REFORMS & RECOVERYREFORMS & RECOVERY

Kazi MatinKazi Matin

Archanun KohpaiboonArchanun Kohpaiboon

Kirida BhaopichitrKirida Bhaopichitr

Coverage of PresentationCoverage of Presentation

What are key aspects of recoveryWhat are key aspects of recovery

How to reverse private investment slowdown How to reverse private investment slowdown

What accounted for strong export growth & What accounted for strong export growth & Can it continue Can it continue

Policy agenda for quality shared high growthPolicy agenda for quality shared high growth

Key Aspects of Thai RecoveryKey Aspects of Thai Recovery

GDP recovery started slow - but now next to KoreaGDP recovery started slow - but now next to Korea Stabilization & Reforms promoted recovery Stabilization & Reforms promoted recovery External factors, esp. External factors, esp. Regional IntegrationRegional Integration, key, key

Macro-stability & reduced external vulnerabilityMacro-stability & reduced external vulnerability Private investment recovery WEAK – FDI inflows Private investment recovery WEAK – FDI inflows

robust, but private robust, but private domesticdomestic investment SLUGGISH investment SLUGGISH Private consumption & exports key drivers Private consumption & exports key drivers

Oil price shock dampened GDP growth after 2004Oil price shock dampened GDP growth after 2004

GDP Recovery Next to Korea’sGDP Recovery Next to Korea’s

Real GDP per Capita

90

100

110

120

130

140

150

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ind

ex (

19

98

=1

00

)

Indonesia Korea, Rep. Thailand Malaysia Philippines

Private Cons Growth Similar to KoreaPrivate Cons Growth Similar to Korea

Private consumption to GDP ratio

60

70

80

90

100

110

120

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Ind

ex

(1

99

8=

10

0)

Malaysia Thailand Indonesia Korea

Reforms effective - but MORE to Reforms effective - but MORE to sustain strong growth, social stability sustain strong growth, social stability

Successful macro-stabilizationSuccessful macro-stabilization Real depreciation during recoveryReal depreciation during recovery Stimulus to consumption & residential inv.Stimulus to consumption & residential inv.

Reforms to promote competitiveness, Reforms to promote competitiveness, private investment & exports.private investment & exports.

Reforms to strengthen banking & corporatesReforms to strengthen banking & corporates Reforms for public sector governanceReforms for public sector governance

GDP Shares: 1994-95, 2004-05GDP Shares: 1994-95, 2004-05

0

30

60

90

120

150

180

210

1994-1995 2004-2005

Perc

ent

Private consumption Private investmentPublic investment Public ConsumptionExports of G&S Imports of G&S

PRIVATE INVESTMENTPRIVATE INVESTMENT

Can it revive more strongly?Can it revive more strongly?

Private Investment PerformancePrivate Investment Performance

Priv.Inv. recovery pace < earlier recessionsPriv.Inv. recovery pace < earlier recessions Priv Inv/GDP < 1980s averagePriv Inv/GDP < 1980s average

FDI higher than pre-crisis, driven by autoFDI higher than pre-crisis, driven by auto Domestic private inv - main driver of private Domestic private inv - main driver of private

inv pre-crisis – very inv pre-crisis – very sluggishsluggish during recovery during recovery

Residential invest grew most rapidlyResidential invest grew most rapidly Manufacturing inv. after depreciation, littleManufacturing inv. after depreciation, little

Private Investment RecoveryPrivate Investment Recovery

Private Investment to GDP ratio

0

5

10

15

20

25

30

351

99

6

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

As

% o

f G

DP

Thailand

Private Investment function estimate Private Investment function estimate

Positively, by real GDP growth, Positively, by real GDP growth, real real exchange rate depreciationexchange rate depreciation, public , public investment & availability of creditinvestment & availability of credit

But negatively affected, by real cost and But negatively affected, by real cost and excess capacityexcess capacity

Reversing Private Investment SlowdownReversing Private Investment Slowdown

Excess capacity is goneExcess capacity is gone Optimism on supportive policy signals soonOptimism on supportive policy signals soon

Policies Policies

--to continue opening--to continue opening

--to lower costs for domestic, FDI firms--to lower costs for domestic, FDI firms

--to better integrate FDI in domestic economy--to better integrate FDI in domestic economy

--to support innovation & knowledge-diffusion--to support innovation & knowledge-diffusion

STRONG EXPORT GROWTHSTRONG EXPORT GROWTHDURING RECOVERYDURING RECOVERY

Can it Continue?Can it Continue?

Export Performance During RecoveryExport Performance During Recovery

Export/GDP rose – 47% in 1995 to 67% in 2005Export/GDP rose – 47% in 1995 to 67% in 2005 Changing geographic composition of exportsChanging geographic composition of exports

with export growth to E.Asia faster than ROWwith export growth to E.Asia faster than ROW Changing commodity composition of exports Changing commodity composition of exports

moving up value-chain & technology laddermoving up value-chain & technology ladder Auto/vehicles, electronics, non-electric machinery & Auto/vehicles, electronics, non-electric machinery &

partsparts SHARE SHARE in total exports rose in total exports rose 32% to 43%32% to 43%

In autos, all Thai production In autos, all Thai production except designexcept design Other sectors – more fragmented regional networks Other sectors – more fragmented regional networks

Export Performance StrongestExport Performance Strongest

Export to GDP ratio

40

50

60

70

80

90

100

110

120

130

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ind

ex (

19

98

=1

00

)

Indonesia Korea, Rep. Thailand Malaysia Philippines

Reforms Supporting Export RecoveryReforms Supporting Export Recovery

Private Investment Reforms

Amended Alien Business Law to permit Amended Alien Business Law to permit foreign ownership up to 49% (1999)foreign ownership up to 49% (1999)

Abolished local content requirement for Auto Abolished local content requirement for Auto and several agricultural products (2000)and several agricultural products (2000)

Eliminated export performance requirements Eliminated export performance requirements for firms receiving BOI incentives (2000)for firms receiving BOI incentives (2000)

Established new Free Zones with duty & tax Established new Free Zones with duty & tax free access for investors (2002)free access for investors (2002)

Reforms Supporting Export RecoveryReforms Supporting Export Recovery

Tariff Policy Reforms

Established Tariff Restructuring Committee (1998)Established Tariff Restructuring Committee (1998) Reduced tariffs on electronic, non-electrical Reduced tariffs on electronic, non-electrical

machinery & parts to 3%, on all raw materials to machinery & parts to 3%, on all raw materials to 5%, & on fish crustaceans for breeding to zero 5%, & on fish crustaceans for breeding to zero (Aug1999)(Aug1999)

Implemented AFTA - average AFTA tariff fall to Implemented AFTA - average AFTA tariff fall to 7.3% (2000), ..% (2002) & …% (2005)7.3% (2000), ..% (2002) & …% (2005)

Reduced tariffs in stages to 3 bands from 2001-05 Reduced tariffs in stages to 3 bands from 2001-05 lowering average MFN tariffs from 20% to 10%lowering average MFN tariffs from 20% to 10%

Tariffs on agriculture reducedTariffs on agriculture reduced

Reforms Supporting Export RecoveryReforms Supporting Export Recovery

Customs & Trade Facilitation Reforms

Reduced steps for customs clearance, and started Reduced steps for customs clearance, and started express document handling (1999)express document handling (1999)

Introduced UN Electronic Data Interchange to Introduced UN Electronic Data Interchange to increased automated handling (1999)increased automated handling (1999)

Adopted WTO Valuation, 6-digit HS system, and Adopted WTO Valuation, 6-digit HS system, and simplified appeal rules(2000)simplified appeal rules(2000)

Made Gold card holders inspection-exemptMade Gold card holders inspection-exempt BOI sectors with tariff exemptions expandedBOI sectors with tariff exemptions expanded Allowed SMEs internet customs submissionAllowed SMEs internet customs submission

Reforms Made Thailand More OpenReforms Made Thailand More Open

0

20

40

60

80

100

120

140

160

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Perc

en

t

0

5

10

15

20

25

Perc

en

t

External Trade to GDP ratio (LHS)Unweighted Average MFN tariff (RHS)Import Tariff Revenues to total Imports Ratio (RHS)

External Factors Supported Export Recovery External Factors Supported Export Recovery

World output, trade growth strong after 1999; real interest rates<80s,90s;Commodity prices favorable

Regional integration (inv & trade) driving exports thru’ fragmented regional production networks to lower costs

Lower-income-country export competition in lab-intensive to increasingly skill-intensive goods & services (China, Vietnam, India etc)

Oil price shock a burden for Thailand firms in 2004 onwards Oil price shock a burden for Thailand firms in 2004 onwards

East Asia’s countries have high shares of FDI from other East East Asia’s countries have high shares of FDI from other East Asian countries -- promoting REGIONAL INTEGRATIONAsian countries -- promoting REGIONAL INTEGRATION

Share of FDI inflows originating from emerging East Asia

0

10

20

30

40

50

60

70

Thailand Vietnam China Indonesia Malaysia Philippines Korea

%

1998-00 2001-03

-3

-2

-1

0

1

2

3

-6 -4 -2 0 2 4 6 8

Cha

nge

in e

xtra

-reg

iona

l sha

re

(cha

nge

in:

expo

rts

to e

xtra

-reg

ion/

Wor

ld e

xpor

ts t

o ex

tra-

regi

on)

Change in intra-regional share(change in: exports to emerging East Asia/World exports to emerging East Asia)

Japan

ThailandKorea

Singapore

Philippines

China & HK

Emerging EA

Vietnam Malaysia

Cambodia

Lao

Indonesia

Taiwan

Percentage point change in extra-regional and intra-regional market shares between 1994-96 average and 2002-04 average

Regional Integration Major Driver of Regional Integration Major Driver of Exports in E. AsiaExports in E. Asia

Japan/NIEs

New Traditional

Manufacturing

Country 1

Part A

Manufacturing

Country 2

Part B

Japan/NIEs

Quality Control A

B

A

BChina/

ASEAN

A

B

Japan/NIEs

Japan/NIEs

Sent for Assembly

Sent for Assembly

Sent for Assembly

A

BGrouping into kits or further processing

Regional Integration – Production fragmentation to lower costs changes production network allocation to benefit diff. countries

Multinational Corporations Multinational Corporations Decide Where to Locate Parts of Decide Where to Locate Parts of

Production within E. Asia & WorldProduction within E. Asia & World

Whether THAILAND or some other country Whether THAILAND or some other country benefits – depend on their relative costs & benefits – depend on their relative costs & on their integration with domestic economyon their integration with domestic economy

Competition for ThailandCompetition for Thailand -- Lower-income China -- Lower-income China experienced notable technological upgradingexperienced notable technological upgrading

Product Category 1994 2004 1994 2004 1994 2004 1994 2004 1994 2004Labour-intensive and resource-intensive manufactures 46.4 30.9 20.7 15.2 8.1 8.4 14.9 11.7 15.3 12.4

Leather, textiles, apparel, and footwear 34.2 21.5 14.5 10.2 2.6 2.6 7.1 5.1 8.6 6.5

Low skill-, technology-, capital- and scale-intensive manuf. 4.9 7.5 7.5 7.8 3.4 3.8 7.5 7.2 6.6 6.8Fabricated metal products 2.4 3.1 2.1 2.2 1.7 1.9 2.6 2.5 2.2 2.2

Medium skill-, technology-, capital- and scale-intensive manuf. 11.0 15.6 24.5 23.9 30.0 29.9 29.7 30.8 25.8 26.0Rubber and plastic products 2.3 2.2 1.8 1.7 1.4 1.7 2.1 2.0 1.7 1.7Non-electrical machinery 2.4 4.7 8.9 8.3 11.4 11.2 12.7 12.4 10.5 10.0Electrical machinery other than semiconductors 6.0 8.0 6.3 6.9 5.1 5.5 4.8 4.5 4.9 5.1Road motor vehicles 0.3 0.7 7.5 7.0 12.2 11.5 10.1 11.8 8.7 9.2

High skill-, technology-, capital- and scale-intensive manuf. 23.7 35.4 33.0 39.7 30.5 32.4 24.2 28.3 26.3 29.4Chemical and pharmaceutical products 3.3 3.4 4.8 6.6 8.3 10.1 12.3 15.6 9.0 11.0Computers and office equipment 3.9 12.1 8.4 10.0 6.1 5.5 3.5 3.4 4.9 5.0Communications equipment and semiconductors 11.6 15.9 15.8 18.6 8.3 9.1 3.9 4.8 7.6 8.7Scientific instruments, watches and photographic equip. 4.8 3.9 3.7 4.3 3.4 4.2 2.7 3.0 3.1 3.3

Remaining exports 14.1 10.6 14.3 13.4 28.0 25.4 23.7 22.1 26.0 25.4Note : Category definitions from Mayer, Butkevicius and Kadri (2002). Trade between China and Hong Kong not computed in the values presented above. East Asia= emerging East Asia plus Japan.

Source: COMTRADE, SITC Rev. 2. Data reported by member countries.

WORLDExport composition by factor intensity, 1994 & 2004 (%)

China & HK NAFTA EUEast Asia

Thailand’s Upgrading, More Modest Thailand’s Upgrading, More Modest HS code HS code 19951995 20052005

Labor-Intensive Exports:Labor-Intensive Exports:

Leather, textiles, apparel, footwearLeather, textiles, apparel, footwear

HS41-43 and 50-HS41-43 and 50-6565

17.117.1 7.57.5

More skill/technology intensive:More skill/technology intensive:

Road motor vehiclesRoad motor vehicles HS87HS87 1.21.2 7.47.4

Non-electrical machineryNon-electrical machinery HS84HS84 14.014.0 17.517.5

(Computer and office equipment)(Computer and office equipment) HS8469-8473HS8469-8473 9.79.7 10.410.4

Electrical machinery (other than Electrical machinery (other than semiconductors)semiconductors)

HS85 exc.8541HS85 exc.8541 16.516.5 18.318.3

(Communication equipment)(Communication equipment) HS8517-8531HS8517-8531 5.75.7 5.75.7

(Semiconductors)(Semiconductors) HS8541HS8541 0.50.5 0.70.7

Scientific instruments, watches and Scientific instruments, watches and photographic equipmentphotographic equipment

HS90 and 91HS90 and 91 2.22.2 2.02.0

Chemical and pharmaceutical productsChemical and pharmaceutical products HS28,29 and 30HS28,29 and 30 0.70.7 2.02.0

Source: MOC

Electronics, Other MachineryElectronics, Other Machinery--Limited domestic value-addition--Limited domestic value-addition

Multi-country production fragmentationMulti-country production fragmentation Competing - low-income Vietnam, ChinaCompeting - low-income Vietnam, China

-higher-income Malaysia, E, Europe-higher-income Malaysia, E, Europe Competing with others - Vietnam, ChinaCompeting with others - Vietnam, China Trade facilitation improvements lowered costsTrade facilitation improvements lowered costs Footloose FDI – need Thai production & Footloose FDI – need Thai production &

innovation to better integrate in-countryinnovation to better integrate in-country Expand RTG Innovation Initiatives in electronicsExpand RTG Innovation Initiatives in electronics Stronger skill-development key for FDI, innovationStronger skill-development key for FDI, innovation

Most Value-Addition in Auto & partsMost Value-Addition in Auto & parts

Largest market in ASEAN, incl. 1-ton pickupsLargest market in ASEAN, incl. 1-ton pickups Japanese firms looking for relocation advantagesJapanese firms looking for relocation advantages

Policies supported value-additionPolicies supported value-addition No ‘national car policy’ – level playing fieldNo ‘national car policy’ – level playing field Tariffs reduced – more competition soughtTariffs reduced – more competition sought Reduced foreign ownership restrictions allowed Reduced foreign ownership restrictions allowed

first-tier auto-parts-supplierfirst-tier auto-parts-supplier FDI FDI Trade, customs facilitation improved to respond to Trade, customs facilitation improved to respond to

demands of production networks demands of production networks

Exports of Vehicles & PartsExports of Vehicles & Parts

All Thai Production, All Thai Production, except Designexcept Design

Can Strong Export Growth Continue?Can Strong Export Growth Continue?Yes – if …Yes – if …

Costs for production relocation fall here:Costs for production relocation fall here: Trade facilitation & better investment climate Trade facilitation & better investment climate Ensure more competitive Ensure more competitive servicesservices sectors sectors

Integrate FDI through value-addition further:Integrate FDI through value-addition further: Skill-Upgrading beyond Thailand income levelSkill-Upgrading beyond Thailand income level RTG support for innovation, knowledgeRTG support for innovation, knowledge Balanced financial sector support innovationBalanced financial sector support innovation

Way ForwardWay Forward

Policy ReformsPolicy Reforms

What this recovery experience means?What this recovery experience means?

Growth fell - annual 6% 02-04 to 4.5% 05-07Growth fell - annual 6% 02-04 to 4.5% 05-07 Inequality harder to reduce with lower growthInequality harder to reduce with lower growth Limits on private consumption growth as GDP Limits on private consumption growth as GDP

driverdriver E. Asia integration drive exports-trade facilitation, E. Asia integration drive exports-trade facilitation,

investment climate improvements & value-addition investment climate improvements & value-addition Competition from low & middle income countries Competition from low & middle income countries

generate generate rising inequality w/o skill upgradingrising inequality w/o skill upgrading Volatility-external demand, relocation decisions job-Volatility-external demand, relocation decisions job-

turnover causes of turnover causes of social distresssocial distress

Policy Reform Agenda Policy Reform Agenda to Convert Strong Recovery to Strong, to Convert Strong Recovery to Strong,

Quality, Shared GDP GrowthQuality, Shared GDP Growth

Quick Policy signals supportive of aboveQuick Policy signals supportive of above Address Investment Climate ConstraintsAddress Investment Climate Constraints Facilitate trade & increase competitionFacilitate trade & increase competition Reduce cost of non-tradable servicesReduce cost of non-tradable services Protect workers and facilitate job turnoverProtect workers and facilitate job turnover Empower communities & manage resourcesEmpower communities & manage resources