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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 150 Real GDP per Capita Index (1998=100) 140 130 120 110 100 90 1996 Indonesia 1997 1998 1999 Korea, Rep. 2000 2001 Thailand 2002 2003 M alaysia 2004 2005 Philippines Private Cons Growth Similar to Korea Pri vate consumpti on to GDP rati o 120 100 90 80 70 Malaysia T hailand Indonesia 2005 2004 2003 2002 2001 2000 1999 1998 1997 60 1996 Index (1998=100) 110 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: 1994-95, 2004-05 210 180 Percent 150 120 90 60 30 0 1994-1995 Private consumption Public investment Exports of G&S 2004-2005 Private investment Public Consumption Imports of G&S 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 Pri vate In ve stme n t to GDP rati o 35 T hailand 30 20 15 10 5 2005 2004 2003 2002 2001 2000 1999 1998 1997 0 1996 As % of GDP 25 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 130 Export to GDP ratio 120 Index (1998=100) 110 100 90 80 70 60 50 40 1996 Indonesia 1997 1998 1999 Korea, Rep. 2000 2001 T hailand 2002 2003 Malaysia 2004 2005 Philippines 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 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 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 160 25 140 20 120 80 10 60 40 5 2005 2004 2003 2002 2001 2000 1999 1998 0 1997 20 0 External Trade to GDP ratio (LHS) Unweighted Average MFN tariff (RHS) Import Tariff Revenues to total Imports Ratio (RHS) Percent 15 1996 Percent 100 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 labintensive 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 Share of FDI inflow s originating from em erging East Asia 70 60 50 % 40 30 20 10 0 Thailand Vietnam China Indonesia 1998-00 2001-03 Malaysia Philippines Korea Regional Integration Major Driver of Exports in E. Asia Percentage point change in extra-regional and intra-regional market shares between 1994-96 average and 2002-04 average Change in extra-regional share (change in: exports to extra-region/World exports to extra-region) 3 China & HK 2 Emerging EA 1 Cambodia Lao 0 -6 -4 -2 Malaysia Vietnam Philippines 0 2 4 Taiwan Singapore Korea Thailand -1 Japan Indonesia -2 -3 Change in intra-regional share (change in: exports to emerging East Asia/World exports to emerging East Asia) 6 8 Regional Integration – Production fragmentation to lower costs changes production network allocation to benefit diff. countries New Traditional Sent for Assembly Manufacturing Country 1 n sig e D I FD Part A Japan/NIEs A Japan/NIEs De s FD I B ign Japan/NIEs Quality Control Grouping into kits or further processing Manufacturing Country 2 Part B Sent for Assembly A A A B B B China/ ASEAN Sent for Assembly Japan/NIEs 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 Export composition by factor intensity, 1994 & 2004 (%) Product Category Labour-intensive and resource-intensive manufactures Leather, textiles, apparel, and footwear Low skill-, technology-, capital- and scale-intensive manuf. Fabricated metal products China & HK 1994 2004 46.4 30.9 34.2 21.5 East Asia 1994 2004 20.7 15.2 14.5 10.2 NAFTA 1994 2004 8.1 8.4 2.6 2.6 EU 1994 2004 14.9 11.7 7.1 5.1 WORLD 1994 2004 15.3 12.4 8.6 6.5 4.9 2.4 7.5 3.1 7.5 2.1 7.8 2.2 3.4 1.7 3.8 1.9 7.5 2.6 7.2 2.5 6.6 2.2 6.8 2.2 Medium skill-, technology-, capital- and scale-intensive manuf. Rubber and plastic products Non-electrical machinery Electrical machinery other than semiconductors Road motor vehicles 11.0 2.3 2.4 6.0 0.3 15.6 2.2 4.7 8.0 0.7 24.5 1.8 8.9 6.3 7.5 23.9 1.7 8.3 6.9 7.0 30.0 1.4 11.4 5.1 12.2 29.9 1.7 11.2 5.5 11.5 29.7 2.1 12.7 4.8 10.1 30.8 2.0 12.4 4.5 11.8 25.8 1.7 10.5 4.9 8.7 26.0 1.7 10.0 5.1 9.2 High skill-, technology-, capital- and scale-intensive manuf. Chemical and pharmaceutical products Computers and office equipment Communications equipment and semiconductors Scientific instruments, watches and photographic equip. 23.7 3.3 3.9 11.6 4.8 35.4 3.4 12.1 15.9 3.9 33.0 4.8 8.4 15.8 3.7 39.7 6.6 10.0 18.6 4.3 30.5 8.3 6.1 8.3 3.4 32.4 10.1 5.5 9.1 4.2 24.2 12.3 3.5 3.9 2.7 28.3 15.6 3.4 4.8 3.0 26.3 9.0 4.9 7.6 3.1 29.4 11.0 5.0 8.7 3.3 Remaining exports 14.1 10.6 14.3 13.4 28.0 25.4 23.7 22.1 26.0 25.4 Note : Category definitions from Mayer, Butkevicius and Kadri (2002). Trade between China and Hong Kong not computed in the values presented above. East Asia= emerging East Asia plus Japan. Source: COMTRADE, SITC Rev. 2. Data reported by member countries. Thailand’s Upgrading, More Modest HS code 1995 2005 HS41-43 and 5065 17.1 7.5 More skill/technology intensive: Road motor vehicles HS87 1.2 7.4 Non-electrical machinery HS84 14.0 17.5 HS8469-8473 9.7 10.4 HS85 exc.8541 16.5 18.3 HS8517-8531 5.7 5.7 HS8541 0.5 0.7 HS90 and 91 2.2 2.0 HS28,29 and 30 0.7 2.0 Labor-Intensive Exports: Leather, textiles, apparel, footwear (Computer and office equipment) Electrical machinery (other than semiconductors) (Communication equipment) (Semiconductors) Scientific instruments, watches and photographic equipment Chemical and pharmaceutical products 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% 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 jobturnover 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