REFORMS & RECOVERY Kazi Matin Archanun Kohpaiboon Kirida Bhaopichitr

Coverage of Presentation  What are key aspects of recovery  How to reverse private investment slowdown  What accounted for strong export growth & Can it continue  Policy agenda for quality shared high growth

Key Aspects of Thai Recovery  GDP recovery started slow - but now next to Korea  Stabilization & Reforms promoted recovery  External factors, esp. Regional Integration, key  Macro-stability & reduced external vulnerability  Private investment recovery WEAK – FDI inflows robust, but private domestic investment SLUGGISH  Private consumption & exports key drivers  Oil price shock dampened GDP growth after 2004

GDP Recovery Next to Korea’s

Private Cons Growth Similar to Korea

Reforms effective - but MORE to sustain strong growth, social stability  Successful macro-stabilization  Real depreciation during recovery  Stimulus to consumption & residential inv.  Reforms to promote competitiveness, private investment & exports.  Reforms to strengthen banking & corporates  Reforms for public sector governance

GDP Shares: ,

PRIVATE INVESTMENT Can it revive more strongly?

Private Investment Performance  Priv.Inv. recovery pace < earlier recessions  Priv Inv/GDP < 1980s average  FDI higher than pre-crisis, driven by auto  Domestic private inv - main driver of private inv pre-crisis – very sluggish during recovery  Residential invest grew most rapidly  Manufacturing inv. after depreciation, little

Private Investment Recovery

Private Investment function estimate  Positively, by real GDP growth, real exchange rate depreciation, public investment & availability of credit  But negatively affected, by real cost and excess capacity

Reversing Private Investment Slowdown  Excess capacity is gone  Optimism on supportive policy signals soon  Policies --to continue opening --to lower costs for domestic, FDI firms --to better integrate FDI in domestic economy --to support innovation & knowledge-diffusion

STRONG EXPORT GROWTH DURING RECOVERY Can it Continue?

Export Performance During Recovery  Export/GDP rose – 47% in 1995 to 67% in 2005  Changing geographic composition of exports with export growth to E.Asia faster than ROW  Changing commodity composition of exports moving up value-chain & technology ladder  Auto/vehicles, electronics, non-electric machinery & parts SHARE in total exports rose 32% to 43%  In autos, all Thai production except design  Other sectors – more fragmented regional networks

Export Performance Strongest

Reforms Supporting Export Recovery Reforms Supporting Export Recovery Private Investment Reforms  Amended Alien Business Law to permit foreign ownership up to 49% (1999)  Abolished local content requirement for Auto and several agricultural products (2000)  Eliminated export performance requirements for firms receiving BOI incentives (2000)  Established new Free Zones with duty & tax free access for investors (2002)

Reforms Supporting Export Recovery Reforms Supporting Export Recovery Tariff Policy Reforms  Established Tariff Restructuring Committee (1998)  Reduced tariffs on electronic, non-electrical machinery & parts to 3%, on all raw materials to 5%, & on fish crustaceans for breeding to zero (Aug1999)  Implemented AFTA - average AFTA tariff fall to 7.3% (2000),..% (2002) & …% (2005)  Reduced tariffs in stages to 3 bands from lowering average MFN tariffs from 20% to 10%  Tariffs on agriculture reduced

Reforms Supporting Export Recovery Reforms Supporting Export Recovery Customs & Trade Facilitation Reforms  Reduced steps for customs clearance, and started express document handling (1999)  Introduced UN Electronic Data Interchange to increased automated handling (1999)  Adopted WTO Valuation, 6-digit HS system, and simplified appeal rules(2000)  Made Gold card holders inspection-exempt  BOI sectors with tariff exemptions expanded  Allowed SMEs internet customs submission

Reforms Made Thailand More Open

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

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

Percentage point change in extra-regional and intra-regional market shares between average and average Regional Integration Major Driver of Exports in E. Asia

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

Multinational Corporations Decide Where to Locate Parts of Production within E. Asia & World Whether THAILAND or some other country benefits – depend on their relative costs & on their integration with domestic economy

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

Thailand’s Upgrading, More Modest HS code Labor-Intensive Exports: Leather, textiles, apparel, footwear HS41-43 and More skill/technology intensive: Road motor vehicles HS Non-electrical machinery HS (Computer and office equipment) (Computer and office equipment)HS Electrical machinery (other than semiconductors) HS85 exc (Communication equipment) (Communication equipment)HS (Semiconductors) (Semiconductors)HS Scientific instruments, watches and photographic equipment HS90 and Chemical and pharmaceutical products HS28,29 and Source: MOC

Electronics, Other Machinery --Limited domestic value-addition  Multi-country production fragmentation  Competing - low-income Vietnam, China -higher-income Malaysia, E, Europe  Competing with others - Vietnam, China  Trade facilitation improvements lowered costs  Footloose FDI – need Thai production & innovation to better integrate in-country  Expand RTG Innovation Initiatives in electronics  Stronger skill-development key for FDI, innovation

Most Value-Addition in Auto & parts  Largest market in ASEAN, incl. 1-ton pickups  Japanese firms looking for relocation advantages Policies supported value-addition  No ‘national car policy’ – level playing field  Tariffs reduced – more competition sought  Reduced foreign ownership restrictions allowed first-tier auto-parts-supplier FDI  Trade, customs facilitation improved to respond to demands of production networks

Exports of Vehicles & Parts

All Thai Production, except Design

Can Strong Export Growth Continue? Yes – if … Costs for production relocation fall here:  Trade facilitation & better investment climate  Ensure more competitive services sectors Integrate FDI through value-addition further:  Skill-Upgrading beyond Thailand income level  RTG support for innovation, knowledge  Balanced financial sector support innovation

Way Forward Policy Reforms

What this recovery experience means?  Growth fell - annual 6% to 4.5%  Inequality harder to reduce with lower growth  Limits on private consumption growth as GDP driver  E. Asia integration drive exports-trade facilitation, investment climate improvements & value-addition  Competition from low & middle income countries generate rising inequality w/o skill upgrading  Volatility-external demand, relocation decisions job- turnover causes of social distress

Policy Reform Agenda to Convert Strong Recovery to Strong, Quality, Shared GDP Growth  Quick Policy signals supportive of above  Address Investment Climate Constraints  Facilitate trade & increase competition  Reduce cost of non-tradable services  Protect workers and facilitate job turnover  Empower communities & manage resources