- Erik Offerdal, Kalpana Kochhar, Louis Dicks-Mireaux, Jianping Zhou, Mauro Mecagni, and Balázs Horváth
- Published Date:
- December 1996
Thailand’s adjustment experience during the past 15 years or so has, in general, been impressive. Despite having faced relatively large adverse external shocks in the late 1970s and early 1980s, Thailand, unlike many developing countries, did not experience a significant “investment pause” or a prolonged slowdown in growth following its stabilization program. It is clear, however, that the authorities were concerned at the time about a possible slowdown in growth in response to the adjustment policies. Belying even the most confident expectations, since 1986–87 Thailand has been in the midst of an unprecedented economic boom that has been characterized by rapid growth led by a surge in private investment and manufactured exports. This study has undertaken an examination of economic policies that may have contributed to this outcome.31
Common causes that underlie these developments include the following. First, there was a sustained improvement in external competitiveness. Because of the stabilization policy mix, particularly in the latter part of the adjustment period, expenditure and production switching was successful in generating rapid export-led growth. In particular, the nominal devaluation of 1984 was translated into a significant and sustained real depreciation, owing to the support of prudent financial management and a shift in the composition of public expenditures away from import-intensive capital spending. Second, the lack of labor market segmentation and the relatively high degree of labor mobility were instrumental in bringing about the resource movements necessary to generate the export boom. Moreover, the absence of wage-price inertia in goods and labor markets helped to keep Thailand’s unit labor costs low relative to those of its trading partners, and this was an important factor (as suggested by the empirical analysis of investment behavior) in the relocation of production from other East Asian countries in the late 1980s. Third, the elimination of export taxes and the introduction of other incentives aimed at export promotion provided a highly favorable environment for private investors—both domestic and foreign. Fourth, the fiscal consolidation beginning in the mid-1980s, which resulted in substantial surpluses, made it possible to accommodate the surge in capital inflows and the investment boom in an environment of low inflation, and without a real appreciation of the baht. However, it appears that the scope for a major shift in the fiscal stance is becoming increasingly limited, making some upward pressure on the baht a possibility in the future.
Structural reforms, in general, did not conform closely to what are commonly regarded as “best practices.” In particular, trade reforms did not follow a preannounced medium-term plan, and there were some policy reversals, including import tariff hikes for fiscal reasons. However, that the initial distortions were relatively small and that the authorities acted pragmatically in redressing problems before they became acute were important factors in preventing this from becoming a hindrance to long-term growth.
Although Thailand’s adjustment experience does not necessarily provide a definitive blueprint for successful adjustment, and although not all of Thailand’s policy choices proved to be unequivocally growth-enhancing, a few clear messages do emerge. First, Thailand began the period with relatively small macroeconomic imbalances and structural distortions, and therefore, despite suffering large adverse shocks, it faced a relatively less severe adjustment problem. Second, it had a well-developed and dynamic private sector and was thus able to generate a vigorous response to adjustment measures.
Finally, and most important, the authorities’ high degree of policy credibility was attributable largely to the unwavering emphasis on macroeconomic stability, which was reinforced by a policy mix that was for the most part internally consistent. In turn, this meant that delays in effectively addressing the fiscal and external imbalances of the late 1970s and early 1980s, as well as the relatively slow progress of structural reforms in certain key sectors, did not have a markedly detrimental effect on recovery and longer-term growth. It is undeniable that some of Thailand’s economic performance is attributable to good fortune—“being at the right place at the right time”—particularly with respect to the substantial production relocation within Asia. It is equally true, however, that Thailand had the right policy environment in which to reap the benefits of these developments.