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Sustainable Growth, Regional Balance, Project Funding For Infrastructure Development & in Bangkok Social Development for Poverty Comments of Session I: Growth, Regional Balance and Poverty Reduction Kanit Sangsubhan, Ph.D. Fiscal Policy Research Institute Oct 26, 2006 Bangkok, THAILAND Fiscal Policy Research Institute Economic Growth in Thailand, Barry Bosworth (2006) 75% Gross INV 25% Net INV Quantity LFS (2.6%) Quality: Education attainment and work experience (0.6%) Table 9: Source of Growth (1977-2004) d ln Q sk d ln( K ) sl d ln( L) ln TFP Factor Income share (%) L adjusted K Land Ind Sers 48 62 52 38 0 0 25-30% Ag 40-45 55 < 10 TDRI 22% 51-52% TDRI 61% 16-21% TDRI 16% TDRI (1980-95) Fiscal Policy Research Institute Economic Growth in Thailand, Barry Bosworth (2006) Quantity LFS (2.6%) Quality: Education attainment and work experience (0.6%) 75% Gross INV 25% Net INV Table 9: Source of Growth (1977-2004) d ln Q sk d ln( K ) sl d ln( L) ln TFP Factor Income share (%) L adjusted K Land Ind Sers 48 62 52 38 0 0 25-30% Ag 40-45 55 < 10 4-7% 51-52% Each year of schooling +7% productivity Return on schooling average 9% late 1970-80 10% early 1990 9% by 2000 University graduate earn 140% more than elementary Wage differential Men : Woman Declined --10-20% different 16-21% TDRI 10% Contribution of Quality of labor % Bosworth L-quality 4-7 TDRI 19.8 FPRI 9.1 Fiscal Policy Research Institute Observations • Long-term TFP 1.6 % a year of around 6% GDP growth • Period after the crisis (1999-04) gain from cyclical component and low investment fall into TFP (16% contribution share) • After the crisis (1999-2004) AG: growth contributed mainly by capital input (K:L:TFP =14:68:17) IND: K:L:TFP =34:59:5 SER: contributed mainly by labor input K:L:TFP =63:46:-9 (due to financial sector) • Quality of labor contribution share of AG and IND around 5-6 % -- 10% for SER Fiscal Policy Research Institute Main Conclusions 1. 2. 3. 4. 5. 6. Thailand’s growth contributed mainly for quantity of K and L inputs Labor quality contribution is low TFP is low Large employed workers in the AG Low productivity in AG (1/5 of non-AG) Gain of aggregate TFP come from relocation of resource among sectors (11%) Because of the crisis, a large portion of productivity growth loss permanently. Growth resumed new path, lower than the old path (banking, wholesale, retail trade) Thailand no longer has high rate of capital accumulation Problem in financial sector limits the potential output growth Large reserves of labor in AG/facing competition in the low-skilled manufacturing Fiscal Policy Research Institute Suggestion and Forecast • Suggestion: upgrading skill level of work force • Forecast: potential growth 5.5-6.8% 2 % growth of labor force 0.8-1.2% growth contribution from education and skill improvement 29.5-33.2 % of gross investment (22% in 2004) 1-2 % growth of TFP Fiscal Policy Research Institute 1997 Crisis Under-utilization of Capital Potential Cap U Utilization Gap Actual Cap U Source: FPRI Fiscal Policy Research Institute 1997 Crisis Under-utilization of Capital Potential Cap U Actual Cap U Demand Management Supply Management Source: FPRI Fiscal Policy Research Institute Reform & Recovery, K. Martin, A Kopaiboon, K. Bhaopichr(2006) • Give weight to Macro stability / Reform and Regional Integration • View from demand side Strong private consumption Consumption stimulus and residential investment Strong exports Weak investment FDI stronger after the crisis (M&A + restructure into export base) • How to revive private investment Continue opening Lowering costs for production Better integrate FDI in domestic economy Support Knowledge and innovation Fiscal Policy Research Institute Reform & Recovery, K. Martin, A Kopaiboon, K. Bhaopichr(2006) • Past success of exports Law and regulation reform to encourage private investment Trade policy reform (tariff reduction due to AFTA and others) Trade facilitation External factors (world GDP, regional integration, and China factor) • Regional integration in trade and investment EA-FDI to Thailand 25% to 65% (1998-00 and 2001-03) Regional production network – automobiles and electronics Thailand’s trade (export+import) to EA-9 shared 48 % of total trade • Can strong export growth continue? Better trade facilitation and investment climate Integrate FDI through Value-addition – Skill, innovation and knowledge Fiscal Policy Research Institute Phase I.: Bubble Fiscal Policy and Development Phases Phase II.: Deficit to stimulate Phase III: Demand Balance 1,200,000 1,000,000 Reve nue Expen diture Supply Management 800,000 •Poverty • Quality HR/Social 600,000 Demand Management • Competitiveness • Govt. Reform Fiscal Deficit 400,000 200,000 Fiscal Balance Fiscal Finance 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 p -200,000 Fiscal Policy Research Institute Key Policies in Demand Management Phase • Refuse to increase tax (VAT to 10%) for fiscal balance but reduce some specific tax rate to stimulate demand • Restoring fiscal discipline – Fiscal Sustainability Plan • Fiscal Finance Policy – due to excess liquidity in the financial market and dysfunction of the banking sector Choices: External borrowing vs. Excess liquidity Choices: consumption spending vs. loan for investment Village fund /People Bank/ SMEs Loan/SML Loan • Stimulating the real estate sector (not allow the market price sink to the bottom) TAMC House for civil services, Reduction of transfer fee of real estate • Expanding export bases via FTA Before Crisis Excessive K- flows C/A Deficits After Crisis less C/A K-flows Surplus optimum C/A K-flows balance Invest in bubble business– instability Economic Crisis Less investment / Excess capacity Unsustainable Uncompetitive Way forward Value Creation Selective activities Economic Capital Innovation/KM Infrastructure Training and Education Social Capital Sufficiency and Sustainability Full employment No- underemployment HR with quality NR sustain Economy sustain • Fiscal Balance • C/A balance •GDP 5 % • Inflation 3 %