Transcript Reforms to promote competitiveness, private investment & exports.

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 stm e 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