AEC IMPLICATION: EFFECT TOWARDS THAILAND’S RATE

Authors: Chatchawal Kittisowan Tutor: Lars Behrenz Bachelor of Examiner: Dominique Anxo Subject: Bachelor's Thesis Nuttanee Piboonthanakiat Level and semester: Spring 2011 Bachelor of Economics

Salisa Orutsahakij Bachelor of Economics

ABSTRACT

Since ten members of ASEAN are moving towards ASEAN Economic Community (AEC) in 2015 which ten member countries are integrating competitively into regional and global markets as well as continuing to build a people-oriented AEC. From this integration the unemployment rate will be affected through the mechanism of the export and GDP. With economics and models used, this paper will discuss and prove that the implication of AEC will lead to the decrease in unemployment rate.

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CONTENT 1. INTRODUCTION 3 2. OVERVIEW 4 2.1 Economic overview 4 2.2 Labor overview 17 2.3 AEC overview 22 3. LITERATURE REVIEW 25 4. CONCEPTUAL FRAMEWORK 27 5. THEORETICAL FRAMEWORK 28 5.1 Okun’s Law 28 5.2 GDP components 29 6. UNEMPLOYMENT RATE ANALYSIS ,IMPLICATION OF AEC 30 6.1 AEC impacts Exports 30 6.2 Exports and GDP 33 6.3 Unemployment rate and GDP movement 35 7. CONCLUSION 37 8. LIMITATIONS 39 9. REFERENCE 40

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1 INTRODUCTION

In 2008, ten member countries of ASEAN has agreed to sign ASEAN Economic Community or AEC in 2015 to integrate competitively into regional and global markets with their , services and investment, building up a strong economic foundation as the region changes as well as collectively continuing to build a people-orientated AEC. ASEAN figure had improved from 400 billion US dollars in 1993 to 1,710 billion US dollars in 2008; more than 80% is the international trade with the rest of the world. As well as, ASEAN trade with intra-ASEAN countries are rapidly rising; it increased from 82,444 in 1993 to 458,114 in 2008, about 5 times in the past 15 years. This extent to even a wider range of FDI from other parts of the world; the FDI was peaked in 2007 about 70,000 million US dollars, however, since the effected of subprime crisis spread all over the world, FDI to ASEAN in 2008 was dropped to around 62,000 million US dollars.

As the impact from AEC integration has improved the exports drastically, which is already the most important sector contributed to GDP, and then we linked it together with unemployment rate. The unemployment rate is also the main and measurement of population’s welfare. It has been one of the major issues in most of the countries including Thailand. Even though from the data, we have really low unemployment rate, however the informal sector ranked very high. Thus, we would like to discuss this potential factor of how it can affect on the unemployment rate, whether if the employment rate in Thailand will increase or not. Through the relationship of net export, GDP and unemployment rate, which we will be using econometrics model, GDP formulation, and Okun’s law theory in the analysis further on.

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2 OVERVIEW

2.1 Economic overview

The previous economic and financial crisis in 2008 has been largely affected on the ten member countries of the Association of Southeast Asian Nations (ASEAN), however, the region is rebounding better than many has predicted. According to year-on-year quarterly GDP growth, it indicates that in many countries in the region is currently in pre- crisis level with 5.4% grew of GDP in 2010, compare to a mere 1.4% growth in 2009

As well as in Thailand, the economy has rebounded to 12 % growth in GDP of the first quarter (Q1) in 2010, which accelerated from 5.9% of the previous quarter; faster than expected (3.5 – 4.5%) due to the domestic consumption and investment as well as the recovered in exports. However, in the second quarter (Q2) of 2010, the economy slowed down from Q1 partly due to some risks such as the EU over-budget crisis, which significantly affect the recovery in global economy and also our political unrest in Bangkok, which may affect the tourist industry private consumption, investments and also the investor’s confidences.

Figure 1: Thailand GDP Growth Forecast Source: The Bank of Thailand (July 2010)

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Moreover, as we can see from the figure, Bank of Thailand (BOT) has forecasted the GDP growth of Thailand in 2011 to be around 3 – 5% for the whole year including risk factors that going forward including the recovery of the global economy, domestic political conditions. For , core and headline inflation in 2010 will be lower than projected in April 2010, mainly due to the extension of various cost-of-living reduction measures to the end of the year and with firm’s cooperation in maintaining at prevailing levels until the end of 2010 Q3. Moreover, in 2011, the inflation forecast is revised up slightly in line with the robust economic recovery, higher labor costs due to a tightening of labor market, as well as the anticipated termination of various cost-of-living reduction measures.

Plus, there are some positive signs that supported the rapid growth in GDP in Q1 2010;

1) Export, the export has expanded from 12.2 percent in the Q4 2009 to 32.0 percent. The main exported products are cars, electronic parts and devices, computers and parts etc. most of them expanded more than 50 percent from last year. 2) Domestic consumption has expanded 4 percent due to the increased in purchasing power from the increasing in employment in most sectors. 3) Private investment has increased 15.8 percent because of the real estate investors’ confidences increased from 57.8 percent to 59 percent due to the policy that reduce the transfer cost of construction unit which aims to stimulate economy. 4) Industrial sector increased by 22.8 percent, especially for electronic-related production industry and also the domestic-consumption production such as iron, rubber and rubber-based products. Moreover, manufacturing production index increased from 61.0 percent in 2009 to 68.4 percent. 5) Tourist sector, the number of tourists has significantly increased 28.4 percent or about 4.7 million compared to the same period in the last year, most of them came from China, Taiwan, South Korea and Japan, this also increased the number of hotel booking from 53.4 to 60.7 percent, year over year basis.

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Figure 2: Quarterly GDP Growth, year-on-year (%) Source: International Labor Organization

Additionally, compare to the ASEAN member countries, Thailand and other countries moves in the same trends. As illustrated in figure 2, economic growth in ASEAN rebounded strongly beginning in the Q2 of 2009, supported by the significant fiscal stimulus policies undertaken in response. Singapore's economy grew by an estimated 13.1% in the Q1 of 2010 compared to the same period a year earlier, prompting the Bank of Thailand to significantly raise its growth forecast for the rest of 2011 up to 7.3%. As well as Malaysia's economy in 2010, it may have also expanded at its fastest rate since 1996. ASEAN as a region also is expected to rebound strongly in 2011, rising to 5.6%, compared to a mere 1.4% growth in 2009 (ILO, 2010). ASEAN Member Countries that experienced the greatest contractions in GDP in the region in 2009 (Cambodia, Malaysia, Singapore and Thailand) are heavily export dependent and with the exception of Cambodia, the share of domestic consumption in GDP is relatively low. Countries in the region that have fared comparatively better and registered positive output growth in 2009 have a relatively high share of domestic demand in GDP and with the exception of Viet Nam, are less reliant on exports. Gross capital formation is also relatively high in these countries compared to the other ASEAN Member Countries. Such impacts raise

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important implications in terms of reducing excessive dependence on exports to drive growth in some countries in the region. (ILO 2010) Furthermore, as the recovery in the main trading partner economies such as Japan, the European Union and the United States is expected to be weak, ASEAN's export engine of growth has to come from trade within the region. Recent developments in the European Union concerning fiscal situations and their longer-term consequences further illustrate this challenge. While ASEAN's share of total exports to the mentioned developed economies has been declining over the past decades, they still accounted for about 30% of total exports in 2009. In the Philippines and Viet Nam, exports to the more developed economies represented nearly 50 percent of total exports. In Cambodia exports to the European Union and the United States represent around 77% of total exports. The expansion of intra-regional trade driven by ASEAN's commitment to establish the ASEAN Community by 2015 provides an important opportunity for Member Countries to benefit from regional integration and strengthen flexibility against future external shocks (ILO, 2010).

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Figure 3: Thailand Gross Domestic Products (GDP) Year 2002-2010 Source: The Bank of Thailand

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From the figure 3, Thailand Gross Domestic Product has been growing substantially since 2002. From 2002 until 2010, Thailand’s average Gross Domestic Product was 257.8 billion dollars reaching a high historical of 336.8 billion dollars in 2010 and a low of 181.7 billion dollars in 2002. GDP has increased since 2002, primarily because of improved exportation and increasing in domestic spending. However, in 2008 and 2009, overall Thai economic growth has fallen sharply due to a global downturn and political crisis issues, eroded investor and . One reason of low GDP is due to the slowdown of counterpart countries that Thailand exports to. High GDP growth implies high level of consumer confidence, which means the likeliness than consumer will spend However, it appears that Thailand’s economy is moving in the right direction with expecting that the GDP in 2015 will be at 427.802 billion dollars.

Figure 4: Private consumption expenditure at 1988 prices.

Source: Office of the National Economic and Social Development Board, Office of the Prime Minister.

As shown from figure 4, the private consumption has been increasing since 2002 to 2008. In 2008, the private consumption declined to 75,089 million of US dollars due to political instability. Private consumption and investment were negatively affected as political instability dampened consumers' and investors' confidences (Bangkok Bank, 2010). The Bank

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of Thailand launched the policies to help stimulating and restoring the economy that most consumers and investors lacked of confidence in economic situation. Such policy by the Bank of Thailand is to adjust the policy rate downward to counter Baht appreciation and to stimulate domestic consumption and investment (The Bank of Thailand, 2009). Moreover, the government played the role in absorbing excess liquidity in the system to channel capital investment that occurred after the Bank of Thailand adjusted the policy rate downward.

Figure 5: Thailand Investment (% of GDP), year 2002-2010 Source: The Bank of Thailand

Figure 5 shows total investment as a percentage of GDP during the period 2002-2010. Its share of GDP remained at 23.801 percent in 2002 and increased gradually since then until reaching 31.442 percent of GDP in 2006. After 2006, it declined to 28.297 and 26.434 percent in 2006 and 2007 consecutively. In 2009, it has the lowest percent of GDP at 21.241 percent. One of the main reasons is due to the political instability within the country that make the investors felt unconfident to invest in Thailand. Thus, it makes the overall economic to slowdown in 2009.

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Figure 6: Government appending at 1988 prices Source: Office of the National Economic and Social Development Board, Office of the Prime Minister.

From the Figure 6, it illustrates the government spending at 1988 prices from 2002- 2010. The trend of the government spending has been increasing gradually since 2002 at 9,353.30 millions of US Dollars. The world financial problem significantly affected the private and business sector on the ability to purchase and invest in 2008. In consequence, Thai government has launched the fiscal stimulus packages to help relieving the economy. This leads to the fiscal budget has turned from being surplus to being deficit. The government spending in Thailand was about 13,310.47 millions of US Dollars in 2008.

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Figure 4: Thailand Exports year 2002-2010 Source: Customs Department (Complied by The Bank of Thailand)

The economy of Thailand is an emerging country, which is heavily export-dependent with exports for more than two thirds of gross domestic product (GDP). As shown from figure 4, the exports value of Thailand had been gradually increased since 2002 until 2008. After the in economy, it causes the declining in value of exports to 150,743 million dollars in 2009. The considerably fall in export of were resulted from the severe contraction of Thailand’s trading partners’ economies as well as shrinking tourism revenues stemming from political problems and risk associated with the epidemic of Influenza A/H1N1 (MOF, 2010). However, due to economic recovery by the government policies, the export values became strong again in 2010, accounted for 193,662 millions of dollars.

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Figure 5: Exports Classified by Product Group (UD$) 2002-2010, (Unit: Millions of US Dollars)

Source: Custom Department (Complied by The Bank of Thailand)

By comparing the data of Thai exports classified by product group from 2002 to 2010, in figure 5, it shows that the economy of Thailand is heavily exporting dependent. It exports mainly agriculture and manufacture products. The export products in each industry have increased in number of value since 2002 to 2010, except in 2009, that fell in number of export

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values from 2008, especially in agriculture, fishery, mining and manufacturing sectors. In 2010, manufacturing products experienced the highest number of Thai exports value of 173,161.99 million dollars while; the second highest export product is agriculture products which were 17,112.59 million dollars.

Figure 6: Thailand Imports year 2002-2010 (Unit: Millions of US Dollars) Source: Customs Department (Complied by The Bank of Thailand)

As shown from the data in figure 6, import values have increased gradually since 2002 until reaching the dramatically high in 2008 of 175,603 million dollars, but as far as imports are concerned, they declined to 131,355 million dollars in 2009 due to economic downturn mainly from political unrest issues within the country. However, in 2010, they were worth 179,631 million dollars increasing by 48,276 million dollars from 2009. This is due to the effective government policies provided.

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Figure 7.1

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Figure 7.2

Figure 7.1, 7.2: Imports Classified by Economic Classification (US$) 2002-2010, (Unit: Millions of US Dollars)

Source: Customs Department (Complied by The Bank of Thailand)

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From figure 7.1, 7.2, it shows the imports classified by economic classification from 2002- 2010. Thailand’s principal imports are electronic integrated circuits, crude oil and fuels, vehicles, machinery and parts, iron and steel. The values of import products have been increasing since 2002. In 2010, raw materials and intermediate goods were the highest number of Thailand imports accounted for 73,062.78 million dollars, while, capital goods were the lowest accounted for 45,384.13 million dollars.

Figure 8: Trade Balance (Value of Exports – Value of Imports) year 2002-2010 Source: The Bank of Thailand

Figure 8 shows the trade balance (Value of Exports – Value of Imports) year 2002- 2010. Thailand faces trade surplus when value of exports is more than value of imports in a given year, but facing trade deficit when value of imports more than value of exports in a given year. Thailand had a highest trade surplus equivalent to 19,388 million dollars in 2009, while facing the highest trade deficit of 8,253 million dollars in 2005. After 2005, the rapid increase in the automobile exports manufactured by Japanese firms, helped Thailand significantly

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improved in trade balance of 994 million dollars and 12,782 million dollars in 2006 and 2007 consecutively.

2.2 Labor market overview

Chart 1: The number of population by labor force Source: The labor force survey, NSO, Q1 2010.

According to the chart, it shows major findings of Labor Force Survey in the first quarter of 2010, which conducted by National Statistical Office, or called NSO, showed that for people aged 15 years and over of 53.37 million persons, 38.27 million were in the labor force, accounted for 71.70 percent (37.52 million were employed, 0.46 million were unemployed and 0.29 million were seasonally inactive labor force) and 15.1 million were not in the labor force. Note: Total population in Thailand is 67.39 million.

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Figure 9: Unemployment persons and rates by sex year 2001-2010

Source: National Statistical Office

Note:

- % Male unemployed rate is total unemployed male divided by total male labor force multiply by 100

- % Female unemployed rate is total unemployed female divided by total female labor force multiply by 100

- Total Unemployment rate is total unemployed persons divided by total labor force multiply by 100

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Figure 10: Unemployment rate by sex year 2001-2010 Source: National Statistical Office

As shown from figure 9 and 10, from 2001 to 2010, Thailand faced low unemployment rate averaged of 1.88 percent reaching an historical high of 3.32 percent in 2001 and a record low of 1.23 percent in 2010. In 2009, the total unemployment rate was slightly higher than 2008 for 0.11 percent from 1.38 percent to 1.49 percent. By taking year 2002 to 2010 into consideration, year 2009 was the only year that the unemployment rate was higher than the previous year, this is due to the economic crisis in Thailand as mentioned in economic overview that caused the business and consumer confidence within the country to slow down. Thus, it leads to low investment, implying high unemployment rate. Note: Unemployment rate is total unemployed persons divided by total labor force multiply 100 (as percentage). By taking sex into consideration, from 2001 to 2010, male unemployment rate was higher than female unemployment rate due to higher number of male unemployment. Male unemployment rate is calculated by unemployed male divided by male labor force multiply 100 (as percentage). This is also applied to female unemployment rate. In 2010, male unemployment rate was 1.25 percent, while female unemployment rate was 1.19 percent.

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From figure 11, it shows the number of unemployed persons by industry year 2002- 2010. Non-agriculture industry, especially in manufacturing industry, has the highest number of unemployment persons on average from 2002 to 2010. Comparing from 2008 to 2010, unemployment persons in manufacturing industry were 95.28, 93.41 and 86.63 thousand persons in 2008, 2009 and 2010 consecutively. While in agriculture sector, accounted in the large share of GDP, the unemployment persons were 115.88, 153.72 and 109.13 thousand persons in 2008, 2009 and 2010 consecutively.

Figure 8: Unemployment rate, selected ASEAN countries recent quarters (%) Source: ILO Department of , national statistical offices.

Let’s look at the ASEAN region. Asia, as the largest share of job created, is affected by the financial crisis in 2008. It faced slow and contracted economy that has significantly effect on unemployment rates in many parts of ASEAN region. The trend of unemployment rates in many parts of ASEAN region was worsening in 2009 except in Indonesia. Singapore faced the most impact on unemployment rates. The non-seasonally adjusted unemployment rate was more than doubled between the third quarter of 2008 and the second quarter of 2009. In the first half of 2009, unemployment rate increased to 3.8 percent in Malaysia compared to the same period the previous year. However, in low and middle-income ASEAN member countries, a significant impact of the crisis on labor markets is a rise in informal employment rather than in unemployment rates.

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2.3 AEC overview The AEC is the realization of the end goal of economic integration as espouse in the Vision 2020, which is based on a convergence of of ASEAN Member Countries to deepen and broaden economic integration through existing and new initiatives with clear timelines. In establishing the AEC, ASEAN shall act in accordance to the principles of an open, outward-looking, inclusive, and market-driven economy consistent with multilateral rules as well as adherence to rules-based systems for effective compliance and implementation of economic commitments. (ASEAN Secretariat, 2008) The main objective is to change ASEAN countries into a single market and production base. The goal is to transform ASEAN into a single market and production base. There is a commitment to use new mechanisms and measures ―to strengthen the implementation of its existing economic initiatives; accelerate regional integration in the priority sectors; facilitate the movement of business persons, skilled labor and talents; and strength the institutional mechanisms of ASEAN. At the same time, the AEC will address the development divide by accelerating the integration of Cambodia, Laos PDR, Myanmar and Vietnam (CLMV) with the older member countries. With external trade as the main consideration, the AEC‘s goals in the roadmap are: (a) a single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy. Elimination of non-tariff barriers and liberalization of tariffs are the main goals by 2015. Recently, a section of the statement by economic ministries in Bangkok on August 13 & 14, 2009, shows some specific plans to achieve the goals of the AEC:  “Enhance transparency by abiding to the Protocol on Notification Procedure and setting up an effective Surveillance Mechanism;  Abide by the commitment of a standstill and roll-back on NTBs (non-tariff barrier);  Remove all NTBs by 2010 for ASEAN-5 by 2012 for the Philippines, and by 2015 with flexibilities to 2018 for the CLMV, in accordance with the agreed Work Program on Non- Tariff Barriers (NTBs) elimination;  Enhance transparency of Non-Tariff Measures (NTMs); and

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 Work towards where possible having regional rules and regulations consistent with International best practices.”

Chart 2: Roadmap to ASEAN Economic Community Source: ASEAN Secretariat, 2010

According to the chart, in order to create a single market and production base which is stable, prosperous, highly competitive and economically integrated with effective facilitation for trade and investment in which there is free flow of goods, services and investment; facilitated movement of business persons, professionals, talents and labor, and free flow of capital, and now it’s 73.6% of all targeted achieved (ASEAN Secretariat, 2008).

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Figure 9: Share of Global GDP (projected) between 1990 and 2014 Source: IMF World Economic Outlook, 2010

Nevertheless, according to the figure that, the future of ASEAN+6 which includes China, Japan, the Republic of Korea, India, Australia, and New Zealand seems to be brighter, compared to those for USA and EU, as we can see that in 2014, the shared ASEAN+6’s GDP is around 28 percent of total GDP and those for USA and EU are gradually decreasing. Therefore, ASEAN+6 region will become the largest economic region in the world.

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3 LITERATURE REVIEW From the past experience with ASEAN Free Trade Agreement (AFTA), it was concluded by Park I. (2000) that it would improve intra-ASEAN trade and accelerates the ASEAN’s economic growth of each member countries. Especially, economies with higher pre- FTA tariff barriers and larger intra-regional trade volume including Thailand and Philippines, which share larger gains from free trade. This conclusion resemble with paper of Ismail et al. (2007), which found that the GDP, population, relative endowment, distance and common language are the main factors that determines bilateral trading in ASEAN. The ASEAN dummies were used to measure the intra ASEAN trade to proven that there was trade creation among the 5 ASEAN members (Singapore, Malaysia, Philippines, Indonesia and Thailand). Similarly to what has shown by Cabalu and Alfonso (2007) that the AFTA for ASEAN- 6 was trade creating as it was able to stimulate the trading environment and strengthen the economic relations between economies of the member countries. There was also no evidence of trade diversion since the major trade partners of ASEAN remained outside the agreed region. This paper, later, also discuss that the trade liberalization on a multilateral basis would generate even greater benefits to ASEAN economies. For the reviews from the experiences of the current AEC implication, CWK King et al. (2010) by using the dummies ASEAN, concludes that there is trade creation among the 5 ASEAN members enhanced subsequent to the AEC formation, proven from the measurement of ASEAN dummies of intra trade. In general, the formation of AEC will facilitate the region to participate competently in developing an international trading that is more approachable to its requirements. The paper then concludes that AEC plays important roles towards attracting trade among ASEAN member countries. Moreover, from Peter A. (2010), by comparing with those of European Union, AEC would yield similar benefits, which is surprising, as ASEAN economies are not as integrated today, and are less complementary than the EU at the initiative of European’s integration. However, by given the relatively early stage of development of some ASEAN members, existing barriers to trade are greater and their elimination could yield larger productivity gains relative to current trade. These benefits appear to outweigh the effect of lower initial

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integration. In the future as the ASEAN economies continue to develop and work more closely together, the benefits from AEC should grow higher. From the previously mentioned researches, it can be conclude that implementation of AEC will lead to trade creation, as it was proven with econometrics model of the current imposition of AEC as well as the past data of AFTA experiences. This information will be use in the further analysis of this paper.

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4 CONCEPTUAL FRAMEWORKS

• Single market AEC and Implication production based

•previous Impact on literature and Export regression model

Impact on •GDP GDP components

Unemploy •Okun's Law •Regression ment effect model

From the figure, you can see that this paper is based on the implication of AEC effect to Thailand. By providing overview information of economic, labor and AEC, which is aimed to provide understanding about the targets of AEC. The paper will first discuss the effects from AEC towards export from the previous literature review, which has been proven. Then the will see how net export could impact the overall income through using GDP formulation model. The linkage between GDP to unemployment rate, then will be analyzed by using Okun’s law and proven their relationship through regression model.

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5 THEORETICAL FRAMEWORKS

5.1 Okun’s Law Generally, economic theory that can be used in explaining the relationship between growth and unemployment is Okun’s law. Okun’s law is an empirical observation on the relationship between unemployment rate and economic growth. In 1962, Arthur Okun observed that, U.S. unemployment was likely to drop by 1 percentage point for every 3 percentage point increase in GDP. In other words, the United States had an Okun coefficient of 3. He also stated further that, the measured unemployment usually less volatile than output because fluctuations in hours per worker and labor force participation hide some underemployment. There would also be other factors that might affect the coefficient, e.g. labor market regulation, labor union, etc. For instance, in Japan, unemployment rates tend to vary less for a given gross domestic product (GDP), due to the strong social job protection. Okun coefficients can change over time because the relationship of unemployment to output growth depends on laws, technology, preferences, social customs, and demographics.

Even though the model was invented in the 60s and the economy of U.S. has changed. However, it was proved again to still be a precise measurement in 1993 and 2005 by Martin Prachowny and Andrew Abel and Ben Bernanke.

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5.2 GDP Components GDP is referred to all final goods and services produced within a country given a period of time, which often use as indicator of a country’s standard of living. GDP can be determined mainly 3 ways, product or output approach, income approach, and expenditure approach. However, in this paper, we will be concerning the expenditure approach. In economy, people spend their on products which came from the production, thus, by measuring the total expenditure of money used to buy products is one way determine production. In expenditure approach GDP (Y) is a sum of consumption (C), investment (I), government spending (G) and net exports (X-M). Or Y = C + I + G + ( X – M )  Consumption (C) is normally the largest GDP component in the economy, consisting with household final consumption expenditure or private expenditure.  Investment (I) includes business investment in productions, for example, construction a new mine, purchase machinery and equipment for factory. However, buying financial products doesn’t conclude as investment, instead it is classed as , which is opposed to investment.  Government Spending (G) is the sum of government expenditures on final goods and services. For example, public servants’ salaries purchase of weapons for military, and any investment expenditure by a government. However, it doesn’t include any transfer payment such as, social securities or unemployment benefits.  Exports (X) represent gross exports. GDP also captures the amount of a country production, including goods and services produced for other nations’ consumption, thus exports are concerned.  Imports (M) represent gross imports. Imports are subtracted since imported gods will be including in the terms G, C or I and must be deducted to avoid counting foreign supply as domestic.

Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.)

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6 UNEMPLOYMENT RATE ANALYSIS, IMPLICATION FOR AEC

To outline this part, Economics methodology has been included in order to clarify the research questions. The use of ordinary least square (OLS) will be placed. This research will try to estimate an impact of Asean Economic Community (AEC) agreement on unemployment rate. Previous researches shown that AEC will have impacts on the total exports of Thailand. That would probably drive up the exports value. Then, we’ll see the relationship between the exports and Gross Domestic Product (GDP) by basic theory. Finally, it will be connected further to the unemployment rate change with respect to a change in GDP that could be explained by the Okun’s law. The data were collected quarterly since 2002 to 2010. Total observations are 36 observations.

6.1 AEC impacts on exports From previous researches, CWK King et al. (2010) has proven that AEC has created a trade among members of ASEAN. It played important role in an international trade aspect among countries. Because the formation of AEC will facilitate the regions to participate in developing an international trading that is more approachable to its requirements. Thus, in this part, we hypothesize that AEC agreement, once introduced, will create more trade between Thailand and other ASEAN members which should also increase a level of exports during the period. The method of ordinary least squared (OLS) will be used further on This method used is intended to identify the variables that seem to have significant effect on exports movements. Some variables are noticed to have an impact on exports. Those are the world demand (world imports), real exchange, lagged term of export, and of course the Asean Economic Community which is treated to be dummy variable. Since exports amount is varying on the amount of world imports, real exchange rate, exports of the previous period which can smooth the movement of exports, and also AEC. Therefore, the equation is;

ln = + ln + ln + + ln

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Where; is amount of exports (million baht)

is the world demand or total world imports (million baht)

is real exchange rate AEC is Asean Economic Community (dummy variable)

7© has been used to estimate this model. The following tables are the result.

Table.1

Dependent Variable: LOGEX Method: Least Squares Date: 06/02/11 Time: 14:51 Sample (adjusted): 2002Q2 2010Q4 Included observations: 35 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 40.06236 64.79632 0.618281 0.5411 LOGWD 6.10E-06 3.34E-06 1.826272 0.0778 LOGRER -0.115743 1.583715 -0.073083 0.9422 AEC 22.91806 10.97508 2.088190 0.0454 LOGEX(-1) 0.690175 0.124721 5.533737 0.0000

R-squared 0.740287 Mean dependent var 133.8286 Adjusted R-squared 0.705659 S.D. dependent var 33.46257 S.E. of regression 18.15452 Akaike info criterion 8.767279 Sum squared resid 9887.593 Schwarz criterion 8.989472 Log likelihood -148.4274 Hannan-Quinn criter. 8.843980 F-statistic 21.37807 Durbin-Watson stat 1.913364 Prob(F-statistic) 0.000000

From table.1, At 5% significance level, all variables except C and LOGRER were significant. Meaning that, especially, AEC variable do positively affect the exports. Once AEC was implemented, the export will rise. Nevertheless, this model has quite high R-squared value

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which represents the reliability of the model which is 74%. We will dismiss some insignificant variables in the next table.

Table.2

Dependent Variable: LOGEX Method: Least Squares Date: 06/02/11 Time: 14:54 Sample (adjusted): 2002Q2 2010Q4 Included observations: 35 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 35.43053 13.26735 2.670505 0.0120 LOGWD 6.14E-06 3.23E-06 1.902871 0.0664 AEC 22.48847 9.118367 2.466283 0.0194 LOGEX(-1) 0.686675 0.113300 6.060667 0.0000

R-squared 0.740241 Mean dependent var 133.8286 Adjusted R-squared 0.715103 S.D. dependent var 33.46257 S.E. of regression 17.86089 Akaike info criterion 8.710314 Sum squared resid 9889.353 Schwarz criterion 8.888069 Log likelihood -148.4305 Hannan-Quinn criter. 8.771675 F-statistic 29.44715 Durbin-Watson stat 1.903240 Prob(F-statistic) 0.000000

From table.2 above, every variables seem to have a significance of themselves (consider LOGWD be almost significant) at 5% significance level after dismissing LOGRER variables. Thus, this model tends to have a good estimation of exports. R-squared value is still the same at 74% that makes this model quite reliable as well. For conclusion, as stated before, Asean Economics Community (AEC) has significant impact on the exports. They are positively related. Since AEC was implemented, exports tend to increase substantially. We will make an analysis further with an effect of increased export to the change in Gross Domestic Product (GDP).

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6.2 Exports and GDP Gross domestic product (GDP) is a market value of all final goods and services produced within a country in a given period. It is considered an indicator of a country's standard of living in a big image. It can be determined by many approaches. One of the direct approaches is product approach which sums products of every classes of enterprise to arrive at the total. This approach works on the principle that all products must be bought by someone, so the value of the total product must be equal to population's total expenditures in buying things. The income approach also works on the principle that the incomes of the productive factors must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes. In this analysis, we’ll use another approach called “expenditure approach”. In economies, most things produced are done for sale. Hence, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. By expenditure, the components of GDP are;

=+++(−)

Which Y is a gross domestic product C is consumption I is investment G is government spending X-M is a net export (X is exports, M is imports)

Exports GDP

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According to this macroeconomics theory, exports has a simply positive relationship to the GDP since GDP has been calculated by the product produced within a country, the goods and services produced for other nations’ consumption would be considered. The more products you made and sent to other countries, the more GDP will be calculated. Holding other things constant From the previous analysis, we have shown that Asean Economics Community (AEC) has raised exports. In this content, holding other things constant, the increase in export will be raising GDP as well. Thus, the implementation of AEC in 2007 will make GDP increase more or less during the period.

Table.3

Dependent Variable: LOGGDP Method: Least Squares Date: 06/03/11 Time: 01:55 Sample: 2002Q1 2010Q4 Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.

C 7.900559 0.179001 44.13697 0.0000 LOGWD 9.49E-08 7.25E-09 13.09218 0.0000 LOGRER -0.014542 0.004119 -3.529966 0.0013 AEC 0.070746 0.030541 2.316433 0.0271

R-squared 0.943210 Mean dependent var 7.545970 Adjusted R-squared 0.937885 S.D. dependent var 0.205671 S.E. of regression 0.051259 Akaike info criterion -2.999413 Sum squared resid 0.084079 Schwarz criterion -2.823466 Log likelihood 57.98943 Hannan-Quinn criter. -2.938003 F-statistic 177.1583 Durbin-Watson stat 0.851198 Prob(F-statistic) 0.000000

This estimation is about to estimate the relationship between AEC and GDP. Since exports has been estimated with many independent variables such as world demand, real exchange rate. So, those variables are used to represent the export variable in the estimation. The result is AEC variable turns significant. That means as AEC was implemented, it does increase GDP of Thailand. This model is very reliable because the R-squared value is about 94%. Finally, after analyzing the impact of AEC on exports, and further on GDP, we would say that Asean Economics Community has a magnificent effect of the movement of exports and so

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does to GDP of Thailand over time. Further on, the unemployment rate will be involved with the movement in GDP in the country.

6.3 Unemployment rate and GDP movements Ultimately, this paper’s goal is trying to see the relationship between an implementation of AEC and the movement trend of unemployment. Currently AEC was proven to have an effect on both exports and GDP. The AEC implementation did increase the exports and, further, increase in GDP (holding other things constant). Hence, the increase in GDP will be analyzed towards unemployment rate by a theory called “Okun’s Law” Okun’s law is an observation that represents a relationship between GDP and unemployment rate. Arthur Okun (1962) has concluded that the unemployment rate will drop by 1 percentage point for every 3 percentage point increase in GDP. It depicts a negatively relationship between those two variables. The increase in GDP would help relieving an unemployment rate. Since AEC has raised both exports and GDP of Thailand by the analysis. We can conclude our result that the increase in GDP will decline the unemployment rate of Thailand in both short run and long run.

Table.4

Dependent Variable: LOGUNEMP Method: Least Squares Date: 06/03/11 Time: 13:39 Sample: 2002Q1 2010Q4 Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.

C 18.33313 2.575363 7.118659 0.0000 LOGGDP -2.203835 0.341167 -6.459703 0.0000

R-squared 0.551023 Mean dependent var 1.703056 Adjusted R-squared 0.537818 S.D. dependent var 0.610615 S.E. of regression 0.415120 Akaike info criterion 1.133455 Sum squared resid 5.859040 Schwarz criterion 1.221428 Log likelihood -18.40219 Hannan-Quinn criter. 1.164160 F-statistic 41.72776 Durbin-Watson stat 1.731267 Prob(F-statistic) 0.000000

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This table above is a simple regression estimating the significance between GDP and unemployment rate (other things being equal). GDP is completely significant as prob. 0% is less than 5% significance level. GDP can affect the unemployment rate. The GDP coefficient of this model, which is -2.203, represent the negatively relationship between them. It can be interpreted that the unemployment rate will fall 1% for every 2.2% increase in GDP. This coefficient is quite the same as Okun’s law coefficient (3%). Finally, AEC implementation will lower down the unemployment rate analyzing from 2002 to 2010.

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7 CONCLUSION As Thailand is one of the most exporting countries in Asia and in the world, Government would try to expand the economy and well-being of people by considering export to be a considerable factor. Also, when AFTA (Asean Free Trade Area) has been launched. It improved and accelerated the Asean member’s economic growth dramatically. After that, the AEC took place in 2007 and played an important role among Asean members. It basically facilitated the free flow of goods, services, investments, capitals, and labors. That would exactly make a big change to the exports of Thailand in term of goods and services production as previous researches have been done before. Initially, we expected AEC to have an impact on exports, said more export will be faced. Then, the exports which contributed to the GDP will raise the GDP up (other things being equal). Finally, the unemployment rate would go down .

Unemployment AEC Exports GDP rate

According to the analysis result, it was proven by both empirical studies and regression model that Asean Economic Community (AEC) has affected the amount of exports in Thailand since it was implemented. Table.1 and 2 has shown the significance of the AEC variable, together with reliably high r-squared value. Thus, once AEC was implements, exports would be raised overtime. After that the macroeconomics theory of GDP can also explain the increase in GDP due to increased exports (other things being equal), as stated above, with a support of regression model of GDP against AEC and others supportive variables. AEC is significant towards GDP and we observe that GDP and export are going on the same way as AEC was implemented. Further, a rise in GDP does have an effect unemployment rate as stated by Okun’s law. We expect the unemployment rate to decrease by 2 or 3 percentage points. As

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proven in table.4, Unemployment rate will decrease by 1% for 2.2% increase in GDP. Eventually, there exist some links between AEC, exports, GDP and unemployment rate altogether. AEC implementation will raise exports, GDP, and lastly lower down the unemployment rate. Thus, we can conclude that our hypothesis is true in which the AEC implementation will decrease the unemployment rate, ceteris paribus.

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8 LIMITATION As we know that the future is unforeseeable, we cannot exactly predict what will happen in the future. Thailand, as an exporting country for goods and services both inter- and intra-ASEAN countries. The export will be directly affected by the integration of ASEAN Economic Community (AEC). The unemployment rate will decrease as an effect of GDP. But there are some limitations, we suggest, in the analysis of this paper. Firstly, the irrelevant variables were held constant in the GDP part of analysis. In fact, there’s some variable not only exports that can raise GDP. But we hold those variable constant in order to observe the direct effect on exports to the GDP. Moreover, future research should try to vary those fixed variables to get to more reliable result. Secondly, Okun’s law that represents a relationship between GDP and unemployment rate was done and observed in USA economy. It might have misalignment if used with the other nations’ economy. But once it was considered as a theory, it might be, at least, useful to analyze the economy as well. The following results may not fully reflect the exact result in Thailand’s labor market condition. Since AEC is not fully implemented yet. It’s ongoing process. But we treated dummy variable as it was fully implemented. The result might be distorted. As well as the labor market itself, empirical studies said that unemployment rate in Thailand was calculated regardless of informal sector condition. Although unemployment rate in Thailand was considered to be quite low, but actually there exists a huge magnitude of informal sector which hasn’t been counted in the data. This kind of problem plays a role in the incorrect of estimation. Finally, the unemployment rate analysis might be distorted because the analysis reflects unemployment rate in merely formal-registered sectors, which is quite small. The fall in unemployment rate will affect in the whole image of formal sector regardless of what happen to the informal sector.

For the further research, there will be more researches about the effects of AEC integration on each objective or each sector such as agricultural sector and manufacture sector etc. because AEC integration will become talk of the town for people when the time comes.

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9 REFERENCE ASEAN (2008). ASEAN ECONOMIC COMMUNITY BLUEPRINT. Jakarta, Indonesia: ASEAN Secretariat.

Bank of Thailand. (2010). Inflation Report. Bangkok: Bank of Thailand.

Colin Wong Koh King, Normaz Wana Ismail, Law Siong Hook. (2010). The impact of ASEAN economic community (AEC) on intra-ASEAN trade. Universiti Putra, Malaysia: Faculty of Economic and .

Dobre Ion, Alexandru Adriana Anamaria. (2008). Modeling unemployment rate using Box- Jenkins procedure. Bucharest, Romania: Journal of applied quantitative method.

Ministry of Labor. (2010). Current trends of Thailand labor market; the second quarter of 2010. Bangkok: Ministry of Labor.

Regional Office for Asia and the Pacific. ILO. (2010). Labor and Social Trends in ASEAN 2010: sustaining recovery and development through decent work. Bangkok: ILO.

Peter A. Petri, Michael G. Plummer and Fan Zhai. (2010) The Economics of the ASEAN Economic Community. Massachusetts: Brandeis Park, I. (2000). "Trade Liberalization and Long-run Economic Growth - A CGE Model Analysis of AFTA." Korea Review of International Studies, Vol. 3, No.1, December 2000, pp. 107-130. Cabalu, H. and C. Alfonso (2007). "Does AFTA Create or Divert Trade?" Global Economy Journal 7(4): 1-16. Ismail, N. W. and P. Smith (2007). Bilateral Trade in the ASEAN Transition Economies: A Gravity Model Approach. International Economic Conference Trade and Industry, 3rd – 5th December 2007. Penang, Malaysia.

Neely, C.J. (2010), Okun’s Law: Output and Unemployment, Economic Synopses No.4 2010

International Financial Statistics (IFS) database

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