrowed the least with an average of Baht 1,360 per household. Added up, the total credit obligations of fanners in Thailand in 1963 amounted to Baht 9,121 million. This sum could presumably be regarded as the amount of basic credit needed by the farmers under the conditions and at the particular interest rates prevailing in 1963. In 1970, the Bangkok Bank conducted its own survey and arrived at a total figure of Baht 13,400 million as the amount of credit needed by farmers. This appears in the following table. Bangkok Bank 1970 survey on farm credit need in Thailand (1) Region

(4) (3) Pecentage of Total number of Total number families farm families of needing farm families needing credit credit (2)

North North-East Central South

777,642 1,220,786 722,971 493,006

Total

3,214,405

90 96 86 100 —

(8)=(4)x(7) (7) (6) (5) average average credit average Total credit farm size investment needed by a needed farm family per family per rai (million baht) (baht) (baht) (rai)

700,200 1,172,160 643,470 493,000

13 16 26 10

334 234 313 357

3,000 3,700 8,100 3,500

2,100 4,336 5,212 1,725

3,008,830

—

—

—

13,373

Source: Bangkok Bank.

In 1974, Dr. Chaiybng Chuchart, Deputy Director General of the Land Development Department, made a rough calculation of his own. 'There were approximately 4 to 5 million farm families in Thailand — each heeding, by Mr. Chuchart’s estimate, roughly Baht 4,000 in credit per annum in spite of the.fact that the yearly average income of each family did not exceed Baht 6,000. Possibly, then, the total basic credit need of the farming sector was Baht 16,000 under 1974 conditions. Mr. Chamlong Tohthong, BAAC’s managing director, explained, in .a recent interview concerning credit needs of farmers: “In relation to the question, of how many farmers there' are and the amount of credit needed by them, we do not have precise figures. The best we can do is to make an educated estimate. The present number of farm families is placed at between 4 and 5 million. Subtract the ones that do not require credit. The rest are regarded as requiring it. This number times the means figure estimated to be the credit requirement of each farm family will give the approximate total credit required by the farming sector”.

177 Mr. Chuchart’s and Mr. Tohthong’s methods seem to have some common ground. One could quite safely opine that the present basic credit need of farmers in Thailand is at least Baht 20,000 million (given that there are 4 million farm families in need of credit with each needing Baht 5,000 which is the average amount of a farm loan in the experience of both BAAC and the Bangkok Bank). Nonetheless, one has to' concede that for the precise figures of the actual credit needs this total could easily run up to even twice as much if, for instance, overall interest rates were brought lower than the prevailing level, or the pace of the farming sector quickened through a fresh supply of money being channelled in. The achievement. to date The govemment-began early to pipe some money into the fund-thirsty agricultural sector. But,, despite much drum rolling, .governmental efforts did not really get off the ground until BAAC became more active and began to take over the major role from 1973 onwards. In contrast, commercial banks, led principally by the Bangkok Bank, without much fanfare initiated programmes on their own to assist this less fortunate sector. The commercial banks’ credit contribution to the fanning sector led that of other sources until 1967 when their loans still exceeded those made available by government agencies. The present sources of organized funds available to fanners can generally be classified into three, namely BAAC, commercial banks and agricultural co-operatives. Owing to rather loose operations which resulted in substantial bad debts, agricultural societies stopped giving loans directly to their members in 1973 and instead referred their credit needs to such other sources as BAAC or commercial banks. Volume of farm credit from domestic financial institutions 1967 — 1975 unit: million baht Commercial Banks (6)=(l)+(2)+(3)+(4) (70)=(l)+(2)+(3)+(5) (3) supervised arid supervised Agricultural Agricultural nonsupervised yearly total Yearly total BAAC Year Co-operatives credit societies credit V 1967 1968 1969 1970 1971 1972 1973 1974 1975 Total

(1)

(2)

(3)

(4)

49.0 65.0 ’80.0 100.0 100.0 64.0 —

140.9 202.6 229.6 204.8 198.2 400.6 342.1* 801.8 954.5 3,475.1

121.3 380.4 562.8 563.3 509.4 670.9 773,7 1,203.7 2,100.9 6,886.4

65.2 106.8 151.7 116.5 107.5 130.1 145.5 223.5 751.0 1,797.8

— 458.0

,

473.1 565.2 660.5 637.4 742.7 771.2 991.5 1,305.3 2,823.7 8,969.6

Sources: Co-operative auditing dept.; BAAC; Bangkok Bank; Bank of Thailand.

377.3 754.8 1,024.1 984.6 915.1 1,265.6 1,261.3 2,229.0 3,806.4 12,618.2

784.3 1,213.2 1,532.9 1,505.5 1,550.3 1,906.7 2,107.3 3,310.8 5,879.1 19,790.1 *as of June 30, 1973.

In 1975, supervised farm loans totalled roughly Baht 3,806.4 million or 19.0 per cent of the basic credit need (figured at Baht 20,000 million according to the calculations mentioned earlier). If, however, one brings into consideration both supervised and non-supervised Ioans which added up to Baht 5,879.1 million, the funds owed by farmers stood at 29.4 per cent of the basic amount they wanted to borrow. While these percentages were an improvement, they still fell far short of the situation of the farm sector in developed countries, such as the U.S.A, where credit institutions supply as much as 6 0 per cent of the Ioan demand of farmers. BAAC, in terms of the volume of outstanding credit to farmers, has lately become the star

178 performer — thanks to the helping hand of the government working in several ways. In 1975, this bank distributed Baht 2,100.9 million in straight Ioans to farmers. Through its 9 years of operation, the bank’s total direct farm credit assistance, addeds up to a .respectable Baht 8,886.4 million. Besides straight loans, BAAC’s funds go indirectly to farmers bia agricultural co-operatives and agricultural societies. For fiscal 1975, these organizations received Baht 866.1 million and Baht 387.8 million respectively. . Through its 5 8 provincial branches operating in 492 amphurs (districts), BAACin 1975 served 516,314 farm households — an increase of 136,739 from 1974, Its medium term loans which aim at aiding fanners to acquire the tools of their trade have been responsible for the acquisition — from 1967 to 1975 — by fanners of such important items as 37,950 pumps, 275,602.beasts of bur- . den, and 669,947 rai of land purchased; redeemed or newly claimed. Besides these material accomplishments, BAAC’s managing' director, Mr. Chamlong Tohthong, is clearly happy at the psychological'effect of-the bank’s operations in terms of good will.-* “Our men,” he says “are in one of the few- branches of government service that have not been molested by insurgents.” Problems galore

i » >* - While* it is undeniable that some achievements have been made, of which 'those concerned caribe justely proud, many problems remain and there are headaches galore for the credit people bent on improving the fanner’s. lot with the funds available to them,for this purpose. 4 i , * » Problems concerning the farmer

.

/

-

i

Productivity: * » t ’, No matter from which angle one views it — as return on investment, or in comparison with the productivity of other countries, etc. — Thailand’s farm productivity is low. The Ministry of Agriculture and Co-operatives recently reported on the most important commodity, rice, and the income derived from it for the period 1975/1976. On the average, a rice farm household produces 4. 17 1 tons of paddy per year from which 1 .5 18 tons are consumed (by the average household of 6), and 0.239 .tons are reserved as seed for next season’s: planting. The household is left with. 2.414 tons to sell, for which, at the price of Baht 2,017/ton prevailing in- November 1975, it-receives Baht 4,999.39. However, there have been other input costs that have yet to be rekoned with. These amount to approximately Baht 4,803.86. Deducting these input costs from the sales income, our farm household is left with a startling -—’and indeed pathetic — net income for the year (during which it labours, sweats and worries) of Baht 195.53. The Ministry’s report Concedes that the net per capita income (Baht 195.53 divided among the 6 members; of the household-equals Baht 32.49) of the toiler on the land is lower even than .that of a beggar. t In comparison with other countries, Thai farm productivity increases at a very slow pace. In the case of rice, for instance, while productivity in such countries as Japan and Taiwan has doubled or tripled, that of Thailand has increased by little more than 50 per cent over a period of 18 years. Low productivity of Thai farm corrimodities results from various factors. , Land. The first of the classic trio of basic production inputs is land; and this one is already problem-plagued. Apart from the fact that its management is virtually void of any trace of sophistication, the size of holdings has become of late a major headache (and heartache) the gravity of which will be progressively exacerbated. The average.plot of land worked op by a farm family is small. I t will be further partitioned as farm population grows. Yet, to open up new land is now well night impossible. Dr. Thalemg Thamrongnavasavat, Deputy Undersecretary, Ministry .of Agriculture and Co-operatives, warns that a satellite survey has revealed that Thailand is left with forested areas amounting t o roughly 38 percent of the country’s total territory. Since,, ideally, jungles and forests should comprise at least half of the total terrain, any more encroachment on the forested areas will involve serious and far-reaching results. On top of this, the Land Development Department states that in 1974, 56 per Cent of farmers were tenants (up from 40.7 per cent in 1968). Among these,

179 27 per cent were entirely landless while the other 29 per cent rented part of the land they tilled. Farm labour, the second farm production input also involves a number of problems. Either by their own fault or by sheer force of circumstances, farmers form the least informed sector of Thai citizens. They are left three-quarters in the dark more than three-quarters of the time with respect t o new production technology, product marketing techniques and so on. Communications media do not get through to them. Their radios for the most part are tuned to folk songs and plays. And one hears the story of a high ranking Thai official in the Ministry of Agriculture and Co-operatives advising USIS to refrain from the distribution of agricultural leaflets to farmers, his reason being that it was a waste of the United States’ foreign assistance. The leaflets, he claimed, would be used by the farmers to roll cigarettes.

BAAC’s Aggregate yearly farm credit unit: million baht

directly to farmers To Agricultural co-op. To agricultural societies Total percentage increase

1968

1969

1970

1971

1972

1973

1974

1975

380.4 135.3 — 515.7

562.8 129.4 — 692.2 34.2

563.3 167.6 — 730.9 5.6

509.4 164.0 — 673.4 -7.9

670.9 224.6 — 895.5 33.0

773.7 249.1 — 1,022.8 14.2

1,203.7 388.7 143.4 1,735.8 69.7

2,110.9 866.1 387.8 3,354.8 93.3

Source: BAAC t

For at least one other reason, the future does not look bright for agricultural labour. As the land holdings become ever more limited, with the present plots being further subdivided, the manto-land ratio will progressively increase. A diminishing rate of returns, with all its ramifications, will result. Will the excess manpower on the farms be absorbed into other sectors as quickly as it appears? By all counts, judging from the current situation, the answer unfortunately is far from the current situation, the answer unfortunately is far from certain. Capital. Mr. Chamlorig Tohthong, BAAC’s managing director, has expressed an interesting view on this subject: “The solution of the farmers’ debt problem will not be easy. It is a complex matter needing careful study before programmes may be drafted. It demands deep thinking, the expenditure of considerable funds and a long period of development to that 'ways and means may be found to bring about a solution. And more yet, it is of great importance of draw up long range plans involving decades. The process involves more patience that governments feel they can afford. For the most part, past governments have been impatient and launched programmes too hastily” One might also opine that apart from the fact that funds have simply not been available, another obstacle to an effective and all-round programme for providing fanners with capital comes in the form of direct political sabotage of such programmes.

180

Rice Production per rai in Thailand •


P|k>

Ef E(a-A)

n6 2 - 6 2 +

E fuf

Slro

Since:

= ( ) mT- E E ( B U 2 ) = n6 2

t

(n 4 2 )

t

E(EU t )

(l £jUt ) J 2

+ U 2 2 + ... + Un 2 + 2U 1 U 2 +- 2U n j , 7

10. In summary, given the regression line Xt = A + U t and based on the traditional linear regression model, the least squares unbiased estimator of A is a = X, and the unbaised estimated variance of a is equal to S 2 /n, where S 2 = 2 ( X t -X) 2 /n —1. 11. To test the constancy of relative export prices of Thai rice, if the 2 — sigma rule is adopted, a is statistically significant different from zero with a 5 per cent level of significance if a >2 ( S). This implies that the series of relative export prices of Thai rice was statistically unchanged, witff a 5 per cent level of significance.

218

Annex II CROP DIVERSITIFICATION IN THAILAND:-A MOVE AWAY FROM ITS CONCENTRATION OF RICE EXPORT 1. Thailand has a predominantly agricultural economy. The agricultural sector contributed more than 30 per cent of value added to its gross domestic product in 1975. Over 80 per cent of Thailand’s population work in agriculture. Furthermore, agriculture is Thailand’s major export earners, accounting for more than half of its total earned foreign exchange. 2. Agriculture has maintained a high rate of expansion during recent decades. During 1966-1970, its growth rate was on average 5.6 per cent per year; but it declined to 4.3 per cent during 19701975. The rate, however, was still substantially in excess of the population growth rate. 3. Crops make up the major subsector of agricultural products. Livestock, fisheries and forestry are other subsectors but they have made relatively less significant contributions.Within the crop subsector, rice is traditionally the most important commodity and is the nucleus of the crop diversification process. 4. Rice is the basic staple food for Thai people and its farming has generated millions of jobs. It is also the major foreign exchange earner; prior to 1958, rice exports alone accounted for around 50 per cent of Thailand’s total export earnings. 5. Thailand faced the danger caused by its high concentration in rice exports. In 1958 rice production in Thailand was severely damaged because of bad weather. Thailand banned rice exports in order to make sure enough rice was available for domestic needs. By such a restriction, Thai rice exports, as well as total foreign exchange earnings were enormously reduced in that year which disturbed the process of economic development. / 6. In response to such a danger Thailand has spent resources to diversify its crop base. As shown in table 1, rubber, maize, cassava (or tapioca products), kenaf and cane sugar have increased their roles in export earnings. , 7. Rubber is one of Thailand’s traditional crops. It is entirely produced in the southern part of the country. For a number of years, rubber exports ranked second behind rice in foreign exchange earnings. Its export values in 1960 jumped into first place among Thai agricultural exports. However, since then, its earnings have declined and it dropped to fifth place in 1975. One striking characteristic of rubber exportswas that earnings from them fluctuated widely from year to year, partly because of the uncertainty of world-demand. 8. The future of Thai rubber export earnings is not clear. The competition from synthetic rubber has been strong in the past; however increases in the price of oil and the recent agreement on international rubber stocks might be two factors that bring about the enrichment of rubber plantations in Thailand. 9 . Maize is a newcomer among Thai exports. Its output has increased considerably from a zero level in the early 1950s to a level of 2.8 million tons in 1975. Thailand ranks as the world’s third or fourth largest maize exporter. In 1975 the export value of maize was greater than that of rubber and it trended to move ahead of rice as well. Maize is grown intensively in a so-called maize belt, in the central and northern parts of Thailand. The remarkable expansion of maize production and export were partly due to the introduction of the Guatemala PB5 variety, which found ready export markets, and partly due to the strong world demand for Thai maize. 10. Thai maize exports have been largely destined for East Asian countries, such as Japan and the Republic of Korea. As the livestock industries in these countries have been growing rapidly, Thai maize exports should have a bright outlook. 11. Cassava is also a new crop in Thailand’s export lists. Its major destinations were in western Europe and Japan. As indicated in table 2 , the production of cassava roots has been expanded rapidly -from a planted area of 0.5 million rai in 1960 to 3.4 million rai in 1975. The expansion of cassava output is expected to continue into the distant future because of the needs of world demand and the stable yield of its production.

219 12. Sugar cane is another outstanding food crop for Thailand’s export earning's. Sugar exports have increased tremendously in value, from US$ 4.6 million in 1970 to a level of US$ ,280.6 million in 1975. It is likely that sugar market prospects, Sugar-cane growing has expanded into the paddy land under irrigation' in 'the' western part of Thailand. This has caused the sugar-cane -yield to increase steadily over the past decade. 13. Kenaf is another newly introduced crop. Its production and processing are highly concentrated in the northeastern part? of Thailand. Unlike jute, which is little grown in Thailand, kenaf is ah interior fibre used in the production” of gunny bags and other fibre products. Its export is entirely ’dependant? upon jirfe production in Bangladesh and India. When jute is in short supply in these two countries,Akenaf 'exports from Thailand inevitably increase, and vice'versa. 1'4’. The future o'f the kenaf industry’ in Thailand is not so prosperous. Its export earnings have dropped steadily in recent years from US$ 51.9 million in 1973' to US$ 3.1 million in 1975. It has been revealed that most of kenaf-planted areas have been replaced by cassava growing. The comparative advantage theorem would suggest that it is likely that Thailand might have to import . jute from Bangladesh or India to feed its -gunny bag industry in -the near future. /With its existing crop r 15. Crop diversification in Thailand Jias progressed m the past two decades. base, Thailand’s foreign exchange earnings should be more secure.than before. As most of the diversified crops are not substituted commodities, their world demand patterns are likely to be independent of one another. Tlm.fall.in . foreign exchange earned by some crops .should be automatically offset by the increase in foreign exchanges earned by others. To cite an example, despite the sharp decline in the world demand for andrihe price of Thai rice during 1969-1971; Thailand’s total export earnings still rose. The declines in earnings from,.rice in those years were largely?offset by increases in exports of maize, kenaf, cassava and cane sugar. 16. Thailand, although highly successful in -ifs crop diversification programmes, still faces a danger from local specialization in the growing of particular crops. Apart from, rice that is grown all over the country, maize production is highly concentrated in the central and northern regions, rubber in the’ south-, cassava in the northeast and sugar cane in the west. With an unstable world, demand for any p articular crop, it is likely that the stability of a region. might be beyond governmental control. 17. To tackle such regional planning problems, as Ingram has pointed out, ‘Thailand must be prepared for wide fluctuations in specific products arid needs to develop'a flexible agriculture .capable of shiftirig quickly from one’ crop to another as market conditions warrant” 1 Such a scheme is, of course, Utopian as far as Thailand’s crop diversification process is concerned.. It needs time and effort to reach such a goal, but although. it. is difficult, it is possible. • Annex III Titles of PL 480 1. In general, Title I Title II Title.'III Title IV

there are four titles,under the PL 480. They are: Concessional.sales . Donations and disaster relief Barter General provisions and requirements.

2. Title I is the most important type of United. States rice exports. Over 90 per cent of United States Government rice exports are shipped under this title. Concessional sales include local currency sales and long-term credit sales. Under Title II, rice. can b e ,donated, to meet the following objectives: for famine, or other ordinary relief requirements, to -combat malnutrition, . especially in. children, j to promote economic, and community development in friendly developing countries and for needy persons and nonprofit school lunch and preschool feeding programmes outside the United States of America. All rice shipments under this title are clearly indentified as a gift from the people of the United States of America. . ,

220 3. Title III provides for the barter or exchange of rice for strategic or other materials which are not produced or of which there are insufficient quantities in the United States of America. Under this title, rice might be exchanged for materials, goods, or equipment required in connexion with foreign economic an’d military assistance programmes and for materials or equipment required in substantial quantities for offshore construction programmes. . » 4. Title IV covers a number of general aspects of PL 480. For example, instates that PL 480 is intended to serve both humanitarian objectives and the. national interest of the United States of America. Such assistance cannot be available if the,dispersal would reduce the United States supply Below the level to meet domestic needs, adequate carry-over and anticipated commercial export requirements. Under Title IV, the United States of America, has authorized *a farmer-to-farmer assistance programme to help farmers in the recipient country to increase the. effectiveness of their Tanning and marketing operations. The management and administration of the shipments of rice under PL 480 are also provided for under this titled . „ ' -I Olarn Chaipravat and Sayan Pariwat,, “An econometric model of.world rice .markets’-’, a paper presented- at the 1976 Pacific Basin Central Bank Conference on Econometric Modeling at the Bank of Korea, Seoul, 8-1.1June 197.6. > 2/ 'Hiroshi Tsujii, “An econometric model of the international rice market and analyses ‘of the national rice policies in Thailand, Indonesia, Japan and the United States”,-Discussion Paper No. 75 (Kyoto,' Center for Southeast AsiaStudies, Kyoto University, July 7 1974), ' > S. Ramkomud, “Thailand’s foreign’trade structure'and policies, 1951-1960, unpublished doctoral dissertation, Indiana University, 1963.. J ' ■fy K. Griffin, The’Political Economy of Agrarian Change: the Green Revolution (New -York, Macmillan, 1974), p. 173. p. 4.

JM1 Blair, Economic Concentration: Structure, Behavior and Public Policy (New York, Harcourt Brace Jorano'vich, Trie.,1972), 1 ’

Augustin Cournot, Researches into the .Mathematical Principles of the Theory of Wealth (trans, by Nath’aniel.T. Bacon) (London Macmillan Co., 1897); also J.M. Henderson and R.E. Quandt, Microeconomic Theory: A Mathematical Approach (2nd edr) .(New York, McGraw-Hill, 1971), pp. 222-22R , * ‘ 7/ * For a survey of relevant articles, see WAI. Corden Recent developmentsin the theory of international trade,” Special Papers in International Economics, No. 7(Prince’ton NJ, Princeton University, 1965). 3 For a discussion os these issues, see I.B. Kravis and R.E. Lipsey, Prince Competitiveness in World Trade (New York, National Bureau of Economic Research, 1971). c 1 ’ t 9/ This is the so-called Hicks theorem, see J.R.Hicks Value and Captal, (2nd ed.) (Oxford University Press, 1968), pp. 33-34 and 312-313. There is an alternative condition to test such a hypothesis. If all kinds of Thai rice were exported in fixed proportion, all Thairice could be grouped ds a single composite commodity in economic analysis, see W. Leontief, “Composite Commodities and the Problem of Index Number”; Econometrica. vol. IV, 1936, pp. 53-59i ' 19/ Approximately, 10 per cent of Thai rice ‘production was exported. The production ratio of non-gltitinous t o glutinous rice was around 3 to 1 in most crop -years. Almost 99 per cent of glutinous rice was consumed in the northern and northeastern parts of Thailand. See “Documents for national rice policies in Thailand for 1977 (Bangkok, Ministry of Commerce, November 1976). > 11/ The estimation is presented fully in annex I. 13 Report of the Eighteenth Session of the Intergovernmental Group on Rice to the Committee on Commodity Problems (Rome, FAO, January 1975). p. 20. 13/ See Olam Chaipravat and Sayan Pariwat, ibid. Also Bertrand M. Renand and Phiphit Suphaphipat, The effect of rice export tax on demestic rice price level in Thailand, The Economics of Agriculture (New Delhi, Wiley Eastern.Ltd., 1975). 14/ J.M. Henderson and R.E. Quandt, Microeconomic Theory, A Mathematical Approach (2nd ed.) '(New York, McGraw-Hill., 1971), p. 62. 15/ This methodology was used in a study, see A.Y.C. Koo, “Competition of American and Japanese Textiles in the World Market: An Empirical Test of the Theory of Comparative Cost,” in Martin. Shubik (ed.) Essays in Mathematical Economics inHonorof Oskar Morgenstern, (Princeton NJ, Princeton University Press, 1967), p. 309. 16/ -A.C. Chiang, Fundamental Methods of Mathematical Economics (New York, McGraw-Hill, 1967), pp.381-2. jlT/, "L.A.. Mears, “The political economy of rice in the United States” Food Research Institute Studies, vol. XIV, No’.-4, 1975, p. 330. a 18/ C.H. Kirkpatrick, “Food aid analysed”, Grindlays Bank Reviews (London), July -1976, p. 9. ‘ 19/ This conclusion is parallel to that-put forward by Harrod, see R.F."Harrod, International Eco'notriics'(Chicago) 1958), “p-. 67.20/ For the rationality of the, programme, see K. Griffin; the Political Economy, of Agrarian Change: 'An Essay on the Green Revolu7 tion (London, Macmillan, 1974), p„ 147. » ! t 21/ Chaiyawat Wibulswasdi, “Thai rice exports: An analysis of its performance in the 1960’s” jn Prateep Sondysuyan (ed.), Finance, Trade and Economic Development in Thailand (Bangkok, Sompong Press, 1975), p. 180. j f 22/ International Rice Research Institute, World Rice Statistics, April 1976, tables 19 and 22.

221 23/ Rice Bulletin vol XXXI, No. 10, October 1975', p. 224. > , u. . ! 24/ D.S. Watson, Price Theory and Its Us’es (3rd ed;) (London, Houghton Mifflin , 19 72) , p. 3 93. ’ ’ 10 23/ J.G.M. Hilhorst, Monopolistic Competition, Technical Progress and Income Distribution (Rotterdam, Rotterdam University Press, 1965). ’ r 26/ R.O. Hieser, “The conditions for oligopolistic price interdependence,” the Economic Record, 1959. See 'also P.J. Hart and S;J. Praise, "The analysis o f business concentration— a-statisticalappraisal,” Journal of the Royal Statistical Society, 1956. 27/ For more details o f the concept of price leader and followers, see D.S. Watson, op. cit., p. 435. 28/ J.M. Blair, op. cit., p. 4. 29/ For the rationality of this;'concentration ratios theorem, see J.M. Blair, qp; cit., p; 7 , also see J.G.M. Hilhorst, op.-cit., pp.! 8-16 J 30) FAO Tradfe Yearbook, voL, 2 9 , 1975, pp. 136-137. 31/ For more details, see A. Donnithorne, China's Grain: Output Procurement, Transfers and Trade (Hong Kong, The Chinese University of HongKongt iEconomic Research Centre, 1970). * f r " ' * >. 32/ J,N. Efferson, “Outlook for world rice production. andttrade”, in International Rice Research Institute', Rice, Science and Man, (Los Banos,Philippines, 1972), p. 137. ’ ' ” 33/ L.A. Mears„loc, dtp 1 t « t . (Lao Banos, Philippines, 1972), p. 137.> . t r 1 I > f 34/ United States Department of Agriculture, U.S. Agricultural Exports under PL 480 (Washington, D.C., Government Printer, 1974) t table 5; Idem PL 480: Total Amounts Shipped through June 30, 1976, (Washington D.C;; Government Printer, October. 1976). 35/ “A policy and action plan for strengthening national food security in Thailand”, 1 FAO-World Food Security —.Country 'reports, 1 (final draft) December 1975, p. 6 . 36/ For more discussion or crop diversification in Thailand, see annex II. 37/ W.M. Corden and H.V. Richter, “Trade and the balance of payment,” in T.H. Silcock (ed.), Thailand: Social and Economic Studies in Development, (Canberra, Australian National University Press, 1967). 38/ For the chronology of Thai rice trade policy 1955-1973, see Ammar Siamwalla, “A History of Rice Price Policies in Thailand”, in Prateep Sondysuvan (ed.), op. cit., pp. 158-162. 39/ These instruments have been described in detail elsewhere. See Sri-on Somboonsup and D.E. Welsch, “Comparison of government to government with private sales of Thai rice exports, 1959-1975,” Research Report No. 17, Bangkok, Kastsart University, Department of Agricultural Economics, 1976), pp. 5-28. 40/ The objectives were similar in other Asian countries. See, for example, Narongchai Akrasanee, “Comparative Advantage of Rice Production in Thailand: A domestic Resource Cost Study, “paper presented at the workshop on Political Economy of Rice in Asia, sponsored by the Food Research Institute, Stanford University, at IRRI, Laos Banos, Philippines, July 1974; Mahar Mangahas, “The Political Economy of Rice in the New Society,” Food Research Institute Studies, voL XIV, No. 3 , 1975. 41/ For more details, see P. Bowring and R. Nations, “Kukrit’s first for farmers”, Far Eastern Economic Review (Hong Kong) vol. 91, No. 5, 30 January 1976, pp. 34-39. 42/ For the rationalities o f these basic assumption, see J. Johnston, Economitric Methods (2nd ed.) (New York, McGraw-Hill, 1972), pp. 8-13. 43/ For the identification problem in model building, see FA1. Fisher, The Identification Problem (New York, McGraw-Hill, 1966). As for the proof o f consistency, see A.S. Goldberger, Econometric Theory (New York, John Wiley & Sons, Inc., 1964), pp. 266-280. 44/ The results were derived from the Nonte Carlo experiments, see J. Johnston, op. cit., pp. 408-420. 44/ The results were derived from the Monte Carlo experiments, see J. Johnston, op. cit., pp. 408-420. 45/ For a review o f this issue, see H. Tsujii, loc. cit., pp. 42-44. 46/ For an opposing view,, see D. Usher, “Thai Rice Trade”, in TH. Silcock, op. cit., pp. 206-230. 47/ For an supporting view, sec IBBD A Public Development Programme for Thailand (Baltimore, John Hopkins Press, 1959), pp. 68-69. 48/ For the discussion o f this issue, see W.L. Smith, “Are there enough policy tools?”, American Economic Review, vol. 5 5 , 1965, pp. 208-220. 49/ See Ammar Siamwalla, loc. cit., pp. 154-155. 50/ For the rationale of the ceteris paribus assumption see M. Friedman, Price Theory: A Provisional Text (Chicago, University o f Chicago, 1962) pp. 23-30. 51/ The optimum price of paddy should be around Bht 2,300 pet ton; below that, milling cannot be undertaken economically; higher paddy prices can be achieved only at the expense of economic efficiency. See P. Seethawong and J.R. Gunn, “A weekly rice model”, a paper presented to the Ministry of Commerce, 9 April 1975 ; also reprinted in the final report, under Contract No. AID/ sa — c — 1030 (Thailand), 30 June 1976. 52/ For more details on the titles of PL 480, see annex III. 53/ A.S. Walter, “Reformulating government programmes for rice, penuts, and els cotton; economic considerations”, in United States Department o f Agriculture, Agricultural Food Policy Review, (Washington D.C., Government Printer, 1977), pp. 105-107. 54/ There were controversies on the real effects of surplus disposals upon the receiving countries, also. Schultz has realized that surplus disposal might have adverse effects on agricultural production in receiving countries thereby imparing their long-run economic development. But khatkhate has presented a theoretical analysis showing why there was no reason to believe that this danger would exist. See T.W. Schultz “Value o f US farm surplus to underdeveloped countries”, Journal of Farm Economics Vol XLII, December 1960; D.R. Khatkhate, Som notes on the real effects o f foreign surplus disposal in underdeveloped economics” Journal of Farm Economics, Vol. LXXVI, May 1962.

222•i 55/ For more details, see FAO Principles of Surplus Disposal and Consul totive Obligations of Member. Nations (Rome, FAO r 1972). 56/ As the destinations of Thai rice exports Chinese-rice exports, see International Rice Research Institute, op; cit., table5 1 9 and 22

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57/ For more details on this issue, see Peter Weintraub, “Taching’s theme is growth Far Eastern Economic Review, vol. 96 J, No, 18, 6;May -1977,.pp. 51-52,, >: r’ 58/ United States Department of Agriculture, Foreign Agriculture Circular, 23 March 1977; p. 11. s 1 59/ L.A. Mears, loc. cit., p. 349. 4 60/ Siam Rath (Bangkok), 27 May 1977. 61/ J.' Robinson, The Economics of Imperfect Competition, (9th ed.) (London, MacMillan, 1950), p.17'. « 1t *

1

tl j a/ See Ammar Siamwalla, “Chronology of Thai Rice Trade Policy 1955-1973,” in’P.'Sondysuwan’fed.), Finance, Trade and Economic Development in Thailand,’(Bangkok, Sompong Press 1975), pp. 158-162. ' " * b/ For a similar approach on crop diversification in Thailand, see Sopin Tongpan, “Agricultural exports and economic development: a case study of Thailand", in N. Islam (ed.), Agricultural Policy in Developing Countries (New York, MacMillan,1974). i >’ c/ J.C. Ingram, Economic Change in Thailand 1850-19 70 (Stanford, CA, Stanford University Press, 1971), p. 313! a/ This annex has.been abstracted from O.H. Goolsby, GlRt Kfuer.and’C. Santniyer, “PL dSo’cohcessonal salesi’history, procedures, negotiating and implementing agreements’’,.United States Departmentof Agriculture, Foreign Agricultural Economics, Report No. 65, September 1970. ' 1 * ■»-

1

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175.87 173.50 126.27

109.30 109.21 85.38 104.56 109.19

75.25 70.60 55.08 97.51 96.10

159.16 158.26

202.75 189.76 173.47 11 .74

149.93 139.50 10 .68 87.84

154.17 135.82 108.87 71.77

1973

1972

1971

469.02 .466.06

538.82 536.94 433.98

574.68 547.86 531.91 367.45

1974

307.80 305.29

346.80 343.11 262.47

393.12 363.56 3'39.52 243.23

1975

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224

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Foreign investment has also contributed substantially to the balance of payments of Thailand. The Bank of* Thailand reported that the annual inflow of foreign capital during the late 1960s exceeded the outflow by about SUS50 million. The equity capital from foreign sources registered, with the Bank of Thailand also showed an upward trend with a peak inflow of about $US30 million in 1968 (see Table 3). Japan, which is the leading foreign investor in Thailand, attracts special attention. ’The presence of Japanese in Thailand is conspicuous not only in industry but in export-import, in wholesale trade, and in banking and sendees as well. The situation has raised fears among many observers about possible Japanese economic domination. To be sure, Japanese business policy ,is highly aggressive, and'market-oriented, a great deal more so than its western counterpart. f The Japanese way of doing business, which is effective, sometimes causes resentment from local competitors. It is not surprising, therefore, that some business interests would occasionally attempt to promote nationalism as a shield' against Japanese competition. , The broader base of manufacturing industry has also produced- a strong movement for protectionism-. This feeling. has become apparent in. a few industries and could be extended to others if such a movement proves effective. Nationalism .and protectionism may have their place in the process of !industrialisation as long as one can look at the problems objectively and make the decisions accordingly. Our effort to industrialise the economy

242 could, however, be hampered if we were carried away by emotional and irrational considerations. Fortunately, the authorities in Thailand seem to be well aware of the extent of economic nationalism that Thailand should realistically follow. Table

3

Thailand: foreign investment 1961—9 (million baht)’ Yearly inflow of foreign equity capital’

Year 1961 1962 1963 1964 1965 1966 1967 1968 1969

32.4 43.7 152.1 153.8 112.4 198.5 400.4 598.2 230.2

t

Total yearly inflow of investment 120.9 156.7 348.2 373.3 603.7 587.7 ' 869.5 1,312.5 1,090.0

-

Source: Bank of Thailand

Total yearly outflow (profits, etc.)

Net yearly investment

204.9 204.7 194.5 201.6 205.0 345.6 377.4 339.0 420.3

-84.0 48.0 153.7 172.7 398.7 242. i ’ 492.1 972:5 . 669.7

”

s

Basic Policy Questions ' The interaction of many forces, both rational ’and irrational, have led to a number of dichotomies in investment promotion. These dichotomies will be identified and discussed. The investment process is so dynamic that continuous examination of policy and promotional strategy is desirable in order to copes with the changing requirements. Foreign Investment

5'

versus Nationalism

*

The first dichotomy is the need for foreign investment in Thailandand,f the-fear of foreign economictdomination. On the one hand, we welcome foreign capital, technology and managerial know-how to accelerate and modernise our industrial sector as well as to make Thailand and especially Bangkok the business centre of South-East Asia. On the other hand, some of us fear economic domination from external sources and resent the economic freedom of the foreign business community. It is a simple case of nationalism versus internationalism and firm decisions must be made by the political leaders. This issue is further complicated when we bring our aspirations for regionalism into consideration. Argument has been advanced in favour of nationalism on a selective basis. Economic activities in the form of natural, resource exploitation, in commodity trade, banking, agricultural processing and domestically already well-established industries, should under this policy be reserved t o Thai nationals. Others would like to see a more protectionist policy by requiring all new business and industrial ventures to have Thai investors in a majority ownership. Yet, a counter argument is also made to the effect that if we want foreign investment, which we do, we must adopt a completely open-door policy. Foreign investment promotion would never work effectively on a half-hearted basis. Some neighbouring countries have insisted on local majority ownership in all investment projects in order to avoid problems and difficulties. Whether this is the best .approach is subject to discussion. Thailand’s position is that we should be more flexible and open-minded. Majority ownership does not necessarily mean control of management, nor does it give a better assurance for success. A multitude of factors must be considered in order to evaluate the long-term contribution of an investment project. In some cases, like an electronic assembling industry for export which is highly labour intensive, 100 per cent foreign ownership may be allowable. This may be the only way of ensuring such new industrial development. In other cases, foreign investors may consider a. majority holding initially; but should allow the local investors to take a greater share of the enterprise after a certain period of time. The current policy in Thailand is therefore to strike a balance in foreign investment by encouraging

243 greater participation' from foreign countries and by discouraging the complete control of a particular industry by a single foreign nation. Diversification of fpreign investment has, however, not been very effective under present political conditions in the region. Many western investors may have begun to adopt a wait-and-see attitude and maybe holding back their investment plans until the political situation becomes clearer. baclc their investment plans until the political situation becomes clearer. If political stability does not return to the region, foreign investment in Thailand and in Asia may come from Japan to an even large extent because of the Japanese investors’ greater willingness to take risks. Outward-Looking

versus Inward-Looking Policies

k

The second dischotomy concerns the relation between import-substitution and export-oriented industries, or inward-looking versus outward-looking policies. Previous industrial investment in Thailand was largely oriented towards import substitution. Such a. pattern of industrial development could be accepted and encouraged in the initial stages of industrialisation. But it could not be pursued indefinitely. Internally-oriented industrial investment in developing countries is limited by the domestic market factor and, in most cases, will require tariff protection against competition and dumping from ‘external sources. Such protection requirements will be even greater in an economy which depends largely on tariffs as the source of public revenue. But excessive protection in the industrial sector may run a danger of making the next stage of' development more difficult due to higher costs of production permissible in over-protected industry. Developing countries are therefore urged to be more outward-looking in their industrial policy. If necessary, we should overcome local market limitations by promoting industrial exports through various forms of fiscal incentive. Such a policy would offset the danger arising from over-protection and ensure better utilisation of economic resources, with benefits accruing from economies of scale. Export incentives combined with tariff protection have been used effectively in many countries in their industrialisation programs, most notably in Japan, Korea and the Republic of China. Their effectiveness is, however, conditioned by a1 proper, selection of industrial activities. Naturally, developing countries can be more competitive in- industries with higher labour content or industries which depend mainly on competitively priced indigenous raw materials. Export incentives- do not necessarily involve subsidy payments to the exporters. What is needed is a system which will enable the industrial producers for export to avoid absorbing high taxes or duties in their production costs. The need is more apparent in a high-duty economy like Thailand. One alternative is to extend market boundaries beyond the national borders by adopting regional industrial co-operation and harmonisation programs. This would call for specialisation in specific industrial activities by each member country in the region of arrangement and market-sharing through a preferential trading system. For example, the ASEAN countries could decide to undertake an Industrial co-operation program by investing in five different industries, one in each country, on a scale large enough to supply the ASEAN region. The industries could be paper pulp, food processing, automotive parts, rubber products and iron and steel. A co-operative program for regional or subregional industrialisation has been under study by the ESCAP. This effort is commendable but much, more is needed to bring political leaders to the conference table to discuss the program seriously. Regional co-operation in South-East Asia is still in its early stage of ’development- and the member countries seem to be content at the present time with the low-cost, low-risk projects such as joint training and research programs, joint promotion activities, and regional exploration surveys. An Integrated Program for Industrial Development The third problem deals with the role of the government in promoting industrial development. Out .economic planners and those who are responsible for guiding the flow of private investment have long advocated labourintensive and agriculture-based industries. Yet, private investors, both local and foreign, do not give this type of industry its deserved attention. Foreign investment, in particular, appears to be more concerned with producing for the domestic market and some even make investment conditional upon partners’ not being allowed to market outside of Thailand. Such restrictions should be lifted but the question remains whether the private sector needs greater support, and assistance from the government in order to fulfil these objectives.

244 Greater fiscal support and understanding from the government and its tax-collecting agencies are being requested by industrial enterprises. An argument is advanced that export-oriented industries, to be successful, must be able to obtain full tax rebate on their exports and obtain it in the shortest possible time. The Customs Department should also be more understanding of the needs and requirements’ of the industrial producers in working out a rebate formula. The revenue department can also be more sympathetic in its legal interpretation and in business tax collection. The 7.7 per cent business and municipal taxes on every level of output can put tremendous financial strain on industrialists, especially in such industries as textiles. High rates of business taxation tend, of course, to favour vertical integration. Perhaps business tax on value-added should be used to overcome the existing problem. The accounting difficulty with the value-added system could be a blessing in .disguise, for it could provide useful information and make tax evasion rather more difficult. Greater budgetary support from tire government may also be necessary in the industrialisation program, especially in the development of industrial estates and bonded manufacturing areas to promote exports. One can easily understand the difficulties of the government in allocating limited financial resources to public development projects, but industrial estates are also an important infrastructure for industrial development. Industrial parks and export-processing zones are in fact self-financing in the same way as public utilities. Perhaps the best way to realise this objective is to set up an independent organisation responsible for industrial estate development in the kingdom. Such an organisation can get initial funds from the government but can obtain long-term loans from external sources for its development program. Local industries can also be developed more rapidly with successful diversification in the agricultural sector. Some of our industries experience difficulties in getting adequate supplies of agricultural raw materials because of a slow response from the primary sector. The problems can be attributed partly to market imperfections and partly to inadequate research and extension services. A strong effort to overcome these obstacles may contribute significantly to our industrial development. Conclusions Foreign investment has undoubtedly been a .dynamic force in the development of Thai industries and its contribution is expected to continue to be important for a long time. The qu stion is not whether foreign investment is needed but how foreign capital and technology should be put to work in the economy of Thailand. On past performance, foreign investment has not been an unmixed blessing. While many industrial successes are due to foreign co-operation, some mistakes in private investment decisions have also been made. This is, perhaps, part of the free-enterprise system. The encouraging note is that we can always learn from our past mistakes any the knowledge can be used to avoid future failures. Looking back over the past decade of industrial development, our investment promotion policy might profitably be reshaped in the following manner, in order to answer more effectively the needs of the nation. First, foreign investment should be welcomed and promoted on a selective basis. Its contribution to the national economy in terms of income and employment must be substantial to justify governmental support. Assembly-type industries would be ruled out except in tire case of labour-intensive items for export. Furthermore, foreign participation should serve to supplement and strengthen local effort, not to overwhelm it. Second, new investments should be more outward-looking or oriented towards export. Such projects must, of course, have comparative advantage and economies of scale. In the case of Thailand, our strength is associated with labour, agricultural supplies and mineral resources. Ability to trade internationally is the ultimate test of industrial efficiency. Third, industrial development should be promoted on a regional basis to overcome the market limitations. Major industrial powers should also be invited to co-operate in our regional endeavours. Although regional industrial co-operation in South-East Asia is still at an exploratory stage, there is much to be gained from joint efforts. The pace should be accelerated. Fourth, while industrial development must become more important, the agricultural sector will remain economically, socially and politically dominant for many years in the economy of Thailand. This does not mean, however, that the government should not extend more efforts in promoting industrialisation. Much can still be done to provide better services and assistance to private enterprises. In this respect, developed countries can be more co-operative in providing economic and technical assistance to enhance our capacity to assist the private

245 sector. Fifth, most developing countries are looking for ways and means of bilising private savings for productive investment. Attempts are being made .to promote general public participation in business and industries through public sales of stock and securities. Such an approach requires public confidence in corporate management and foreign investors can play an important role in promoting local capital market. Established foreign companies always attract public confidence, and they should capitalise on it to induce public capital participation. The policy considerations outlined above are not unreasonable. They take into full acount the fact that foreign investment is a business decision and must be made in view of business objectives. Foreign investment must have an adequate rate of return and security but, as a host nation, we can rightly expect to share equitably in the benefits from our- joint efforts.

Foreign Investment and Labour in Thailand Chirayu

Isarangkun

na

Ayuthaya

Keji Taira

J

Professor Hironb has already made a broad’ and comprehensive survey -of the industrial relations scene in Thailand in his paper which was presented to the 1975 Asian Regional Conference on Industrial Relations* In the last few years, we have also been observing labor relations and work force management in the “formal” modem manufacturing sector in Thailand. It is this formal industrial sector which encompasses most of the foreign investment which have been attracted into Thailand for the last 15 years. Part of our observation has involved interviews with personnel managers (or those who were responsible for personnel matters) and factory workers. Nearly 250 returns from worker interviews have just begun to be analyzed. Manager interviews covered 46 firms over a period of more than nine months. An intensive analysis of these returns was undertaken when 33 of them were available, and reported upon at the 1975 convention of the Industrial Relations Research Asspciation at Dallas, Texas.** The whole set o f 46 firms is currently undergoing various stages of analysis. Among the initial 33 firms, 12 had “substantial” Japanese investment, 6 had majority European - American participation and 15 had various degrees of Thai - Chinese interests. By. means of interviews based on a unifonn questionaire, we have obtained information part of which will be utilized here hopefully to throw some light on the relationship between foreign investment, by broad groups of nationalities, and labor in Thailand. At this point, some additional explanatory background information may be of some use. Professor Hirono has already shown that the share of manufacturing in Thailand’s GDP almost quadrupled from 1960 to 1973 admittedly from a relatively small base of 7.3%. In terms of employment, however, the contribution does not seem to be anywhere nearly so great. According t o tire last Census in 1970, less than 700,000 were registered in the manufacturing sector out of a labor force of 16.5 million. According to the latest estimates based on past surveys, there should be in 1976 just over 1 million workers in the manufacturing sector out of a total labor force numbering over 18 million. But even within the manufacturing sector itself, it would be obvious to the most casual observers that there is more or less a clear line of demarcation between the modem and traditional sectors of Thai industry. According to the last industrial Census 12 years ago, establishments having more than 50 workers accounted for only 0.03% of the total Census, although their share of employment and total receipts was relatively high at 20% and 63% respectively. While few will deny that the growth of the larger firms has probably been accelerated within the last 10 years, their proportionate contribution to employment could hardly have changed by very much. Therefore the modern and formal industrial sector, where we are to find most of the foreign investors, is really an island in the sea of the informal industrial sector, beyond which lies the ocean of the whole traditional agricultural sector. On this point, the Japanese readers would greatly benefit from Professor Yasuhiko Torii’s estimated brealdown of the population into three categories: the modern sector (2.5 percent), the urban traditional sector (6.1 percent), and the rural sector (91.4 percent) (The estimates are presented in a book authored by Professor Torii for the Japan Institute of Labor and published in 1976, p.93). Wages, Promotion and Recruitment Policy Within this context, we can now start to examine some of the characteristics of the foreign corporations with regard to workforce management. First on wages. The table below shows the average wage received by unskilled, semi-skilled and skilled production workers.

Unskilled

Wages & Salaries Semi-skilled

skilled

26 30 36 29

35 41 48 39

52 56 64 55

Ownership

Thai Japanese Euro-American Average

A paper presented at the Asian Regional Conference on Industrial Relations, Japan, March, 1977

247

There* are two noteworthy points. First, it appears that the Thai firms tend to be low-wage while the Euro- American firms are usually high-wage with the Japanese firms in the intermediate position. This confirms Professor Hirono’s conclusion that foreign firms pay better than Thai firms but adds some insight with regardto the considerable differences between ’Japanese and Euro-American firms. The second point is that although the Thai firms are lowest on the ladder, they nevertheless offer wages which are higher than what is likely to be paid in. the informal urban sector.*“Whether this is due to market forces or due to'the ability of the Government to enforce the minimum wage eon these large firms would be interesting to pursue further. At least for the unskilled workers, the latter reason could be the stronger of the two, given the condition of excess labor supply prevailing in Thailand. While it is possible that the enforcement of minimum wage regulations can explain the level of wages in the large". Thai firms, w e mustseek the answer as to why the Euro-American and Japanese firms pay relatively high wages. Why is -it necessary for the foreign firms to pay higher wages since it ,is likely that the traditional sector would supply an “unlimited” amount .of labor? Professor Hirono suggests th& reason to be that these foreign 'firms want “to create and maintain a good public image toward themselves, conscious of the fact that they' are guests of Thailand and liable to ‘undue’ pressures from the nationalist sentiments in the country.”* At the same time, however, -professor Hirono observed that the Thai firms usually charge the foreign firms “for being aggressive in their policy of recruitment..........”* The latter observation leads us to believe that the answer to the relatively high wages paid in foreign firms is likely to b e more complicated than just trying to project a good image to protect themselves. Our enquiry included the question of labor turnover and the findings are that the labor turnover rates in these modern firms are extremely low by international comparison, the average being 8.3 percent for 33 firms. The average rates for the Thai, Japanese and Euro-American firms covered in the survey were 11.5, 6.9 and 2.8 percent respectively. Furthermore, as would b e expected, the low labor separation rates are ‘significantly’ correlated with firms paying, relatively higher wages. Therefore, for the Euro-American firms especially, the high wages offered have given them a stable work force and presumally the ability to attract workers not only from the informal and traditional sectors but from all sources. A stable work force in the present stage of Thai industrialization may yield considerable advantages, especially if some of the conditions implicit' in the internal labor market hypothesis are in operation. With the exception of a few industries, such as textiles, the degree of “technological specificity” in Thai industries is considerable, the number of plant’s using a particular type of technology being very few in number. To man the various positions in 'the production line-up, there is no 'ready source of workers from the external labor market, except for the very menial jobs. Under these conditions training of unskilled worker on the job may be the only feasible alternative to be adopted. Once trained, the ability to keep these workers would yield obvious benefits. The- Euro-American firms, generally using more -capital-intensive technology often transferred directly from the mother company, would be rational in pursuing a high wage policy which would serve to internalize their trained workers from the pressures of the external labor market, hi this way, they would hope to keep the'plants working smoothly unhampered by breakdowns caused by inexperienced hands while at the 1 same time not being'undtfly bothered by the wage bill as they might have been had the. technology been more labor-intensive. For the Japanese firms, there was a clear indication that they showed strong preference in recruiting young inexperienced workers, giving them on-the-job training, before promoting them to higher skill levels and responsibilities. As far as earnings are concerned, most workers receive small annual wage increases. It is further observed that in the Japanese firms the use of aptitude tests are more widespread than among firms of other nationalities. This wouldseem to suggest that the Japanese firms, using a .relatively higher initial wage to start with compared to Thai firms, aim to attract an adequate supply o f average quality young workers whom they are confident they can train, to work satisfactorily in their factories. From past experiences, it would seem that the supply of young workers' left after being absorbed by- the Euro-American firms is adequate for Japanese firms t o fulfil their objective in this respect. ' * Although the minimum daily wage in Bangkok is Baht 25, it is general knowledge that in the numerous smaller informal establishments, the daily wage rarely exceeds 20 Baht for the unskilled. *

Hirono, op.cit., p. 183.

248 life processes, (even if rewarded through the incentive schemes) the more fatigued the workers become at the end of*the working day. This means that while managerial techniques are available for raising work intensity considerably above what is implied in the general life processes, there are physical and social limits to the wisdom of such techniques. (One may recall that Frederick Taylor’s “scientific” task management made public in 1911 was effectively that is, in the minds of millions of working people - -.--refuted by Charlie Chaplin’s “Modern Times” of 1927.) From the point of view of industrializing Thailand, it would be folly to repeat the trails and errors of Western management when one could benefit from the history of such errors in industrialized countries. This ‘cultural clash’ does not pertain only between management and workers. The Japanese commitment towards the long-run also puts them at odds with many of their Thai partners. The latter group which comprises mostly of Thai businessmen with various degrees of Chinese ancestry is usually interested in short-run profitmaximising. Their long-run is only a sum of many short-runs, the short-runs extending not too many years in the future. They would for instance prefer to fill a skilled position immediately by attracting them from other firms without paying too much attention on the possible effect this would have on the long-run cohesion of the workforce. In their marketing policies, they would prefer to cut. losses and recuperate their capital in as short a time as possible using means which could perhaps demage long-run prospects. The Japanese, on the other hand, would insist on protecting the long-run position even at the costs of incurring heavy losses at the start. The Thai counterparts, weaker in their financial backing, bitterly accuse their Japanese ‘partners’ of deliberately pursuing a policy to buy them out of their share of the business. From an economic point of view, the Thai-Japanese differences in the time horizon have understandable structural reasons, reflecting the differences in the development and maturity of the two economies. In a developed economy, the cost of capital is low and profit expectations of firms are adjusted to the relative abundance of capital. The reverse holds for a less developed economy; high capital costs and high profit expectations. Economic risks and uncertainties are also very much part of these differences. For the foreign partner to insist that his Thai partner accept his time horizon is therefore economically irrational because it amounts to the impositon of a developed country’s relative factor prices on a less developed country. Should the foreigner persist, he would have to satisfy his Thai partner’s profit expectations by making up for the low profit of the joint venture by extra-economic payments, which might result in scandelous practices. Going back to the level of wages and fringe benefits, we can confirm Professor Hirono’s findings that the Japanese pay better and give out better welfare than the indigenous Thai firms. While this tends to give some weight towards better labor relations in Japanese firms, we have had to point out some of the dissatisfactions at present felt by Thai workers against the Japanese style of management with regard to wages and promotion. Even the effects of the clashes between the Japanese and Thai partners are transmitted down to the workforce. It is possible of course for the Japanese to try and explain the philosophy behind their actions but. it is doubtful whether they (partners and workers alike) will ever be convinced about their reasoning, or even of their sincerity. While the situation remains so, the Japanese managers may wonder why in negotiations, on wages or matters unrelated to these points of conflicts, the workers may tend to be just a little ‘unreasonable.’ It is possible that the Thai workers cannot easily separate issues and what the Japanese mangers complain as ‘unreasonable’ stands taken by Thai workers is caused by these unfavourable attitudes mentioned above. Whether and how far the Japanese will trade off their style of management and general philosophy to conform with local attitudes remains a question for further observation. Overall Labor-Management Relations up to 1976 In the last section, we tried to examine the differences in styles of management in connection with wages and promotion in order to assess the effects it had on the labor relations in these firms of different nationalities. Now we turn to other aspects of labor-management relations. We shall try to avoid duplicating Professor Hirono’s general description of the legal, economic and socio-political background. Towards the end of the. section, however we shall attempt to fill in some of the important developments, especially since October 1976. First, however, we would like to elaborate on some of Professor Hirono’s analysis of the recent overall labor-management relations scene in Thailand. He concluded that “the sources of labour disputes and strike actions in foreign corporations in Thailand are found both within the companies, for which remedies are available * Hirono, Op. Cit., p. 186. ** which had no legal status

249 It is also further observed that the Japanese firms are more principled than others in their commitment to this style of workforce management. The Thai and Euro-American firms are willing to recruit workers with experience and are willing to give them pay and status in relation to such an experience. The Japanese not only do not give premium to experience but also tend to give annual wage increases to workers in a “slow but sure” manner. Although they offer scales of ranks and titles* which carry nominal pecuniary attachments and egoboosting demonstrations**, the rise in earnings of “skilled” workers progresses at a relatively slow pace. Therefore some of the more able workers being “trained” in Japanese firms are tempted to leave to join Euro-American or Thai firms as “skilled” workers. This takes place most in the textile and those industries where skills are interchangeable and not too plant-specific. Eventually, therefore, the Japanese firms will tend to generate a closelyknit workforce of average calibre with a high, degree of regularity or uniformity of performance, habits and attitudes. In the long run, it is possible that this may produce the most stable kind of workforce to manage. Here we may have stumbled upon one of the causes which has prompted the charge of “exploitation” levelled against the Japanese investors. The mechanism above suggests that Japanese firms, because of their peculiar loyalty to the power of time as the final arbiter of job capability, may tend to overlook individual differences and fail to do justice to exceptional workers, underutilizing their ‘true’ capability. When the technology is not too plant-specific which means that the workers can leave to join non-Japanese firms, these workers would level the charge at their former employers to relieve their own conscience.*** In those cases where the skill and training acquired are not transferrable, most workers could quickly see that it would be worse for them to leave and despite their dissatisfaction would stay on. When they compare their earnings to those of some Japanese ‘advisers’ or ‘technical experts’, doing jobs which to them are not so superior to their own, the cry of exploitation is uttered with more vehemence and seemingly with greater justification. The charge of “exploitation” may also arise in relation to the degree of work intensity per unit of time that is demanded of each worker. In more developed countries like the United States, this is a nasty problem in which workers’ and management’s views collide head on. Management tends to favor the determination of work intensity per unit of time by time-and-motion studies, while workers claim that they know what a fair day’s work is for a fair day’s wage. Usually, the “fair day’s work” claimed by workers appears too low to management. But, as one always experiences in any assembly plant, management cannot get away with a unilateral determination of the speed of the conveyor belt in the hope that the amount of work per unit of time may be increased (for the same rate of wages). Workers usually know how to “beat’ the system; for example, by oiling the wheels on which the belt turns, so that the wheels may run faster but the belt slips in proportion. Similar informal controls by workers over that face of work are numerous. Disputes often break out when workers feel that their sense of “fairness” is blatantly transgressed ----- the most usual kind of revolt against what workers consider “exploitation,” which may be interpreted analytically as an increase in the marginal product of labor without an increase in wages paid to workers. The intensification of work in this sense has so far not become a major problem in foreign enterprises in Thailand. But the problem potential is there. For one thing, the technology used in enterprises in Thailand is the same as in the parent firms in developed countries. It is understandable, therefore, that the foreign managers in these enterprises expect Thai workers to work at the same pace with the same results in the quality and quantity of output as the workers in their own countries. Many foreign managers have remarked about the “slowness” of Thai workers; i.e., they move slowly, use tools slowly, accomplish a given task slowly, calculates slowly, etc. But, to their credit, foreign managers have never dubbed Thai workers “lazy.” It may be because they know altogether too much that workers in their own countries would jump to the challenge of any hint of an adverse value judgement of this kind regarding matters which like the pace of work are essentially mechanical and determinable by negotiation or informal understanding. Furthermore, it is also clear in any country that the “fair”' degree of work intensity is really a function of the general pace of life outside the workplace. True, with appropriate incentives, pecuniary as well as moral, management can make workers do things that they would not do at home and at the pace that is too fast for comfort in daily living. What is known empricially, however, is that the more the pace of work deviates from the intensity of general * eg. Sub-group leader, assistant to sub-group leader, assistant to foreman, foreman , sub-chief foreman, chief foreman etc. ** Different color bands and so on-which are noticeable among the workers themselves. *** The Thai workers, troubled by the traditional value of loyalty implicit under the patronage system, which still operates almost everywhere in Thailand, suffer conscience pa:)gs if they ‘foresake’ their employers for no good reasons. Seeking higher pay is not a ‘gped’ or ‘noble’ reason.

250 internally, and in tile national economy and politics where government actions are-needed”.* No one can deny that, during the ‘liberal’ 1973-76 period, politics, both international and national, did have important repercussions on labor in foreign aswell as Thai companies. It should also be admitted that tire various eventshad created some degree of mistrust against the labor side and this has had the effect of slowing down the advance of the legitimate labor movement which was also taking place during this period. Concerned about this problem, the National Economic and Social Development Board in early 1976 set up a committee comprising representatives from the Government, the Employers’ Association and the Federation of Labour** Unions as well- as a few interested ‘neutral’ parties. After lengthy discussions about the overall labor relations situation, one of the major recommendations, submitted was for the Government to legalize and encourage the establishment of a Labor Council which could claim to represent the industrial workers as a whole as well as having some control of the workers’ actions. It was argued that this was the best way of putting a stop to wild-cat strikes as well as discouraging labor leaders who had political (or even pecuniary) motivations. The workers’ representatives at this meeting were confident that there was an adequate number of labor leaders who were not only reasonable but who were genuinely interested in thewelfare and advancement of workers and these people would, if encouraged, be able to put their own house in order. Anyway, it seems that the NESDB was adequately convinced as is demonstrated by the fact that this recommendation has been included in the present National Economic and Social/ ivelopment Plan. Whether this recommendation is acted upon in the present political atmosphere remains to be seen. Many people may argue that there is no need any longer for such a body to exist because the Government is able t o control any undersirable, political or otherwise, encroachments upon the workers. , Leaving the political factors, which have been affecting foreign and Thai firms alike, we would like to point out from our observations a couple of attitudinal and cultural factors which tend to favor the foreign firms in their labor relations. Even among the humane Thai owners, who also usually manage the enterprise as well, the reactions against workers’ demands are often explosive. These people would have been happy to give benefits to workers, but there is a great deal' of difference between voluntarily giving and being demanded or even sometimes threatened. Many of the strikes, especially the lengthy ones, suffered needlessly from these bitter feelings on both sides. Here it could be observed that in each of these cases the Department of Labor tried their best to encourage the two parties to reach a ‘just’ compromise, but even had they been more experienced or better-staffed they would probably have failed. The foreign firms mostly had professional managers who had experienced such demands elsewhere and did not react emotionally in the same way when the workers present their numerous demands. Although there are no breakdowns in statistics to. prove this, but from general observations and interviews in our survey, there appeared to be proportionately fewer strikes among foreign firms and most of the factories in which there were strikes could settle the disputes within a relatively short time.* Analysing the causes of some labor disputes further, we found another advantage belonging to foreign firms. In the traditional family business and even in the Government bureaucracy, the patronage system has been so widely practised that it has become built into the Ihai value system as the accepted norm. In the larger modern industrial firms, patronage and paternalism could not be practised with the same effectiveness as in the smaller traditional firms. The personal relationship and reward system cannot extend as far down or as widely because of the sheer size of the workforce. In most cases, some formalization of the reward system has been established to cope with the larger- workforce with the inevitable introduction of “meritocracy.” What has ensued in these Thai firms is that those who would gain by merit criteria would clash with those who still try to seek rewards through the informal patronage system. The top management itself often finds itself in a dilemma. To discount tire personal loyalty of their ‘entourage’ is possible in principle, but difficult in practice given the traditional values of Thai society. Underlying the disputes have been found cases where those who have grievances in connection with such situations as described above had incited workers to create trouble as a kind of revenge for tire injustice or dissatisfaction which they felt. The foreign firms dp not suffer from, such “schizophrenia.” Workers in foreign firms do not expect to advance through patronage and the foreign management feels no social pressure in implementing the ‘meritocracy’ system. Thus an important area of conflict has been to a large extent avoided as far as the foreign firms are concerned. * There were a few noted exceptions. This usually happened when the workers overstepped the legal boundary or the boundary of ‘reasonableness.’ Under these circumstances, foreign firms, especially Euro-American, can be very stubborn also.

251 The Role of Foreign Investment in the Future Economic Development o f Thailand We have so far confined ourselves narrowly to the direct relationship between foreign investors and Thai labor. But the Thai industrial labor force is an inseparable part of the Thai nation which is seriously affected by the strategy of economic development pursued and the overall repercussions created by the role of foreign investors in such a style of economic development. Therefore we would like to project a few thoughts in evaluating the role of foreign investors in a possible new style of economic development for Thailand. Long, bitter labor disputes were more numerous among the Thai firms than among the foreign firms for various reasons mentioned above. This implies that the reference to labor disputes, as a major cause of the recent deterioration of the “investment climate” may be very much out of proportion, if by that we mean the 'climate for foreign investors.* Striking the strikes out alone would then not substantially improve the investment climate. It can be safely assumed that the majority of strikes and other forms of dispute arise because there are deeply-felt needs which override the short-run economic considerations on the part of workers (losses of income due to work stoppages). The needs for which workers are willing to pay price in this manner simply cannot be disregarded; nor can they be regarded irrational. As all labor economists know, labor disputes usually have their rational limits in any society bounded by the general conditions of the economy and the- particular conditions* of various industries and firms. What is noteworthy in industrial history anywhere is that strikes have always been partial in’scope, not general. This is not to deny that strikes are not costly, economically as well as psychologically to the nation, but it is also unwise to magnify the costs beyond all proportions. To have a dispute-free situation is ideal, if the lack of disputes reflect a genuine lack of grievances on both sides. But if there1exist, deeply-felt complaints, their outlet would have the benefit of keeping the people alert to the potentially explosive problems, of modernizing economy and society. The people sensitized to problems naturally look for their solutions. It would be useful therefore to pay attention to the ample evi’dence of self-sustaining end self-correcting' forces that exist in Thai economy, society; and polity despite occasional crises. It is generally known that in the last three years since the early part of 1974, foreign direct investment in Thailand has been-stagnating. This has been considered a national disaster, and since it has occurred during the period of heightened industrial action by workers, a spurious correlation has been drawn between “strikes” and the worsening of the investment climate. And yet, during the same period, the Thai economy recovered from the effects of the oil shock and world-wide stagflation by its own bootstraps, as it were, with the reduced stimulus from foreign direct investment. The data presented in the “Year-end economic review” by the Investor (december 1976) are illuminating. The rate of growth of GNP was 4.6 percent in 1974 over the GNP of the preceding year. But tire growth rate increased to 5.5 percent in 1975 and, though all the figures are not yet in for 1976, it is expected to have increased to a higher rate in 1976. The manufacturing output increased by 6.9 percent in 1975 and its increase was further accelerated during 1976. by all accounts. The. double digit inflation rates of 1973 and 1974 were sharply curtailed to 3.8 percent in 1975, though the rate for 1976 may show an increase to slightly more than 5 percent. What we have observed, then, is economic recovery, growth and stabilization in association- with the" stagnation of foreign direct investment and despite the much talked-about industrial disputes. This would seem to indicate the structural strength of the Thai economy.* It has weathered a major crisis imposed on it by the world at large, while affording the luxury of “strikes” and other developments in industrial relations. This does not mean that Thailand does not need, foreign capital or foreign direct investment. It only means, that the economic and industrial base of the Thai, economy has been laid on which further progress may now be seen to depend more on the domestic initiative while new foreign direct investment would, play a subsidiary role, though supportive and stimulative. This is certainly a welcome trend, if it is one, for,the Thai economy which has traditionally depended rather excessively on external economic initiatives.** The capability and sophistication of the Thai in managing the enterprises have evidently increased to a substantial level, thanks, of course, to the accumulation of past foreign direct investment as well as domestic responses to the external stimuli. Foreign direct investors are welcome, but it is clear that the Thai economic development has come of age and that the Thai economy is capable of discretion, on the kinds of investment that are most likely conducive to further development. From this point of view, the talk of the so-called “investment climate” should not be considered a carte blanche for unbridled foreign direct investment solely on the investor’s terms. Rather, tire climate should refer to the whole animus of economic growth that pushes the Thai economy forward. Of this, the * It coulcl be argued that potential foreign investors have been discouraged by the' disputes which had taken places in the Thai firms fearing that these word'd spread to the foreign firms. From our analysis, however wise management based on a full understanding of the work force could keep the foreign firms relatively free from labor problems.

252 most important is the initiative and entrepreneurship from the domestic sources. Fortunately, experiences of the past three years are also instructive in this respect. One usually associates foreign direct investment with largescale, capital intensive enterprises. But too much infatuation with these qualities of “modern” investment only accentuates the duality of the economic structure, and the emergence of rather acute inter-industrial and interregional imbalances in the past decades may well have been due in part to the absence of a clear view of the requisite characteristics of investment for balanced growth in an economy like Thailand. (We are very much encouraged by Professor Torii’s thoughtful review of the structural evolution of the Thai economy, which is substantially ours, too.) Then something new happened during the last year or two. In so far as the promoted enterprises which actually started operations are concerned, the average size in terms of capital decreased between 1974 and 1976. In association with that, there was an increase in the number of enterprises promoted. This certainly cannot be considered a trend, or if it is one, cannot yet be evaluated good or bad. But there are solid economic justifications for smaller-scale, more widely shared enterprises, even without going as far as Mr. Schermacher does — “Small is Beautiful.” Widely shared economic activities are obviously desirable for heightening the sense of participation of a broader populace in the progress of the economy. Smaller-scale enterprises are flexible and hence more adaptable to changing economic exigencies than larger enterprises with a considerable amount of sunk capital. In addition, the techniques of production and management are more easily understandable and therefore can diffuse quickly. A smaller labor force may also maximize the human meaning of work, facilitating face-toface contacts and inter-personal- interactions. What is required of foreign direct investors is precisely the bundle of these qualities; i.e., bring in activities that can be readily understood by the Thai and that can diffuse know-how quickly and widely throughout the Thai economy. Professor Torii is unusually astute in pointing out that the thinking of the Thai economic planners seems to be moving in this direction (pp. 50. 51). He does so by comparing the investment strategies of the first, second, and third economic plans of Thailand. If so, what has been happening in the actual practice since 1973 bodes well for Thailands economic planning, implying that the Thai economy is indded ready for a new and a more humane style of economic development in the coming years. New Developments since October, 1976 The foregoing represents an analysis of the pre-October 1976 period preceding the political take-over of the National Administrative Reform Council. Although the time has been too short to be able to analyse any new trends, we feel the obligation to report on the new legal developments and some of the phenomena since the political change. The first decree of the National Administrative Reform Council dealt with its labor policy. The following are some of the important points contained in the decree. 1) The maintenance of the present legal framework in allowing the rights of formation of organizations on both the employers and labor sides and the allowance of both sides to.negotiate with each other on matters of mutual concern. 2) The dissolution of all bodies, which have been in existence not in accordance with the existing Labor Relations Act. The most important ‘illegal’ body dissolved under this decree was the Federation of Labor Unions of Thailand riiich had been attempting to act as representative of the whole industrial workforce. A few days afterwards, however the Labor Relations Act was amended by Decree No. 46, which allowed the formation of “labor federations” from a group of at least 15 individual employee associations. However, no formation has yet been made since then up to the present time. Following close behind NARC Decree No. 1 on 8th October, a Ministry of Interior Decree was announced prohibiting all strike actions and factory lock-outs during the period o f martial law and referred all disputes for the judgment of the National Labor Relations Committee. The capacity of the National Labor Relations Committee to investigate facts and deliver judgments is fairly limited, being a tripartite body made up of part-time members who have other functions to perform. This in itself probably discourages cases from being raised by employers and especially from workers. In addition, workers probably feel that the present political climate is hot appropriate for them to make too many complaints about what they feel to be grievances. Under these circumstances, it is rather difficult to assess the present true situation o f management — labor relations. * As well as some good fortune in terms of high agricultural and commodity prices in the world market and the good weather enjoyed by the Thai farmers. * * See, H.B. chenery and N.G. Carter, “Foreign Assistance and Development Performance, 1960-1970, American Economic Review, Vol. LXIII, No. 2 (May 1973).

253 Conclusions This paper has attempted to follow up on Professor Hirono’s description and andysis of the relations between foreign investors and labor in Thailand and point out a number of factors from our observations, some of which tend to favor foreign investors in their relations with the Thai workforce in their factories while others may be the root causes of stresses and strains in such relations. There is no illusion that foreign investors are philanthropic or benevolent in nature. From the recipient country's point of view, they should be welcome only in so far as they provide greater benefits than costs to that society. It is expected that these foreign investors will be able to reap some benefits for themselves, otherwise they will not remain in that country for long. Such benefits should be kept as low as possible. While these things are easier said than done, one can perhaps say that it should a matter of hard but wise bargaining on both sides with good understanding and ‘good faith’ on both sides. To understand, the root causes of efficient or inefficient workforce management increases the size of the cake to. be shared and increases the ‘good faith’ and mutual understanding which is the necessary background for the hard but wise bargaining mentioned above. On the Thai side, it is felt, that more effort should be spent on specifying the desirable nature of future development and in placing more confidence in mobilizing the indigeneous investors while of course encouraging and attracting the type of foreign investors who will contribute most to objectives laid down in the national development plan.

The Role of Japanese Investment in Thailand Sura Sanittanont

Introduction Since 1960, Japan has loomed large in the Thai economy, being a dominant partner botfi in trade and investment. Looking into the future, Thailand will probably be more rather than less dependent on Japan as a trade and investment partner since the United States seems to be withdrawing her- military as welkas economic influence from -Southeast Asia. From the standpoint of Japan, however, Thailand is only a minor economic partner. The economic relationship between the two countries is therefore peculiar and uneven. This relationship ■has also been subjected to considerable stress and strain in recent years, both in the area of trade and investment. In order to improve the relationship, it is necessary to identify the causes of such stress and strains, so that efforts could be made to remove them. This paper proposes to take a close look at the Japanese investments in Thailand, in the hope that it will shed some light on this very difficult and complicated area of economic activities. Special emphasis will be given to the textile industry, now the largest industry in Thailand. Some Salient Features of Foreign Investment in Thailand. In 1960, the military government of Thailand embarked on the then fashionable game of “formal development planning” by drawing up the so-called “Five Year Economic Development Plan”. In the “Plan”, targets of GNP growth were set up and various “developmental programs” were implemented to achieve the “targets”. As part of the “development strategy”, it was considered necessary to encourage and promote private investments in various productive areas, especially manufacturing. In view of the fact that the administrative machine existing at that time was considered to be slow-functioning, the government deemed it necessary to introduce the Investment Promotion Law in 1960 and created a new statutory body called the Board of Investment (BOI) to administer the law - again a very popular and fashionable act among developing countries in those days. Under the Investment Promotion Law, any investment ventures that qualify for promotional privileges are given various import duty and income tax concessions. The government’s investment promotion program was well received by the private sector and investors, Thai and foreign, responded with a significant increase in investments. From 1960 to 1973, a total of 680 projects were granted promotional certificates in 16 areas of production and services (see Table 1 and 2). The industries that were most heavily invested were, respectively, textile, food and cold storage, minerals and metal industries. From the inception of the investment promotion program, foreign investment was figured to play a key role in the industrialization process of Thailand and various measures were taken to attract foreign investments. On the whole, it could be said that a sufficiently large quantity of foreign investments have been attracted to Thailand. Whether or not they are of high quality is a moot and difficult question to answer. Foreign investments have come to Thailand largely in the form of joint ventures (see Table 1). Among the 680 investment projects that have received promotional privileges, about 50% are joint venture projects. In terms of the registered capital of these ventures, foreign equity accounts for only 25 to 30 per cent of the total registered capital. However, the actual influence and importance of foreign investors are significantly larger than their equity share, because in many cases, foreign partners hold key positions in the management, production and even marketing departments in the company. This is quite evident in the textile industry. Among the foreign investors, the Japanese are the largest and the most important ones, followed by American investors and the Chinese from Taiwan (see Table 3). Japanese investment have been concentrated in four major areas of production, namely, vehicles and spare-parts, textile and fibre products, chemicals and chemical products, glass and glass products, in that order. Together they account for over 83% of Japanese capital invested in Thailand (see Table 4). *

A paper presented at International Symposium on Japan’s Overseas Investments, Tokyo, November, 1975.

255 The Role of Japanese Investment in the Textile Industry. Japanese capital, technology as well as management loom and can be summarized as follows :

very large in the textile industry in Thailand l

1. Japanese equity accouts for about one-fifth of the registered capital of tlie’promoted textile ventures up to 1973 (Table 4). 2. About half of the textile machinery used in Thailand is from Japan (Table 13). 3. About one-third of the raw materials and intermediate inputs are acquired from Japan (Table 15); 4. Japanese technicians and engineers are employed in most large scale factories, including those without Japanese equity participation. » 5. In the 28 largest textile producing companies in Thailand, there are about the same number of Japanese directors, managers and deputy managers as there are’ Thais (Table ,14), In fact, in many cases, Japanese directors and managers tend to have greater influence on 1 the policy and management of the company than their Thai counterparts. The dominant position of Japanese investments in Thailand’s textile industry is illustrative of the overall Japanese influence in the Thai economy, both in trade and in direct investment as well as in other,related economic activities. This has tgiven rise to a very peculiar and delicate situation, especially from the view-point of Thailand. It also puts Japanese investments and Japanese businessmen in Thailand in a conspicuous position and becomes an obvious target for any expression of nationalism The Pattern of Expansion of the Textile Industry in Thailand. ‘ Prior to the 1960’s, Thailand’s textile industry hadremained in the infantile,' cottage industry stage for a long time. It was small in size and unsophisticated in technology. Since the implementation of the investment promotion program in I960,, the textile industry has been one of the fastest, growing industries in the country (see Tables 6 - 8). From 1961 to 1974, the number of spindles have increased from 92,516 to 838,060 and the number of looms have increased from about 7,000 to 44,957, representing increases of nine folds-and six folds respectively. As the production capacity of the textile industry increases, the number of workers in the textile industry 'is, now in excess of 100,000, making it the'largest labor force in a single line ofindustrial production (see Table 5). During this period of rapid expansion in the size of the industry, there has also been a very significant improvement' in technology. More and more modern and sophisticated machinery has been*imported. Foreign engineers, ment -in technology. More and more modern and sophisticated machinery- has been imported. Foreign engineers and technicians are being employed' in large number by the factories. The increase in the size and technical sophistication of the textile industry is reflected in the increase in the quantity and composition of the textile products turned -out by the industry (see Tables 7 - 9). In’both cotton textile and man-made fiber textile production, there has been a shift from the production of yarn and fiber to woven fabrics. Thus, over the past several years, the output of cotton, and man-made yarns has not changed significantly, while the output o f cotton and man-made fabrics has increased a lot. Cotton fabrics production’increased from 385 million yeards in 1970 to a peak of 613 million yards in 1973, then dropped back to 525 million yards in 1974. Similarly, the output of man-made fabrics has increased from 11.0 million yards in 1970 to 417 million, yards in 1974. Perhaps a more significant change in the nature of Thailand’s textile industry is its transformation from a basically import-substitution industry info an export-oriented industry, largely in response to very strong foreign demand for Thai textile products in the late 1960’s and early 1970’s. The import of cotton and man-made fabrics into Thailand has declined from 130 million yards in 1970 to 89 million yards in 1974, or a drop of 31.5%. Exports, on the other hand, has increased from a mere 3.6 million yards to 83.5 million yards over the same period, according to official figures. However, it should be pointed out that the official export figures represent only ’a fraction of Thailand’s actual textile exports. A much larger quantity of cotton as well as man-made fabrics to the tune of 400 - 450 million yards are exported to the neighboring Indochinese states in what is known as border trade and is not registered in the official records for exports. Although the textile industry has been growing at an unusually high rate over the past decade and a half, the pattern of growth is by no means smooth or orderly, rather it has been hazardous and ridden with seemingly

256 endless crises. During the early stage of expansion in the early 1960’s, the industry is constantly threatened by competition from imported products while in the later stage during the late 1960’s and early 1970’s, it is often plagued with internal cut-throat competition, over production or shortage, depending upon world market condition. The transformation of the textile industry from an import-substitution into an export-oriented industry was also, more by accident than by deliberate design. It was only due to the unusually strong foreign demand and exceptionally high prices for the textile products that prompted the industry to go into a phase of rapid expansion in 1972 and 1973, with further expansion planned for 1974. Then came the oil crisis and the ensuring world recession in 1974-75, causing the world market for textile products to shrink. The hardest blow to the textile industry in Thailand came with the fall of South Vietnam and Cambodia to the communist forces, effectively eliminated the border trade through which a large quanity of textile products were exported. This has left the industry with enormous unsold stock and excess capacity, plunging the industry into its most serious financial and marketing crisis with no immediate relief in sight. The Public View and Attitude towards Foreign Investment The attitude of the general public towards foreign investment has been less than favorable in recent years. During the 1960’s, foreign investments and foreign businessmen were quite warmly welcomed. The economic boom of the 1960’s and the government’s policy to induce foreign investment into Thailand and resulted in an unprecedented influx of foreign investment, especially from Japan. But within a year after what appeared to be the end of the economic boom in 1969, demonstrations led by university and vocational students began to erupt with increasing frequency and intensity, culminating in the “violent” demonstrations against the visiting Japanese Prime Minister in January 1974.* Since then, demonstrations have become widespread and branching into protests against alleged American interference in this country’s internal affairs. Now, demonstrations have been taken up by hotel workers, factory workers and even farmers against low wages, poor working conditions, and high rent and interest. The current labour unrest can be regarded as a confrontation between labour and the owners and management of various enterprises, Thai and foreign alike. These expressions of resentment toward foreign investment and foreign economic “domination” are in fact expressions of public disenchantment with the overall pattern of economic and social development o f the country, where after more than a decade of governmental development efforts the economy shows no sign of having achieved sustained growth. On the contrary, the ill effects of mismanagement by the military regime resulting in certain structural anomalies are beginning to emerge, income disparities between the rich and the poor, as well as between the urban and the rural sectors, have been widening at an alarming rate. Foreign investments, as the mass, of the people see them, have contributed to and even accentuated this anomalous pattern of economic growth. Foreign business and foreign investments, being the most conspicuous symbols of economic disparities, became a convenient target for public attack on the country’s economic structure. Discontent and frustration over economic conditions were widespread, and eventually the military regime that ruled the country crumbled under the pressure of angry public demonstrations on a national scale in October, 1973. Since then, social unrest, labour disputes, rampant inflation and ensuring political and economic instability in the country have severely damaged the investment climate in Thailand. The precise extent to which foreign investments have been discouraged cannot yet be determined, but it is generally agreed to be significant. This will have very far-reaching consequences on the economic conditions of Thailand in the medium-term future. Unless the current social and economic instabilities are dampened, and unless the country’s basic policies toward foreign investment are clearly defined, Thailand should not plan to rely on foreign investment to play any significant role in the country’s industrialization. Before examining ways and means of improving the investment climate, it is necessary to look into the underlying causes of discontent with foreign investments among the Thai people. There .are two levels of discontent, or resentment towards foreign investments. Firstly, on the people-to-peqple level, there is an apparent lack of harmony between the Thai people and businessmen on the one hand and foreign investors and businessmen residing in Thailand. One of the major complaints among the Thai people about foreigners, and particularly about the Japanese who are forming an increasingly conspicuous economic presence in Thailand today, is that some of them possess an exaggerated .sense of superiority and tend to be a socially closed group living in a foreign enclave in this country. A lack of communication and understanding naturally breeds suspicion and resentment. In order to build up harmonious economic and cultural relations between the two peoples, both the local people and the foreigners must try to understand each other and adjust themselves in whatever way they can to accommodate the other. * Only by Thai standards could these demonstrations be called violent as paper models of Japanese cars were burned instead of real ones as elsewhere, and material damage was confined to a few broken windows.

257 With proper orientation of foreign businessmen to the ways of the host country and open mutual exchange, the situation can certainly be improved markedly. A more complicated and difficult problem in interpersonal relations is that Thais often feel that foreigners who come to do business in this country benefit more from their ventures or joint ventures than do the local people or local partners. However, the fact must be faced that foreign investors usually can manage to get a larger share of the benefit from any venture even when they are playing a clean business game because foreign businessmen are often better equipped, better trained, better financed, and more skillful than their local counterparts. In other words, the relationship between foreign investors and local investors is a strong partner-weak partner relationship. Naturally, the strong partner will always come out ahead, unless he can voluntarily restrain himself from taking full advantage of his position. However, it is unrealistic and difficult to expect businessmen, foreign or Thai, to exercise such self-restraint. Local businessmen will have to learn from experience and train themselves in order to catch up with their partners in this game. This will be a long and costly process. Secondly, there has been a growing feeling among educated Thais that foreign investments are not making the positive contributions to the industrialization and overall economic development of the country that are expected of them. In the most crucial area of technological transfer, for instance, it is felt that after more than a decade’s history of industrial promotion and the influx of foreign investments, very little impact has been made on the overall productivity of the country. This is attributed primarily to the fact that foreign investors are reluctant to train and put Thai people in important technical or managerial positions. Furthermore, it is maintained that whatever technological transfer has been effected, the benefits have been confined to only a small group o f people (namely the Thai members of joint venture projects) in the urban sector, thereby contributing to the widening gap between the rich and the poor, and between the rural and the urban sectors. The Need for a Foreign Investment Policy From the foregoing brief analysis of foreign investment in Thailand, it evidently follows that w e have reached a stage where the government must make a critical reassessment of past policies and practices regarding foreign investments and must formulate, for the first time, a clearly defined foreign investment policy for the present and the future. First and foremost, the government must decide whether or not Thailand will continue to allow foreign investment to play a role in the industrialization of the economy, and if so to what extent. Considering the present economic structure, resource endowment, and the level of technological development of the country, it seems fairly certain that Thailand will continue to rely on foreign investments in the forseeable future, unless there is a sudden and dramatic change in the country’s basic political and economic policies, which is rather unlikely. This being the case, the government must proceed to clarify its position publicly. At present, foreign investors must be quite confused as to whether they are welcome in Thailand. On the one hand, government agencies concerned with attracting and promoting foreign investment are trying to do their part in getting as much foreign investment as possible. Local businessmen are also trying to attract foreigners to enter into joint-ventures with them. On the other hand, certain other public regulatory agencies and a large part of the vocal public often criticize foreign investments as exploitative, calling for the gpvemment to discourage or even ban foreign investment; and radical voices are occasionally heard calling for nationalization of foreign businesses. It is apparent that the conflicting sentiments and pronouncements against foreign investments are very damaging to the investment atmosphere in the country, despite the fact that Thailand possesses many attractive features for foreign investment; e.g. rich natural resources, low wages, and a very versatile labor force. Some foreign investors liken the situation of Thailand to that of a very beautiful maiden with many young men courting her, but with uncooperative parents who tend to drive away potential suitors. Therefore, the government must first develop a clear and coherent policy of its own toward foreign investment, and it must then convince the public of its correctness and importance if it does decide to attract foreign investment. The second major area in which improvement requires government action has to do with cumbersome laws, and confusing and conflicting laws and procedures governing investors and foreign investments. Foreigners are concerned and discouraged, for instance, by the Alien Business Law and the Alien Occupation Law. The difficulties arise not merely because such laws exist, but because of their unclear definitions and inefficient and costly

258 procedures. Foreigners may have to wait for months before a ruling as to whether they will be allowed to participate in a certain line of business. They may have to wait for months before they receive the necessary work permits. And while waiting, expenses must be paid. These factors often weigh more than or just as much as any tax concessions received by foreigners. It is through efficient practices regarding foreign investment that Singapore has made itself such an attractive, and popular place for foreign investment. The above improvements, when implemented, will encourage more foreign investments to b e made in Thailand but not necessarily better ones from both the private and. social points of view. Yet, it is a better quality o f investment projects that this or any country needs. This means that we must try to attract projects with quite different features and characteristics from most that we have been able to attract so far. We need to attract foreign investments that will effect significant transfers of technology, both in the technical and in the managerial fields. Such transfers of technology should not be confined to a small group of people. The knowledge should be diffused among the masses. However, it is the responsibility of the government more than that of the foreign investors to see to it that the technological level of the masses is raised. Foreign investments should also be directed to the less developed parts of the country rather than be allowed to concentrate in the vicinity of the Metropolitan area. Labor-intensive, employment-generating projects should be encouraged rather than capital-intensive ones. Finally, in view of the country’s huge and chronic balance of trade deficits, export-oriented projects should be given priority over projects that produce goods for local consumption, since the latter may be “new” consumer items rather than substitutes for imported consumer goods. Only when we can attract such “quality” foreign investments will it be in the long-term interest of this country to open its door to foreign investment. And only when we have succeeded in doing so will public resentment and hostility towards foreign investments and businessmen be eliminated. It is not always necessary for Thailand to give greater concessions in term of taxes and other benefits in order to attract more and better foreign investment. The rate of return to investment in Singapore is generally lower than in this ..country. And yet Singapore is generally rated as having a better investment climate despite the limited resources and markets of that country. Clarity and stability of government investment policy, and efficient a ministrative processes are highly valued in foreign investors’ minds. In short, certainty in policy, stability in the investment atmosphere, and simplicity in administrative practices weigh heavily in potential investors’ decisions to invest. Probably the most important thing to be done in order to attract more foreign investment to Thailand and to improve its quality is a total revamping and substantial improvement of the administrative agency concerned with attracting and screening foreign investment, because it is this agency and the officials working in it that make it possible or impossible for Thailand to attract more and better foreign capital. Objectives'can be set, and criteria can be laid down, but unless there are people competent and concerned enough to execute them, the objectives will remain on paper! It is not possible to reform the entire administrative system in this country in the near future; and’ if the agency responsible for foreign investment remains a part of the existing administrative system it will not be able, to escape the red tape and the drawbacks of the system. The low salary scale imposed by the civil service alone is sufficient to make it impossible to. recruit and retain personnel administering such an agency who possess the required vast knowledge and skill, both managerial and technical. Therefore, the short-run solution to this problem is to spin off the agency responsible for screening and administering foreign investments from the civil service system of the country and accord it an autonomous status as has been done in some other countries. Unless such a drastic step is taken, there can be no escape from the vicious circle of poor organization, poor administration and miserable performance. Conclusion Foreign investment has played a significant role in the industrialization of the urban sector of the Thai economy. Therefore such investment can be described as having made positive contributions to the short-term growth of the economy during the 1960’s and early I970’s. However, the industrialization process and the resulting economic performance have been less than impressive when compared with such countries as Korea, Singapore, Taiwan or even Malaysia. 'In fact, many would consider Thailand’s industrialization program a failure from the long-term overall economic development point of view, because the industries that have come into existence during the past decade or so are by and large capital-intensive, urban-based and catering mainly tourban markets. This v pattern of industrialization has resulted in increasing disparities between the rich and the poor, and between the*

259 urban and the rural sectors. Foreign investments and investors are considered to have contributed to this unhealthy pattern of economic growth, and have become a target for attack from the vocal public. It is in this context and perspective that the recent sudden upsurge of social and political unrest in the traditionally docile Thai society should be interpreted. The fact of the matter is that despite the disadvantages and harmful effects of foreign investment, it is unlikely that Thailand will change her basic economic policy and reject future foreign investment. In view of the country’s economic structure and resource endowments, it would not be in her interest to do so. But in order to minimize the harmful effects of foreign investments that have been experienced in the past, the administrative system must be overhauled. Indeed, the success or failure of the entire development effort crucially depends on whether Thailand can replace, the existing archaic administrative system with a reasonably efficient one. A noted development scholar has aptly pointed out that if a society changes more rapidly than its political (or administrative) system, national development in all fields slow down until the government catches up.

260 Table 1:

Composition of Foreign arid Indigenous Equity in Promoted Enferprises

Registered Capital

Promoted Firms ’ll Total ( (Number) 1960-62 1963—65 ,1966 r 1967 1968 1969 1970 1971 1972 1973

64 131 > 29 „ 76. ; 82 n 51 54 49 61 97

J

Thai (%)

Foreign (%)

45.3 35.9 41.4 46.1 ' '4'6.3 47.1 40.7 59.2 54.1 48.5

1.6 0.8 6.9 3.9. ,

Joint (%K

Total ’ ‘ (M. Baht)

53.1 63.3 51.7 50.0 43 9 51.0 55:6 40.8 45.9 50.5

994 1,274 }s 5 1 2 -1952 , 1 615 ‘ '1,251 '902 456 1,008 1,284

Foreign

‘Thai (%) 4

£

ft '• 3.7 — — 1.0

11

» 75.1 ‘‘‘60.73 62.9 74.1 54.7 1 64.4 68.2 ‘ 70.2 76.6 77.0

.»

24.9 39.3 37.1 25.9 45:3 , 35.6’ 31.8 5 29.8 23.4 23.0

Source: Board of Investment

Table 2 :

Distribution of Promoted Enterprises by Industrial Group. 1960—1973

Promoted Projects* Industry


Production

Export

Consumption /

Cotton Yarn (tons) 1970 1971 1972 1973 1974 Cotton Fabrics (’000 yds.) 1970 1971 1972 1973 1974

,

Man-made Fiber (tons) 1970 197.1, 1972' 1973 1974 Man-made Yarn (tons) 1970 1971 1972 1973 1 1974

Import

t

1,941 2,098 827 1,215 253

385,478 471,794 513,928 612,616 524,708

56,323 48,616 43,312 44,266 38,014

28 141 225 1,227 174 ;a i

44,316 52,386 57,131 69,393 59,609

3,462 438,265 15,876 498,838 36,496 517,318 69,039 .583,863, 32,348 ‘ ’ ‘ 526,442

3,094 11,685 15-.588 28,552 28,552

6,760 10,892 18,878 24,233 15,589

273 1,061 3,402 3,518 2,546

6,822 20,170 29,682 35,418 29,783

8,111 6,294 10,978 12,931 9,970

273 1,061 3,902 3,518 2,546

14,660 25,400 -36,758 43;368' 45,208

110,444 194,201 286,364 410,058 416,691

74,176 43,103 44,735 49,770 51,102

175 415 23,518 75,309 51,153

192,194 241,751 301,423 360,209 400,247

1

10,665 /22,577 33’966 40,236 44,141

f

’

* " 'Man-made Fabrics' (’000 yds.) 1970 1971 1972 ’ 1973 1974

42,403 50,430 56,530 70,216 58,762

‘

u

Source: The Thai Textile Mfg. Association

4

J

264 Table 10:

g*

Textile Imports of Thailand*

1970

i

i

1971

1972

1973

1974

50,112 753

49,361 780

86,133 1,354

62,506 1,487

48,616 220

43,312 2294

44,266 268

38,014* 362 < *i

*

t" Cotton,& Cotton Yam Vol. (tons) Value

42,190 543

r

Cotton Fabrics ’ Vol. (’000 yds.) ‘Value ' * f - . t Man-made Fiber & Yam Vo].-(tons) * j jValue

; t

56,323 382

1

I ,X

3

«■ d

it

17,186 388

28,356> 67,5- > ?

37,164 995

43,103 355

44,735 323

49,770 468

t-

Mammade Fabrics Vol. (’000 yds.) Value

74,176 617

"

Garment Vol. (’000 pcs.) Value

’

TOTAL VALUE

3,339 74

v

Source: TTMA Note: {Value in millions of baht

ii

1,520 47 1,764

2,017

t *

nV’ 14,871 f 401

’

?

, .

tfl

1,327 46

,

ti vp

2,053

*

25,559' 9.71. 1 t 51,102 712 - •' i - ?.

.J 1,212 46

1,359 61

3,131

3,594

f J "

r

f 1

s« 1

c

Table 11 :

* .1 dii*- -*

♦e 3,*

• i'

t j »

1

t.

V 1971

,

1972

>S(

, » s

U

i

'* 285 2

383 5

1,853 32

3-462 21

15,876 60

36,496 143

1,061 21

3,902 108

415 4

23,518 128

H 1 «s fr

iAs S. 273 I* 6 L 175 2r 472 16

r

*

1 Source: The Thai Textile Mfg. Association Note: Value in millions of baht

. -

i

*

1973 '

1974

.i TOTAL- VALUE

f

Textile Expoits from Thailand

c J. H) Cotton &Cotton Yam „ Volht'ons) Value

Man-made-. Fabrics Vol;(’000 yds.) Values

t t *

*

r

J -t >J 4 7 . ;* » i t *

‘

3,806 66 155

13 ,511, 263’ 674

i

1,473 ' 42 ; 'I

178 18

69,039 ' 411 C* i

32,248 254

3,518 ’ ‘122 1a ■

"" ‘

o J 75,309 ,

51,153 534

619;m ?V i 31.761 . r. ‘ 677 >; . 1 r 1,871? V p C‘

2,546 l ’ 148

r

31;656 845 1,799

£

265 Table 12:

Wholesale Price indices for Textile Products in Thailand

Textile &

£■

Sub-Indices

1968 ’ 1969 1970 1971 1972 1973 1974 1975 Jan. Feb. ,r Mar. , Apr.- " May June 1 «.

‘

’ t

Products

Yarn

100.0 104.6 106.8 107.6 110.9 129.3 160.6

100.0 102.8 104.3 109.8116.8 141.8 '172.6

100.0 102.2 104.0 102.8 104.3 123.2 149.8

100.0 101.5 101.2,, ' 101.2 101.2 126.1 158.5

100.0 115.6 120.6 '124.1 131.5 141.9 190.4

138.3 138.3 ,1-38.3 ’i33.6 135.2 135.2

130.8 129.9 129.9 129.9 153.8 153.8

158.5 158.5 158 r.5 158.5 158.5 158.5

185.0 185.0 185.0 185.0 162.9 ,162.9

’

142.3 141.7 141.7. 141.7 150.3 150.3 ...

‘ ,

Fabrics

Apparels

’

j I

1

• * ’ I I f f

-

1 I 4 » ’

:

i

f 1

i;

r’

-

. * i i

a,

Tpr** :

‘ !_

t

1 r »

’ Table 13:

’ 1 J-

j.

'•

-

Total

* -

Import

Man-made Fiber Machines ' “ 1970 L 1971 . 1 1972 " , 1973 ? L 1974 * r? Spinning & Weaving Machines 1970 1971 1972 1973 1974 Finishing Textile Machines 1970 1971 1972

+-

*I

s

r

K; I '

?

■

’ x Thailand’s Import of Textile Machinery L {

L

$ 1

’

' I

~ l'

1 t :

..... * j u .

>■ f.i i t 7

t

c . Department n J * ofr nBusiness ■ 0 Economics d Source*


.Others

Value *3 ’ “ 123,472 19,916 67,907 41,348 111,075

157,258 42,750 129,435 89,096 259,375 556,864 £ 655,160 553,615 1,054,627 429,528 168,240 168,375 264,316

J

, ’J Ji ?

(millions of baht).’ f l, is fii m ..s. v’ Lr Imports'! from-1.. Japan. < F

'

’’ ’ "

•

>.? •*1 th -f lI'lJ ? >-" r1 » T - i - Lil « - -i r i
Source:

Total Receipts Total Number of Establishments Reporting Total Number of Persons Engaged

'

% of Receipts

12,988 million bahts 3,584 154,956

National Statistical Office, Report of the 1964 Industrial Census, Volume I.

Conditions in the Industrial and Aims of Industrialization Chirayu

Sector Policy

Isarangkun. na Ayuthaya

1. It is the aim of this paper to present views on selected aspects of the industrialization process which Thiland is going through. It is hoped that the paper might stimulate some discussions by the participants in the symposium. It is to be assumed that the majority of the members o f this symposium are not wholly interested in Thai industrialization by itself, but would like to use it as a case study to reflect upon the industrial conditions and objectives in their own respective countries. Using the case study of Thailand, however, we in Thailand are likely to receive the benefits of comments from outside observers whose impartiality and wisdom may assist in making our industrial planners move in the right direction. 2. Before fully embarking on the analysis of the Thai industrial sector, let us pause briefly to tune in our understanding of the word, “industrial sector” and. “industrialization”. .For some, industrialization ould have a meaning as wide as “modernization”. Thus the use o f tractors in agriculture is taken as part of the industrialization process. Instead of adopting such a wide meaning, this paper suggests a much narrower focus, and confines the meaning of industrialization merely as the growth process of the manufacturing sector. Indication that a country is industrializing is shown by the rate of growth of manufacturing being higher than that of GNP as a whole. So it is the manufacturing sector and the relationship of the manufacturing sector with the rest of the economy which is being examined here. 3. The question which should be posed is-why should we want to industrialize? This question needs to be asked because all countries have to develop under the conditions of scarce resources. Putting resources into industry means that there are less resources available for other sectors. One answer which is most appealing but which is not accepted as an economic argument is that because all rich countries are industrial countries, therefore developing countries which want to become rich must industrialize. But although the economic argument is not sound, the aim is very clearly demonstrated i.e. -to get rich. So if the manufacturing sector can provide more growth of income for the economy than any other sectors, then industrialization is indeed justified from an economic point of view. But this is by no means a certain thing as many countries which have in the past pursued a vigorous industrialization policy have found to their costs. Very slow rates of growths have been achieved in these countries which would lead to the. conclusion that if the resources put into industry had been allocated to other sectors (especially agriculture) the rate of growth may have been faster. In such cases, is there any argument for continuing to push forward an industrialization policy? 4. . Planners in some countries, faced by prospects of lower growth rates, might still defend their allocation o f resources to industries, on the grounds of diversification. They would argue that the fluctuation in prices of agricultural products was so great that they would prefer the economy to have greater stability at the cost of some-longrun rates of growth. Although instability of primary products in the past have lent strong support to this argument, it should be pointed out that there are in fact many other alternatives to industrialization in order to alleviate instability. Agricultural diversification, national and international stabilization programs all offer possibilities to cure instability of primary product prices. Whether industrialization is better than these alternatives or not remains a relevant question to be answered. 5. A strong argument in favour of industrialization, however, can be advanced for countries with a rapid population growth with limited land. To maximise output under these circumstances, it is possible that agriculture may be the best choice and therefore should receive the lion’s share of the resources to be put into development A Paper presented at the SEANZA meeting in Bangkok, 1973.

in effort. But increasing unemployment and underemployment would occur as the existing land could not further absorb the increase in the labour force and because the increase in agricultural productivity arises from labour-saving techniques. Theoretically it is possible to keep taxing the agricultural surplus to feed the unemployed labour force outside the agricultural sector. In the practical sense, such a policy would be difficult administratively and dangerous from a social and political point of view. To create work it is necessary to build up a sector which has the potential to create employment opportunities. Industrialization becomes an important sector which could help to absorb this surplus labour. The Case of Thailand 6. It was estimated that the population in Thailand was about 5 or 6 million in 1850. According to Ingram, “They worked just long enough to supply themselves with the necessities of life and' custom, habit, and climate kept the requirements at a modest level”. Most of these engaged in rice faming and the area under plantation then was estimated to be 2.3 million acrers. In 1970, it was estimated that the population was nearly 4 0 million and their average requirements although still relatively modest have risen. Marginal land to which the agricultural population had expanded tended not to be as productive as the ones cultivated in 1850. These developments are creating tremendous pressure on the availability of agricultural land. The Government has since 1960 been intent on maintaining 50:50 ratio o f forests and lands for economic use. This is in order to preserve the balance of nature which if upset could have catastrophic affects on rainfall, soils etc. Officials fear that the present proportion of forests has already dwindled to 40%; the reserved forests have been invaded by land-hungry fanners who would not be pushed out. If the situation continues, water sources would be 'jeopardized, soil erosion would occur on a widespread scale and we would have the miserable situation of seeing the land getting poorer while the population was getting bigger. 7. Given the situation, a population control program is something which we must urgently adopt ana implement. But even if this is done and if it becomes successful, say the rate drops to 2.0-2.5% per annum-an effective employment generation policy is still necessary to ease the pressure of the agricultural labour force t o push the cultivated land beyond its limit.- We need to find alternative means of generating employment opportunities which are land-intensive in nature. The industrial sectorreadily presents itself for this role. 8. The question still needs to be asked-why industries? Why not land-intensive agriculture such as dairy farming or why not the other sectors such as services? While we should look at all possible alternatives, industries nevertheless offer perhaps the greatest potential. Firstly, the demand already exists for certain industrial products within the local economy, so if the industries can be set up, then they will be- able to sell in the local market. Secondly, industrial products can be sold in the international market (whereas most services cannot) so the possibilities of the market is not only confined to the local market. Thirdly, industrial activities tend to have larger linkage; effects than other kind of activities. Fourthly, in terms of the resource endownment of Thailand, we would seem to have certain advantages in connection with agricultural-product-processing activities and labour-intensive industries, so that we have the potential o f holding a comparative advantage in the long-run in these activities. Thai Industrial Development up to the Present 9. Prior to 1960, the private manufacturing .sector received little attention from the government. The sector consisted almost entirely of agricultural-product-processing activities which have grown up as a natural adjunct to the increase in primary activities. A few industries, tobacco, alcoholic beverages, sugar and matches had been created in the 1930’s as an accidental by-product of the government’s attempt to raise revenue from import taxes. The government itself has had its hands burnt in trying to enter directly into the ownership and operation of state industrial enterprises without properly assessing the feasibility of the projects. As a result they acquired a large number of expensive factories which had little, chance of becoming solvent. To make matters worse, they manned these factories with people whose main qualifications were hot ability but loyalty to the government elite of the day. Under these circumstances, instead of spearheading growth most of the government enterprises were doomed to lag behind the rest of the industrial sector. 10. In the middle of the 1950’s, the government adopted a new policy of encouraging private manufacturing industries. The new policy did not really become effective until the early 1960’s when, promotion laws were enacted in I960, 1962 and 1965. These laws granted to promotion firms privileges which jn essence included tax holidays, tax reductions and tax exemptions while also trying to encourage foreign investment by guaranteeing repatriation of capital and facilitating various aspects of foreign investment.

278 11. In terms of value added, it would be accepted even by the harshest critic of Thai industrialization that the.sector grew rapidly during the 1960’s. Indeed the average rate of growth for the decade was over 10%.* Very few would contradict that such a rate of growth was made possible by the new promoted industries** rather than the industries already in existence before the promotion period; 1 2. So it appears that Thailand has achieved its aim in rapid industrialization. While we have to a certain extent b e satisfied at the progress made, there is little cause to be complacent about the present situation. First of all, we must first understand that although the average rate of growth of the industrial sector was rapid, the base from which it grew was rather small. Two implications which we have to consider are (1) that the rapid growth resulted from a sudden spurt of activities after the main bottlenecks were removed and that a saturation point may soon be reached after which there will be a sharp decline in the rate of growth, (ii) the contribution of the industrial growth towards the overall goals of national development may be, because of the small size of the industrial sector, rather small. Share of Manufacturing in Gross National Product at 1962, prices

Manufacturing GNP % o f ManufacturinginGNP

1957

1969

6,194

18,821

48,636

. U970

1971

1972

1973

20,607

22,363

23,843

26,079

112,589.

120,869

127,526

131,062

142,515

16.7

17.0

17.5

18.2

18.3

12:7

-

Fear of Slow-down of Industrial Growth Rate 13 . There is some weight to the argument that the growth of Thai industries may reach its saturation point soon. This view is supported if we accept that the government’s infrastructure programs in the early 1960’s eliminated some major bottlenecks which had been in existence prior to that time. Add to this the incentives of the promotion scheme and it is reasonable to expect a rush to take advantage of the opportunities "being opened up. Most of these opportunities were in import substitution. Once these projects have been started, new opportunities in import substitution could only arise with the expansion o f the local market. Given the large minimum scale of many industries, the rate of growth of industrialization, if dependence is placed on import substitution, is likely to decline.* Employment Creation in the Industrial Sector 14. In addition to the doubts expressed about the rate of growth of Thai industries, the Thai import subtitution strategy has. been criticized as being capital-intensive and thus has not really achieved one of the most important objectives of industrialization employment creation. While we saw that the value of industrial production grew by over 10% druing the 1960’s, employment grew by only about 5%.* Given the small base of the number of workers in manufacturing (it was 470,000 in 1960), the sectqr absorbed a rather small number of the increase in the labour force. During the 1960’s, the sector absorbed per annuan about 26 ,000 new workers of about 7% of the incause in labour force. This is hardly an impressive record for a sector which we would like to be responsible in absorbing a large proportion of the increase in the labour force.** *

Calculated from the data from 1957— 1969;the average annual rate o f growth is approximately 10.5%.

** Professor Silcotk estimated that gross investment on plant, equipment.and working, capital of promoted firms in Thailand during 1959 and 1966 amounted to Baht 125,billion. This was estimated to be over half of the total investment in the. private sector; * In the phatmaceutical.industry a number of years ago, a feasibility study was undertaken about the prodpctibmof antibio-, tics, whose annual import value was nearly 70 million baht. It was found that the minimum level o f production would have to be 10 times the present market, if the plant is to operate reasonably efficiently. * Calculated from data obtained from the 1 9 6 0 Population Census and the 1969 Labour Force Survey. Using the 1960 Census and the 1970 Census, which is believed' to be underenumerated, the annual rate of growth of manufacturing employment H f was under 33% ** Many would argue that the indirect employment generation effects created by the growth of industries may have been' substantial. Looking at the absorption, of labour, during 1960 and 1970 however, it was found that agriculture still accounted for 66%. This does not seem to support that much indirect effect came 1 from the industrial sector. ‘

279 Export-oriented

Industries

15. To increase, the rate of growth of industries as well as to achieve the objective of employment creation, there has been a shift in the Thai government’s policy from import substitution to promote labour-intensive exportoriented industries. Together with the opening up of opportunities in the would market, a few export industries really made headway in the 1971-72 period. The textile industry especially the garment section, expanded rapidly, encouraged by the offer of import duties, concessions for exports as well as expanding markets in United States, Europe and Japan. New electronics industries have been and are being set up, to assemble finished and semi-finished products for export. Although no official data is available, the overall rate of growth of industrial production as well ; as the rate of labour absorption must have been very impressive from 1970 to 1972. 16. The new oil situation, however, is now threatening to alter the favourable trend of events. Although the long-term implications for Thai industrialization are still unclear, there have been some definite adverse repercussions on Thai industrial exports within the last year. The textiles industry, in'particular, received cut-backs in orders from abroad and there are already some talks of massive lay-offs of workers in that industry. 17. Nevertheless, the outlook of many Thai manufacturing exports continue to be more than reasonable. Food processing industries, for instance canned and dehydrated food, have been making a steady advance in the world market, wided by foreign investors who have contributed the know-how and the market outlets. The electronics industry continue to have a good potential, because there are many electronic products-computer parts for instance, which have to use labour-intensive methods, the costs of which* are prohibitive in advanced countries. The low wages of labour in Thailand should be able to attract further investment in this field. Event textiles which have suffered a set-back should continue to be the leading foreign-exchange earner for the Thai industrial sector. Conditions in the Thai Industrial Sector 18. But here we have the crux of the matter. Whether the aims of industrialization can be achieved, arid the extent to which it can be achieved, depends on the conditions existing in the sector. On the supply side, it would seem that one of the most favourable aspects in Thailand is the low wagesof labour. Indeed, for the labour-' intensive industries, this aspect would appear to be most attractive, although it most be remembered that it is the labour cost per unit which is important, and not merely the ‘wage cost. In other words, labour productivity, reliability and labour relations in general are also important factors to be considered. Taken as a whole, Thailand’s labour supply may not be as attractive as some neighbouring countries, especially Hong Kong and Singapore, although the wage level in these countries are higher. 1

19. As far as the physical “social overheads” are concerned, a great deal of expansion has taken place during the last decade. More improvements need to be made, however, to remove problems which obstruct the establishment and smooth operation of industries. Improvements need to be made in the-area of port facilities, electricity; telephones, water supplies and appropriate sites for the construction of factories. The picture of most manufacturers in Thailand fending for themselves in this respect is sharply contrasted to the situation in neighbouring countries where sites and sometimes ready-built factories are available for immediate occupation at low rental rates in industrial estates which are suitably located and well-supplied with all the basic public utilities. 20. The third major area which we should consider is whether the role of the government has been conducive to industrialization. While the changes brought about in the late 1950’s and early 1960’s have vastly improved the climate for industrial investment in Thailand, there are still aspects which hinder development. For instance, the Government has offered privileges to “promoted” firms which may be just as attractive as those obtained elsewhere. But to obtain these privileges require considerable scrutiny which takes much time. Even after obtaining promotion privileges, the firm has to further seek the approval from a large number of other government organizations before it can start production. The prospects o f such a delay must deter many investors, especially those which has some other choices in other countries to compare with. AH these procedures must be stream-lined and speeded, up so that the investor can start his project with the minimum of delay. 21. The conditions of the Thai industrial sector have been described mainly with foreign investors in mind. This is because it is the author’s view that foreign investment is important in the field of export -oriented industries. But even in the case of local investors, the hindrances mentioned above are also detrimental to their entrance into manufacturing. Although they may not have such a horizon of choices of locating their investments in different countries, but they nevertheless have the choice to invest in different sectors. If conditions are not favourable in industry, many would turn to trading as their most profitable line of business.

280 A Last Word on Import-Substitution 22. Although we have concentrated our-aims of industrialization towards exports, a under word should be said about import substitution. It is true that the opportunity of import substitution is limited f the present circumstances, but it could have a much greater potential under a different growth strategy. Import substitution is limited at present because the internal market is limited. The internal market is limited because agricultural families, comprising nearly 80% of the population, have low income and thus low purchasing power. Import substitution is therefore limited to the production of goods demanded by a small proportion of the population. If we are able to develop the agricultural sector, through multi-cropping, double-cropping, improved seedings, better farm price poli cies etc. The higher incomes received b y the agricultural families would increase the demand for “wage-goods” considerably. It is well-known that the production of these “wage-goods” tend to be relatively labour-intensive. Therefore we would see the development of the Industrial sector, not only in terms- of production but also in terms of employment-creation. Added to the development of export-oriented industries as described above, industrial growth and employment would increase at a much more satisfactory rate. Conclusions It is the aim of every developing country to become “richer” and “more prosperous" in the shortest possible time. Industrialization has been regarded b y many countries as being synonamous with development, mainly because there is a very strong correlation between high G.N.P. and a high degree of industrialization. This brief paper has attempted to examine the role of the industrial sector in the development effort of Thailand. The development aspirations here in Thiland are of course similar to other developing countries. It wants to raise the well-being of the people by increasing their income as fast as possible. In addition, the limitation of land and the population pressure make it necessary for Thailand’s development plan to consider employment generation as .a major aim together with the growth of income. Examining industrialization as a means to realize such aims, we find that the. conditions of Thailand offer reasonable prospects for the industrial sector to make important contributions towards growth and employment generation. Certain improvements need to be made, such as, expanding “social overhead” facilities in the form of suitably-located industrial estates, streamlining the bureaucratic process needed to obtain promotion privileges and permission to set up an industry, and promoting good labour relations. Properly implemented by the government such actions will serve to increase the attraction of Thailand to local and foreign investors, especially in the sphere of export-oriented industries, which the government already has the policy and instruments to promote. Producing for the local market should not be ignored either. However, any industrialization based on the local market is bound to be very limited until the present agricultural sector can be developed so that it can generate demand for industrial “wage” goods with its increase in purchasing power. It is somewhat of a paradox for this paper, which starts by examining the industrial sector, to end by placing strong emphasis on agricultural development as a key to industrialization itself.

Labour Relations: Thailand’s Nikom

Experience Chandravithun

Labour Relations in General Labour relations is a product of industrial development. Its nature and the form in which it is practiced are influenced by the forces by which industrialisation is activated as well as by the kind of society in which it operates. Accordingly, the role of Government in Labour relations varies in scope and method from one country to another depending upon its state of socio-economic development. Historically, all countries go through the same process but, of course, at a different pace according to the circumstances. In countries with an agricultural economy the pace can generally be expected to be slower than in countries which are rich in mineral resources and are under a compulsion to transform them into industrial tools and commodities wherewith to earn the money t o purchase .food, in particular. In more recent time's it has been shown, however, that industrial development in agricultural countries can b e accelerated by importing the raw materials of industry, where their technology in sufficiently advanced arid the human energy at their disposal can be efficiently utilised. This process is not unlike the extension of a family business where the owner begins to engage employee thereby earning a livelihood not only for himself and his family but enabling those who work for him to do the same. The group is small enough to permit close personal contacts and employees are known by name as are their private domestic circumstances. The sons and daughters of workers follow their parents into the same concern developing family connections with it which may extend over many generations..Any disagreements are settled between the older employees and the employer. Outside interference is resented by Jroth'sides and strangers are not welcome. In such circumstances the part played by government in the evolution of their working conditions has been insignificant. The change usually begins when the supply of labour exceeds the demand and exploitation begins. Then government acts, usually under pressure of public opinion, by introducing laws which safeguard workers from such exploitation by setting up the standards for wages, hours and other working conditions. These laws must be enforced and so the necessity arises for a government organisation which will be responsible for this task. The need for such an organisation also stems from the expansion of industry to an extent which disrupts the paternal approach. An employer may keep in touch with twenty or may be a hundred employees but not with five hundred. Moreover; the advent of scientific riianageriient has made the employer figure increasingly remote, and modem financing has shattered the old employer image and replaced it with a Board of Directors. As the contacts between employers, in this modern sense, and their employees become.more objective, misunderstandings and disagreements increase and the assistance of an outside party in overcoming them, becomes essential. Consequently, the government, apart from acting as a protector of labour against’ exploitation has to step in and assist in the settlement of disputes. The extent

282 of government intervention into labour disputes differs from one country to another but usually takes the following forms of providing conciliation and arbitration services. These roles of government are now accepted by both parties. However, it is fully realised that an outsider can never do as well in a dispute' between an employer and his workers as they are capable of doing themselves. For this reason government constantly encourages industry to increase and improve its capability for settling its own domestic affairs. For developing countries where modem management practices are new, it has become necessary for governments to assist employers and employees in appreciating and understanding peaceful ways and means of solving conflicts and reaching agreement. Development in Thailand In general, the development of labour relations is closely linked with the industrial development of the country. But in Thailand the development of labour relations has its own peculiar characteristic that it has stemmed from the development of labour administration. Labour administration originated at the time when the democratic form of government was first introduced in the country in 1932. It was confined to only the protective aspect of labour administration. However, “full employment” was then declared as one of the government’s Six Principles for the administration of the country. During the World Depression Thailand was no exception and witnessed a large number of unemployed. Top priority was therefore given by the government to the problem of employment and working conditions. As a result a government agency was established for employment and labour affairs and finally developed and became the Department of Labour. Labour Union Recognition The first ever comprehensive legislation on labour matters was introduced in 1956 — the Labour Act of 1956. In addition to the traditional aspects of labour protection it also provided the registration of labour unions and the procedure for the settlement of labour disputes. The Labour Act was revoked in 1958 by the government for security reasons. But the right to strike of workers and the right to lock-out of employers were to a great extent unaffected. Quite a number of strikes did take place after the Act was repealed by the Revolutionary Party Announcement No. 19 of October 31, 1958, where a temporary procedure was provided for the settlement of labour disputes. The Settlement of Labour Disputes Act of 1965 was passed with the principal objective to develop the full capability of both employers and workers to settle their own affairs. Strike action could be taken after negotiations had failed. Furthermore, arbitration procedure was also provided should the parties to the dispute select to do so. The Act was less successful than was first envisaged. Claims submitted by workers were often concerned with rights not interests. In brief, the burden in labour relations had rested primarily with the government in ensuring that the parties to any dispute observed and carried out the provisions of the law. ' .*

It was not until 1972 that workers and employers were permitted to organise in a limited form for the purpose of bargaining and negotiating the conditions of employment and work. By virtue of the Announcement No. 103 on Labour Protection and Labour Relations and the related regulations issued by the Ministry of Interior, workers and employers associations were allowed to set up and be registered. The experiences of the waves of labour unrest in 1973 and 1974 had prompted the government "to rectify the labour relations situation and resulted in the amendment of the law in August 1974’ • J * The August 1974 amendment was only an- interim measure. At the same time a compre-

283 hensive revision of labour relations legislation jwas called for by-the government in order to adjust to the changes ,in social and political, life after October 1973. As a result the Labour Relations Act of 1975 was passed and became effective on March 29, 1975. ?* r The new Act has not only consolidated the previous amendments but also transformed the former workers associations into full-fledged labour unions by giving them a proper role in the collective bargaining process. Unions can represent the workers in the negotiations. , ,■ t i. If (there is a number of competing unions in the case, the Labour- Relations' Officer is authorised to organise a referendum among the workers to determine' the representation' issue.' Under the 1975 Act, labour unions could be organised on the enterprise line* or on the industrial line. Within these limits they may be amalgamated into new unions or "formed into federations for collective bargaining. National organisations may be set. up. r Up to date 8 2 labour unions have been registered. However, a movement toward federations is underway only in a few fields. A national organisation is only loosely and informally structured. Collective Bargaining

t

" In the past wages arid other conditions of employment tended to be given or fixed as such by the employers. Negotiation in such matters was exception rather than of general practice. This pattern is changing rapidly now. Growing expection, inflationary pressure and new political climate have brought about an unprecedented upsurge in the use of collective bargaining after' October 1973. / ’ Such change is also reflected in the' evolution of our labour legislation. Under the new Labour Relations Act of 1975 all undertakings having 20 or more workers shall have agfeeriients on conditions of employment. It implies negotiation' of terms rather than their unilateral fixation. i. , t * r, y The agreements have to cover at least the conditions of employment and work, hours and time of work, wages, welfare, termination of employment arid the procedure of submission of grievances. It is interesting to note that' the cases of negotiations in ‘the -past years have laid important emphasis first on welfare facilities, wage increase, increase- of other payments. * In the majority of the cases the bargaining level is confined to the individual undertaking. This is attributed to the present stage of development of the industrial relations system in Thailand where most of the unions are of house unions and the employers are no.t in general organised for collective bargaining. Therefore, the adjustment of conditions of employment could not be done on 1 an industry-wide basis; '" * * ' '■ «

Labour Disputes

k.

ts

>

'

11

In the last two years labour unrest has reached an unprecedented proportion in the history of Thailand. In 1973,577 labour disputed resulted in 501 work stoppages involving 177,887 workers and 296,887 man-days lost. The year 1974 witnessed 477 labour disputes resultingin 347 work stoppages which involved 105,883 workers and 507,607 onan-days lost. This means that during the last two years Thailand had about 4 times as many work stoppages as in all the 15 year period prior to it. ’ „ ' , ? , It also indicated a new pattern; of work stoppages changing from .a great number of rather short duration to a decreasing number of longer duration of work, stoppages. • t The massive, wave of unrest could be attributed to: First, there had been widespread dissatisfaction among workers with the terms and conditions of employment and work which prevailed in the various establishments. Second, the onslaught of inflation, had greatly affected* the low income earners. Third, the social and political changes that have taken place as a result of the Oc-T tober 1973 event have helped to bring about self-expression and freedom of action in the field of labour. iv . * s Under the Labour Relations Act of 1975, strikes or lock-outs are not permissible in certain

284 essential, services, such as railways, ports and harbours and others. In.these specified activities, unsettled disputes must be referred to the tripartite Labour Relations Commission under.'the compulsory arbitration procedure. 1*

*

hi other cases, the Minister may prohibit individual.stoppages if he considers that such stoppages endanger the national economy or national security or cause severe public hardship, or during the period of state emergency or martial law. Here, the Minister may order the ’resumption of work, substitution of labour, or , submission of the dispute to compulsory arbitration, by the Labour Relations Commission. • Labour Relations at Enterprise Level

'c

The problem ’of labour-management communication at the enterprise level has only recently received the due attention of the management. Only some of the large companies have established such machinery for joint consultation and employ specially trained personnel managers. In the majority of die enterprises, communication, between the management and .workers are not well developed. No formal machinery for consultation exists and there is a lack of modem management concepts. In fact, the deficiency of communication at the enterprise level has led to many disputes and work stoppages. To rectify the situation, the new 1975,Act provides a formal machinery for plant-Ievel communications. In the establishments with 5 0 or more workers, the workers have the right to set up a Workers .Committee. The functions of such Committee are to give advice on facilities, work rules, grievances and any conflicts within the establishment. Thus a legal framework has been laid down to serve as a basis for more fruitful labourmanagement relations and communications at the enterprise level in the future. At present, there is little formal participation of employers’ and workers’ organisations as such in the development planning process. Workers organisations are still of recent .development and lack of sophisticated supporting structure. Their interest and concern at the moment are mainly confined to the distribution of the wealth of development rather than the policies of the development itself. The' majority of the employers have not yet established associations for the purpose of collective bargaining. The lack of proper organisations on both the workers’ and employers’ parts is reflected in the structure and procedures of the national agencies concerned with developmental planning. It is hoped that this situation will be rectified in the near future when all parties in the national development process will assume their respective roles and responsibilities for the betterment of all. The above has at least givensome insight into the industrial relations system of Thailand. It has already touched upon some problems for which solutions will yet have to be worked out. But our present task is to structurise our labour relations system without falling prey to either repression or chaos. But there is still room' for improvement. ’ The procedure for the settlement of labour disputes appears quite reasonable in itself. It is simple enough not to put the parties under undue restrictions. It also provides enough flexibility for the government to safeguard the interest of the general public. But the way the procedure is actually used depends largely on the parties involved. The power of intervention, by the government will have to be used sparingly and when really necessary. The parties to the disputes will have to learn how to solve their own' problems and at the appropriate level. It is not infrequent to find a paradoxical situation existed in the disputing cases; The negotiations and disputes have taken place almost at the enterprise level. But once the dispute in question could not be resolved, it would immediately be referred to the highest possible instances, such as the Minister, the Cabinet or the Prime Minister himself without exhausting the existing machinery. ,, n

285 To rectify the situation would involve the complex questions of social attitudes and organisational requirements. It would require the willingness of the parties to face each other in open and fair discussion with a view to finding solution to the conflict without a breakdown in their relationship. It will also require the establishment of strong and powerful organisations on both the employers and workers part as well as a clear policy in this field on the administration’s part. A further matter 'is the uncertainty of -both parties, as to their proper roles and conducts in the industrial relations system. To what extent should the strikers be allowed to exercise their right vis-a-vis the right to workof other fellow workers? Should the right of the employer be protected or respected with regard to his property and assets? At what stage will a dispute endangering the public order warrant the police intervention? Quite a few incidences have highlighted the seriousness of these questions. As a remedy, the Department of Labour is inviting employers and workers to adopt a Code of Conduct which will provide the agreed rules for their relationship. There is one final and crucial problem that still require our solution, ‘namely,’ the labourmanagement communications -at the plant or enterprise level. When the Workers’ Committee was introduced under the new Act, some oppositions came from the employers; who felt that management prerogatives were threatened as well .as from some union- leaders who felt, that collective bargaining was undermined. Perhaps this matter could be accommodated within the framework of .the Code of Conduct where, the acceptable rules on the relationship, between workers; unions, committees and employers could be worked out? to the benefitsdor .all. Thus; the committee-could-be used to promote labour-management- communications in the enterprise and' to> avoid any large-scale conflict in the future. o . ,

.

t

s

I

•
and in the monetary system of Thailand where the money market is not highly developed, responses to any change of policy can be mixed and varying. Therefore, any policy adjustment has to.be done in a.subtle manner. and well preparedness is very vital for the timely implementation' and the .success of the policy..

An Analysis

of the Money

Multiplier

and

Money

Supply

Chiznges fo Thailand Songkram

Grachangnetara

In a fractional banking system, the conventional money multiplier* has a value that is deter- 1 mined by two critical ratios. One is the currency ratio, which is the proportion of cash held in total money supply; the other is, the reserve ratio of the commercial banks, being the proportion of reserves held, against deposit liabilities. The latter ratio can be further refined, and subdivided into the legal reserve ratio on the one hand, and the excess reserve ratio on the other. Changes in the three ratios, therefore determine changes in the value of the multiplier. More important, if the overall change in the money supply can be attributed to the combined influence of these three variables, a given change in the money supply for any period can be separated into different components, each of which is singly attributable to a change in any one ratio. The technique is suggested by Ahrendorf and Kanesathasan,** but there may have to be modifications to take into account the particularities of different monetary systems. 2 This paper attempts to identify the magnitude of changes in. Thailand’s money supply over the past six years that can be separately attributed to individual elements of the multiplier. The exercise is, thought to be particularly relevant at this juncture of Thailand’s economic development, where the considerable margin of banks’ excess reserves has begun to be drawn down. The year 1969 marks a turning point in Thailand’s economic progress, when the steady accumulation of foreign exchange reserves for the past decade came to a stop, with a deficit in the balance of payments of 998 million baht. This was only the beginning of a trend that can be expected to continue throughout the next five-year plan period, scheduled to begin in 1972. Thus whereas money supply in the past may have characteristically been demand-determined-with banks in possession of reserves amply in excess of the legal requirement, and perhaps in excess of what may be required in terms of conventional banking practice too-the restraint on money supply expansion in the foreseeable future may no longer be the demand for bank credit, but shortage of the monetary base. In other words, money is now to be supply-determined. The continuing deficit in the balance of payments in 1970 and the resultant dramatic drop in the rate of growth of money supply, from the norm of over 10 per cent per annum to less than 5 per cent, is an illustration and a portent of. how the massive drainage of liquidity via the foreign sector affects domestic money supply, to the extent that a tight money situation has now developed and may necessitate corrective monetary and fiscal measures.

k=

I J3 + R. (I - C) M D M

where C is currency in circulation outside banks, M money, R bank reserves and D demand deposits. ** Joachim Ahrendorf and S. Kanesathasan, IMF Staff Papers November I960.

A reprint from the Economic Journal, Vol. 3, No .l,Thammasat University Economic Association, 1972.

302

The Period 1964-1969 Money supply as defined by the Bank of Thailand includes currency held by the public, commercial bank demand deposits held by the public, as well as a small volume of non-commercial bank deposits. In the first instance, the overall change in the money supply thus defined can be broken down into changes due to the movements of the monetary base, of the mu jdier k, and of the noncommercial bank deposits. Table 1 below indicates the relative annual changes over the 1964—1969 period.

Table 1 CHANGES IN THE MONEY SUPPLY

Year

Change due to monetary base movement Amount

1964 1965 1966 1967 1968 1969

1,281.2 1,112.1 3,106.3 1,547.2 1,556.4 364.3

Change due to movement of k Amount

% 174.0 56.2 178.6 147.4 98.6 51.8

-

492.8 847.3 -1,157.0 - 802.8 • 45.8 132.5

(million Baht)

Change due to noncommercial bank deposits % -66.9 42.8 -66.5 -76.5 - 2.9 18.8

Aihount -

52.1 19.6 -209.6 305.4 68.5 206.6

TOTAL CHANGE IN MONEY SUPPLY % 7.1 1.0 12.1 29.1 4.3 29.4

Amount 736.3 1,979.0 1,739.7 1,049.8 1,579.1 703.4

% 100 100 100 100 100 100

Comparison of the years 1966 and 1969 shows up a striking contrast. There was a heavy inflow of foreign exchange in 1966, the balance of payments recording an unprecedented surplus of 3,287.3 million baht, which accounted for a - very large expansion in the monetary base for that year. The total expansionary effect however was partially cancelled by an .offsetting movement of the money multiplier, the value of which dropped from 1.0588 in 1965 to 0.9804. The commercial banks excess reserves rose 5 0 per cent, from 1,908 million baht to 4,360 million baht, almost totally (93 per cent) in the form of government securities held outside the official reserves deposited, with the Bank of Thailand. The same pattern, but in reverse, was observed in 1969. The "massive deficit in the balance of payments resulted in a particularly small net increase in the monetary base for that year. To accommodate the private demand for credit, banks lowered their excess reserves, again largely (84 per cent) by offloading government securities. The value of the multiplier k increased from 0.9288 of the previous year to 0.9359, thus enabling the overall money supply increase to be more than a third of what it might have been on account of the change in the monetary base alone. It is clear that the implications to be drawn from comparing the monetary movements of the two years are 1) that money supply was demand-determined, and 2) that banks allowed the money multiplier to fluctuate a great deal in order to accommodate the demand for money, the excess reserves being a residual that took temporary refuge in government securities. A closer analysis of the change in the money supply due to movements of the money multiplier is presented in Table 2. The multiplier that is used in this analysis (see Appendix) takes into account changes in the ratio of commercial bank time and saving deposits to demand deposits (t), the ratio of interbank deposits to demand* deposits (b), and the ratio of government deposits to demand deposits (g), Negative correlation is assumed for these three ratios with regard to the money supply. The reason is that since reserves are legally required for all the three types of deposits equally as for private demand deposits, increases in t, b, or g lock up part of the total monetary base available that might otherwise be utilisable as reserves against the expansion of demand deposits, and therefore of money supply. Similarly, movements in the currency ratio c, the legal reserve ratio r , and the excess reserve ratio r e , are also negatively correlated to money supply. Increases in all these ratios would lower the value of k.

303 Table 2 (MiUion Baht) CHANGE IN MONEY SUPPLY DUE TO MOVEMENT OF THE MONEY MUTIPLIER AND ITS COMPONENTS

Year 1964 1965 1966 1967 1968 1969

Due to change in the currency ratio c -

2.2 30.9 1.5 - 3.3 -26.8 - 1.9

Due to change in the legal reserve ratio r

l

Due to change in the excess reserve ratio *e

—. — — — — -263.1

-110.7 364.9 -673.7 -160.5 211.6 857.5

Due to change in

Due to change in

t

b and g

—335.1 461.1 —521.6 - 590.9 -230.6 -743.9

•

-44.6 - 9.6 36.8 -48.1 — 20.8

TOTAL CHANGE DUE TO MULTIPLIER -

492.8 847.3 -1,157.0 - 802.8 45.8 132.5

It will be seen from Table' 2 that the currency ratio plays a very minor role in determining the overall money supply. Interbank deposits and government deposits also play negligible parts. The two major influences that need to be considered are the excess reserve ratio and t, the proportion of time deposits to private demand deposits. The sign of the money supply changes attributable to t is negative, but for the exceptional year 'of 1965 reflecting the fact that the proportion of time deposits relative to demand deposits has. almost always been on the increase. This is significant in that for periods in which commercial banks desire, or find it necessary, to conserve their excess reserves, the lowering, rate of growth of the money supply would be sharply accentuated by the trend in t. However, for other periods in which banks are still in a position to counteract small increases in the monetary base, by lowering their excess reserve ratio, and thus increasing the value of k, the independent trend in t would somewhat dullen the impact of the expansionary countermeasure. This happened in 1969, when the change in the excess reserve ratio in itself would have meant an increase in the money supply of 858 million baht. This amount of increase would have been sufficient to offset the change in the legal reserve requirement from 6% to 7%, as well as the compounding deflationary bias of the foreign sector within the year. As it turned out, the increase in t led to an opposite, negative, change in the money supply of 744 million baht. The net increase in money supply due to the multiplier was therefore no more than some 130 million baht. The overall increase for the year was 4 per cent, whereas it might have been nearer 8 or 9 per cent. 1970 and Prospects In 1969, and for much of 1970 for which the figures are now available at the time of writing the volume of bank loans and overdrafts to the private sector expanded at a high, even abnormally high, rate. The expansion, however, belies the shortening .availability of bank reserves to back up deposits. For the ratio of excess reserves, including vault cash and uncommitted government securities in hand of banks, relative to their total deposit liabilities, declined sharply in the third quarter of 1969, and has apparently .continued to fall in 1970. From a value of between 0.240 to 0.260 at th|f end of each quarter since 1966, the ratio slipped below 0.200 for the first time in November 1969, fell to 0.177 at the end of the year, arid has continued to drop in 1970 to 0.183 by the end of September (see Table D.) This begs the question of how much longer banks can be expected to continue expanding credit at a high rate: certainly the 'recent expansion cannot be taken at face value, and incorporated into a projection of future trend, unless the impossible assumption is made that there is no lower limit to the excess reserve ratio. In the face of a continuing drain on bank reserves through the deficit in the balance of payments, and in view of the limited compensatory volume of government deficit financing possible in Fiscal Year 1972, the relevant question is not if, but when, the minimum level of excess reserves will be reached.' Credit rationing will then operate, and money becomes supply-determined. In such-circumstances, more attention will have to be paid to the concept of the monetary base, and to factors that cause its movements. Once the values of the multiplier, and the excess reserve ratio, are stabilised, it is clear that the credit expansion cannot

304 take an .independent course as in the past, but will have to be fairly closely associated with changes in the monetary base. It is equally clear; too, that from now on the government will have increasing difficulty in placing bonds with the banks, since in a tight money situation there would be a shift between types of banks’ assets, out of government securities and into private loans. This has already happened throughout 1970 up to the present, and accounts for the seemingly paradoxical upsurge in bank credit volume at the onset of tight money. It is simply part of the normal adjustment of the banks, during transition into a period of supply— determined money stock. * I wish to acknowledge Mr. Somchit Nopakhun of the NEDB for helpful suggestions regarding the mathematical formulations, and Miss Permpool Vareedee for the calculations.

APPENDIX

Monetary base is conventionally defined as currency held by the public plus reserves of commercial banks. Banks reserves as defined in this paper however also include, apart from. the official reserves — legal as well as excess — deposited with the Bank of Thailand, the uncommitted Treasury bonds and bills held by the banks as well as their vault cash. This definition gives a stabler value of the excess reserve ratio for the period considered, except for 1969, when changes begin to appear which are not at once and dramatically apparent if uncommitted Treasury bonds and bills were excluded from the definition of excess reserves. In this regard, it is to be noted that in Thailand government securities are immediately convertible into cash, and are used as collateral for borrowings from the central bank. Since 1965, half of the legal reserves may also be held in the form of government securities. Separating the commercial bank deposits from the non-commercial bank deposits which are included in the Bank of Thailand’s definition of the money supply, we have M’, consisting of currency held by the public and commercial bank demand deposits. The difference between the percentage change in the monetary base H, and the percentage change in M\ gives the percentage change in money supply that is attributable to movements of the multiplier k. Components of the changes in money supply due to changes- in the monetary base, in- the value of the money multiplier, and in the volume of the non-commercial bank deposits can then be identified, as in Table 1. As for separating the components of changes due to individual elements of the money multiplier alone, the method used is described below. Symbols. D Dj Ddd Dj-jj Dbd Dgd C M’ R

~ = = =

Rt Re r| re r

= = = =

= = = = =

commercial bank deposits; subscripts indicate type of deposits. total commercial bank deposits. demand deposits held by the public. total time and saving deposits. Interbank demand deposits. government demand deposits. currency held by the public. money spply excluding non-commercial bank deposits. bank reserves; subscripts indicate type of deposits against which the reserves are being held. total commercial bank reserves. excess reserves. legal reserve ratio. excess reserve ratio. reserve ratio; subscripts indicate the type of deposits against which reserves are being held. , D

b

bd = -----D dd

305

_ D gd gj — ■ D dd t

'

*

D td = ----D dd

'

t

H

= monetary base.

H

= C + Rt

Definitions: r

R

t

'

R

dd

+ R

td

D

t

=

D

dd

+ D

td +

M’ The Multiplier: (1)

+ R

D

bd +

R

gd + R e

bd +

D

gd

= C + D dd

H

= C + Rt Divide through by M’: H C Rt ----- = — + — M’ M’ M’ - C + “ M’

R

dd

+ R

td * R bd + M’

R

gd •* R e -

But since D dd - M’ — C, multiplying the second term on the right hand side of the equation by D d d gives (2)

H C /R dd R b d R b d R gd Re \ c ----- = — +1------ + ----- + -------1+ — 1(1 ) M’------M* \D d d D d d D dd D dd D dd / --------M’

Expansion of the last four terms in the first bracket leads to: H C / R dd R td D td R bd D dd R gd D gd R e D t \ C - - - -. = -----J -------f------- . - -----1------ . -------1------- . ----- -]----- . - - - 1(1 ----M-------M - - -*Ddd ---Df d ---D b d - -D b d ---D dd ---Dgd ---D d d ---D t - - -D d d

=

c

+

( r dd

+ r

td-

t + r

bd ■ b

+ r

gd • g + r e ( l

+ t

+ b + g))

(1 “ c )

306

r

However, since the legal reserve ratio is equal for all types of deposits, we can substitute for all the various legal ratios for time deposits, government deposits, and interbank deposits—

=c +

rj + rj . t + rj . b + rj . g + r e (1 + t + b + g)

(1-c)

= c + (rj + r e ) (1 + t + b + g) (1 - c)

(4) and (5)

M’

=

1 c + (r j ■+- re ) ( 1 + t + b + g) ( 1 — c)

.H

The reciprocal on the right hand side of the equation gives the money multiplier k. k

Since

(6) A k

= f (c, r, l r e , t, b, g) r

C +

-

de

dr

l

+

dk- A r e + dk. A t + dk. A b + dk.A g dg db dt dr e

The partial derivatives in equation (6) are given from equation (4) 1 = c + (rl + r e ) (1 + t + b + g) ( 1 — c) as follows: K.

where

= k2

(7)

J-

(8)

dk —- = k 2 drj

(9) '

de

= fc2

(rl + r e ) ( 1 + 1 + b + g) — 1

( 1 + t + b + g) ( c - 1 ) (rl + t + b + g) ( c - 1)

dr e 2

(r 1 + r e ) ( c - l )

(10)

57 dt

=k

(H)

”

= k2

(ri + re ) ( c - 1)

= k2

(ri + r e ) ( c - l )

(12)

db

Substituting equations (7) to (12) into equation (6) gives an approximation of the change in the multiplier which is attributable to changes in c, r l , re , t, b, and g. The approximation is improved by expressing each of the derivatives in terms of the average values of c, r l , r e , t, b, and g, for two periods.* The value offik estimated by equaton (6) can then be compared to the actuals k obtained directly by dividing M’ by H (Table A and C). * Joschhn Ahrendorf and S. Kanesathasan, Appendices, IMF Staff Papers, November 1960.

307 Table A

End of Year 1963 1964 1965 1966 1967 1968 1969

(3)

(2)

(1) C

(1]> + (2)+(3)

(4)

H

m'

(5) k (M'/H)

(6) k

9,515.4 10,750.0 11,879.8 14,819.1 16,391.1 18,068.9 18,463.1

9,831.1 10,619.5 12,578.9 14,528.2 15,272.6 16,783.2 17,280.0

1.0332 0.4879 1.0588 0.9804 0.9318 0.9288 0.9359

— -0.0453 0.0709 -0.0784 -0.0486 -0.0030 0.0071

*i

6,660.3 7,265.8 8,124.5 9,370.9 9,823.9 10,640.7 10,949.7

595.8 708.8 847.4 1,088.7 1,269.9 1,478.3 1,973.6

(million baht)

2,259.3 2,775.4 2,907.9 4,359.5 5,297.3 5,949.9 5,539.8

Table B End of Year 1963 1964 1965 1966 1967 1968 1969

c

r

0.6775 0.6842 0.6459 0.6450 0.6432 0.6340 0.6337

0.0589 0.0593 0.0599 0.0605 0.0601 0.0597 0.0700

r

e

t

b

g

0.2233 0.2322 0.2056 0.2422 0.2507 0.2403 0.1965

1.9671 2.2963 1.8993 2.2379 2.5957 2.7484 3.1844

o;iii4 0.1367 0.135,6 0.1475 0.1760 0.1805 0.1716

0.1121 0.1305 0.1400 0.1048 0.1056 0.1019 0.0987

b

g

l

Table C End of Year

dk. dcj

1964 1965 1966 1967 1968 1969

-0.0002 0.0026 0.0001 -0.0002 -0.0017 -0.0001

c

dk. dri

rr

-0.0004 -0.0007 -0.0007 0.0005 0.0005 -0.0139

dk. dr e

rc

dk. dt

t

-0.0098 -0.0308 0.0388 0.0314 —0.0353-0.0449, —0.0102 -0.0357 0.0129 -0.0146 0.0592 -0.0393

dk. db

-0.0024 0.0001 -0.0012 —0.0028 -0.0004 0.0008

dk. dg

TOTAL ESTIMATED k

-0.0017 0.0009 0.0037 -0.0001 0.0004 0.0003

1966 Q 4 1967 Q 1 Q 2 Q 3 Q 4 1968" Q 1 Q 2 Q 3 Q 4 1969 Q 1 Q 2 Q 3 Q 4 1970 Q 1. Q 2

t 2.2379 2.3452 2.6075 2.7321 2.5957 2.6869 2.7863 2.7693 2.7484 2.8627 3.0496 3.1616 3.1844 3.2418 3.4271

b.

g

0.1475 0.1261 0.1457 0.1290 0.1760 0.1511 0.1574 0.1523 0.1805 0.1520 0.1331 0.1532 0.1716 0.1412 0.1666

0.1048 0.1070 0.1479 0.1233 0.1056 0.1095 0.1232 0.1149 0.1019 0.0949 0.0957 0.1087 0.0987 0.0941 0.0925

r

e 0.2422 0.2383 0.2550 0.2547 -0.2507 0.2473 0.2484 0.2514. , 0.2403 0.2334 0.2150 0.2065 0.1965 0.1911 0.1860

k

-0.0453 -0.0453 0.0709 0.0713 —0.0783 -0.0784 -0.0485 —0.0486 -0.0029 -0.0030 0.0070 0.0071

Table D End Period (quarter)

Actual

k 0.9804 0.9780 0.9265 0.9194 0.9318 0.9315 0.9159 0,9131 0.9288 0.9314 0.9251 0.9241 0.9359 0.9422 0.9304

Public Debt . Is Thailand

Going

Bankrupt-. Not Likely Bangkok Bank, fr*

* J

Considerable controversy has raged recently around the question of government borrowing or national debt or public debt which, in a sense, is the debt of all of us. If the business cycle were perfectly symmetrical, the national budget would be balanced over it. Though not balanced in every single year or month, the deficits incurred by the government during recession could be neatly balanced by the surpluses raised during prosperity; But theeconomy does not behave in such an ideal fashion. Fiscal policy is employed to counter the cyclical, fluctuations and stagnation of the economy. Deficits in government budget are therefore inevitable’, and so is public debt. Financing government expenditure Government expenditure can be financed by taxes and borrowings. Normally, taxes are the most important sources of revenue with the short-falls being made up by borrowing. Taxes and borrowings have various effects on the economy. Taxes can affect consumption patterns, savings, investment, the supply of effort, and hence the national income. Borrowing, on the other hand, has a two-tier effect i.e. once at the time of borrowing and again at the time of repayment. Borrowing can affect interest rates, savings, investment, money supply, price levels, and national income. The effects of borrowing depend basically on the source of the loan, and the method and the time of debt retirement. The government may borrow internally from, the Central Bank, the Government Savings Bank, commercial banks, and other private institutions. Borrowing from the Gentral Bank implies the printing of new money which results in an increase in money supply, which may in turn result in a rise in price levels. Since the commercial banking system can create money from its excess reserves — money held in excess of the amount required by law — borrowing from commercial banks will also increase the money supply. If the government chooses to borrow from other private institutions including individual persons, it may have to raise interest rates in order to be able to compete with other borrowers. This will have an adverse effect on the capital market and investment as there may be contraction in the private sector. The government may, on the other hand, borrow from abroad. If the loans' are taken into the country in the form of foreign currency, money supply will increase. But in practice, these loans come in the form of importe'd capital goods so they cause no- change in the money supply The choice between Tax finance and loan finance depends on’the economic conditions of each country and its philosophy of public debt. Loan finance, especially external loan finance, is necessary for developing countries attempting to break the vicious circle of porverty and whose government revenue usually falls short- of expenditure. Foreign borrowing is very important in the early stages of economic development. It permits capital formation without reduction in the current level of consumption. It also provides the foreign exchange needed to secure capital equipment that is not available at home. An article

published

in ’Bangkok-

Bank

Monthly

Review,

May , 1 9 7 7 .

309. For public projects that benefit only certain groups of people in a society, the use of loan finance is fairer to the. non-benefiting groups if repayment of the loan is made from charges or fees paid by those who gain benefits from the projects. Loan finance is also considered to be more appropriate for public projects that will be used by several, generations. This is aimed at distributing costs among the generations that benefit from the projects. Debt retirement can also be financed either by taxes of by borrowing. The appropriateness of the method depends on economic conditions at the time of repayment. For external debt due-at the time when the .economy is in. recession, tax finance is certainly not an appropriate way, for it will merely aggravate the situation. In the case of domestic debt,, retirement adds more liquidity to the economy. Tax finance is thus more appropriate for the repayment of domestic debts due at the time of economic boom. Loan finance is, on the other hand, more suitable for the repayment of debts due during economic recession. The reason behind this is that the economy is already sufficiently liquid during a boom period, so adding more liquidity to it may cause inflation. Contraction caused by tax increases will offset the liquidity added by the retirement. On the other hand, a slumping economy needs more liquidity, and loan finance is thus more appropriate! Debt retirement financed by taxes also creates a redistribution of income from taxpayers'to bondholders who generally are in the higher income brackets. Borrowing, on the other hand, causes no change in income distribution.. False analogy of public and private debt If asked to make a list of worrying economic problems, a layman may put the size of the public debt near the top of the list while a modem economist will usually put it near the bottom. The layman’s fear of national impoverishment and bankruptcy arises from the false analogy -of public and private'' debt. He overlooks the fallacy of.composition: what seems to be true for each individual is not alway true for society as a whole, and conversely, what seems to be true for all may be quite false for any individual. Public debt is actually quite different from private debt. A private debtor can end up completely impoverished and bankrupt if his debt becomes too large relative to his assets. A government, on the contary, can always legally meet its obligations to pay off maturing debt and interest on outstanding debt by new borrowing. For domestic debt in particular, it can even print new money to the necessary amount. The national government thus cannot go bankrupt. Debt burden and future generations: A controversy 1

The burden of debt and the. shifting of the debt burden' are still controversial, issues. According to the traditional view, the.burden of government expenditure financed by borrowing will be passed on to future generations because the resources are shifted, from future to present use. Extra taxes have to be imposed on future generations to finance the interest payments and the repayments of principal. These lead to the loss of real output because of their distorting and redistributional effects. If the borrowing leads to a reduction in investment, future generations will inherit a smaller stock of capital which means a smaller capacity to produce and hence smaller output. Borrowings thus- make future generations worse off. According to the more modem vi< , the possibility of shifting the debt burden depends on whether it is borrowed internally or externally. The .external debt.enables a nation to get additional resources at the time of borrowing hut it also causes a drain of resources at the time of serving. Thus, borrowing abroad will mean a burden on future generations. This is not true of internal debt which merely shifts resources from private to public use. It is not possible to shift resources or the burden between * different points in time. When the interest on internal debt is paid or the debt is retired out of taxation, there is no reduction but only a transfer in the national wealth. The financial claims are owned by and owed to the same generation or, in other words, the generation is in debt to itself.

310 The assets equal the liabilities and thus no burden is shifted to future generations. Nevertheless, since thosf who own and those who owe the claims are usually not the same persons, it is true that the transfer will result in redistributional and distorting effects. As a matter of fact, those who own the claims, or the bondholders, are generally in the higher income brackets. Thus, the transfer tends to result in a more inequitable redistribution of income. Moreover, taxation, may affect the supply of working effort and efficiency. Taxpayers may work harder to compensate for the loss in het income or they may work less simply because of the disincentive effect. Bondholders, on the other hand, may feel richer and so consume a little bit more and save a little bit less. However, these indirect burdens are in reality quantitatively insignificant. It is very important to note that borrowings, both internal and external, if put into productive uses, will increase the nation’s production capacity which means more goods and services available for future generations. .If borrowing is put into unproductive use or is used to finance higher consumption for the present generation, the burden will be put on future generations. This is also true if the present generation uses' up the nation’s stock of capital goods or fails to add the usual investment increment to the stock of capital. The size of debt is meaningless without comparison with the national imcome which is the taz base out- of which interest costs must be met. Growth in debt may be matched or more than matched by the growth of the economy. Growing debt will not adversely affect a growing economy provided that the government sees to it that national income grows faster than debt. Thailand’s experience The idea of financing fiscal expenditure by borrowing was initiated here by a British fiscal expert, Mitchel limes, who was advisor to the Thai Treasury in 1894. He advised that, though the balanced' budgets of the time provided fiscal stability, they did not permit rapid economic development. The government should therefore borrow to finance public projects like the building of railroads, which were being planned. The government at the time agreed with the idea, but a plan to borrow was only set up in 1902. It was decided to borrow £1 million from European countries to finance the railroad project. .Since Thailand had had no experience in borrowing before, the plan was delayed by obstacles until 1905, when bonds worth £1 million were sold in London and Paris. These bonds carried an interest of 4.5 per cent and were to be retired within 40 years. A series of three other Ioans were successively made by selling bonds in Europe. Since 1924, the only way used to secure foreign loans has been to contract directly with foreign governments and international financial organisations. As for internal borrowing, this was attempted for the first time in 1933 when the Ministry of Finance sold a total of Baht 10 million in bonds to local people with 4.5 per cent interest and a tenyear term. After its establishment in 1942, the Bank of Thailand became the manager of the government’s internal debt. At the same time, the Bank is also one of the government’s largest domestic creditors. The government incurs long-term debt by selling bonds and short-term debt by selling treasury bills. The bonds can be classified into two types i.e. bonds to be sold to the Bank of Thailand and those to be sold to the public. For borrowings made to finance special projects, bonds are sold directly to the Bank of Thailand. The interest on the bonds is low and the repayment period is as long as 20 or even 50 years. For borrowings made to finance the annual budget deficit, bonds are sold to the public. The interest on the bonds, aimed to make them attractive, is set close to the current interest rate on fixed deposits, and the repayment period is usually about 15 years. The interest income from government bonds is not subject to income tax. Short-term borrowing was resorted to for the first time in 1945. Interest on treasury .bills is lower and the repayment period is less than one year. At first the interest on these bills was only 2 per cent per annum and the repayment period was 4 months. Later the interest was raised when market rates became higher, to 3, 5 and 7 per cent, and the repayment term was shortened to 3 and 2 months. The bills are sold at auctions which are held weekly with a minimum bid of Baht 10,000

311 the discount being the interest. Those who offer the lowest discounts are announced the winners. During 1952 -1960, the government also made short-term borrowings by overdrafts with the Bank of Thailand. Repayment had to be made within the first three months of the next fiscal year with interest of 2 per cent per annum. Repayment was made by the taking out of a new overdraft. After repaying all overdrafts at the end of 1960, overdrafts have been been resorted to again. The government’s power to incur debt The Budget Procedure Act B.E. 2502 empowers the government to finance budget deficits by borrowing. However, a limit is set by the Act that the annual debt incurred must not exceed 2 0 per cent of current budget appropriations and supplementary budget appropriations plus 8 0 per cent of the budget appropriated for the repayment of pricipal in that year. Borrowing can be made either by selling treasury bills, bonds or other instruments, or by making loan contracts. According to the Regulations Governing the Creation of Debt with Foreign Countries B.E. 2507, any government agency or public enterprise wishing to undertake a project which will result in foreign borrowing has to present its project in detail to the National Economic and Social Development Board (NESDB) for consideration of its economic justification. The Foreign Loan Supervisory Sub-Committee which serves as a body under the Exectutive Committee of the NESDB is authorised to study the justification, feasibility, and particularly relating to the loan to be applied for, including magnitude, source, terms and conditions of the loan. The NESDB, the Ministry of Finance, the Budget Bureau and the Bank of Thailand jointly set limitations on government borrowing. The limitations are that the borrowing shall not result in annual government revenue, and shall not result in debt service exceeding 7 per cent of an exchange

earning.

Current condition of Thailand’s public debt Thailand’s public debt has been increasing steadily and repidly, especially since the inception of the First Economic and Social Development Plan. Total public debt outstanding rose from Baht 8,590.6 million at the end of 1960, when the First Plan started, to Baht 70,224.5 million at the end of 1976, which was the end of the Third Plan, representing a more than eight-fold increase during sixteen years. With the exception of a small dccrcase- of only 0.1 per cent in 1974, the percentage increases ranged from a low of 5.6 per cent in 1967 to a high of 27.7 per cent in 1972, an average of 14.3 per cent per annum. Table 1 shows the size of public debt outstanding during 1970—76. Domestic debt which accounts for approximately 80 per cent of total public debt is mostly in the form of government Table It GOVERNMENT DOMESTIC AND EXTERNAL DEBT, 1970-76 External Debt

Domestic Debt End of period

1970 Ll?71f 1972 1973 1?74 1975 1976

Government Bonds

20,762.7 25,753.3 33,673.7 37,804.8 39,250.7 40,436;0 45,941.4

Source: Bank of Thailand.

IBRD Loans Participation Certificates Held by BOT 631.5 730,1 776.0 756.6 72'4.5 675.6 633.4

Treasury Bills 2,250.0 2,529.0 3,608.0 3,900.0 900.0 2,100.0 7,000.0

Total

Government Debt

Government Guarantee Obiigaton

Total

Grand Total

Change (%)

23,644.2 29,012.4 38,057.7 42,461,4 40,87.5.2 43,211.6 53,574.5

3,671.3 3,977.6 4,369.2 4,878.6 4,986.1 4,819.2 7,121.1

2,848.0 2,825.6 .3,308.8 3,839.8 5,248.6 7,482.4 9,528.9

6,519.3 6,803.2 7,678.0 8,718.4 10,234.7 12,301.6 16,650,0

30,163.5 35,815.6 45,735.7 51,179.8 51,109.9 55,513.2 70,224.5

17.0 18.7 27.7 11.9 -0.1 8.6 26.'5

(Millions of Baht)'

312 bonds. The IBRD loan participation, certificates held by the Bank of Thailand represent the portion of the World Bank’s loans to the government participated in by the Central Bank. Total domestic debt rose more than twice from BaKt 23,644.2 million at the end of 1970 to Baht 53,574.5 million at the end of 1976. " External debt comprises the government’s debt and the government’s guarantee obligations, which consist of debt guarantee and exchange guarantee. The debt guarantee represents the debt of government agencies and public enterprises for which the government guarantees payment. As for exchange guarantee, the government only guarantees that enough foreign exchange will be available for the payment of debt, .the government not being responsible for repayments. External debt rose from Baht 6,519.3 million at the end of 1970 to Baht 16,650.0 million at the end of 1976, more than a double increase. Shown in Table 2 is the government domestic debt classified by holders. Commercial banks, the. Government Savings Bank and the Bank of Thailand are the largest holders of government bonds. The holdings of commercial banks and the Government Savings Bank have grown very rapidly. Commercial banks’ holdings rose from Baht 5,683.9 million in 1970 to Baht 18,427.1 million in 1976 and those of the Government Savings Bank from Baht 5,891.5 million to Baht 14,068.7 million during the same period. The Bank of Thailand’s holdings have remained rather stable at, around Baht 10,000 million during these years. However, the latter is the largest holder of treasury bills, followed by commercial banks. At the end of 1976 the Bank of Thailand held a total of Baht 3,999.6 million, and commercial banks held Baht 2,489.8 million worth of treasury bills, compared respectively with Baht 1,758.2 million) and Baht 212.8 million at the end of 1970. Table 2s GOVERNMENT DOMESTIC DEBT CLASSIFIED BY HOLDERS, 1970-76 (Millions of Baht) Holden Government bonds Bank of Thailand Commercial banks Government Savings Bank Other financial institutions and domestic sectors IBRD loans participation certificates Bank of Thailand Treasury .bills Bank of Thailand Exchange Equalization Fund Commercial banks Other financial institutions and domestic sectors

1970

1971

1972

1973

1974

1975

1976

7,366.8 5,683.9 5,891.5

9,584.1 7,550.7 6,774.4

10,264.5 12,804.4 8,441.4

10,144.8 14,644.9 10,631.2

9,776.7 15,403.8 11,710.7

7,577.9 17,241.4 12,445.7

9,778.5 18,427.1 14,068.7

1,844.1

2,163.5

2,383.9

2,359.5

3,171.0

3,687.3

776.0

756.6

724,5

675.6

633i4-

1,113.3 717.0 "696.5

2,086.4 512.3 987.0

3,437.9 183.7 252.0

475.5 35.2 368.8

1,726.7 179.6 150.0

2.2

22.3

» 1,820,5 631.5, 1,758.2 < 241.0 212.8 "T 38.0

730.1

*

71.4

5

20.5

43.7

3,999.6 422.5 2,489.8 88.1

Source: Bank of Thailand.

In Figure 1 public debt is shown in relation to Gross National Product, government expenditure and revenue, and foreign exchange earnings. Public debt outstanding was higher than annual government expediture and revenue throughout the period. The amounts of foreign exchange earned from exports of goods and services surpassed the amount of public debt outstanding only during 1966 - 68 and 1974 - 76. / The relationship between public debt and GNP is more interesting because GNP is the tax base out of which the interest cost must be met. It can be seen from Table 3 that, despite the greater average change in public debt than in GNP, the latter grew relatively faster. Public debt grew from Baht 30,163.5 million in 1970 to Baht 70,224.5 million in 1976, an increase of 132.8 per cent compared with a 137.4 per cent growth inGNP which rose from Baht 136,439 million to Baht 323,979 million during the same period. However, the public debt is on the average, less than one fourth of GNP and the interest on public debt is approximately only 1.3 per cent of GNP. Therefore, public

313 Table 3: PUBLIC DEBT AND INTEREST RELATIVE TO GNP, 1970-76 / Public Debt Outstanding (millions o f Baht)

1970 19711972 1973 1974 1975 1976

30,163.5 35,815.6 45,735.7 51,179.8. 51,10'9.9 55,513.2 70,224.5

Change

{%

k

GNP. (current prices) (millions o f Baht)

17.0 18.7 27.7 11.9 -0.1 8.6 26.5

136,439 144,637 164,299 216,119 270,052 291,898 323,979e

Public

Change (%)

4.3 6.0 13.6 31.5 24.9 8.1 11.0

Interest on Debt Public Debt as% (millions of Baht) of GNP 22.1 24.8 27.8 23.7 18.9 19.0 21.7-

1)494.5 1,933.8 2,271.6 2,930.6 3,628.0 3,524.8 3,838.4

Interest as% of GNP

1.1 1.3 1.4 1.4 1.3 1.2 1‘.2

Per Capita GNP (Baht) 3,751 3,859 4,257 5,445 6,622 6,972 7,541®

Capita Public Debt (Baht) 829 956 1,185 1,289 1,253 .1,326 1,635

e: estimate.

Sources: Bank of Thailand, NESDB. Comptroller-General Department.

debt and interest on it need not be considered burdensome to the economy. For comparison, the ratios of public debt to Gross Domestic Project (GNP) of several countries during 1970.— 73 are shown- in Table 4. It is noteworthy that the - ratios for advanced countries like Australia, Canada, the Netherlands, t New Zealand, the United Kingdom and the ’United States are all higher than that for Thailand while the. ratios .for Trance, Germany arid Japan are much lower. In the case, of countries of comparable development level with Thailand, like Indonesia,- the Philippines and Venezuela, but not: Singapore, public debt to GDP ratios are lower than Thailand’s. Therefore, the' conclusion. -may be drawn that .there is no. relationship between the ratio of public debt to GDP and the level of economic progress. Around I I per cent of annual government budget expenditure is appropriated for debt services. The appropriation rose from Baht 2,340.2’ million in 1970 to Baht 7,619.1 million in 1976 and dropped to Baht 6,417.4 million in 1977 (see Table 5). The interest on public debt accounted for more than one half of the annual debt services and it rose from Bahf 1,494.5 million in 1970 to Baht 3,838.4 million, in 1976. The repayment of domestic debt principal grew very rapidly during recent years, rising from Baht 525.5 million in'1973 to Baht 3,244.1 million in 1976, while that for external debt stood at around Baht 200 million a year. Table: 4 RATIOS OF PUBLIC DEBT TO GDP OF SOME COUNTRIES 1970-73

Country Australia Canada France Germany Indonesia Japan Netherlands New Zealand Philippines Singapore Thailand United Kingdom United States Venezuela Source:

1970

1971

1972

1973

40.3 44.1 12.3 12.5 3.0 4.4 28.8 52.1 17.2 — 22.1 66.2 38.9 10.6

37.4 45.6 10.7 12.1 3.3 4.6 27.1 46.9 14.8 29.6 24.3 60.2 38.6 11.4

34.6 45.8 8,6 11.9 3.0 5.2 24.8 '42.9 14.6 33.5 27.8 58.6 37.6 10.7

— 43.2 — 4.4 — 5.9 23.5 40.1 15.1 33.5 23.6 — 36.1 9.3

u

U.N. Statistical Yearbook.

314 Table 5: DEBT SERVICES AND ANNUAL BUDGET APPROPRIATION FOR DEBT SERVICES

(Million is of Baht)

Fiscal Year

Total Budget

Appropriation for Debt Services

% of Budget

1970 27,299.9 2,340.2 28,645.0 1971 2585.3 1972 29,000.0 3,417.8 32,030.0 1973 3,800.6 1974 39,027.6 5,192.2 50,500.0 1975 6,385.5 1976 62,650.0

Review

Of Existing Savings Institutions

Mobilization

and Methods used in

of Small Savings in Thailand

, Paiboon

Wattanasiritham

I. INTRODUCTION The rate of saving in the Thai economy has been quite high, averaging 15.7 per cent of gross domestic income between 1961 and 1972. It was 15.5 per cent in 1972 and, of this 15.5 per cent, 12.8 per cent belonged to households and private non-profit institutions, the rest to corporations, government enterprises and central and local governments. Thus, as to be expected, households and private non-profit institutions are the two sectors which contribute most of the saving in the economy. Principally for this reason, only the (financial) savings of households and private non-profit institutions are taken into account in the study of savings institutions in this paper. The word “household” will be used to represent both sectors (households and private non-profit institutions) throughout, and the words “savings institutions” will be taken to mean institutions which mobilize household (financial) savings. In Thailand, a variety of institutions perform the function of mobilizing household savings. Some of these are very small or are loosely organized so that information on them is difficult to obtain. Examples of such institutions are the Government Housing Bank, non-registered credit unions, mutual benefit societies, “chit” fund companies, and mutual funds. However, these institutions have not become sufficiently significant so far as the over-all financial savings of households are concerned and are therefore excluded from this study. II. SAVINGS INSTITUTIONS AND THEIR PAST RECORDS / The savings institutions which will be reviewed in this paper are: (a) Commercial banks (b) The Government Savings Bank (c) Other savings institutions: (i) Finance companies (ii) Life insurance companies (iii) Savings co-operatives (iv) Agricultural co-operatives (v) The Bank for Agriculture and Agricultural Co-operatives (vi) The Government Provident Fund (vii) The capital market.

Note:

This paper was prepared with co-operation from Mr. Chaleo Pisolyabutra of the Bank for Agriculture and Agricultural Cooperatives, Mr. Prinya Wanchupela of the Government Savings Bank, Dr. Sura Sanittanont of the Bangkok Bank, Mr. Sommai Phasee of the National Economic and Social Development Board, andMr. Arrux Soontaros of the Ministry of Finance. The views expressed, however, are those of the writer only. It was presented at Seminar on the Mobilization ofPrivate Savings, ESCAP, Bangkok, 1974.

317 i

(a) Commercial banks Commercial banks were the first organized institutions that appeared on the Thai financial scene as early as 1888. Over the years .they have, grown in size and injmportance. Of the more important financial institutions in Thailand, commercial banks contributed to 72.0 per cent of total assets, 72.8 per cent of household savings mobilized, and 75.7 per cent of total credit extended at the end of 1973. / The 'are 29 commercial banks in Thailand at present. Of these, 16*are Thai banks (locally1incorporated) and 13 are foreign banks (registered abroad). Thai banks operate a nation-wide network of branches; having between them 75.0 branches within the country at the end of 1973 while one Thai bank also has 15 overseas branches. Of these 750 branches, 254 are in the metropolis’ and 496 in the provinces. All commerced banks operate under the Commercial Banking Act, 1962,/and are supervised by the Bank of Thailand and the Ministry of Finance.. Commercial banks mobilize savings by accepting demand; savings’and time deposits.- At present, no interest is paid on demand (or current* account) deposits.? Savings deposits, which can-be withdrawn on demand, carry 4.5 per cent per annum interest. Fixed deposits are offered at 6:per cent per. annum for 3 months p money, 7 per centiper annum for 6 months money; iand 8 C

i

Table' 1. Deposits at commercial banks (in million baht)

t

a

Percentage End of

Percentage.

Demand

Savings

Others b/

of total

of total

Percentage

.Percentage Time

Total o f total

of total

K J

1965 1966 1967 1968 1969 1970 1971 1972 1973

5,123.0 5,742.9 6,174.3 . 6,942.1 7,103/ 7,598.8 8,270.3 9,765,9 11,725.4

t

37.33 32.76 29.99 £28.76 , 25.67 23.83 21.90 20.45 20.0?

1,377.1 2,010.1 2,194.7 2,486.1 2,793.7 2,934.0 ‘3,201.0 4,054,2 5,056.3

10.03 11.47 10.66 10.30 10.10 . 9.20 8.48 8.49 8.66

6,936.8 9,459.3 11,868.6 14,308.7 17,283.2 20,931.3 25,770.8 33,292,8. 40,740.5

'

50.55 53.97 57.64 59.27 » 62.47 65.65 68.25 69.73 < 69.79

£ 485.7 420.7 51’6.5 633.0 850.2

Al bl

Bank o f Thailand. Excluding inter-bank deposits. ' * Comprising certified cheques, cashiers’ cheques, marginal deposits, etc.

y *

1. See Tables A-3 through A-12.

2/

13,722.3 17,528.1 20,589.2 24‘140.6' ;27,666-.O 31,884.8 37,758.6 47,745.9 58,372.4

r

X. Source:

2.08-4 1.80 1 . 5 3s T;67 1.76 t 1.32 1.37 1.33 -1:46

285.3 315.8 315.6 40X7

Compilation o f the Financial Institutions Section, Department o f Economic Research, Bank o f Thailand.

*

•318

A major portion of commercial bank deposits is held by individuals and private non-profit institutions. At the end of 1973, for example, of the total deposits. of 58,372.4 million baht, 42,273.3 million baht (or 72.4 per cent) were in the hands of individuals and private non-profit institutions, or “households” as defined in this paper. Commercial bank deposits have been by far the most- important form of household (financial) savings as can be- clearly seen in tables A-3 through A-7. Throughout the period 1963-1973, the share of household savings at commercial banks never fell below 62.6 per cent of total household (financial savings at all the savings institutions under review (see table A-4). Moreover, commercial bank deposits have grown at, relatively high and steady rates, averaging 21.5 per cent between.1964 and 1973 (see table A-6). As a share in the total savings of households,, deposits at commercial banks haye also been significant. Between 1964,and 1973, such shares averaged 23.0 per cent; in 1972 and. 1973 they were. 38.5 and 31.1 per cent respectively (see table A-7). No data are available with respect to the number of people and institutions that place their savings at commercial banks. Table A-8, however, shows estimated numbers of savers for various savings institutions. In the case of commercial banks, the estimates are based on (but not equal to) the number of accounts kept at commercial banks, by all .categories of depositors; While the estimates- may be on the high side, they at least indicate that the number of savers who put their sav-. ings at commercial banks has been quite large and has- risen steadily, reaching the region of 2 million or around 5 per cent of total population at the end of 1973-(see.;tables A-8> A-10 and A - l l ) . .This gives an average size, of commercial bank deposit per saver at around 20,000 •baht, throughout the period 1966-1973. Further, the average of 20,000 baht per saver. implies that a majority of commercial bank depositors hold less than 20,000 baht each, which should (although this is an arbitrary standard) put them in the category of small savers. It is also most likely that a greater number of the small savers are those holding savings deposits. A number of reasons may be offered for the popularity of commercial bank deposits as a form of savings, given the level of income of the Thai populace. Firstly, commercial banks in Thailand have enjoyed good public confidence. This in turn may be accounted for by the fact that, throughout Thai banking history, there has never been any bank failure, although a number of banks have experienced a period of financial difficulty. Relatively high interest rates coupled with stable prices may be the second reason.- / Thirdly, the interest derived from commercial banks has been exempt from income tax for individuals since 1961. / (Most of the'private. non-profit institutions are notrequired to pay income tax in any case.) Fourthly, commercial banks have branches throughout the country and are in the position to provide a variety of services for the public in addition to making loans. Hence the public not only find commercial banks a safe and convenient place to put their savings but are also attracted by the services which they can obtain, or hope to obtain, from the commercial banks. In addition to the various attractive features of commercial banks as savings outlets as already, described, commercial banks have employed a number of techniques to promote deposits from small savers. Such techniques include direct visits, approach through leaders in the community, or relatives, of potential depositors, advertising through the various media, distributing gifts, etc. The introduction of new types of deposits or services has also been adopted to a large extent by Thai commercial banks in order to attract depositors. Finally, it may be said that commercial banks, partly aided by their relatively large financial resources as well as by the fact that they operate a profitable / and growing business, have been abie to acquire and/or produce competent personnel who have in turn managed to keep the banking industry dynamic and expanding. 3/

The consumer price index for urban areas rose quite slowly from 100.2 in 1964 to 119.6 in 1972, oran annual (simple) average of only 2.4 points. During this period, commercial banks paid 7 per cent per annumi interest for one-year deposits. From 1972, however, prices rose much more sharply, the CPI reaching 173.3 in May 1974. Meanwhile, the interest rate on one-year bank deposits was raised from 7 to 8 per cent in J anuary 1974,

4/

The Government recently introduced a bill in the National Legislative Assembly to revise.the Revenue Code with respect to taxation of interest income from bank deposits, government bonds, finance companies’ promissory notes, etc. If this bill becomes law, such interest income will all be taxed at a flat rate of 10 per cent for individuals.

5/

Profits after tax of all Thai commercial banks, expressed as percentage of capital funds, were 17.1, 17.6, 17.2, 17.2, 17.7 and 17.3 foi 1967, 1968, 1969, 1970, 1971 and 1972 respectively.

319

(b) The Government Savings Bank The savings institution which is second in size to the commercial banks, taken as a group, is the Government Savings Bank (GSB). The history of the GSB dates back to 1913 when King Rama VI set up the Savings Office attached to the Royal Treasury. In 1929,a the Savings Office was transferred -to the Tost and Telegraph Department and remained there until 1947 when all its assets and liabilities were transferred o the newly created Government Savings Bank. The creation of the GSB was effected by an Act of Parliament — the Government Savings Bank Act of 1946. The Bank was to operate as a non-profit organization under the control and guarantee of the Government but with an autonomous management appointed by the Minister for Finance. tin terms of assets, the GSB is surpassed only by the two largest commercial banks. It has more branches, however, than Jany single commercial bank in Thailand. At the end of 1963, the GSB operated a network of 291 branches and 60 amphur (district) agencies throughout’ the country, compared with 112 branches of the laigest bank and 111 of the second largest. Moreover, almost all of the GSB’s branches are situated in the provinces, whereas about one-third of all commercial banks’ branches are in Bangkok Metropolis. • > Savings mobilized by the GSB are mainly in the form of savings and fixed deposits as' well as through the sale of premium savings certificates (with a lottery feature). The GSB also offers a wide variety of other savings outlets, although, on the basis of the amounts of savings collected, i

4

«

4

L

1

T

- ‘Table 2 . Savings at the'Government Savings Bank (in million baht)

Savings Department

Percentage of total

End of 1973

2,182.4 2,176.8 1,0'54:1 100.6 7.1

,28,7 28.7 13.9 1.3 0.1

2,559.0 3,334.7 1,859.2 85.7 6.6

125.2 32.8 18.3 0.8 0.1

176.3 29.7 407.5 15.9

2.3 -0.4 ‘5.4 0.2

163.1 31.5 510.6 20.0

1.6 0.3 5.0 0.2

1,400.3 5.4

18.4 0.1

1,547.2 3.4

21.9

0.3

25.2

0.3

9.1 5.9

0.1 0.1

8.2 5.3

0.1 0.1

7,593.0

100.0

End of 1972

Type of savings -

•« Percentage of total

->

I . Demand deposits 2. Fixed deposits — 6 months — 12 months $ 3. Giro-transfers 4. Savings insurance (double system) Banking Department 1. Current deposits 2. Time deposits — 6 months — 12 months a / 3. Travellers’ cheques

j

Certificates and bonds 1. Premium savings certificates 2. Savings bonds

15.2 .0.03

Others 1. Life insurance (endowment) 2. Life insurance (educational annuities) 3. Deposits for housing Total

Source: a/ b/

Government Savings Bank, Beginning 1 January 1972. Beginning 1 October 1969.

10,159.7

100.0

320 they have not been significant. Table 2 gives a breakdown of the different types of savings mobilized by the GSB at the end of 1972 and 1973 with respect to all types of savers. However, except for those keeping deposits in the Banking Department, practically all the1 savers are either individuals or private non-profit institutions. Considering only savings of households, the GSB’s records have been impressive. Tables A—3 through A— 7 give the magnitudes, rates of growth, etc. in detail. What is notable is that the GSB has been able- to grow more dr less as fast" as the commercial banks, with the exception of the period ,1968-1971. Part of the explanation for the fall, in rates of growth during that period was the growing consciousness among the saving public that the GSB was paying-interest rates appreciably lower than those paid by commercial banks: With tire upward revision of interest rates and the introduction of 7 per cent for 12-month deposits at the beginning pf 1972,6/ however, household savings at the GSB started to grow at high ratesagain, i.e. 21.5 per cent for 1972 and 26.2 per cent for 1973, the latter surpassing the growth rates of, commercial banks’' household savings for the same year. , t Another notable fact is that household savings at the GSB come almost wholly from small •savers. The average amount of savings per saver has been in the region of 'only 1,000 baht, (see table .A— 9). Moreover, the GSB has managed to -draw savings from a really large number of people, estimated at 9.7 million or 23.4 per cent of total population at the end of 1973 (see tables A—8, A—10 and A—11). Although such figures are likely to beaver-estimated, thefact that more people save at the GSB than all the commercial banks put together still cannot be denied. Among the people who save with the GSB, students (including schoolchildren)- are the biggest group, followed by farmers, small traders, government officials,, and labourers, in that order. Table 3 shows the number of deposit accounts and the amount of deposits held in the Savings Department of the GSB. Although the data do not cover all savings at the GSB, they do give a good indication of the sizes of the various groups of savers as well as the amounts of (heir savings. The relative success of the GSB in mobilizing household savings can be attributed to a number of factors. Firstly, it has full government guarantee, hence it is in a position to enjoy more or less complete confidence from the general public, particularly small savers and savers in provincial and rural areas. Secondly, it has made .great efforts in .reaching “out” to people in all parts of the Table 3. Demand and fixed deposits in the Savings Department of the Government Savings Bank at the end of 1973

Depositors

1. 2. 3. 4. 5. 6. 7.

Students Fanners Small traders Government officials Labourers, odd-job workers Landowners Charitable organizations and other juristic persons S. School teachers 9. Others * Total

Source: a/

61

Number of accounts (thousand)

Amount of deposits (million baht)

1,419.1 581.8 490.7 455.2 469.5 132.2

558.1 1,828.0 2,098.1 1,099.2 675.3 641.0

28.2 23.5 181.9

274.0 60.0 487.3

3,782.1

7,721.0

Average deposit per saver (baht) 393.3 3,142.0 4,275.7 2,414.8 1,4383 4,848.7

'

9,716.3 2,553.2 2,678.9 2,041.5

Government Savings Bank. Excluding accounts which have been inactive for more than 9 years.

Up to the end of 1971, the maximum deposit rate of the GSB was 5 per cent per annum for 6-month deposits, there being no 12-month deposits. From the beginning of 1972, deposit rates have been as shown in table A—12.

321

country as well as reaching “down” to potential savers of all levels and professions. Not only has it opened a large number of branches and amphur agencies throughout the country, but it also operates several mobile units both on land and by waterways. It is, in other words, the sheer number of savers (although mostly very small) which has brought about large amounts of savings held with the GSB. Thirdly, as in the case of commercial banks, interest on deposits placed with the GSB is tax-exempt for individuals. Fourthly, a good portion of savings mobilized by the GSB is through the sale of premium savings certificates which, due to their lottery feature, have proved quite popular among the Thai public. ' (c) Other savings institutions, The two most important categories of financial institutions —. the commercial banks and the Government Savings Bank — having been dealt with, brief mention may now be made of the rest: (i) Finance companies Finance companies are a relatively new type of financial institution in Thailand, their operations beginning only in 1969. However, they Have been growing very fast' and now rank as the third largest group of savings institutions in the country (see tables A—3 through A—7). Finance companies are companies which borrow money from the public through the issuance of promissory notes and lend the money to businesses, individuals, etc. They may not accept deposits as do commercial banks. At present, there are some 100 finance companies operating in Thailand, most of them situated in Bangkok Metropolis. What has made finance companies attractive savings outlets is the relatively high rates of interest that .they offer on their promissory notes, the rates being high even for notes of very short maturities’ (see table A—12). Although legally such interest income is taxable for individuals, the tax is not deducted at source, making it relatively easy for holders of finance companies’ promissory notes to evade taxation. Finance companies have also adopted the personal approach method to persuade people with surplus funds to place such funds with them. Finance companies mobilize funds only from large savers, as can be seen in table A—9. The Bank of Thailand’s regulation forbids them from issuing promissory notes of less than 50,000 baht denomination in Bangkok Metropolis and three surrounding provinces, and not less than 10,000 baht denomination in other provinces. (ii) Life insurance companies At present, there are 11 life insurance companies in Thailand. The life insurance business has not really prospered. There have actually been some setbacks in the past, notably the failure of the then largest life insurance company in 1964 and of another company in 1968. Hence, savings mobilized by life insurance companies have not amounted to as much as can perhaps be expected although the rates of growth,of such savings, except for the two years just mentioned, have been reasonably high (see tables A—3 through A—7). (iii) Savings co-operatives * These are set up principally by employees of public organizations such as schools and government departments. Sources of funds for savings co-operatives are contributions to their share capital an deposits placed by their members. These funds represent savings of members and are in turn utilized as loans to those members who are in need of cash. The number of savings co-operatives at the end of 1973 was 134. Members are usually people in both the medium and the. lower income groups, blit, in any case, the average amount of savings per saver has not been large (see table A—9). Savings at savings co-operatives have grown fairly steadily over the years (see table A—6). One of the reasons for this moderate success is that members see the benefit of either obtaining a fairly high return on their savings or being able to borrow money when the need arises, or both. (As a rule, members are paid a yearly dividend of 8 per cent or more on their shareholdings and 8 per cent per annum for their one-year deposits.)

322 (iv) Agricultural co-operatives Similar to savings co-operatives in their organizational structure, agricultural co-operatives are formed by fanners with the purpose of making credit and other facilities available to members. Savings mobilized by these co-operatives, however, have not amounted to a large sum (see tables A—3 through A— 7). Most of these savings are in the form of contributions to the share capital of the co-operatives; deposits have been very small. (Agricultural co-operatives rely to a large extent on borrowings, mainly from the Bank for Agriculture and Agricultural Co-operatives, for their operating funds.) (v) The Bank for Agriculture and Agricultural Co-operatives This is a specialized financial institution set up by the Government, through the Bank for Agriculture and Agricultural Co-operatives Act of 1966, to provide agricultural credit to fanners. Initially, it mobilized very small amounts of household savings (in the form of savings and time deposits) but, from 1967 onward, efforts in this direction have been augmented, resulting in high rates of growth of savings placed by households with the BAAC (see tables A—3 through A—-7). In its savings mobilization efforts, the BAAC has made good use of the fact that it is a government bank, and has adopted the personal approach techniques also. Although the outstanding amount of household savings at the BAAC was still relatively small at the end of 1973, it is noteworthy that a large number of people who save with it are small savers and; even more significantly, are savers in the rural areas. (vi) The Government Provident Fund In addition to the Government Provident Fund, there are provident funds operated by government enterprises and private businesses, but as data on such provident funds are not yet available, only the Government Provident Fund is listed here among the savings institutions. Contributions to the Government Provident Fund are a form of contractual savings which are automatically deducted from the salaries of all government officials.. At present, the rate of contribution is 4 per cent of such salaries. When, the officials leave government service, these deductions are repaid to them plus interest of 6 per cent per annum. < -i ~ » Savings accumulated by the Government Provident Fund have amounted to an' appreciable sum and have been growing quite steadily, as shown in tables A—3 through A— 7. 4 (vii) The capital market The capital market in Thailand is still at a rudimentary stage. At present, there are very few companies whose securities are readily available to the public for savings purposes. Hence, household savings through the capital market is defined here as holdings of government bonds only. In this respect, the capital market as a savings institution has had a rather limited role. Although holdings of government bonds by households yere not insignificant throughout the period 1963-1973, their growth has been more .or less stagnant (see tables A—3 through A— 7). This means that practically no additonal household savings have been mobilized through the capital market (or, morespecifically, through the issuance of government bonds) during the entire period under study; III. SOME OBSERVATIONS (a) A structural overview

'

From the foregoing review of savings institutions and their past records, it is quite clear that, in Thailand, the dominance of commercial banks and the Government Savings Bank in the mobilization of household savings cannot he over-emphasized. This is true as' far as small savings are concerned also. Looking into the near future, one does not see any firm indication that the scenario will change significantly. There may be an exception in the case of finance companies, but, as long as the present regulations on finance companies remain, they will continue mobilizing only relatively large savings Life insurance companies, savings co-operatives, agricultural co-operatives, : the BAAC, the Government Provident Fund, and the capital market (in the broader sense) will undoubtedly continue to grow, but the share of household savings mobilized -by them, even if put

323

together, is not likely to equal the shares' of savings mobilized by commercial banks and theGovernment Savings Bank for some time to come. From the above picture, two implications are worthy }of note. Firstly, commercial banks f and the * Government Savings’Bank have been the most effective institutions in the mobilization of household savings, large and small alike. Hence, if efforts to mobilize household sayings are to be intensified, particular attention should be given to further strengthening and developing the roles played by these two categories of savings institutions. Secondly, because the effectiveness of the other categories of 'savings institutions (except finance companies) in the mobilization of household savings has been somewhat limited, a study should be conducted to find out the factors that have impeded their growth and/or what measures carijbe adopted to quicken their development as effective savings institutions. This is important because savings institutions otherithan commercial banks, the* GSB and finance companies, in spite of their relatively small sizes, all have a special and valuable foie t o play in that they “mobilize either contractual savings of very small sayings as well' as pavings from 1 4 ’ “ \ people ’in areas outside the nation’s capital. r (b) Interest rate policy '

It does riot appear that the authorities have actively used interest rates as an, insiruinent for the promotion of savings. Official regulation Has kept the deposits "of both commercial banks and the Government Savings Bank at artifically low levels. This is demonstrated by a number of facts. Firstly,! there ,have beehunany cases- of commercial banks paying higher- interest rates than’ those presjcribed by the Bank of. Thailand. Secondly, the unorganized'market has continuedtb thrive, partly because many people find that, if they .have surplus money,',it- is better to lend it iri'the'unorganized market than to place it with savings institutions. Thirdly, finance companies have grown very rapidly both in size and in number in a matter of a few years principally Because they have been able to pay interest rates at higher levels than those offered by commercial banks and other savings institutions (up. to now, interest rates offere'd4by finance companies h'ave’not beeri-regulated)’.** - • Such being the case, there should be a good reason for reviewing the authorities’ policy ph' interest rates. With 'a morti liberal interest rate policy, or by regulatirig'iriterest rates at more realistic levels, there is a better chance that m“6re household savings will*be channelled away from the unorganized market and other “forms of "unproductive” savings into the (organized) savings institu(c) Type's and sources of savings Up to "now? household savings in Thailand have been mainly of the voluntary (as opposed to contractual) type. Contractual savings, i.e. those placed with life insurance companies and the Government Provident Fund, have contributed relatively little to the savings, mobilized by all savings institutions put together. Even if one counts’ provident funds operated by government enterprises and private businesses as well, the total contractual savings would still not amount to a major part in the over-all savings. Nevertheless, as demonstrated in other countries, the potentials of contractual savings are great. Furthermore, contractual savings are, as a rule, more stable and of a longerterm nature than voluntary savings, so that they are useful as sources of long-term or development financing which is greatly needed in a country like Thailand. As far as the sources of savings are concerned, it appears that most of household savings come from urban areas, particularly Bangkok Metropolis.?/ Savings from the rural or agricultural sector seems to have been very small, although this sector comprises some 80-85 per cent of the total population. While such a picture is only to be expected with the present state of income distribution, it does not mean that thrift should not be encouraged among people in rural or agricultural 7/

As an. indication,, total commercial bank deposits at the end of 1973*(including inter-bank deposits) stood at 58,744.7 million baht. Of these,?40,095;9 million baht or .68.3 per cent were in Bangkok Metropolis while 18,648.8 million baht or f 31.7 per cent came from other provinces.

324 areas. On the contrary, the more these people save, the firmer will be the basis on which their incomes can grow. > Thus, in formulating policies on savings institutions and savings mobilization, attention should also be paid to the types and potential sources of savings'. In particular, contractual savings of various forms and savings among people in rural o r agricultural areas should be actively promoted. (d) The,Government Savings Bank Past records show that the Government Savings Bank has been very effective in mobilizing household, especially small, saving. These savings in turn have been invested practically wholly in government securities.®/ This of course is by no means unusual or unexpected. However, might a less rigid framework for the GSB’s use of funds be more desirable? Even leaving aside the question of which alternative use will benefit the country most (taking into account the risk factors, etc., as well), there is still the consideration that a more liberal use of funds may further promote savings through the GSP itself in at least two important ways. Firstly, it is likely that a-more liberal use of funds will earn more profits for the GSB, hence the GSB will be in a better position to offer attractive rates of interest to potential savers. Secondly, if the GSP uses more of the savings it mobilizes for the benefit (through loans, etc.) of its savers, savings with the GSB will become even more at. tractive. Admittedly, such a deviation from the normal practice of a savings bank will need careful study beforehand. Nevertheless, there appear to be adquate grounds for comprehensive re-examination and reconsideration of the policy and practice that have hitherto been adopted. (e) Need for more active policy The Government and the monetary authorities have, af least implicitly, attempted to promote high rates of domestic saving, whether channelled through sayings institutions or otherwise. Savings institutions, on their part, have been active in encouraging the public to save with them — with varying degrees of success. Nevertheless, as has been observed, there are still many areas in which positive changes can be brought about, or steps taken, which would improve the framework and the system in which savings are mobilized so as to make such mobilization not only more effective but also well-balanced. However, changes or steps in this regard need careful study and planning as well as active implementation. This, in turn, implies that there should be a body or an agency specially responsible for the over-all promotion of savings. In many countries such an agency exists, but in Thailand it is lacking. Thus, the establishment of a national savings promotion bdtly of some form should be considered. Such a body could be an independent institution, or it might be under the aegis, for example, of the Bank of Thailand either alone or in co-operation with the major savings institutions, especially the Government Savings Bank.

8/

At the end of 1973, for example, the GSB held 10,770.5 million baht in government securities, while total deposits plus premium savings certificates, savings bonds and insurance funds amounted to 10,054.7 million baht and the GSB’s total assets stood at 11,666.9 million baht.

11.7 246.51

538.9

1,908.0

9,354.0

4. Saving of corporations and government enterprises

5. Saving of central arid local governments

6. Total domestic saving

Source: a/

14.4 318.1

9,213.8

2,209.9

662.9 2,760.0

1,296.5

9.5 8.9 214.97

6,657.6

74,667

30.97

1964

13.9 316.4 14.4 346.0

9,475.1 10,714.1

2,578.0

819.7

-4.2 8.9 202.92

6,077.4

68,079

29.95

1963

National Economic and Social Development Board, Estimated.

15.9 . 333.8

-8.2 9.9 218.88

Percentage change As percentage ofG.D.I. Per capital (Baht)

As percentage of G.D.I. Per capita Baht)

6,907.1 6,341.0

3. Saving of households and private non-profit institutions

28.97 63,793

28.02

58,970

2. Gross domestic income (G.

1962

1. Total population (million)

1961 33.09

1966

16.5 435.2

13,935.3

3,057.5

1,277.8

44.2 11.4 299.81

20.9 641.1

21,213.7

3,657.4

1,788.3

64.3 15.6 476,52

9,600.0 15,768.0

84,303 101,375

32.02

1965

16.4 519.2

17,757

4,486

2,279

-30.3 10.2 321.40

10,992

108,294

34.20

1967 36.52

1969 37.73

1970

14.9 493.1

17,431

4,483

2,546

-5.4 8.9 294.26

10,402

16.0 562.4

20,537

4,187

2,358

34.5 10.9 383.13

13,992

13.9 502.5

18,961

2,658

2,431

-0.9 10.2 367.66

13,872

116,774 128,566 135,939

35.35

1968

Table A—1. Thai economy: Domestic income and domestic saving at current prices (in million baht)

40.10

1972

15.5 578.4

22,492

1,441

2,588

33.1 12.7 474.75

18,463

15.5 617.5

24,760

1,507

2,722

11.2 12.8 512.00

20,531

145,340 160,162

38.89

1971

15.6 708.3

29,289

1,661

2,920

20.3 13.2 597.53

24,708

187,681

41.35

1973 a /

325

t

I

111

o

‘

'

1

'

Branches

1

765 cl 351 dl 31 142 —‘

58 S

1,347

Total assets

I

78,361.6 11,666.9 r a t (10,606.6) (1,522:3) (965*7) ('1’,62M)‘ *2,255.6

5 ' t

Number

~ ‘29 1 103 11134790

>1

1;, r -

1,06? j ,

t

60,421.8

t

(

“ ;,

% of total

0.4? 2.9

{

a )■»

Ka

No. of sayers

(330;628) (616,44-7)

'f -r 69.9 (2,235,889) 15.7 (9,674,702) » r .. » > i (5.3) ’ (31,770) (2.3) (351,619) ‘ (254,866) t> (1.6) * '(0.9) (332,652) PI

«,.>• » Experience in advanced countries also shows that developed securities markets were made possible by the large, volume of government, securities which provided, a good source of income to dealers:who had built up networks for their distribution.

Market Structure in the Bangkok

and Competition Wholesale Market Udom

I.

Kerdpibule

The Problem.

As a consumer one often feels powerless whenever he buys something from a retail store and finds that the price has gone up since the last time he visited the place. In most developing countries the retail market is highly competitive; with numerous small sellers the opportunity to put on an excessive profit margin is extremely small. Our focus will, therefore, be on the wholesale market where it is believed to be much less competitive and pricing practices of the wholesalers directly determine the retail price that consumers have to pay. Generally, the extent to which a wholesaler can impose a profit markup and pass it on to consumers via retailers depends on the degree of competitiveness in the wholesale market for the commodity concerned. In a highly competitive market where sellers are numerous and each has a small and equitable share of the market it will be very difficult for any individual wholesaler to raise his profit markup. In a less competitive market; however, there may be only a few sellers whose volume of business may account for more than half of the entire market. Under such market situation the large sellers could, if they wish, employ non-competitive pricing and marketing strategies to maximize profits or maintain their dominance over the market. Most of such pricing policies result to higher prices and larger profit margin. It is the purpose of the present paper to examine the Bangkok wholesale markets with a view of answering to simple but important questions: (1 ) How competitive is the market? (2) If the market is found to be less than competitive, is there any indication that wholesalers attempt to exploit their oligopolistic power in' such a way that results to a high rate of profit? II’

The Approach. In a attempt to find the answer we need to investigate two related issues: (1) the degree of competitiveness in the wholesale market:

(2) the'evidence showing rion-competitive pricing practices of the wholesalers. The degree of competitiveness of the market can be indirectly measured by an index that shows how concentrated is 'the share of the market in the hands of few large firms. A concentrated market therefore implies a less than competitive market. It must be pointed out, however, that a concentrated market is not always a non-competitive market, it all depends on the behavior of the large firms in the market. This kind of market differs -from the pure monopoly case in that the freedom to exercise power is constrained by the fear of unfavorable reactions from other large sellers. This type of market situation is generally known as oligopoly. The dominance of the large firms is maintained by their established market networks which act as an effective barrier to entry for any significant competitors. Since the market share of the oligopolists depend critically on pricing poResearch Paper No. 3 , Center for Applied University; November 1976.

Economics

Research,

Kasetsart

345 licies of other oligopolist, each individual oligopolist will" be less willing to change his price but will rely on other non-price 'means for gaining a larger share of the market. This brings us to the hypothesis of the present paper that if the wholesalers are behaving like traditional oligopolists we would expect the wholesale prices to change less; after when they do they are likely to be of considerable magnitude. III.

Market Concentration

in the Bangkok Wholesale Market.

The methods of Lorenz curve analysis will be used here as a means of measuring the degree of market concentration. This method involves the ranking of business firms according to their size, the gross receipt will be used as a measure of the size of market share. From the Lorenz curve diagram one can compute the Gini centration ratio as an index for the degree of concentration of the market share. This Gini concentration index is the ratio of the observed magnitude of inequality to that of. the perfect inequality. The size of the Gini concentration ratio will therefore range from zero to one, representing perfect equality and perfect inequality respectively. The Thai National Statistical Office conducts periodic ceiisus surveys on business, trade and services sector for the whole kingdom and the author was given the privilege to use the disaggregated data from the 1969 survey. The Lorenz curve for various commodity markets are constructed from which the Gini concentration ratio and the aggregate market share of, important groups are derived; these indicators are shown in Table 1. While the Gini concentration index indicates the general picture of business concentration in the market as a whole, the percentage share of the group of smallest and large firms show the pattern of concentration. The Gini concentration figures in the Table show that the market share is most concentrated in the markets for agricultural products; leather and leather products; groceries; gasoline; books and stationaries; metals and mineral products respectively. The top five percent of the largest firms are controlling the largest share of the markets for household utensils; metals and mineral products; leather and leather products lumber and construction materials; construction machinery; books and stationaries. Their share range from 55 to 62 percent of the entire market. That is over half of the’volume of business in the market is in the hands of few large firms who constitute only 5 percent of all the firms in the market. The percentage share of the market of the top 10 and top 25 percent of the largest, firms show similar pictures. With all the measurements taken together it can be said that the share of the large wholesalers are most concen< trated in the markets for agricultural products; groceries; lumber and construction materials; gasoline; books and stationaries. One cannot help being struck by the fact that there are all the concumer necessities and vital investment goods for construction and industries. IV.

Long-Run Behavior of the Wholesale Price.

The purpose here is to see how the wholesale price indices display long-term trends and periodic fluctuations; especially how often do they fluctuate and hpw large is the magnitude of the fluctuations. We have annual series of wholesale price indices for Bangkok market for eight commodity groups, these groups closely correspond to the commodity grouping of the census of business, trade and services. The period selected is the twenty-three years from 1950 to 1972. The methodology consists of three steps: (1 ) The statistical fitting of the time trend of the wholesale price indices; (2) The estimation of an index that shows the average magnitude of fluctuations of the price around the trend line; and (3) The measure of how often do the prices fluctuate over the given period of time In fitting the time trends, the simple linear function gives satisfactory fit for most cases except for three commodity groups where the movements of the price do not appear to have .anydefinite pattern.

346

Once the regression equations for the, time trends are established the residual terms are derived. These values represent the variation of observed value of the wholesale price from the trend value for any given year, from these residual values we construct an index that shows that average magnitude of fluctuations of the price over the period, this idex.is sometimes known as the “instability index” which has the formula in the following form:

I

Where I = instability .index P.= observed value

of wholesale

price4 index for year i I

P/r estimated value N = number

of wholesale

of observations .

price index '

for year "i 1

I

For the cases in which there are no apparent trends, the variation's measured from the mean value and the instability index becomes the “coefficient of variation.” The frequency of the fluctuations over the period under observation is calculated simply as the average value of the number of peaks and troughs that, occurred during the period. Results of the estimation.of time trends and fluctuations are summarized in table 2 The estimates show that up to 1972 the price of foodstuffs had been rising most rapidly compared with other commodities, the wholesale price index increased two percentage points per year. However, the price of agricultural products is .rising most slowly, and also most unstable; within the twenty-three-year period there have been five major cycles, each lasting about 4.5 years. The price of textile products and petroleum products are the most stable. This pattern of price fluctuations reflects, among- other things, the fact that agricultural production is subject to weather conditions and the last two groups of commodities are under the influence of world market and perhaps also the cartelization of the domestic market. The instability index shows that leather products, and metal products tend to have very large fluctuations although they do not occur very frequently. V.

Market Concentration

and the Behavior of Wholesale Price.

We have a hypothesis that if the wholesalers in a given market are behaving like traditional oligopolists resulting to a “kink demand curve’-’ situation the price of the commodity will tend to be rigid and when a price change occurs, it tends to be large. A rank correlation test will be performed to test such hypothesis. For this purpose each individual wholesale market is assigned rank value according to its position with respect to the three sets of indicators, namely; the degree of market concentration; the degree of price instability and the number of cycles of fluctuations. The rank correlation coefficient is estimated by the following formula:

347

and the test-statistiafor the level of statistical significance of the, correlation is: ? z = r/ / n-1 ' * where r = rankcorrelationcoefficent; } f d = difference between the rank value of the. two variables under consideration, 5 , n = number of pairs of the variables in the test. t f t

" -Eight wholesale markets will.be included in the. test, i.e ; , n = 8; these markets are -agricultiiral. products; groceries; construction. materials; hides and leather products; chemicals and chemical products; fuels and petroleum product and metal products. Various combinations of the two sets .of vaiables, i.e., the market concentration on one hand and. the price behavior on the. other, are selected for the test and the results are summarized in. table; 3 c ' Results show that there is a significant correlation between the degree of market concentration, as measured by the Gini -concentration ratio, arid1 the number of cycles of price fluctuations. This is to say that in the market where the market share is more highly concentrated the prices of products in the market' also tend to change frequently. There is also’ a correlation between the degree of market concentration, as measured by the size of market share of the top 10 percent of the largest firms', and the magnitude of the price change. The first finding suggests that the wholesalers. in Bangkok markets do not behave like traditional- oligopolists but this does not necessarily mean that they do not attmept to maximize profitsby other means.! •.

VI.

I

!
' ’ The fact that the Bangkok wholesalers do not use the kind of pricing practices as hypothesized in text, books, it becomes> necessary to test 'whether t-they attempt to' maximize profit-at sdl. Here again a rank correlation test will be performed to determirie whether there is a correlation , between the degree of. market concentration and the rate"'of profit. Two definitions of profits will 1 be used, namely:. ' -T r ‘ 7 (1) the price-cost margin, and (2) the rate of return on assets. , r Specifically the profit rate willbe defined-as-follows:!- -> * price-cost margin - gross receipt-costs i costs and ' « »* rate of return on assets = gross recepit-costs , , t *’ value of assets . < k The, “costs” are defined as the sum. of the value of-goods purchased for sales; operating expenses and labor .costs. The “gross recepit”Js defined to .include, sales, value of service rendered, 'brokerages and other fees. The “assets” are here defined as the average value of inventory during the year including the value of fixed assets when such data are available. The estimates for the rate of profit, however, did not turn out to be very satisfactory; in a number of cases they appear to have negative values. Nevertheless, these estimates are still useful because we are using the rank value of the profit rather than the value of profit itself. When the Bangkok wholesale market for various commodities .are ranked according to profit rates' from the top downwards’ the array appears in table 4 ~ • s « * . Results' of the ranking show’ that* profit rates are highest in the markets for agricultural products; motor vehicles; groceries; -and household electrical appliances. Textiles and paper products 1 t * » ’’

.348 markets show the lowest rates of profits. Once the ranking is established the rank correlation test can be performed and the results of the test are as follows: (1) There is a correlation between the degree of market concentration, as measured by the Gini concentration ratio, and the rates of profit; and (2) There is a correlation between the rates of profit and the number of cycles of price fluctuations. Details of the test results are shown in table 5. The correlation between market concentration and the rates of profit suggests that there is indeed an attempt to maximize profit by the wholesalers; i.e., the more concentrated the market share of the large wholesalers, the higher the rates of profit. The correlation between the rates of profit -and the frequency of price fluctuations is rather interesting, it shows that in the market where the rates of profit are high, the price in that market is found to change more often. This finding not only confirms our previous finding that the Bangkok wholesalers do not behave like traditional ofligopolists but also leads one to believe that there wholesalers behave like opportunist/ speculators who cash in their windfall profits from the' instability of the market. The more often the price fluctutes, the more opportunity to reap the profits. The appearantly unstable market may have been the work of the wholesalers themselves. VII.

Short-Run behavior of the Wholesale Prices.

To further confirm our belief that the wholesalers in Bangkok markets behave like opportunist/speculators, the pattern of short-term fluctuations of the wholesale prices will be examined. Another point to be mentioned here is that a large number of commodities that appear in the wholesale price index series are imports and import-competing goods as well as commodities that have high import contents. The price of these commodities, are therefore, largely determined by the world price, as reflected in the import price index. It means that in the long run the trends and, fluctuations of the wholesale price of these commodities in the Bangkok market will closely follow the movement of the world price. In the short run, however, 1 the Bangkok price of these commodities can deviate from the long-run pattern as a result of short-run demand and inventory situation. The short-run demand depends on the reaction of consumers to the initial price change and other circi mstantial events. If neither the wholesalers behave like opportunist/speculators nor the buyers panic at any change in price the Bangkok price of these commodities will change proportionately with the change in price of imports. If, on the other hand, consumers interpret the initial price increase as a sign of imminent shortages, a panic buying will follow and if the wholesalers take the opportunity to hoard and speculate the price of domestically produced good can increase proportionately more than the price of imports, at least for a short period of time while the market is thrown out of equilibrium. A test case occurred during 1973-1974 when the currency realignments resulted to a de facto devaluation of the Baht coupled with emergence of energy crisis, the c.i.f. price of imports into Thailand increased. It is here where we can compare the size of the increment of the price of imports and that of the price of domestically produced goods; The differential of the increase in pricewill be set against the degree of market concentration to detemine whether there is any relationship between the size of the differential and the degree of market concentration. Details are shown in Table 6. ui Results show that out of thirteen commodity groups eight are found to be the cases in which the price of domestically produced goods increased proportionately more than the price of imports. Among the commodity groups in which the differential is the largest are chemical products, metal and mineral products; the price indices of the domestically produced goods rose 34.4 and 60.7 percentage points higher than the corresponding increases in the price of imports.

349 Examples of the commodities in these groups that were in “short supply” during the crisis a are laundry detergents, rolled steel and scrap metals. Another group of commodities that was in similar situation is the paper products. There is no definite parallelism, however, between the degree of market concentration and the size of the differential of the price increase. Tn fact, there are cases in which the market concentration is quite high but the price of domestically produced goods was raised proportionately less than the increase in the price of exports, i.e., the differential has a negative value. This phenomnon may be due to the fact that the inventory situations of those commodities might not warrant a large price increase and some of the commodities are not the kinds that are strongly subject to panic buying, hence, the opportunity for the-wholesalers to raise price excessively did not arise. The commodities in this category include textile products, motor vehicles, and non-electrical machinery; these are the import substitutes produced under tariff protection, they are likely to have excess capacity and over-stocked inventories. VIII.

Conclusions,

When the findings relating to market concentration, the behavior of the wholesale prices and the rates of profits in various wholesale markets are put together the two questions that have been posed earlier in the paper can now be answered: (1) There is evidence indicating that the wholesale markets in Bangkok are notperfectly competitive, there is, spread concentration of business in the hands of a small number of large firms; (2) There is also an indirect evidence showing that the large wholesalers have been attempting to enhance profits by non-competitive commercial practices. It was found that the wholesalers tended to rely on speculations and profiteering rather than the traditional rigid pricing practice. Their success varies depending on the nature of the products and inventory situations; and (3 ) The wholesale markets in which the concentration of the market share is high with high rates of profit are mostly markets for commodities that are consumers necessities and vital materials for construction and industries. The activities of the wholesalers in their profit maximizing effort can become a serious detriment to the welfare of low-income consumers as well as economic grouth and economic stability of the nation. Esposito, F.F. and Esposito, L. “Excess Capacity and Market Structure,” Review of Economics and Statistics, May 1974. House, William J. “Market Structure and Industrial Performance: The Cas of Kenya,” Oxford Economic Papers, November 1973. Kakwani, N.C. and Podder, N. “On the Estimation of Lorenz Curve from Grouped Data,” International Economic Review, June 1973. Mancke, Richard B. “Causes of Interfirm Profitability Differences: A New Interpretation of Evidence,” Quarterly Journal of Economics, May 1974. Orr, Dale. “An Index of Entry Barriers and Its Application to Structure Performance Relationsships,” Journal of Industrial Economics, September 1974. Sawhney, P.K. and Sawhney, B.L. “Capacity Utilization, Concentration and Price-Cost Margin: Results of Indian Industries,” Journal of Industrial Economics, April 1973. Department of Commercial Intelligence, Ministry of Economic Affairs, Government of Thailand, Wholesale Price Indexes for Thailand (Bangkok, 1971.) Department of Commercial Intelligence, Minister of Commerce (formely Ministry of Economic Affairs), Wholessale Price Indexes for Thailand 1974 (mimeograph). National Statistical Office, Office of the Prime Minister, Goveriiment of Thailand, Census of Business Trade and Services 1969 Whole Kingdom, Document E-Cr. Busi No. 1-74. (Bangkok, 1974.

350

»

1

i

p ! Table 1 Market Concentration and Relative Share of the Market of Selected Percentage Groups of Firms: Wholesale 'Market, Thailand 1969

Commodity Market * ' a

*

Agricultural products Groceries,- fruits, and vegetables, etc. Lumber 'and construction materials > , Construction machinery and materials Machinery and supplies Furniture and fixtures. Household electrical appliances Household utensils Leather and leather products Motor vehicles j Automobile parts and accessories Chemical-and pharmaceutical j. ;* products’ Textile and apparel Paper and paper products Books and stationarie's Gasoline dealers Metals and.mineral products

Gini concentration ratio " 0,8520 .0.7936 0.7402 0.7140

Market Share of Selected Groups Top Bottom Bottom Top Top ,50% 10% 5% 25% 25% 0.50 0.25 2.00 2.00

1.00 2.00 6.509.00

89.00 89.00 * 82.00 .79.00

66.00 66.00 66.00 65.00

50.00 50.00 56.00 55.00

47.00 56.00 52.00 67.50 72.00 64.00 52.00

30.00 38.00 38.00 62.00 60.00 46.00 38.00

63.00 62.00 49.00 70.50 66.00 72.50

48.00 45.00 29.00 55.00 50.00 60.00

r

0.6498 0;6796 0.6281 0.7402 0.8072 0.7636 0.6402 ' •f 0.7385 0.7420 0,5907 0.7848 0.7892 0.7780

1.00 ■ 2.00 3.00 1.50 1.00 1.25 2.50

7.50 8.00 10.00’ < 8.50 3.00 4.00 10.25

1.00. 0.75 1.25 1.90. 0.50 1.00

:6.00 3.90 7.00 4.25 2.10 5.00

* 76.00 78.00 i 74.50 79.00 88.50 85.50.’ ; 52.00 r 83.00 82.50 77.00 86.50 89.00 87.55

Source: Estimated from 1969 Census of Business. Trade and Services.Survey Data of the National Statistical Office, Office of the Prime Minister.

351

Table Bangkok

Commodity group

Agricultural products Foodstuffs Construction materials Hides and leather products Chemical and chemical products Textiles and textile products Fuels and petroleum products Metal products

Wholesale .Price Indices : Trends

Regression equation for time trend Regression R2 coefficient Intercept (b) (?)

Instability “ index (%)

and Fluctuations

No. of cycles (1950-1972) ’ i

83.4471 55.9399

0.8968 2.0532

0.35 0.85

8.83 6.92

5.0 4.0

80.5967-

•1.1747

0.82

4.58

3.5

15.87

4.5

I 1.3584

84.5292

0.47

9.27

4.0

h

k-

85.7374

•— •

■ ,018396 —

_

0.82 —

10.44 2.65-

1.5 1.5

J J

11.05

1 Estimated from the equation P j = a + bT j + u j with T j = 1 for 1950.

2 No apparent trend, variation is measured from the mean. Source: Estimated from wholesale price indices of the Department of Business Economics, Ministry of Commerce.

3.6

352

Table 3

Results of Rank Correlation Test for Market Concentration and Price Fluctuations

variable pair Gini ratio and number of cycles Market share of top 10% and instability index

Rank correlation coefficient (r)

Test statistic U)

Level of significance ( /2)

0.5238

1.3859

0.042

0.3232

0.8551

0.099

* Two-tailed -type error test under the assumption that r is normally distributed with mean = 0 and standard deviation = 1/ /n-1

Table 4 Bangkok Wholesale Markets Ranked According to Profit Rates Price-Cost Margin

Rate of Return on Assets

Agricultural products Agricultural products Motor vehicles Motor vehicles Groceries, fruits, vegetables, etc. Groceries, fruits, vegetables, etc Machinery and supplies Household electrical appliances Household electrical appliances Machinery and supplies Automobile parts and accessories Furniture and fixtures Construction machinery and equipment Automobile parts and accessories Lumber and construction materials Construction machinery and equipment Furniture and fixtures Leather and leather products Book and stationaries Books and stationaries Leather and leather products Gasoline dealers Metals and mineral products Lumber and construction materials Gasoline dealers Metals and mineral products Household utensils Chemical and pharmaceutical products Chemical and pharmaceutical products Textiles and apparel Textiles and apparel Household utensils Paper and paper products Paper and paper products Source: Estimated from the National Statistical Office, Census of Business Trade and Services 1969 Whole Kingdom, Table 8,1, p.2," and Table 9.1, pp. 28-29.

353

Results

Table 5 of Rank Correlation Test for Market Concentration Profit Rates and Behavior o f Wholesale Price

Variable pair

Rank correlation coefficient

(*)

Level o f significance /2) (

0.8571

2.2677

0.006

0.6429

1.7010

0.022

0.6667

1.7640

0.020

0.6905

1.8269

0.017

(r ) Gini ratio and pricecost margin Gini ratio and rate of return on assets Price-cost margin and cycles of price change Rate o f return o n assets and cycles o f price change

Test statistics

354

Table 6 Market Concentration arid Short-Run Price Changes During 1973-74 Crises Price changes during 1973-74 (percentage points)1

Market concentrations Commodity market Gini

Market share of top 25%

Domestic goods - PD

Imports P M r

J

Differential Pd

- rM

A

JI

Lumber non-metal construction mat. Machinery „ electrical non-electrical Motor vehicles Chemical and pharma, prods. chemical products pharmaceutical product Textiles and apparel woven textile other textile products Paper and paper products paper Paper products Metal and mineral products Construction materials 1

0.7402 +37.8 +3.7.8; 76.0

0.6498 0.7636 ft 0.7385

83.00 -

0.7420

-17.1 -17.1

*-

V

85.50

*

82.00(%) +20.7 +20.7

+25.7 +19.3 +22.0

+38.3 +13.7 +10.0

12.6 — 5.6 —12.2

+37.9 +35.2 + 7.1

+54.4 +69.6 . +18.7-

16.5 34.4 i 11.6

+15.2

+27;1

+56.2

+ 1.9

-54.2

+35.0 + 7.2

+32.7 +41.9

- 2.3 34.7

+ 3.6

+64.3

60.7

+34.6

+37.8

3.2

1

1

,

82.5 11.9

♦ 0.5904

017700

77.0

87,55

IBased on price indices with 1968 = 100, Source: Computed from price indices of the Department of Business Economics, Ministry of Commerce.

r

Japanese Trading

Companies

in Thailand

*

Phitay

SmutrakalinT

Hiroji

Katano

41 i

t

’

The number of Japanese trading" companies in Thailand that have been registered as members of the Japanese Chamber of Commerce in Bangkok was 59 as of August 1974. It is suspected that there might be ‘some more Japanese trading companies in Thailand that have not yet been registered as members of the5 Chamber; However, most of these companies are located in’ the’- city of Bangkok due to the nature

18. Yoshida Trading 7. Other Industries Total

Source:

ii

1,758*529 296,900 954,375 178,604 106,200 , 41,250 90,200 10,000 81,000 1,758,529 2,669,829

j

Bangkok Japanese Chamber of Commerce of Thailand.

1

'

49.0 49.0

24.5 24.5

55.9 41.9 42.3' 63.8 35.5 90.2 58.5 49.0 46.1 55.9 47.8 29.8 18.0

32.6 24.4 18.3 18.6 22.3 66.2 41.2 49.0 22.9 32.6 14.1 * —

“

i 24.5 24.5

— — £

23.3 17.5 24.0 45.12 ,13.2" 24.0 17.3

— — —

,

—

‘

i

——

i

—

—

~

23.2 23.3 ** k *• ' J 15;7 "18.0

•

‘ J Table 4: Capital Profile of Local and Foreign Investment in Promoted Industries. I

Nationality

Total Thai Japanese • Taiwanese American (Source: BOI, Oct. 1960-March 1973)

Registered capital Solely owned by one country

Registered capital Joint-Venture

2,700.5 mil B. 89% 7% ! 0.1% S”‘I 1.0%.

5,543.0 mil B. 58% 14% 7% ‘ 6%

Total 1

8,243.5 mil B. « 69% ‘ * r t 12% « 5%; Ji 4%

363

Local and foreign investment in promoted industrial enterprises in Thailand has the following profile: „ The ratio of Japanese capital to the total registered capital of promoted industrial enterprises in Thailand is 12%. This ratio is rather high in relation to the participation- of other countries’ capital. This may be one of the causes for unfavourable reputation for Japanese economic activities in Thailand. For the most part, the' Japanese investment in Thailand has been the result of participation by the Japanese trading companies. ►_ The directions of inve'stment.of the Japanese trading companies .are different, depending upon the characters of the mother companies. For example, Mitsubishi has concentrated its interest mainly in the textile industry and the transport equipment industry, while Mitsui concentrated on iron and metal industry and textile.'industry. However, as a whole, the Japanese trading companies have engaged significantly in the textile industry which has become one of the viable export industries of Thailand that have been newly developed. Iron, and metal, industry, transport equipment industry, and chemical industry rhave been secondary in the investment priority of the Japanese trading companies in Thailand, although these industries would have contributed greatly to the industrialization of the Thai economy. 1 L Contribution of Japanese Trading Companies To Expand Exports from Thailand The question of whether the Japanese trading companies in Thailand have actually contributed to the economic development; of the country is often raised in association with the accusation of the Japanese eponomic exploitation. To be meaningful, the answer must be attempted in quantitative terms. While, one may make an issue out of the expansion of Thailand’s external trade during the past two decades and the increase in the value of Thai-Japanese trade, it is difficult to pinpoint how great is the portion of external trade, handled by. the Japanese trading companies in Thailand. This is so simply because the. Customs statistics. Of Thailahd on bilateral trade are customarily recorded on country-by-country basis. If one wants the trade figures on a firm-by-firm basis for the purpose of determining the portion of trade handled by the Japanese trading companies which are not at all compiled for publication, ( r Nevertheless,' with the cooperation of the Computer Centre of the Ministry of Commerce of Thailand, an attempt has been made to derive the actual export and import values of “own business” Handled by the Japanese trading companies including direction of trade as shown in Table 5 . Because of the .time and financial limitations imposed upon our research, the actual figures] of annual export and import.values'and direction of trade could be compiled for 1972 only, and those of 1973 are estimates because monthly data for. actual trade were available theri'only up to August 1973, the time our field-work had ended. Imports of the Japanese trading companies in the “own business” category grew from 914 million baht in 1972 to 1,351. million baht in 1973, representing an increase of 47.8 per cent. The “own business” imports by the Japanese trading companies by groups such as the “Big 10”, other general trading; companies and special 'trading conipanies'could be broken down as follows for the two continuous years mentioned above. -t ~

34,232 24,488 16,202 8,286 9,744 152,363 137,942 121,674 16,268 14,421

144,992 144,916 128,593 16,323 76 232,134 23 f, 976 223,343 8,633 158

1,226 1,097 915 182 129

529 529 529

18,615 18,508 15,401 3,107 7 33,808 33,808 31,441 2,367

143 70 63 7 73

20,280 20,280 19 ?997 283

10,651 •10,651 9,994 657

(2.2)

Hong Kong Germany (2.3) (2.4)

Netherland

913 921 1,678 1,417 1,247 170 261

1,834 913

4,739 4/739 4,739

JF

374 374 374

of. Thailand.'

4,255 56,561 53,368 53,090 " 2783,193

8,830 4,575. 4,575,.

54 32,863 32,736 32,736 * ,127

. 15 13,642 13,642 13,642

981 981 98 1,

(2.7)

(2.6)

5,513 5,459 5,459

Africa

USA

4,843 4;828 4,828

(2.5)

UK

Organinally prepared by ECOCEN in cooperation with Computer Center of the Ministry o f Commerce, Government Annual figures of exports of 1973 are estimates: no monthly data are available after August t

879,543 623,140 539,487 83,653 256,403 1,198,405 920,760 804,864 115,896 277,645

Imports 1972 GTC “Big 10” Other GTC STC 1973 GTC "Big 10” Other GTC STC

Source: Note:

171,345 167,843 129,940 37,903 3,502 156,314 136,855 92,537 44318 19,459

(2.1)

(2)

(1)

Exports 1972 GTC “Big 10” Other GTC STC 1973 GTC “Big 10” Other GTC STC

ASEAN

Other

Japan

Table 5: OwriBusiness of Japanese Trading Companies in Thailand's External Trade (with Direction of Trade)

“ 21,294 16,726 = 9,452 1 7,274 4,568 77,711 66,946 52,032 14,914 16,765

426,526 126,495 121,107 5,388 ‘ 31

104,489 104,489 91,930 12,559

. (2.8)

Other

9 13,’775 647,628 555,689 91,939 266,147 1,350,768 P,058/702 926,538 132,164 292,066

316,337 312,759 258,533 54,226 3,578 388,448 368,831 31’5,880 52,951 19,617

(3)

Total *

(Value in 1,000 Baht)

™ „ * -

x

.

-

364

365 Table il

6: "Own

Business'' Imports

by Groups of Japanese Trading Companies

(million baht) 1972

F

r

v

*

*

1

914 100.0% 648 70.9 556 60.8 92 10.1 266 29.1

*

Total GTC “Big 10” Other GTC STC

1973

J

j

a

j

1,351 100.0% 1,059 / 7814 927 68.6 132 9.8 292 21.6

t

It could be clearly seen that most part of the imports washandfed by the general trading companies, of which about 90 per cent was controlled by the “Big 10”. The remainder belonged to the special trading companies, the portion of which decreased from 1972 to 1973. As a whole, the above Table indicates clearly the increasing importance of the “Big 10” as reflected in the enlargement of its share in 1973. The Japanese trading companies in Thailand handled the imports both from Japan and from the third countries in the following way: , Table

7:

Direction

I


i

*

r

a

t

Imports

;

Exports,

>

.1'973 *

1972

* I

,

•

1972

,

1973

(Value in million Baht)

15,863 5,939 3. Indent Business Total 10,572 11,971 13,543 3.1 Japan 4,489 10,521 8,252 2,320 1,450 2,32,0 1,450 3.2 Third Countries For Case II, according to assumption (b), the figures of the “indent business” in the external trade of Thailand with the third countries of the Japanese trading companies are estimated by using the composition ratios (between Japan and the third countries) of the “own business” exports and the exports of Thailand to Japan in the “indent business” of the Japanese trading companies. s

i

»

*

3. ; Indent Business Total 3.1 Japan 3.2 Third Countries*

Imports

Exports

f If

11

‘ [Case I I ]

« 1972 8,296 4,48'9 3,807

1973

1972 ,

(Value in million Baht) 20,523 10,931 10,521 8,252 410 12,272

1973

15,277 13,543 1,734

(3.2)*-(2.

375 Table 1 Receipts from U.S. Military Transactions 1963 — 72 (In Millions of Baht) GOVERNMENT (n.i.e.)

TRAVEL

a

Year

Total, Received

R&R Personnel Spending

Total, Received

1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

206.8 241.2 358.8 832.3 1,211.7 1,255.8 1,768.0 2,170.6 2,20819 2,718.0

— — 50.0 208.0 395.2 424.1 458.6 389.8 239.7 62.8

576.4 744.6 1,308,8 3,362.8 4,618.7 5,094.2 4,591.2 4,444.5 4,115.2 4,924.7

Source: Bank of Thailand

,

’

Other U.S. Military Spending 30,8.4 . 421.2 864,4 2,576.2 4,101.4 4,877.6 4,283.6 4,164.0 3,766.1 4,410.9

,

’

Indirect Effects of U.S. Military Spending on Thailand’s Balance of Payments There are several ways in which U.S. military spending indirectly affected the Thai balance of payments, the first being that expenditures made in local economies generated income, thus lending to an increase in the demand for imported goods. If the income-generating process really increases demand for imports, as well as for domestic products, price Jeyels may accordingly rise due to unusual spending, if, and only if, monetary and fiscal authorities do nothing about it. This point, in relation to U.S. military. spending, will be discussed,briefly later in this paper. • ’ A second effect of U.S. military spending may well have-been in stimulating exports by generating output or income, but this is unlikely for Thailand. Thai exports are not of a nature or volume to have benefitted from' military spending. I Thirdly, U.S. military expenditures may have hed some-effect on the unilateral transfer account. Although it is assumed that U.S. unilateral transfers were mutually exclusive from military spending (or not related), they should be reported at this point. The Bank of Thailand presents U.S.grants, including U.S. government holdings of baht arising from Thailand’s purchases of U,. surplus agricultural commodities for the years 1964 — 72 as follows: t 1964 1965 1966 1967 1968 1969 1970 19,71 1972 395.7 357.4 438.8 799.6 1 1,172.4 864.3 " 613.0 519.0 417.9 Fourthly, U.S. military spending may have had an influence on the capital account or the flow of short-term and long-term foreign direct investments. This, however, involves political issues beyond the scope of this study and will, therefore, not be taken into consideration in this paper. Returning to the effect of U.S. military spending on imports, these can be divided into directly induced imports and indirectly induced imports. Directly induced imports are defined by the Bank of Thailand as imports made by the initial receivers of U.S. military expenditures, such as the American and Thai contractors: and hotel owners who probably imported construction materials, transport equipment, and certain consumer durable goods. The Bank of Thailand estimated’ these imports amounted to about one-fifth of the total U.S. military spending each year, and this assumption is arbitrarily used in estimating the directly induced imports herein. Indirectly induced imports could be defined as the residual or difference between total induced imports and the directly induced imports; In calculating indirectly induced imports, the multiplier of theThareconomy is needed and thus has to be estimated first. 4

-376 The theory of the income multiplier, according toMachlup, is “ additional disbursements of a certain type, starting now and expected henceforth in equal periodic amounts, will generate additional incomes per period in amounts which (ultimately) will be a multiple, and indeed a determinate (predictable) multiple, of the said disbursements” Theoretically, an estimate of a multiplier therefore involves time lag adjustments since all the concerned “marginal propensities” are in fact changing over time, and the multiplier value is accordingly changing from one period to another. Although fully aware of these variables, it is unfortunately inapplicable in obtaining the equation to estimate the multiplier of Thailand’s economy. The major problem lies not in the theoretical field, but in the data available. The number of consistent statistical observations is small, thus imposing firm constraints on practical time lag analysis. The following’ equations, therefore, intentionally rule out the time lag adjustment process. An implicit assumption underlying the analysis in this section, which should be noted here, is that all estimates concerning marginal propensities are stable over the period of analysis. The basic formula of the multiplier to be estimated is: multiplier = ljCyd * C y d + where Cyd is the marginal propensity to consume, my the marginal propensity to import; and ly the marginal propensity to invest. According to the formula, the magnitude of the multiplier is therefore reduced by the saving leakage (1-Cyd), the tax leakage (Cyd.ty), and the import leakage (my),*but increased by a reinjection of induced investment (iy). Followings are the estimates of these coefficients using thirteen observations (1960-72) 1. C = 1150.31250 + 0.83654YD r + 0.99737,* ( t = 45,61742 ) 2. T = 686.46802 + 0.0"2569Y r = 0.99319 t ( t = 28.27646) 3.. I = 5853.89 + 0.22010Y r = 0.96510 ( t = 15.82) 4. M = 1681.46875 + 0.25283Y r = 0.99210 (t = 26.23586) By using these estimated coefficients, the multiplier for the Thai economy is: Multiplier— “ 8 3 6 5 4 + 0.83654 (0.02569) + 0.25283-0.22014 From this equation, it is found that the marginal propensity to import of the Thai economy is approximately one-fourth and the estimated multiplier is 2.9. This implies that one dollar of U.S. military expenditures made locally would eventually lead to a rise in imports of about 72 cents (2.9 x 1/4 = .72). If this really happened, one dollar of U.S. military expenditure made locally would •also lead to ’an increase in indirectly induced imports of about .72 x 8 0 = 57 cents. By using this method, the indirectly induced imports can be calculated and are presented together with directly induced imports in Table 2. i

Table 2: Estimated Induced Imports Associated with U.S. Military Spending 1963 - 72 (In Millions of Baht) INDUCED IMPORTS Year Direct 1963 1964 1965 1966 I 1967 1968

61.6 84.2 190.1 556.8 899.3 1,060.3

Indirect 175.7 240.0 ’ 521.2 1,586.9 2,563.0 3,021.9

Total 237.3. 324.2 711.3 2,143.7 3,462.3 4,082.2’

377 1969 1970 1971 1972

948.4 910.7 801.2 894.7

2,703.0 2,595.6 2,283.3 2,55'0.0

3,651.4 3,506.3 3,084.5 3,444.7

Table 2 reveals that total induced imports of the Thai economy had increased substantially. In 1963, one of the initial years of U.S. military base construction, total induced imports amounted to 237.3 million baht, jumped to 711.3 million baht in 1965, further increased to its maximum of 4,082.2 in 1968, then declined to about 3,444.7 million baht in 1972. This estimated total induced imports will be taken into account when the effect of U.S. military spending on the overall balance of payments are investigated in the next section. Thai Balance of Payments with and without U.S. Military Spending: 1963 — 72 As indicated and estimated in the previous sections, effects of U.S. military spending can be divided into indirect and direct effects both of which are consolidated with Thai balance of payments in Table 3. Scanning this table, it is obvious that the Thai merchandise trade account remained in deficit with exports almost static during the 1963 to 1970 period, while imports increased substantially from 12,695 million baht in 1963 to 26,406.7 and 30,634.7 million baht in 1970 and 1972 respectively. Accordingly, merchandise trade was in a deficit position at — 3.117.0 million baht in 1963, declining to a low of — 12,258.1 million baht in 1970, then rising to —9,382.5 million in 1972. The merchandise trade deficits over this period were offset by surpluses of other accounts, namely, services, unrequited transfers, capital movements, allocation of SDRs since 1971 and positive net errors ancTomissions. The overall balances were therefore in supplus during the 1963 to 1968 period. In 1963 the overall balance surplus was 949.0 million baht in 1965, and reaching maximum point of 3,3.04.4 million baht in 1966, when it began to decline. A deficit in the balance of payments emerged for the first time in 1969 and continued until 1971. To determine the effects of U.S. military spending on the balance of payments, both the military expenditure under government (n.i.e.) and rest and recuperation personnel spending under travel, as well as the directly and indirectly induced imports are taken into account. The resulting overall balances became the estimated balances without U.S; military spending. The data indicated that, had there been no U.S. military spending, the overall balance would be 887.9 million baht in 1963 instead of 949.0 million baht. The effects of U.S. military spending were obvious in the later years. Especially in 1968, had there been no U.S. military spending over the preceding five to six year period, the overall balance would have been a deficit of about — 770.4 million baht instead of a surplus of 449.1 million baht. Furthermore, the balance of payments would have been in deficit for the first time in 1958 rather than in 1969. To illustrate these effects, the following figure is presented and line 3 therein clearly indicates the balances of merchandise and service trade of Thailand have always been in deficit. Despite this fact, the actual balances of payments of Thailand as depicted by line 2 were always in surplus with the exceptions of 1969, 1970 and 1971. The vertical gaps between lines 1 and 3 were filled by capital movements, unrequitted transfers, allocated SDRs, U.S. military expenditures, and net errors and omissions. The role of U.S. military expenditures is indicated by the vertical gaps between lines 1 and 2. Line 3 indicates (as has been previously stated), that had there been no U.S. military expenditures in the Thai economy, the balance of payments would be in deficit for the first time in 1968. It could be concluded briefly that U.S. military spending had helped Thai balance of. payments without any doubt. The final point to be examined, albeit in brief, is whether there is a relationship between the U.S. military expenditures and Thai money supply. It should, in fact, have some connection since U.S. military spending had some impact on banking activities and might have affected credit expansion, reserves of commercial banks, and money supply. To test this point, the same method of simple regression in logarithmic function is used. The number of observations again is thirteen (1960-

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Table 3 Thailand’s Balance of payments with and without U.S. Military Spending: 1963—1972

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SUBTRACTION (1) U.S. Military Expenditure

o

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> o o H 5 z

Spending under Travel

w GO H k- 1 g Ck

(3) Direct Induced Imports

M

WITHOUT U.S. MIL. SPNDG

Bank of Thailand, Monthly Bulletin (December, 1972). Preliminary.J"Coverted @20.8 baht = J> 1.00

Source: Bank of Thailand, Monthly Bulletin, XIII (May, 1973), pp. 68-69.

a

g w

379 72). It is found that the relationship between money supply and U.S. military expenditures 0 14537 Ms = 8.57998 U.O.

is:

j..

t = 5.63440, 4 = 0.86178 This function indicates that if there is an increase of one percent in U.S. military expenditures, money supply will increase one-seventh of that one percent (0.14537). This appears to be so small and negligible as to support the; statement that U.S. military spending had very little impact on money supply. Accordingly, it is likely that U.S. military expenditures would have little impact on price levels. To substantiate this, the relationship between consumers’ price level and U.S. military estimated, resulting in: P = 4.37048 E 0 ;'! 4 1 0 5 t = 8.15940, r = 0.92639. This indicates that the elasticity of consumers’ prive level with respect to U.S. military spending is only 0.04105, a negligible amount: This point has validity since Thai monetary and fiscal authorities were very successful in maintaining price stability. The Asian Development Bank indicated that despite large military transaction receipts in recent years, and the extraordinary construction boom, the monetary and fiscal policies of the Thai government succeeded in holding wholesale price rises This was not a policy of holding the price line at any cost, but one to about 2.5 percent a year/ of reasonable compromise between the aims of price stability and maximum growth/

Thailand's *.

Balance of Trade with Asean J

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Thailand’s trade with ASEAN countries has been in surplus for a long time. The surplus has increased consistantly and tended to persist under the present trade situation. This brings 'Up a question of what will be the direct effects on Thailand’s balance of trade with ASEAN countries, if an ASEAN Free Trade Area were to be formed.— / One possibility is that, the formation of an ASEAN Free Trade Area would generally result in alarger trade expansion among ASEAN countries as a whole. Since th’e reduction of tariffs..would affect relative prices and generate trade* creation and trade gam more on trade under the new liberalized trade policy. j ■«

*

k.

->

Here, ah attempt will be made to measure the impact on Thailand’s' balance of trade with ASEAN members' by hypothesizing that the first" step of an ASEAN Free Trade Area would be constituted by an initial ICPper cent tariff cut across the board'. This hypothesis, perhaps, would be politically a little too extreme. Some ASEAN countries might not be convinced at this stage that the positive effects under this hypothesis will be sufficiently significant, and-that the negative effects negligible or tolerable. The fear of possible detrimental effects on their protected infant industries would make them reluctant to adopt this new approach in the new trade expansion policy. The more moderate one, however, has been practiced in the Caribbean Free Trade Area where member countries have removed custom duties from all trade with temporary exception for a reserved list of goods. Another possible alternative is the one implemented by the Central American Common Market where participants have agreed to form a free trade area for industrial products, but maintained the status quo in other economic sectors. / However, the hypothesis of this study was proposed by Singapore and the Philippines at the Meeting of Senior Economic Planning Officials held in Jakarta recently. We recognize it as an important issue, and proposed for a deeper analysis here. In estimating the direct impact on Thailand’s balance of trade, this study will concern only with the short run effects. The method of analysis is static by assuming that the existing production and trade patterns among ASEAN countries will be prolonged, and that all imported products are perfect substitutes of similar locally available products. To assess the changes in Thailand’s balance of trade with ASEAN due to the 10 per cent tariff reduction, there are several possible approaches suggested.—' This study will adopt the price elasticity concept in conjunction with the reciprocal agreements on tariff reduction. The direct effect of ~

Besides the effect on balance of trade, there are effects on national income, term of trade, factor efficiency, factor mobility and distribution, factor availability. For a more detail survey, see L.B.M. Mennes, Planning Economic Integration Among Developing Countries, Rotterdam University Press, 1973. Trade creation is defined as a shift from high cost to low cost source of supply within the integration area. Whereas trade diversion is defined as a shift from a l o w cost of supply outside the integration area to a high cost producer within it. See B. Balassa, "Trade Creation and Trade Diversion in the European common Market,” Economic Journal, March 1967, p. 1-21. The Caribbean Free Trade Area or CARIFTA is composed of Barbados, Guyana, Jamaica, Trinidad and Tobago, Antigna, British Honduras, Dominica, Greneda, Montserrat, St. Kitts-Nevis-Angnilla, St. Lucia, St. Vincents. These countries removed custom duties from all-trade commenced on 1 May 1968, except for a reserved list of goods that in the preceeding year had value amounting to 9 per cent of trade in the area. The Central American CommonMarket or CACM consists of Costa Rica, El Salvado, Guatemala, Honduras and Nicaragua. They agreed to form a free, trade zone on industrial goods by maintaining individual high tariff walls in agricultural products. See UNCTAD, Trade Expansion, Economic Cooperation and Regional Integration among Developing Countries, Doc TD/110, Third Session, Santiago, Chile, February 1972.

ECOCEN

Study No. 15, May, 1976.

381 tariff reduction in each commodity will depend upon the height of the original tariff, changes in tariff rates, and the responsiveness of demand and supply to changes in price.—/ Mathematically, a tariff reduction, 'under the .assumption that export prices remain unchanged, will cause the import prices to decline by a.t/(100+t), where, a, is rate of tariff reduction, and, t, is original tariff level. With the; ceteris paribus assumption / Thailand’s import from ASEAN countries in each com- . modity would increase by the amount of: Zk M = [a.t/(100+t)J n.M. Where, /_ M, is the increment of Thailand’s import from ASEAN countries, n, is the price elasticity of Thailand’s import demand, and, M, is Thailand’s original value of import from ASEAN countries. / Before going through the estimated results, let us consider the tariff structure of Thailand, as shown in Table 1 The tariff rates are not uniform for all commodities. The high rates are imposed on food, beverage and tobacco, animal and vegetable oils, as these commodities are produced abundantly in Thailand. The low rates are applied to crude materials, minteral fuel oils and lubricants, as they are mainly imported as inputs for industrial production. For chemicals, manufactures and machinery, the tariff rates are quite evenly high. It should be noted also here that trriff is normally used as a tool for trade protection in Thailand. The non-tariff restrictions, such as, quota or import licensing, which are used extensively in developed countries, are seldomly applied in Thailand. Presently, there are about twenty import items under non-tariff restriction. They are, for examples: gold, rice, explosive materials, narcotic, used cars, tea leaves, sugar, pepper, gunny bags, timbers. It ,is quite obvious that Thai quantitative restriction will not significantly distort the probable effects of trade liberalization, as Thailand’s trade policy is quite liberal.- / To approximate the impact on Thai imports under the new liberalized trade policy, the price elasticities of demand on commodities will play the crucial role. As shown in Table 9 , the prices of manufactures, machinery and chemicals are highly elastic. But for primary goods, such as, food, crude materials, mineral fuel oils and lubricants, animal and vegetable oils, the. price elasticities are relatively low. It must be noted here that the calculation of price elasticity for mineral fuel oils and lubricants was made during 1960 — 73 before the advent of the oil crisis. Hence, the low elasticity attached to it as a group would hold true only in relation to the expansion of demand for Thailand as a whole connecting with its total consumption and supply from all sources both within and outside the region. In case of a 10 per cent tariff reduction for the products, from intra-regional sources trade, diversion would probably occur, thus* adding to the increased value of. intra-regional trade. This is ,a possibility in view of the prevailing high prices of mineral fuel oils. Nevertheless, for the purpose of evaluating the effects on Thailand’s national output and employees’ income, we shall treat its price elasticity as a group as being-low. Empirically, it is. estimated, as shown in Table 10, that Thailand’s total, import would,increase by about 595 million baht, which is about 5 0 per cent of Thailand’s imports from ASEAN counFor the relevance o f this point, see R.F. Mikesell, “The Theory of Common Markets as Applied to Regional Arrangements among Developing Countries,” in R. Harrod, International Trade Theory in a Developing World, Mcmilian, 1963. For a survey of approaches, see D.E. James, “The Assessment of Adjustment Problems in Australian Trade,” in Structural Adjustments in Asian-Pacific Trade, edited by K. Kojima, Japan Economic Research Center, Vol. II, Tokyo, 1973, p. 318-348. To cite ’examples, see B. Balassa and Associates, Studies in Trade Liberlaization: Problems and Prospects- for thelndustrialCoun: tries, John Hopkin Press, 1967, p. 315 Or, P. Drysdaie,” japan, Australis, New Zealand: The Prospect for Western Pacific Integration,” the Economic Record, September 1969, p. 320-330. 7/

-I

.

■

■

*

The ceteris paribus assumption implies that all other factors, except the tariff reduction among ASEAN countries, are unchanged. For the relevance of this assumption, see M. Friedman, Price Theory: A Provisional Text, University of Chicago, 1962, p. 23-30.

™ For a proof, see M.E, Kreinin, “In Effects of Tariff Changes on the Price and Volumes o f Import,” American Economic Review, 1 June 1961, p. 310-324. On trade barriers, developed countries tend to rely more on quantitative restrictions, such as, quota and licensing, while ASEAN countries use tariff protection most extensively. See for example, GATT document L/3391/Rev, 1 , March 15, 197.1, Report of the Joint Working Group on Import Restriction.

.382

Table 1: Tariff Rates and Price Elasticities of Thai Imports SITC

1 2 3 4 5 6 7 8 9 10

Average Tariff Rate

Estimated Price Elasti-

(ad valorem)

city of Import Demand

27.3 62.9 5.1 7.4 31.3 18.4 14.8 19.2 20.5 17.5

- 0.4886 - 2.6947 n.a. / n.a. n.a. - 0.4061 -1.1188 - 1.4841 - 1.7914 n.a.

;

Sources: a/ Thailand Tariff Rates, Department ofCustoms, 1974. 1g( Satapom Jinachitra, “Import Demand of Thailand,” in Monthly Economic Report (Thai-Version), Bank of Thailand, September 1975, Table 3.2. p. 116. c/ n.a. indicated negligible values.

tries in 1974. The impact on Thailand’s imports is quite sizeable, because the increments as appeared from ASEAN members are confined mostly to beverage and tobacco, manufactured goods, chemicals and machinery, of which tariff rates and price elasticities are relatively high. There are negligible import increments on crude materials, mineral fuel oils and lubricants, and animal and vegetable oils, since their respective price elasticities are very low. Imports on food would increase slightly by 26 million baht, or about 4 per cent of the total import increment. As far as individual ASEAN countries are concerned, the increment of Thai imports is quite fairly distributed, the Republic of Singapore would benefit from trade on chemicals and miscellaneous manufactured goods about 134 million baht; Malaysia would gain from trade on food, chemicals and machinery about" 1 2 1 million baht; the Republic of Indonesia mainly on beverage and tobacco about 298 million baht; and the Republic of Philippines on chemicals, manufactured goods, machinery, and miscellaneous manufactured goods about 40 million baht. As assumed, the import increments would substitute similar locally -available products. And the imports would increase persistently in such circumstance, since tariff reduction is assumed to be permanent. The habit formation would theoretically prohibit Thai imports to locally available products, even if import prices might increase. 1 - Thjs conclusion seems to be too extreme in actual practice though possible in theory. It nevertheless helps to point out that there exists certain scope of trade expansion and diversion in the ASEAN region which will benefit the participating countries. For the estimation of the increment of Thai exports to ASEAN countries, a similar formula can be applied.1 - Empirically, it is estimated that Thai exports to ASEAN countries would arise by about 2,334 million baht, of which food exports would increase by 998 million baht and’manufactured goods by 1,335 million baht. The total increment is about 25 per cent of Thai exports to ASEAN countries in 1974. This rate of export increase is smaller than the rate of import increase. Because the major commodities of Thai exports to ASEAN countries are food-grains, the average tariff rates are low and prices are highly inelastic. Thus, the reduction of tariffs would- stimulate exports of Thai food to ASEAN countries as little as expected. 1 — ■ ■5/ See L.B. Krause, “United States Imports 1947 — 1950,”Economectrics,

April, 1962, p. 221-238.

For the formulae and the relevant data for the estimation, see Appendix D. This estimation confirms with Balassa’s prediction that less developed countries cannot expect trade expansion of primary commodities in the formation o f an integrated area. That is because of resource and or demand limitation of their primary .exports. See B. Bassala,” Regional Integration of Trade: Policies on Less Developed Countries,” in Trade, Strategies for Development, edited by P. Streeten, Macmillan 1973, p . 176.

383

Table 2: The Increments of Thailand’s Import Demand from ASEAN due to a a 10% Tariff Reduction (million baht) SITC

Trading Countries

* A Singapore

1 2 3 4 5 6 7 8 9 10

— — — 36.09 — — 98.74 — 134.83

Total

Malaysia

Indonesia

Philippines

Total

26.61 — — — — 18,80 — 76.25 — —

— 291,33 — — — — — — 6.70

— — — — — 17.17 11.53 5.98 5.79

26.61 291.33 — — — 72.07 11.53 82.23 111.23 —

40.47

594.99

121.66

*

t

—*

298.03

In relative terms, the increments of Thailand’s exports to ASEAN are found to be quite substantial with regard to manufacturing products. The value of the increase is about 247 per cent of Thailand’s total exports of manufactures to ASEAN in 1974. At the same time, the increments of Thailand’s exports of food to ASEAN are only 21 per cent in total. The positive effects as such will have significant bearing an Thailand’s national output and employment. Table 3:- The Increments of Thai Exports to ASEAN countries due to a 10% tariff cut across the board (million baht) SITC 1 2 3 4 5 6 7 8 9 10 Total

Increments of Thai Exports to ASEAN 999.80

1,335.44

2,334.24

Under the new liberalized trade policy, however, Thailand’s balance of Trade with ASEAN countries would still be in sizeable surplus. But, as the rate of import increase by 5 0 per cents and the rate of export by 25 per cent, the gap of the Thai trade surplus with ASEAN countries would be naturally narrowed down. Should Thailand sacrify the present benefit on trade with ASEAN countries by adopting the new liberalized trade policy? “Thailand might as well accept such hypothesized trade policy. Firstly, Thailand still enjoy surplus on trade with ASEAN members in the short run. Secondly, from a long run point of view, Thailand might be able to adjust her national development strategy to capture the economy of scale in. manufacturing industry through the enlarged ASEAN market. The intensified competition among ASEAN countries would force Thai investors to improve the efficiency of production. The.growth of productivity and the gain through the economy of scale in the manufacturing sector would accelerate Thai economic growth. This is .a causal factor, so called” dynamic effect”.1

384' To conclude in plain terms, trade expansion through a 10 per cent tariff reduction among ASEAN Countries would stimulate the growth of their manufacturing sectors. From the side of Thailand s imports from ASEAN about fifty-fifty will be splitted between primary and industrial products. Most imports of primary commodities will come from the Republic of Indonesia, while those of industrial goods will be fairly distributed among other ASEAN’-members. For Thailand’s exports to ASEAN, major gain will be made by the manufacturing sector. The conviction that the industrial sectors of the ASEAN countries will receive a big push toward accelerated growth is thus clearly substantiated. As Thailand’s trade with ASEAN expands, it will indirectly produce certain effects upon the economy, particularly its national, output and employee’s income. Theoretically speaking; the increment of Thailand’s, exports to ASEAN will increase its national output and consequently its em-’ ployee’s income, given that exports to outside ASEAN do not decline, and that they are not re-exported goods. Conversely, the increment of imports from ASEAN that replace Thailand’s similar locally available products, will result in the contraction of its national output and employee’s income. An attempt will be made here to estimate the indirect short run impact on Thailand’s national output' and its employee’s income due to the creation of an ASEAN Free Trade Area ignited by a 10% tariff cut across the board. The analysis will be static. The assumption is that the present structures of production and employment remain unchanged. In other words, the input coefficients and the share of labor cost.will be fixed. As for .the research method, formerly, a popular technique was the industry-study approach which would select industry by industry for evaluation. The analysis was, thus, the partial equilibrium. It ignored the industrial inter-dependence effects.1 / Here, a general equilibrium analysis will be used. The technique is the Leontief input-output analysis. It should be noted that this technique was first used by Leontief on his empirical study of the structure of the American economy in 1951 Since then, it has widely received international acclaim Although the input-output analysis has some weaknesses on the assumptions of homogeneity and fixed proportion of factor inputs, yet, at present, there is no better method for estimating the interdependent effects which one industry has on other industries. The input-output technique, therefore, is an appropriate technique from our points of view for assessing changes of Thailand’s economic structures re-

13

For More details of the dynamic effects, see M.E. Kreinin, “Trade Arrangements Among Industrial Countries: Effects on the United States," in Studies in Trade Liberalization, edited by B. Balassa and Associates, John Hopkins Press, Marryland, 1967, p. 24. This assumption has been examined by several studies. For an example, Cameron has investigated a sample o f Australian industries, and found input coefficients to be,stable over quite a lengthy period of time, See, B. Cameron, “The Production Function in LeontiefModels,” Review of Economic Studies, Vol. 20, N o . 5 1 , 1952-3.

13

R.A. Mathews, Industrial Viability in a Free Trade Economy i Program of Adjustment Policies for Canada, U niversity of Toron- ’ to Press, Toronto, 1971.

IS •13

W.W. Leontief, The Structure of the American Economy 1919 — 39, 2nd edition, Oxford University Press, New York, 19.51. i H.B. Chenery, Introduction to Volume IP of Application of Input-output Analysis, edited by A.P. Carter and A. Brody, North Holland, Amsterdam, 1970.

13

R.M. Jarrod, "Input-output Analysis, “Economic and Social Journal, NESDB of Thailand, VoL 10, No, 4, July 1973, p. 12.

13

Linear Programming Method is an alternative general equilibrium analysis. For more details of the other models, see M. Bruno, “A Programming Model, for Israel,” The Theory and Design of Development, edited by I Adelman and E. Thorbecks; Johns f Hopkins Press, 1966. .

385 Basically, the input-output model is composed o f three tables: the transaction table, the input coefficient table and the interdependence coefficient or inverse table. As for Thailand’s input-output tables, they were' constructed in 1971 by a Japanese team under the supervision of the Office of National Economic and Social Development Board of Thailand./ The 'data of the tables are presented in- Sheet No. I, No. 2 and No. 3 in Appendix F. Briefly speaking, the Sheets divided the economy into 33 sectors-;or- industries. Sheet No. 1 is thetransactidh table showing the inter-sector flows.- Mathematically, .if x (ij)'is the value of output -in the i th sector used as’input in thej th sector, X(j) and Y (j) are the values of’ gross output and final demand in the j th sector respectively, the intersector flows can be equated in the following simultaneous equations: + x(l,33) + Y(l) = X(l) , , , 5 x ( l , l ) + x(l,2) +. 1 x(2,T) + x ( 2 , 2 ) b .....+ x(2,33) + Y,(2)=X(2) x(33,l)+x(33, 2)+.. x(33, 33) + Y(33) =X(33) The above equations can be written in the following matrix forms: X~xi= Y, where x is the intersector flow elements matrix, i is a unity column vector, X and Y are vectors of gross' output and final demand respectively. ’ *‘ ‘ As for Sheet No. 2 , it is the input coefficient table. The figures are simply derived from a (ij) = x(ij)/X(j), where i,j =T,2, .'.33. If we substitute x(i,j) with a (ij) X(j) the transaction matrix can be reexpressed as (I-A)X=Y or X=(I-A)- Y. The matrix (I-A- will provide the data of the inverse matrix table as shown in Sheet No. 3. These inverse coefficients are very crucial for the present study. They indicate the direct and indirect effects by which the output of the i th sector will change, if the final demand for thej th sector changed by 1 million .baht; In this study, the final demand is composed of domestic consumption both private and government expenditures plus exports minus imports. It is assumed here that the imported goods will wholly replace -similar locally available products. Im other words, the assumpition is that there is no product differentiation between similar locally available products and the imported ones from ASEAN. Thus, the lower import prices following from a reduction of tariffs will generate buyers’ willingness to switch from domestic to imported sources of supply. In Sheet No. 1, the labor costs of production are tabulated in row 41 up to 47. They indicate the values of : different- primary inputs, such as, employee’s income, profit, and indirect tax,,used in producing output of the‘i th sector. For row 42, namely', the employee’s income, let us defined x(0j) as the incomeeearned by labours in producing outputs in the j, the sector. Thus, a(0 j ) “(Oj)/ X(j) would be the average income earned by the Thai workers in producing a million baht worth of output in the j th sector. In deriving a formula to assess the impact on Thailand’s national output, let us start with the general equilibrium level of output, X = (I-A)- Y ; a shift of the commercial policy would affect the final demand and therefore the national output levels by the amount of: k X=(i-A)-1 A / where L X is the vector denoted the changes of output levels; (I-A)-1 is the inverse matrix; andA Y represents changes of the vector of final demand. If A X(j) is the changes in output levels of the j th sector, the changes in labor income could be estimated by the amount equivalent to the sum of j (a(0,j)A X(j)).

-J

For the relevance ofthis assumption, see J.R.C. Lecomber, “Input-output and the Trading Economy,” Input-output ted Kingdom, edited by W.F. Gossling, Gass, 1970. The values of a (Oj) for all j=l,2....33

are tabulated in the last row of Sheet No. 2.

in the Unir

386 Up to this. point, if we combine the findings-on the changes of Thailand’s trade with ASEAN •' and the data of input-output tables, we can estimate the changes of Thailand’s national output and employee’s income. But, a minor .difficulty arises, since the data on trade.have been classified into 10 SITC commodity groups, whereas the whole structure; of the' economy has been divided into 33 sectors. This means that, there is no J I !• « t 7 : « 1

'•

PART

V ■ THAI

ECONOMY

IN HISTORICAL

PERSPECTIVES.

•Cku

The Rise of Dependent Commodity Production in Siam, 1855—1910 t

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y

Chattip Nartsuphd Suthy Prasartset