Project Funding For Infrastructure Development in Bangkok Kanit Sangsubhan, Ph.D. Fiscal Policy Research Institute Sustainable Growth, Regional Balance, & Social Development for Poverty Oct 26, 2006 Bangkok, THAILAND Comments of Session I: Growth, Regional Balance and Poverty Reduction

Fiscal Policy Research Institute Economic Growth in Thailand, Barry Bosworth (2006) 75% Gross INV 25% Net INV Quantity LFS (2.6%) Quality: Education attainment and work experience (0.6%) Table 9: Source of Growth ( ) 25-30% 51-52% 16-21% TDRI 16% TDRI 22% TDRI 61% TDRI ( )

Fiscal Policy Research Institute Economic Growth in Thailand, Barry Bosworth (2006) 75% Gross INV 25% Net INV Quantity LFS (2.6%) Quality: Education attainment and work experience (0.6%) Return on schooling average 9% late % early % by 2000 University graduate earn 140% more than elementary Wage differential Men : Woman Declined % different Each year of schooling +7% productivity Table 9: Source of Growth ( ) 25-30% 51-52% 16-21% 4-7% Contribution of Quality of labor TDRI 10%

Fiscal Policy Research Institute Observations Long-term TFP 1.6 % a year of around 6% GDP growth Period after the crisis ( ) gain from cyclical component and low investment fall into TFP (16% contribution share) After the crisis ( )  AG: growth contributed mainly by capital input (K:L:TFP =14:68:17)  IND: K:L:TFP =34:59:5  SER: contributed mainly by labor input K:L:TFP =63:46:-9 (due to financial sector) Quality of labor contribution share of AG and IND around 5-6 % -- 10% for SER

Fiscal Policy Research Institute Main Conclusions 1.Thailand’s growth contributed mainly for quantity of K and L inputs 2.Labor quality contribution is low 3.TFP is low 4.Large employed workers in the AG 5.Low productivity in AG (1/5 of non-AG) 6.Gain of aggregate TFP come from relocation of resource among sectors (11%) Because of the crisis, a large portion of productivity growth loss permanently. Growth resumed new path, lower than the old path (banking, wholesale, retail trade) Thailand no longer has high rate of capital accumulation Problem in financial sector limits the potential output growth Large reserves of labor in AG/facing competition in the low-skilled manufacturing

Fiscal Policy Research Institute Suggestion and Forecast Suggestion: upgrading skill level of work force Forecast: potential growth %  2 % growth of labor force  % growth contribution from education and skill improvement  % of gross investment (22% in 2004)  1-2 % growth of TFP

Fiscal Policy Research Institute Source: FPRI 1997 Crisis Under-utilization of Capital Potential Cap U Actual Cap U Utilization Gap

Fiscal Policy Research Institute Source: FPRI 1997 Crisis Under-utilization of Capital Supply Management Demand Management Potential Cap U Actual Cap U

Fiscal Policy Research Institute Give weight to Macro stability / Reform and Regional Integration View from demand side  Strong private consumption Consumption stimulus and residential investment  Strong exports  Weak investment FDI stronger after the crisis (M&A + restructure into export base) How to revive private investment  Continue opening  Lowering costs for production  Better integrate FDI in domestic economy  Support Knowledge and innovation Reform & Recovery, K. Martin, A Kopaiboon, K. Bhaopichr (2006)

Fiscal Policy Research Institute Past success of exports  Law and regulation reform to encourage private investment  Trade policy reform (tariff reduction due to AFTA and others)  Trade facilitation  External factors (world GDP, regional integration, and China factor) Regional integration in trade and investment  EA-FDI to Thailand 25% to 65% ( and )  Regional production network – automobiles and electronics  Thailand’s trade (export+import) to EA-9 shared 48 % of total trade Can strong export growth continue?  Better trade facilitation and investment climate  Integrate FDI through Value-addition – Skill, innovation and knowledge Reform & Recovery, K. Martin, A Kopaiboon, K. Bhaopichr (2006)

Fiscal Policy Research Institute Phase I.: Bubble Reve nue Expen diture Fiscal Balance Phase II.: Deficit to stimulate Demand Phase III: Balance Fiscal Policy and Development Phases Supply Management Poverty Quality HR/Social Competitiveness Govt. Reform Fiscal Deficit Fiscal Finance Demand Management

Fiscal Policy Research Institute Refuse to increase tax (VAT to 10%) for fiscal balance b ut reduce some specific tax rate to stimulate demand Restoring fiscal discipline – Fiscal Sustainability Plan Fiscal Finance Policy – due to excess liquidity in the financial market and dysfunction of the banking sector  Choices: External borrowing vs. Excess liquidity  Choices: consumption spending vs. loan for investment Village fund /People Bank/ SMEs Loan/SML Loan Stimulating the real estate sector (not allow the market price sink to the bottom)  TAMC House for civil services, Reduction of transfer fee of real estate Expanding export bases via FTA Key Policies in Demand Management Phase

Invest in bubble business– instability Excessive K- flows less K-flows C/A Surplus optimum K-flows C/A balance Less investment / Excess capacity Infrastructure Innovation/KM Training and Education Value Creation Selective activities Social Capital Economic Capital Sufficiency and Sustainability Full employment No- underemployment HR with quality NR sustain Economy sustain Fiscal Balance C/A balance GDP 5 % Inflation 3 % Economic Crisis Unsustainable Uncompetitive Before Crisis After Crisis Way forward C/A Deficits