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Economic Growth in Thailand: A Macroeconomic perspective Barry Bosworth 26 October 2006 Growth Performance The Thai economy has achieved high growth over the past quarter century The manufacturing sector has expanded even more rapidly 6 percent per annum, 1977-2005 8 percent per annum, 1977-96 (pre-crisis) 8 percent per annum, 1977-2005 10 percent per annum, pre-crisis 1997-98 crisis had a large and long-lasting impact on output and investment Overall growth slowed to 5 percent GDP and Investment, 1970-2005 5,000 billions of Bhat 4,000 GDP 3,000 2,000 1,000 Investment 0 1970 1975 1980 1985 1990 year 1995 2000 2005 Overview & Objectives Analysis of Thailand’s growth: 1977-2005 Growth Accounting framework examines: Roles of capital accumulation & TFP Both aggregate & sectoral analyses Extensions on capital accumulation Agriculture, Industry (Manufacturing), and Services Role of Factor Reallocations Returns to schooling Saving & investment Additional detail on services Growth Accounting Develop indexes of growth in output and factor inputs. Adjust for quality change in labor Use adjusted factor shares to measure contribution of factor inputs. Increase in years of schooling Need to account for self-employed Obtain estimate of TFP as a residual Basic Growth Identity Output Growth as a function of growth in inputs and TFP d ln Q sk d ln( K ) sl d ln( L) ln TFP si is factor income share Assumes competitive markets where price is equal to marginal product Basic Data Largely drawn from national accounts for output and capital stock Employment is from the Labor Force Survey Survey provides information on educational attainment and wage rate by industry. Measure the return to schooling Prior Growth Accounting Studies Major studies NESDB - Macroeconomic Division TDRI –Tinakorn and Sussankarn (1996,1998) APO – Achara, Bangorn, and Kamjara (2004) Fiscal Policy Research Institute BOT – Katharit (2001) Generally find negative or small positive rates of growth in TFP Large capital contribution Different estimates of improvement in labor quality Aggregate Economy Growth dominated by increases in employment and the capital stock. TFP growth is a small positive contribution The crisis of 1997-98 appears to have imposed a permanent cost on the economy Output did not return to prior path Recession largely absorbed by declines in employment and capital accumulation. Total Economy 6 Total Index 5 Labor quality 4 Employment 3 Capital 2 TFP 1 1975 1980 1985 1990 Year 1995 2000 2005 Agriculture Large reserve of underemployed labor Productivity level far below nonagricultural sectors Low output growth Employment declines in recent years Large increase in capital contribution. Modest growth in TFP Agriculture 2.5 Total Employment 2 Index Labor quality Capital 1.5 TFP 1 1975 1980 1985 1990 Year 1995 2000 2005 Manufacturing Growth largely due to increased labor and capital Gains in TFP are quite modest Contract manufacturing with little innovation. Capital goods are imported (embodied technology) Sharp deceleration in capital accumulation after 1997. Manufacturing 10 Total 9 8 Index 7 6 Labor quality Employment 5 4 3 Capital 2 TFP 1 1975 1980 1985 1990 Year 1995 2000 2005 Services Slower output growth Dominated by increased labor input Largest gains in educational attainment. High factor share weight assigned to labor Most capital intensive industry (housing?) as measured by K/Y; but capital contributed modestly to growth. TFP change is negative – particularly after 1997. Financial sector disruptions, measurement issues Need for more disaggregation of services Services 5 Total 4 Labor quality Index 3 Employment 2 Capital 1 1975 1980 1985 1990 0 Year 1995 2000 TFP 2005 Component Service Industries Very diverse patterns of growth Difficult measurement problems Reasonable measures for transportation, trade, and banking. Prior to 1997, strong gains in labor productivity and decent gains in TFP Finance sector suffered extraordinary losses after 1996 TFP growth highly negative Trade negatively affected Contribution to Output Growth, 1980-1996 Transportation Trade Finance Output 9.2 7.2 14.1 Contribution of: Employment Education Capital TFP 3.1 0.4 2.6 2.7 0.4 3.8 4.0 0.3 2.5 2.8 0.2 6.8 Contribution to Output Growth, 1996-2005 Transportation Trade Finance Output 4.2 -0.1 -4.7 Contribution of: Employment Education 0.9 0.9 1.5 0.4 0.6 0.3 0.9 1.2 0.4 -2.3 1.1 -6.6 Capital TFP Reallocation Effects Weighted sum of sector TFP changes accounts for less than half of change in aggregate. Total economy Weighted sum of sectors Resource reallocation 1977-96 1.6% 0.5% 1.1% 1999-2005 2.1% 1.0% 1.1% Gains from moving workers out of lowproductivity agriculture into industry and services. Regional Comparisons Sources of growth in Thailand are very typical of East Asian economies. Large contribution from capital accumulation Ranks in middle for TFP Similar to Alwyn Young results for other East Asian countries. Sources of Growth in Asian Economies, 1975-2003 average annual percentage change Contribution of: Output Region/Period Output per Physical Worker Capital Education TFP Thailand 6.3 4.2 1.9 0.5 1.7 China 8.7 7.0 2.6 0.4 3.9 Indonesia 5.6 2.9 2.2 0.5 0.1 South Korea 7.0 4.7 2.9 0.7 1.0 Malaysia 6.5 3.2 2.0 0.5 0.7 Philippines 3.2 0.4 0.7 0.4 -0.7 Singapore 6.9 3.8 2.0 0.5 1.3 Taiwan 7.1 4.9 2.5 0.4 2.0 India 5.2 3.2 1.3 0.4 1.5 Conclusion Bulk of growth is due to increased use of capital and labor Reliance on existing technologies implies limited gains in TFP within industry Large gains from resource reallocations out of agriculture. Financial crisis led to sharp reductions in the rate of investment and large output disruptions in some services Future growth potential of 6-7 percent Services could provide a broader base for future growth