Publication Code: Y89F
by Paitoon Wiboonchutikula, Rachain Chintayarangsan, and Nattapong Thongpakde
In the 1980s while the world economy was experiencing slow growth, increasing DC protectionism, major currency realignments, and rapid technological change, Thailand's manufacturing sector grew at a double-digit rate in the late 1980s and throughout the 1980s, at an above average rate when compared to all other sectors. Production and exports were also diversified from industries based on primary product processing and a few labor-intensive goods to more kinds of agro-based labor intensive industries, and industries requiring higher levels of skilled labor and capital content for production. During this time export expansion also enabled imports to increase and the structure of imports to change from consumer goods to investment goods used in export production. When projecting the trends of various industries into the 1990s, we found that industries with the highest growth potential were all export-oriented, or those which produced their own intermediate inputs. These industries depend on both future world demand growth and proper domestic policy. The other industries with high growth prospects are the engineering and chemical and chemical-product industries, whose growth and ability to compete with imports rely heavily on increased domestic demand and government assistance in the form of protection and promotion.
Since export growth was rapid despite the generally difficult world economic conditions of the 1980s, an explanation for such favorable export performance was necessary. Thus, we conducted constant-market-share analysis. Results show that the major source of export growth came from increased competitiveness, followed to a lesser extent by world demand growth and commodity composition factors. We also found that the market destination factor was not an important source of export growth in most disaggregated industries, except for the effect of world demand growth which can be regarded by a small economy such as Thailand as exogenous and a function of external conditions. Indeed, the rest of the effects on export growth can all, to varying extents, be induced by changing domestic policy.
An evaluation of Thailand's trade and industrialization policy shows that since the early 1970s, although an outward-looking development strategy has been attempted, the success of implementating this policy as a trade liberalization approach still leaves room for improvement. At times policies to reduce distortions in input and output prices resulting from fiscal measures conflicted with other policy goals such as government revenue enhancement, balance-of-payments-deficit correction, and infant industry protection. Thus, throughout the 1980s the average nominal tariff and the effective protective rates on manufactured goods and the dispersion of the rates across industries were not able to be reduced. Moreover, the effective rate of protection for import substitution industries was still higher than the exporting industry rate. In this sense, a bias of the measures against exports still existed. All of the investment promotion incentives, the tax exemption schemes, and other credit privileges were provided to reduce biases against exporting industries. Thus, future Thai manufactured export growth under a world economic outlook of relatively slow growth will hinge upon proper domestic policy on which market destinations will be able to encourage Thai exporters to: (1) shift exports from products with low demand growth to those with high demand growth; (2) shift the export destination from slow-growing countries to rapidly growing countries; and (3) increase both price and nonprice competitiveness.
December 1989