1. REFORMS & RECOVERY Kazi Matin Archanun Kohpaiboon Kirida Bhaopichitr

2. 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

3. 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

4. GDP Recovery Next to Korea’s

5. Private Cons Growth Similar to Korea

6. 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

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

8. PRIVATE INVESTMENT Can it revive more strongly?

9. 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

10. Private Investment Recovery

11. 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

12. 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

13. STRONG EXPORT GROWTH DURING RECOVERY Can it Continue?

14. 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

15. Export Performance Strongest

16. 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)

17. 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 2001-05 lowering average MFN tariffs from 20% to 10%  Tariffs on agriculture reduced

18. 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

19. Reforms Made Thailand More Open

20. 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

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

22. Percentage point change in extra-regional and intra-regional market shares between 1994-96 average and 2002-04 average Regional Integration Major Driver of Exports in E. Asia

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

24. 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

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

26. Thailand’s Upgrading, More Modest HS code 19952005 Labor-Intensive Exports: Leather, textiles, apparel, footwear HS41-43 and 50- 65 17.17.5 More skill/technology intensive: Road motor vehicles HS871.27.4 Non-electrical machinery HS8414.017.5 (Computer and office equipment) (Computer and office equipment)HS8469-84739.710.4 Electrical machinery (other than semiconductors) HS85 exc.8541 16.518.3 (Communication equipment) (Communication equipment)HS8517-85315.75.7 (Semiconductors) (Semiconductors)HS85410.50.7 Scientific instruments, watches and photographic equipment HS90 and 91 2.22.0 Chemical and pharmaceutical products HS28,29 and 30 0.72.0 Source: MOC

27. 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

28. 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

29. Exports of Vehicles & Parts

30. All Thai Production, except Design

31. 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

32. Way Forward Policy Reforms

33. What this recovery experience means?  Growth fell - annual 6% 02-04 to 4.5% 05-07  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

34. 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