Information about Asia and the Pacific Asia y el Pacífico
Chapter

II. Overview of Economic Developments Since 1950

Author(s):
David Robinson, Ranjit Teja, Yangho Byeon, and Wanda Tseng
Published Date:
September 1991
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At the end of World War II. Thailand was a basically agrarian economy. Heavily dependent on rice, which accounted for some 25 percent of GDP. and about one half of total exports, it had only a very small manufacturing sector and limited basic infrastructure. (Box 1 presents a profile of Thailand. Box 2 describes the first 100 years of Thailand’s modern economic history.) Over the ensuing 40 years, Thailand has achieved an impressive record of growth and development. Real GDP growth has averaged nearly 7 percent (Chart 1); poverty has been dramatically reduced; and output and exports have become increasingly diversified. By the end of the 1980s, Thailand was well advanced in its transition from an agricultural to an industrial and services-based economy, and is on the verge of joining the ranks of Asia’s newly industrializing economies (NIEs).

Chart 1.Selected Economic Indicators, 1953–90

Source: Data provided by the Thai authorities.

Thailand’s postwar development can be broadly divided into three phases. The first (1950-72) was characterized by rapid growth and development, driven from the late 1950s by the adoption of an industrial strategy that was oriented to the private sector and by a rapid improvement in infrastructure. The second (1973-85) was dominated by the need for domestic adjustment in the face of severe external shocks: attempts to maintain growth through expansionary policies in the late 1970s were followed by a series of adjustment programs designed to restore internal and external balance. From 1986 onward, these adjustment efforts, aided by a favorable external environment, began to bear fruit, and Thailand embarked on a remarkable economic expansion.

A Market-Based Industrial Strategy, 1950–72

During the first two decades of its postwar history, Thailand’s economic development was generally very successful. GDP growth averaged 5.2 percent in the 1950s, and. with the adoption of a comprehensive industrialization strategy at the turn of the decade, accelerated to an average 7.4 percent during 1960–72. Thus, despite rapid population growth, real GDP per capita doubled over the period, and the proportion of the population below the poverty line fell dramatically (Box 3). At the same time, inflation remained low, and—at least until the latter part of the 1960s-—the current account deficit remained at a moderate level.

The focus of the authorities’ development strategy during this period was to build up the manufacturing sector. At the same time, investments in irrigation and the transport network contributed to high rates of growth in agricultural output and exports. After a brief—and generally unsuccessful—flirtation with state enterprises in the early 1950s,1 from 1959 the authorities adopted an industrial strategy based on the private sector. The Board of Investment (BOI) was created to administer a package of investment incentives designed initially to promote import-substituting industries,2 while the role of the public sector was limited to providing basic infrastructure. This strategy was in turn supported by conservative financial policies. The government deficit averaged below 2 percent of GDP over the period, while monetary growth was limited to 10–15 percent annually. From 1963 onward, the exchange rate was formally linked to the U.S. dollar, to which it remained fixed—albeit with some changes in the par value—until the mid-1980s. In the tradition of Thailand’s prewar development the economy continued to be very open, with current account transactions generally free, and capital controls essentially limited to outflows: at the same time, despite an increase in tariff protection, trade accounted for an increasing share of GDP.

Box 2. A Historical Retrospective

As of the early 1850s, Thailand was an independent and self-sufficient kingdom with a population of about 5 million. (Until 1939, it was known as Siam, but for simplicity Thailand is used throughout.) The economy, which was essentially agrarian, operated almost entirely on a subsistence basis: farmers and their families “worked just hard enough to supply themselves with the necessities of life, and custom, habit and climate kept their requirements at a modest level” (Ingram (1971), p, 19). Internal trade was mostly local, and carried out through barter, whereas, as Thailand had been virtually closed to the outside world since the seventeenth century, trade with the outside world was both extremely limited and strictly controlled.

Thailand’s modern economic history really began with the accession of King Mongkut to the throne in 1851. In 1855, Thailand and Great Britain signed the Bowring Treaty, under which Thailand agreed to allow free trade in almost all products, including silver and gold; to keep tariffs at or below 3 percent; and to limit export duties. For Thailand, the treaty involved a substantial surrender of sovereignty, particularly in fiscal policy. In contrast to similar treaties imposed on China and Japan at about the same time, it seems to have been signed voluntarily, in part to head off the implicit threat of British colonial rule, but also owing to the king’s conviction that Thailand’s future economic development depended on its relations with the West (see Ingram (1971), p. 33).

The Bowring Treaty, which was quickly followed by similar treaties with the other major industrial powers of the time, turned Thailand practically overnight into an almost completely open economy. Buoyant foreign demand for rice, especially following the opening of the Suez Canal in 1869, combined with the free availability of cheap imported goods, prompted Thai fanners to shift from subsistence farming to production of rice as a cash crop; correspondingly, agricultural output increased, and the use of money increased dramatically. Rice exports increased some twenty-five fold between 1850 and the 1930s, to comprise about 30 percent of world trade in rice. At the same time, what was to become a long tradition of cautious financial policies began. The government budget was managed very conservatively, with only very limited recourse to foreign borrowing to finance infrastructural projects, while monetary policy was constrained both by the fixed value of the baht (first to silver and then to gold) and by the open capital account mandated by the Bowring Treaty.

Two main trends characterized Thailand’s economic development during this period. First, it was based almost exclusively on increased agricultural production, particularly of rice, while the manufacturing sector remained almost completely undeveloped. Until 1919, domestic manufacturing (apart from rice and lumber milling) was almost nonexistent, and while some limited growth in manufacturing occurred in the 1930s—for instance, production of cigarettes and matches—even by 1950 the manufacturing industry accounted for less than 10 percent of GDP. Second, Thailand’s development relied almost entirely on the greater use of inputs, and only slightly on growth of productivity. The technology used in rice production hardly changed over the period, and the growth in agricultural output entirely reflected the expansion of the area planted.

These trends had several, common, causes. First, since land was both abundant and freely available to anyone who would clear and cultivate it, Thailand’s comparative advantage lay in land-intensive rather than in labor- or capital-intensive production. Second, until the renegotiation of the Bowring Treaty in the 1920s, manufacturing not only faced strong foreign competition as a result of low tariffs, but was further hampered by a variety of taxes (on inland transport, for instance) that the Government was unable to abolish, partly because of the constraints imposed under the Bowring Treaty on its ability to raise revenue. Third, infrastructural development—except for the railway system—was quite limited. Irrigation projects, which could have considerably improved agricultural yields, were repeatedly postponed; electricity generation capacity was very limited; and the road system was underdeveloped. Finally, although the economy became increasingly monetized, financial and capital markets were almost nonexistent. While the relative abundance of land would remain a structural feature of the Thai economy until the 1970s, the authorities moved swiftly to address the remaining problems as they sought to accelerate Thailand’s industrialization in the postwar period.

Box 3. Poverty and Income Distribution

Poverty is primarily a rural phenomenon (see Table 3). About three fourths of the poor are fanners, typically located in less accessible areas, and cultivating the less profitable crops such as rainfed glutinous rice, kenaf, and jute. Correspondingly, poverty is most prevalent in the Northeast (37 percent below the poverty line), and the North (23 percent), areas characterized by relatively poor soil, low and unreliable rainfall, and poor infrastructure. (The poverty line is defined as the annual per capita household income needed to satisfy basic needs. In 1988/ 89. the poverty line stood at B 4,141 in rural areas and B 6.324 in urban areas.) Poverty is least important in the Bangkok Metropolitan Region (3 percent below the poverty line) in which much of Thailand’s recent growth has been concentrated. But even though urban poverty is less widespread, it is relatively severe, with average family income for those in poverty in urban areas averaging 28 percent below the poverty line.

Table 3.Poverty and Income Distribution, 1975–88
1975/761980/811985/861988/89
Poverty incidence1
Overall130233024
Urban113867
Rural36273629
Income distribution
Top 10 percent33353938
Top 20 percent49515655
Bottom 20 percent6555
Gini coefficient0.430.450.500.48
Source: Hutaserani (1990).

Measured as the percentage of households below the poverty line.

Source: Hutaserani (1990).

Measured as the percentage of households below the poverty line.

The alleviation of poverty has been a long-standing objective of the Thai authorities. Between the early 1960s and 1980, considerable progress was achieved, as rapid growth of agricultural output and incomes was supported by several specific policy programs to improve the lot of the rural poor, and the proportion of the population below the poverty line fell from close to 60 percent to some 23 percent (Table 3). In the first half of the 1980s, largely owing to declining crop prices, the proportion increased; but with the economic boom of the late 1980s, this has been largely reversed, and in 1988, the proportion of those below the poverty line had returned to its 1980 level.

But while poverty has been reduced, at least until the mid-1980s income distribution tended to become more disproportionate. The share of the top 20 percent of the population in total income increased from 49 percent in 1975 to 56 percent in 1985, while the Gini coefficient increased from 0.43 to 0.5. Perhaps unsurprisingly, the urban population, particularly in Bangkok, has received the largest share of the fruits of Thailand’s economic development: between 1975 and 1985, average incomes in Bangkok increased faster man in any other region. With the economic boom in the late 1980s, there are some signs that this trend had slowed. By 1988, the share of the top 20 percent in total income had fallen to 55 percent, while the Gini coefficient declined to 0.48.

In the Seventh National Economic and Social Development Plan (1992–96), a series of measures to reduce poverty and income inequality have been proposed. In particular, concerted efforts are to be made to raise rural incomes through improvements in production, marketing and price support programs, and a greater dissemination of industrial activities into rural areas. Policies to raise income and wages, and development of human resources through better access to education and public health are to be emphasized. Also, tax policy—for instance, land, property, and inheritance taxes—will be used to reduce income disparities, while budgetary expenditures will be increasingly directed to develop health and education in rural areas. In addition to these discretionary measures, rapid economic growth and the expansion of labor-intensive manufacturing should also contribute to reducing poverty and income inequality.

Note: The above draws heavily on Hutaserani (1990) and Meesook (1979 and 1988).

As a result of these policies, investment soared during the 1960s, financed primarily by increasing domestic savings (Chart 2). Industrial output grew rapidly, initially in agroindustries (such as food processing) and in textiles, and then in heavy industries such as petroleum refining, chemicals, and transport equipment. Consequently, although agriculture remained the mainstay of the economy, its share in GDP fell sharply, and the dominance of rice and other traditional crops began to be challenged by new export crops (such as sugarcane, maize, and cassava) (Chart 3). This development was greatly facilitated by substantial improvements in the infrastructure, notably in irrigation, electricity supply, and transportation, and by the growth of the commercial banking system, particularly during the 1950s, The improvement of the road system opened up the domestic market for Thailand’s nascent manufacturing industry, while allowing agricultural production in the provinces to be sent to Bangkok for export.3

Chart 2.Investment and Savings, 1950–90

(As percent of GDP)

Source: Data provided by the Thai authorities.

1 Derived as gross capital Formation plus the current account balance.

2 On a fiscal-year basis.

Chart 3.External Developments, 1953–90

In percent of GDP

Source: Data provided by the Thai authorities.

Toward the end of the 1960s, however, it became clear that, given Thailand’s small domestic market, the limits of efficient import substitution would be quickly reached. At the same time, the industrialization strategy had contributed to a structural deterioration in the trade balance (Chart 4): manufacturing exports remained small, export diversification was limited to nontraditional agricultural products, whereas imports of raw materials and capital goods by import-substituting industries had grown rapidly. Although the impact on the current account was partly offset by a boom in service receipts associated with the Vietnam war, balance of payments deficits emerged in 1969 and 1970. From 1969 onward, there was a conscious shift in policies away from import substitution toward export promotion: in 1972 the investment incentive law was amended to give greater incentives to export industries. Thus, despite a tariff regime that continued to favor import-competing production, the growth of the manufacturing sector from this time on became increasingly export oriented.

Chart 4.Indicators of Structural Change, 1950–90

Source: Data provided by the Thai authorities.

External Shocks and Domestic Adjustment, 1973–85

The period 1973–85, during which Thailand faced a cumulative deterioration in its terms of trade of about 36 percent, was perhaps the most difficult in economic terms in Thailand’s postwar history. Real GDP growth in most years was well below the levels of the previous period; inflation rose sharply in the period immediately after the two oil shocks; and a substantial and persistent current account deficit emerged, which led to a significant increase in Thailand’s external debt and debt service. Even so, largely because the authorities adopted adjustment policies before these problems became acute, Thailand’s difficulties were moderate compared with those of many other developing countries, and it enjoyed access to international capital markets throughout the period.

While adjustment to the external shocks was initially delayed, the authorities changed policies pragmatically as macroeconomic and structural imbalances became increasingly evident. Following the first oil shock, the primary concern of policymakers was to restore past rates of economic growth. To this end, public expenditures were increased sharply, with particularly rapid growth in infrastructural investment and outlays on defense; and a substantial fiscal deficit emerged, financed increasingly through foreign borrowing. Prices of certain key inputs, including oil, were maintained at well below world market levels; and tariffs and other trade barriers designed to protect domestic industries were increased markedly.

While this strategy resulted in a pickup in growth, its limitations were rapidly exposed by the second oil shock in 1979. Despite buoyant export growth—owing in part to the incentives adopted earlier in the decade—the trade balance deteriorated sharply, and the impact on the current account was exacerbated by a decline in services receipts caused by the closure of U.S. bases in Thailand at the end of the Vietnam war. While there was no immediate difficulty in financing the deficit, and the stock of foreign debt and level of debt service remained moderate by international standards, the rapid rate of accumulation of debt became an increasing concern. At the same time, the structure of domestic prices had become increasingly skewed, as the effects of the price controls and higher tariff protection were compounded by a steady appreciation of the real exchange rate and the emergence of negative real interest rates. This not only led to resource misallocation, but also directly contributed to the domestic imbalances. For example, subsidized energy prices not only affected the fiscal position but also—because they had discouraged energy conservation—exacerbated the impact of higher foreign oil prices on the external accounts. It became clear therefore that, without a change in policies, the deterioration in the external payments situation and distortions in relative prices would be unsustainable and would undermine the economy’s growth potential over the long term. In recognition of this, from 1980 onward, the authorities embarked on a comprehensive adjustment program, supported by three stand-by arrangements with the IMF (together with drawings under the compensatory financing facility and the buffer stock facility) and two structural adjustment loans from the World Bank.4 Key objectives of this program, set out in the Fifth National Economic and Social Development Plan, included the reduction of the twin fiscal and current account deficits, the elimination of distortions in relative prices, and a reversal of the protectionist trend of the late 1970s.

During the following five years, although a variety of expenditure and revenue measures were implemented, little sustained progress was made in strengthening the fiscal position, and the current account deficit remained consistently high. While this reflected a number of factors, including the difficulties caused by a further deterioration of the terms of trade in 1981–82, there were two key underlying problems: a chronic tendency to overestimate revenues that meant—given the innate difficulty of reducing expenditures in midyear—that the deficit was consistently higher than budgeted; and the inelasticity of the tax system, owing mainly to a plethora of tax exemptions. Yet while the macroeconomic imbalances persisted, considerable progress was made in other areas. Domestic prices of energy products were raised to world levels, eliminating the disincentive to energy conservation that had contributed to the current account deficits of the late 1970s. Controls on domestic interest rates were relaxed, and interest rate ceilings increased. This, together with progress in reducing inflation, contributed to steadily positive real interest rates from 1982 onward (Chart 5) and to rapid increases in the monetization of the economy and in the growth of the domestic banking system. Export taxes and quantitative restrictions on imports were also reduced, and the dispersion in tariff rates was narrowed, but—partly because of the fiscal situation—little sustained progress was made in reducing the level of import tariffs (see Section V), Finally, the external competitiveness of the Thai economy—which had been further eroded as the baht appreciated with the U.S. dollar during the early 1980s—was strengthened through a 14.8 percent devaluation against the U.S. dollar in November 1984.5

Chart 5.Interest Rates and Exchange Rates, 1978–90

Source: Data provided by the Thai authorities.

1 Maximum rate on 3–6 month deposit at commercial banks.

A far-reaching development that occurred during these years was a slowdown in the rate of growth of cultivated land, as the limits of Thailand’s land frontier began to be reached. Thus, Thailand’s relative abundance of land, which had been a dominating influence on the pattern of development over the past 120 years (Box 1), began to fade, reinforcing the shift toward labor-intensive manufacturing that was already under way.

The Boom Years, 1986–90

Since 1986, Thailand has experienced an economic boom, unparalleled in its postwar history. Real GDP has risen by an average of over 11 percent a year, high both in absolute terms and in comparison with other dynamic countries in the region. Manufacturing output and exports have not only increased but become more diversified: more than half of the export growth over the period has been due to nontraditional exports, including computer parts, consumer electronics, travel goods, and toys. At the same time, both construction—associated with a boom in real estate prices and development—and services, particular!) in the financial sector and in tourism, have grown rapidly.

The driving forces underlying the expansion have been twofold: first, a boom in manufacturing exports, which have grown by an average 29 percent annually in volume terms during the period; and second, a surge in private investment, particularly in the export-oriented manufacturing sector, whose share in GDP more than doubled, from 14 percent to 29 percent between 1986 and 1990. These developments, in turn, had several common causes. First, as noted above, by 1986 the depreciation of the baht had improved the competitiveness of Thai exports. Second, particularly after 1988, Thailand—like other countries in the region—benefited from a surge in foreign direct investment, much of which reflected plant relocations from Japan and the Asian NIEs in response to economic restructuring in those countries. Third, export growth was also boosted by the elimination of most export taxes and other burdens on exporters, while domestic costs—particularly wages—remained quite low relative to Thailand’s main competitors.

The sustainability of the boom was greatly enhanced by a sharp improvement in the fiscal position; thus, despite a decline in private savings, the current account deficit remained—until 1990—well below the levels of the previous decade. The public sector deficit of 5 percent of GDP in 1984/85 was eliminated by 1987/ 88, and by 1989/90 the public sector was running a surplus of close to 5 percent of GDP, a swing of 10 percent of GDP. The reasons for this dramatic success, which had eluded policymakers for so long, are analyzed in more detail in Section III. But the most important factor was a reversal of the previous practice of revenue overestimation toward an even more pronounced tendency toward revenue underestimation, thus imparting into the system an institutional bias toward fiscal surpluses that was in practice compounded by higher-than-expected GNP growth.

By late 1989. however, it had become clear that the strength of Thailand’s economy had brought with it a number of problems. Infrastructural bottlenecks—which had been apparent for a number of years—became increasingly serious, especially in transportation, port capacity, and water and electricity supply (see Box 5 in Section III for a summary of these problems). At the same time, shortages of skilled labor, particularly engineers and technicians, began to emerge. Moreover, the strength of investment demand was reflected in buoyant capital inflows and in increasing balance of payments surpluses, resulting in turn in accelerated monetary growth, which the Bank of Thailand found increasingly difficult to sterilize, given the openness of the capital account and the limited monetary instruments at its disposal.6 As one symptom of these developments, the current account deteriorated, while inflation—although not far out of line with trading partners—edged upward, and asset prices, particularly of real estate and stocks, surged, thereby causing growing concern that the economy might be overheating.

In response, the authorities implemented a series of measures in early 1990 to reduce excess liquidity and dampen credit demand, including the re introduction of a 10 percent withholding tax on interest payments on foreign loans; the abolition of ceilings on deposit interest rates; an increase in the lending rate ceiling from 15 percent to 16.5 percent; and the sale of B 13.5 billion of Bank of Thailand bonds (equivalent to about 8 percent of reserve money). These measures were backed up by the introduction of voluntary limits on commercial bank lending to “nonproductive” activities, including purchases of consumer durables and real estate and construction of luxury condominiums and golf courses. At the same time, although public investment in infrastructure was boosted, fiscal policy remained tight, with buoyant revenues raising the overall public sector surplus in 1989/90 to 4.8 percent of GDP, the highest level on record.

These measures, combined with the impact of the Middle East crisis from early August, did result in some slowdown in demand pressures toward the end of the year, which was reinforced by a further tightening of monetary policy in November when the lending rate ceiling was raised further to 19 percent. Nevertheless, for the year as a whole, demand growth remained very strong, led by a further sharp increase in investment. As a result—and reflecting also the temporary impact of a drought-induced reduction in agricultural exports and higher oil prices in the second half of the year—the current account deficit increased sharply, to about 8.6 percent of GDP, the highest level since the late seventies. Even so, the balance of payments remained in strong surplus, owing largely to a substantial increase in private nonbank borrowing.

Policy Challenges for the 1990s

The main economic challenge for Thai policymakers continues to be how best to sustain the expansion of the past four years, while at the same time avoiding overheating the economy and beginning to eliminate infrastructural and other constraints to growth in the longer term. In the short term, while inflation appears on a downward trend, the current account deficit increased sharply in 1990. This increase is, to a considerable extent, the natural consequence of Thailand’s rapid industrialization. In marked contrast to earlier periods, the deficit has not been due to higher public sector deficits (indeed the public sector is in historically high surplus) but to booming private sector investment, much of which has been concentrated in export-oriented industry; moreover, it is more than financed by capital inflows. Even so, if the deficit were to continue at present levels over a longer period, external debt and debt service would grow considerably, and Thailand’s vulnerability to external shocks would be correspondingly increased. Consequently, the authorities intend to continue to implement cautious fiscal and monetary policies, combined with measures to encourage both exports and private savings, so as to facilitate a steady reduction in the deficit over the medium term.

In the long term, however, the most crucial issues are structural in nature. As noted above, strains on the domestic infrastructure and in certain segments of the labor markets have become increasingly apparent in recent years. While the impact on growth may so far have been slight—it is believed, for example, that the return on foreign investment in Thailand remains very competitive with that in neighboring countries—it is unlikely to remain so indefinitely unless corrective action is taken. Moreover, these strains have added to inflationary pressures, and in some cases have brought both environmental and health problems in their wake (see Box 4 for an overview of environmental problems in Thailand). Public investment in infrastructure has been increased, and—as described in more detail in Section III-—a wide-ranging program of infrastructural projects is now under consideration, in which the private sector is expected to play a leading role. While the timing and status of many of these projects have yet to be determined, they will likely require substantial investment, which in turn reinforces the need to strengthen domestic savings if excessive recourse to foreign borrowing is to be avoided. To support this, the authorities have also taken a number of steps to reduce shortages of skilled labor, including guidelines to encourage training for apprentices and those wishing to upgrade their skills, and measures to increase the output of engineering and technical graduates. The draft Seventh National Economic and Social Development Plan also envisages an increase in the minimum period of schooling from six to nine years.

Box 4.Environmental Issues

One undesirable side effect of Thailand’s rapid growth has been an increase in environmental problems. Economic development has damaged the environment by encroaching on natural areas and threatening existing ecosystems. At the same time, rapid industrialization, migration, and population growth have put increasing pressures on urban areas, straining existing infrastructure and resources, exacerbating urban congestion, and contributing to noise, air, and water pollution.

In response to these problems, government programs since the early 1980s have begun to focus on the need to balance economic growth with environmental improvement. Standards for national air quality were introduced in early 1981, and for noise pollution from land and water vehicles in 1985. A master plan for rural water supply and sanitation was also completed in 1985; the use of environmental impact assessments in the design of major projects was increased: and a variety of sector-specific measures were taken.

At present, the main areas of concern include

  • Air and noise pollution, particularly in the Bangkok area, which is caused mainly by traffic (including long-tailed boats) and industry, and much of which is not equipped with pollution control equipment. Concentrations of suspended particulates and carbon monoxide in Bangkok reportedly exceed standards set by Thailand’s National Environment Board (NEB), although concentrations of ambient lead have dropped, owing to the reduction in 1984 in the lead limit for gasoline, and also to the greater use of diesel oil and liquefied petroleum gas.
  • Water conservation is crucial in the Bangkok area, where increased private underground water extraction from artesian wells in response to the unreliable public water supply has resulted in subsidence and frequent flooding. The lack of waste treatment facilities poses an additional threat to water supplies through contamination of both surface water and groundwater, while the dumping of solid wastes from factories and the drainage of agricultural wastes contribute to cumulative pollution problems, especially in the lower sectors of the Chao Phraya and Tha Chin Rivers feeding into the upper pan of the Gulf of Thailand. In response to these problems, the authorities plan to increase the capacity of the Bang Khen water treatment plant by over 50 percent by 1994, and to boost the supply of untreated water to the plant through a canal to the Tha Chin—and ultimately the Mae Klong—Rivers by the year 2000, which should eliminate the need for artesian wells. To combat industrial pollution, the NEB has laid down similar standards on industrial location and water production by factories, although enforcement of these rules is complicated by the large number of plants operating in the Bangkok area.
  • Land and soils have been eroded through deforestation, until recently at an annual rate of 1.5 percent. The disappearance of many rain forests in Southern Thailand was a major factor in the disastrous floods of October 1988, which prompted the Government to impose a nationwide ban on logging. In addition, the Government has set a minimum target for forest coverage of 40 percent of Thailand’s total land area (compared with the current level of 29 percent), although at the current rate of replanting this would take over a century to achieve. The expansion of agriculture into watersheds and marginal areas, the runoff from agricultural enterprises, and the expansion of freshwater shrimp farming have also led to environmental problems.
  • Fisheries in both the Gulf of Thailand and the Andaman Sea have been depleted through modem fishing techniques. In response, the authorities capped the number of trawlers in 1983. and more recently banned fishing within three miles of the shoreline. Freshwater catches are also declining because of overexploitation.
  • Thailand’s coastal zone consists largely of mangrove forests, which serve as important habitats for many species of marine life and are a vital part of marine ecosystems. These have, however, been depleted for charcoal production or cleared for industrial or residential development. Management areas are being established to control mangrove exploitation and promote reforestation, while more generally the Government is implementing a project to develop and manage the coastal zones.

The Seventh National Economic and Social Development Plan (1992-96) reiterates the need to promote the effective use of natural resources and to conserve the environment. To this end, a tripartite effort, by the Government, the business sector, and the public, is envisaged to protect, maintain, and monitor the environment: and plans for infrastructure will include an assessment of the environmental impact and measures to limit any resulting adverse effects. Priority will be given to addressing the problems of air pollution (through controls on emissions of sulfur dioxide and other gases, and restrictions on the lead content of fuel oil); acid rain (through better combustion technologies and the installation of pollution control devices); and water quality and the disposal of solid waste (through restrictions on the sites of new factories and investment in new waste water treatment facilities). Taxes or fines on enterprises that damage the environment or fail to install pollution control equipment are also envisaged.

A second important issue for Thailand as it makes the transition from an agricultural to an industrial and services-based economy is the deregulation of domestic markets. In this area, compared with many other developing countries, Thailand is already well advanced: the public enterprise sector has historically been relatively small and efficient; while some price controls exist, domestic prices are largely market determined, and the current and capital accounts of the balance of payments have historically been very open.7 The main focuses of regulatory reform are the financial system (particularly the development of the capital market); the tax system, including the replacement of the business tax by a value-added tax (VAT); and the trade system, where the distortions caused by high nominal tariffs and effective rates of protection are likely to pose an increasingly important obstacle to both output and export growth (see Section V).

Finally, efforts to improve the quality of economic growth, which has been affected in recent years by both environmental problems and by a deterioration in income distribution, will be crucial to ensure the substainability of Thailand’s development over the longer term. As, on the one hand, the role of government recedes through deregulation and the various reforms designed to strengthen the role of the private sector, policymakers will need to devote increasing attention to the development of new, market-based instruments to reduce the environmental costs of economic development and to improve income distribution, while minimizing the impact on incentives and growth. These issues, and the reform proposals the authorities are currently proposing, are taken up in more detail in the following sections.

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