Download Thailand`s boom and bubble and the fate of agriculture

Growth, crisis and resilience: household responses
to economic change in rural Southeast Asia
Evidence from Northern Thailand
Research note no.1: Thailand's boom and bubble and the fate of agriculture
In the late 1980s, a remarkable combination of
domestic and international phenomena came
together to “make a miracle” in Thailand: an
acceleration of real economic growth from about
6 percent per year in l976-1985 to above 8
percent
in
1986-1995.
Low
wages,
macroeconomic stability, and liberalization of
trade, foreign investment and borrowing laws
made the Thai economy an ideal host for
investment, and helped Thai exporters ride a
wave of growth in global trade. The phenomenal
growth virtually created an entire class of
wealthy urban Thais, and also created thousands
of new urban jobs for unskilled and semi-skilled
labor.
By the mid-1990s, however, the
investment boom had spilled over from tradable
sectors into speculative demand for non-traded
assets such as stocks and real estate.
This emerging 'bubble' caused an acceleration of
job growth in construction, services, and other
industries making intensive use of unskilled and
semi-skilled labor. As labor demand expanded,
non-agricultural wages rose by more than 10%
per year, inflation-adjusted, from 1990-95. Part
of the jobs and wage growth was due to the
boom in tradables sectors, but increasingly, the
bulk of new jobs created were due to the
construction and service sector bubble.
The gains from the boom were not uniformly
shared among sectors. Agriculture captured only
a tiny fragment of the investment boom, and as
the most labor-intensive sector, found itself
increasingly squeezed by the need to offer wages
competitive with those in the new urban
economy. After 1989, as close to three million
workers out of a total agricultural labor force of
about 20 million walked off the land (Figure 1),
planted area growth ceased (Figure 2) and
agricultural output growth decelerated (Table 1).
Table l: Thailand: aggregate and agricultural
output growth rates (percent per year)
Period
l965-80
1980-90
1990-94
GDP
7.2
7.6
8.2
Agric.
4.6
4.0
3.1
Difference
2.6
3.6
5.1
Agricultural decline is a part of economic
development, although its speed in the Thai case
was exceptional. Domestic terms of trade
changes and unequal rates of factor endowment
growth cause labor to migrate to sectors where
its relative productivity is higher. In the course
Growth, crisis and resilience: 81910373
of economic growth, both rising prices and
investment in non-agricultural industries
increase labor productivity outside the farm
sector. Wage pressures and declining relative
agricultural prices squeeze farm profits and
discourage investment in the sector, and this
reduces the agricultural growth rate relative to
rates in the rest of the economy.
upon which the boom was built could easily be
withdrawn from the economy, as happened in
1997, with consequent reductions in nonagricultural production and labor demand. From
a policy perspective, treating such a boom as
permanent when it is in fact temporary can have
undesirable consequences. First, the decline in
agriculture's domestic terms of trade with other
sectors—caused by the investment boom and by
spending on non-traded, non-agricultural goods
and services—was probably exaggerated.
Second, too-rapid growth in non-agricultural
labor demand may have stimulated a faster rate
of non-agricultural wage growth than long-term
factor market trends would warrant. This in turn
provided incentives for labor migration, and thus
for the contraction of planted area as well as
agricultural mechanization.
The same forces that drive agricultural decline
also cause the structure of agricultural
production to change. Labor-intensive annual
crops are replaced by perennials, mechanization
accelerates, and at the cultivated margin, the
least economically productive land (where
productivity includes such factors as market
access) may be fallowed or even revert to forest.
Thus outmigration may have significant
environmental benefits as pressures on forests
and on easily-eroded sloping upland soils
diminish. For communities that remain in
upland and highland areas, diminished
competition for land may encourage longer-term
approaches to forest and soil management
(especially if economic change is accompanied
by institutional and legal developments that
promote more secure property rights).
Even so, the non-agricultural boom raises
potential long-term problems only if it has longterm effects. We contend that the boom may
have stimulated a pattern of agricultural and
labor market responses which, for a variety of
reasons, will be costly to correct in the long run.
The investment bubble may thus have had some
unexpected long-term costs for the Thai rural
economy, far beyond the bank collapses that
captured most of the headlines. By promoting
an unjustified acceleration of agricultural decline
and outmigration, Thai economic growth during
the bubble period was “too fast.” Corrective
policies to inhibit it, and thus to prevent such a
rapid agricultural decline, were merited.
Our research with time-series data on prices,
wages, agricultural production, and land use in
Thailand quantifies the intersectoral forces that
lie behind the decline of Thai agriculture during
the boom-bubble period. Our estimates reveal
the prominence of job-creating non-agricultural
investment in particular as a force causing outmigration from agricultural occupations. With
massive labor outflow, a considerable amount of
agricultural land, especially in marginal upland
and forest areas, was idled.
Both labor migration and mechanization entail
sunk costs, and the presence of such rigidities
suggests that the investment boom may have
induced changes in labor markets and
agricultural technology that will be costly to
reverse in the very different economic climate of
post-bubble Thailand. The presence of sunk
costs and other irreversibilities provides
justification for protection to sectors that are
negatively affected by a temporary boom. A
variant of this argument applies to rural-urban
migration, where reversal of the labor flow
entails welfare-reducing transactions costs for
workers who have invested time and money in
gaining a foothold in the urban labor market, and
Agriculture's sudden decline may be a source of
policy concern if it occurred at a rate greater
than warranted by long-term trends in factor
endowment and productivity growth rates. The
problem arises because, by contrast with the
standard model of growth and structural change
in which the decline of a sector is driven by a
permanent change in capital or resource
endowments, in Thailand the primary fuel for
the boom was the accumulation of
internationally mobile capital. The resources
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Growth, crisis and resilience: 81910373
in doing so may furthermore have relinquished
certain traditional relationships in rural society.
economic crash (accompanied as it was by a
severe drought) may have left many rural
households
highly
vulnerable
to
impoverishment. This question, of the resilience
of rural households with differing degrees of
engagement with the market economy and with
traditional social networks of in the face of a
downturn, is the subject of our continuing
research.
The rapid transfer of labor out of agriculture
during the boom indicates high intersectoral
labor mobility in Thailand. The recession
revealed, however, that this mobility is much
greater in one direction—away from the farm—
than the other. The asymmetry has two possible
causes. First, even with high and rising open
unemployment, the expected wage in nonagriculture may still exceed the reservation price
of migrant labor. Second, in contrast with
earlier seasonal migration patterns, there is a
high degree of irreversibility in recent ruralurban migration. Having invested in a move,
migrants are unlikely to give up their new
situation readily, especially if they believe that a
recovery is imminent and therefore that they
should remain “in line” in the urban job market.
This labor market rigidity is one of the reasons
for the sudden increase in open unemployment
among Thai workers in 1997-98.
Rapid
agricultural mechanization and the switch to
perennial crops further exacerbated the
irreversibility problem by reducing the
flexibility of agriculture to respond to a softer
labor market by switching to more laborintensive crops and techniques.
In an open economy, the decline of agriculture
and of the agricultural labor force are inevitable
features of economic growth, and are not in
themselves cause for concern. However, when
growth rates are unsustainable and the
agricultural response involves significant
adjustment costs or irreversible effects, then
there is a chance that the inevitable downturn
will have serious effects for rural households
and unskilled labor, the most vulnerable groups
in any developing economy. Thailand, it seems,
has been lucky in that the recession was shortlived. In other countries or under other
conditions, an extended recession might do
long-term harm to the welfare of the poor by
causing them to give up on various forms of
capital investment such as schooling and
reforestation. Impacts may be more severe in
cases where rapid commercialization has
hastened the attenuation of reciprocity-based
traditional modes of social insurance without a
corresponding development of formal safety
nets.
Lessons from Thailand's experience
should be studied by its neighbors with a view to
ensuring that development policy maintains its
focus on long-term welfare growth and poverty
alleviation. As developing Southeast Asia
industrializes, the economic health and sustained
growth of agriculture, and the robustness of rural
social institutions remain major policy concerns.
A less tangible problem associated with the
boom and bubble economy concerns economic
and social changes within rural areas. The pace
of economic change may have prompted many
households to reduce their commitment to
traditional reciprocity-based clan and village
networks in favor of market-based links to
banks, traders and non-agricultural employers.
That the latter ties do not involve reciprocal
obligations may have meant little as long as
growth continued. However, in the absence of
any formal social "safety net" such as
unemployment benefits or crop insurance, the
Ian Coxhead is an associate professor of Agricultural and Applied Economics at the University of
Wisconsin-Madison. This research was funded by a grant from the Ford Foundation and benefited from
resources provided by the Thailand Development Research Institute Foundation. For more information
visit www.aae.wisc.edu/coxhead or send email to [email protected].
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