Beyond the Crisis: a Strategy for Renewing

Beyond the Crisis: A Strategy for

Public Disclosure Authorized Renewing Rural Development in Thailand

by Public Disclosure Authorized

Rural Development and Natural Resource Sector Unit East Asia and Pacific Region The World Bank Public Disclosure Authorized

Financial Support by

Public Disclosure Authorized Australian Agency for International Development

April 2000 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand By Rural Development and Natural Resource Sector Unit East Asia and Pacific Region The World Bank 1818 H Street, N.W., Washington, D.C. 20433 U.S.A. Tel: (202) 477-1234 Fax: (202) 477-6391

World Bank Office Bangkok Diethelm Towers, 14th Floor Tower A 93/1 Wireless Road, Bangkok 10330 Thailand Tel: (662) 256-7792 Fax: (662) 256-7794-5

Printed in Thailand April 2000

Photo credit: Bank for Agriculture and Agricultural Co-operatives (BAAC)

ii “This Sukothai is good. In the water there are fish, In the fields there is rice.”

King Ramkhamhaeng

iii iv TABLE OF CONTENTS

Page

FOREWORD ix

EXECUTIVE SUMMARY xi

Chapter 1 : NEW VISION FOR RURAL DEVELOPMENT 1

OVERVIEW OF RURAL SECTOR...... 1

KEY RURAL CHALLENGES ...... 3

CRISIS IMPACT...... 4

A RURAL DEVELOPMENT VISION FOR THE 21 ST CENTURY...... 6

Chapter 2 : STRENGTHENING LOCAL COMMUNITIES 9

CHANGING STRUCTURE OF GOVERNMENT ...... 9

CHANGING ROLE OF COMMUNITIES...... 10

SPECIAL NEEDS OF POOR COMMUNITIES...... 11

KEY TASKS FOR THE FUTURE ...... 11

Chapter 3 : FOSTERING RURAL ENTREPRENEURSHIP 15

INDUSTRIAL CONCENTRATION ...... 15

SME DEVELOPMENT...... 16

OFF-FARM EMPLOYMENT AND RURAL LABOR MARKETS...... 17

CRISIS IMPACT ON OFF-FARM EMPLOYMENT...... 18

KEY ACTIONS FOR THE FUTURE ...... 19

Chapter 4 : STRENGTHENING RURAL FINANCE MARKETS 23

CHANGING STRUCTURE OF RURAL FINANCE...... 23

CRISIS IMPACT...... 25

KEY ACTIONS FOR THE FUTURE ...... 26

v Page

Chapter 5 : IMPROVING AGRICULTURAL PRODUCTIVITY 29

LONG-TERM CHANGES IN RESOURCE USE ...... 29

CONSTRAINTS TO GROWTH ...... 30

DECLINING AGRICULTURAL COMPETITIVENESS DURING THE BOOM...... 31

AGRICULTURE AFTER THE CRISIS...... 32

GOVERNMENT STRATEGY...... 33

KEY ACTIONS FOR THE FUTURE ...... 34

Chapter 6 : IMPROVING NATURAL RESOURCE MANAGEMENT 39

FORESTS AND BIODIVERSITY...... 39

WATERSHED MANAGEMENT...... 40

WATER RESOURCES ...... 41

COASTAL RESOURCES...... 43

BIBLIOGRAPHY 47

BOXES

Box 1.1 Managing the Family Rice Bowl...... 5 Box 2.1 A Unique Tradition of NGO Activity...... 10 Box 2.2 Listening to Villagers...... 11 Box 3.1 Building Rice Mills…and Communities ...... 17 Box 3.2 Losing Village Jobs ...... 18 Box 3.3 Forging New Public/Private Partnerships ...... 20 Box 4.1 What Makes Micro-Credit Work ...... 25 Box 5.1 Losing Comparative Advantage in Rice Production ...... 34 Box 5.2 New Agriculture Initiatives for the Poor ...... 35 Box 6.1 Putting Pressure on Trees…and Government...... 40 Box 6.2 Land Use Conflicts in Watersheds...... 41

Figures

Figure 3.1 Spatial Distribution of Industry in Thailand ...... 15 Figure 3.2 Capacity Utilization in Surveyed Industrial Firms ...... 18 Figure 5.1 Real Exchange Rate and Competitiveness ...... 32 Figure 5.2 Change in Rice Prices (percentage change, year-on-year)...... 33 Figure 6.1 Fisheries Sector Production by Sub-Sector ...... 44 Figure 6.2 Value of Fisheries Sector Production by Sub-Sector ...... 44

vi Page

Tables

Table 3.1 Manufacturing Breakdown in Northeast (1995)...... 16 Table 5.1 Agricultural Production Statistics from Southeast Asia...... 29 Table 5.2 Agricultural Labor Statistics from Southeast Asia ...... 30

This report was prepared by Richard Scobey, Louise Scura, William Martin (Bank Staff), Robert Townsend, Peter Warr, Brett Coleman, and Ampai Harakunarak (Consultants), based on field work in Thailand in March and August 1998. The supervising managers were Geoffrey Fox (Manager, Rural Development and Natural Resources Unit, East Asia) and Jayasankar Shivakumar (Director, Thailand Country Management Unit), and the peer reviewers were Nipon Poapongsakorn (Thailand Development Research Institute), Alex McCalla, Gershon Feder, and Robert Thompson (World Bank). Key information and feedback was provided by: Phayap Phyormyont, Kasemsun Chinnavaso, Pairoj Suchinda, Chamnan Rungsang, Suparat Mannin, and Chitti Chuenyong from National Economic and Social Development Board; Petipong Pungbun Na Ayudha, Rungruang Israngura Na Ayudhya, Thongchai Petcharatana, Ampon Kittiampon, Chamnong Vathana, Adisak Sreesunpagit, Promote Maiklad, Chaiwat Prechawit, Watana Kaeokamnerd, Sawat Dulyapat, Taweechai Seneesrisun, Prasit Klaythong, Siri Tookwinas, and Waraporn Prompoj from Ministry of Agriculture and Cooperatives; Sumonman Kalayasir, Virat Tandachanurat, Prachon Charoensri, and Nat Chulkaratana from the Ministry of Industry; Wanee Samphantharak from the Ministry of Science, Technology, and Environment; Sukontha Aekaraj from the Prime Minister's Office; Ammar Siamwalla and Mingsarn Kaosaard from Thailand Development Research Institute; Tongroj Onchan from Thailand Environment Institute; Sophon Suphapong from Bangchak Petroleum; Pittayapol Nattaradal from Bank of Agriculture and Agricultural Cooperatives; Paiboon Wattanasiritham from Government Savings Bank; Vichien Opasvadhana from Small Industry Finance Corporation; Kosit Panpiemras from Bangkok Bank Limited; Prawase Wasi from Local Development Institute; Mechai Viravaidya from Population and Community Development Association; Montri Gosalawat from Thai-German Development Foundation; Marie-Luise Haberberger and Wolfgang Hannig from GTZ; Michael Heyn from UNDP; Arjun Thapan and Craig Steffensen from ADB; Anthony Zola from MIDAS Agronomics; Peter Brimble from Brooker Group; and Malcom Bale, Christopher Chamberlin, Dana Wiest, John Middleton, Choeng Chung, Ijaz Nabi, Nicholas Prescott, Stefan Koeberle, Jacob Yaron, Manida Unkulvasapau, Durudee Sirichanya, and Pamornrat Tansanguanwong from the World Bank. Assistance in preparing the report and arranging field work was provided by Evelyn Cowan, Chittrakarn Bunchandranon, and Kathryn Cherrie.

vii

Foreword

he social and economic crisis that hit Thailand the focus of the report is on synthesizing the dis- in the second-half of 1997—the worst it parate findings of existing work into an integrated, Texperienced since becoming a constitutional prioritized multi-sectoral development strategy for monarchy in 1932—has sparked an extensive rural communities. national dialogue about the country’s past growth Unlike many World Bank reports that are intended strategy and future development objectives. A primarily for the government or international donors, remarkable consensus has emerged among govern- this report is targeted to a broad cross-section of civil ment, civil society organizations, private sector, and society. The World Bank hopes that the report will academic groups about the importance of redressing contribute to the vigorous national dialogue current- the rural-urban imbalance that had arisen during the ly underway about rural development priorities and past decade and returning to a more balanced growth strategies, and help identify key investment and path in the future. As a result, the new Constitution policy requirements for the formulation of the up- and the revised Eighth Plan give unprecedented coming Ninth Plan. To facilitate a wide discussion, attention to good governance, sustainable rural the findings are presented in a focussed and concise development, and community participation. framework, with additional technical information Having reached agreement on the broad framework available in background papers referenced in for recovery and growth, Thailand is now tackling footnotes. the difficult task of preparing and implementing detailed restructuring plans for the key sectors in the The National Economic Social and Development economy. In response to the Government’s request Board served as the overall counterpart agency for for support for a new strategy for rural development, the report, with the Ministry of Agriculture and the World Bank prepared this report. Cooperatives responsible for coordination of the work. Other key support was provided by govern- The report has two main objectives: ment agencies involved in rural development (parti- • Review the short and medium-term impact of cularly the Ministries of Commerce; Interior; the crisis on the rural sector. Education; Public Health; Industry; Labor and Social Welfare; and Science, Technology and Environment), • Lay out a medium-term strategy for sustainable rural financial institutions (particularly Bank for and equitable rural development that will Agriculture and Agriculture Cooperatives; Govern- redress the structural distortions that emerged ment Savings Bank; and Small Industry Finance over the past decade and ensure more sustain- Corporation), research institutions (particularly able growth in the future. Thailand Development Research Institute; Thailand Environment Institute; and Thammasat University), Since a number of excellent analytical reports on and a number of private sector firms and civil specific rural development issues have been prepared society organizations. by the Government, local research institutes, and other donors over the past two years, the Bank Financial support was provided by the Australian decided not to commission additional original Government as part of the AusAID Mekong Basin research as part of the report preparation. Instead, Financial Facility.

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Executive Summary

RURAL SECTOR INT HAILAND populated area. The economy is extremely well diversified among industry (due in large part to the 1. The rural sector in Thailand is home to 38 mil- proximity to the supporting infrastructure of lion people, almost two-thirds of the country’s Bangkok), agriculture (the Chao Phraya Basin has population. More than 90 percent of these house- rich soils and good water supply infrastructure), holds are farmers, who generate 11 percent of GDP in mining (granite cores in the west and basaltic cores in agricultural output, the raw material base for Thai- the east), and commerce. land’s large agro-processing sector, and 25 percent of total export value. 7. Overall, Thailand has a large, dynamic rural sector that has played a key role in the country’s 2. There are significant variations in the structure economic growth and social development. This dy- of production, the pattern of income and employ- namism has been nurtured by the market-oriented ment, and the level of development across the differ- development strategy that Thailand has followed for ent regions. the past three decades, which has emphasized the 3. The Northeast, covering one-third of the total role of the private sector and sound macroeconomic land area and 44 percent of the rural population, is and sectoral management. the most populous region. It is also the poorest, with 8. Unlike many other countries in East Asia, the almost 20 percent of the households below the pov- Government has historically avoided a strong urban erty line. The combination of low agricultural pro- bias in its policies. Nonetheless, the past fifteen years ductivity and low incomes has spurred massive for- of fast economic growth has spurred an imbalance est encroachment as well as largescale migration to between rural and urban development. Key policy other regions for employment. weaknesses include: 4. The North, covering one-third of the land area • Poor macroeconomic management of the and about 21 percent of the population, has good ag- exchange rate and the large capital inflows ricultural land, extensive forests, and good water during the boom economy, which fueled an resources. But farm sizes are relatively small, leading increased demand for labor and capital in urban to extensive migration in search of better farm land areas higher than factor market trends would within the region and proliferation of non-farm ac- warrant, and undermined agricultural competi- tivities. Large pockets of poverty exist, particularly tiveness. among upland hilltribes. • High effective rates of domestic protection, 5. The South, with about 14 percent of the land which skewed resource allocation away from area and population, has a well developed economy, rural activities to urban activities. with large investments in rubber, aquaculture, tourism, mining, and natural gas development. • Underdeveloped legal and regulatory provisions regarding land titling and collateral 6. The Center, comprising the western mountains for typical rural assets relative to urban assets, and southeast coast, is the richest and most densely which constrained rural finance markets.

xi • Insufficient public investment in key rural social 13. Environmental damage is widesprea, das Thai- and economic requirements, such as local com- land’s past rapid economic growth has been accom- munity development, poverty reduction, and panied by significant pollution and degradation of entrepreneurship training, which undermined natural resources. The rate of forest cover has de- human resource development. clined from 53 percent in 1961 to 25 percent in 1998, as a result of unsustainable concession management 9. As a result, the rural sector faces worrisome practices, infrastructure development, and farmer long-term trends in the pattern, equity, and sustain- encroachment. Soil erosion and river sedimentation ability of growth. are widespread in the North, largely due to weak watershed management and significant land use con- KEY RURAL CHALLENGES flicts with upland hilltribes. Water resources are over-exploited and deteriorating in quality. And 10. Rural poverty remains a proble,m despite the coastal resources are under great pressure, as a result fact that Thailand’s impressive growth has raised in- of over-harvesting of marine capture fisheries, poor comes for many rural households. While the national environmental management of coastal aquaculture, poverty rate declined to 11 percent in 1996, there are and conversion of mangrove forests. several problems: the incidence of poverty is greatest in rural areas, with 15 percent of people living in vil- 14. Social capital is under-develope, das a result of lages below the poverty line; and there are extreme several factors. Excessive political and administrative regional disparities, with the Northeast and North centralization in Bangkok has undermined develop- accounting for about three-quarters of all poor. ment of local community institutions and grassroots participatory mechanisms. The limited access to pri- 11. Income inequality is growin,g despite the im- mary health care and secondary school education in provement in the incidence of poverty. Between 1988 many poor rural areas has slowed human resource and 1992, the income share of the top 20 percent of development. And many Thais believe that urbani- households rose from 55 to 59 percent of GDP, while zation and migration have splintered family relations the bottom 20 percent fell from 4.5 to 3.8 percent. and social cohesion in villages. Consequently, while Thailand had substantially lower income inequality than other countries in the Region in the mid-1970s, it now is among the most CRISIS IMPACT unequal distribution in East Asia. The increase in 15. The crisis has further exacerbated these unsus- inequality was largely due to the skewed distribution tainable trends: of formal sector jobs across regions and sectors, and • The proportion of poor has increased to 13.0 and the limited access of the poor to secondary and voca- 12.4 percent in the first and second quarter of tional education. 1998, or equivalent to around 7.6-7.9 million 12. Rural employment is limite, dwhich has spurred people. a massive out-migration of young workers to urban • The income gap has widened: the top 20 percent centers. The average annual migration rate increased income group enjoyed a 56 percent share of total from 420,000 workers in 1976-80 (of which 80 percent income, a slight increase from 1996; while the 20 was seasonal) to 992,000 in 1991-96 (of which 70 per- percent lowest income earners shared the same cent was permanent). As a result, the number of em- portion of total income (4.4 percent), and the ployed persons in agriculture dropped from 20.5 middle income group lost income. million in 1989 to 16.9 million in 1995, mainly from • the ranks of 12-24 years old. These labor dynamics The total number of unemployed in rural areas reflect several factors: the higher wages offered by increased from 2.4 percent in February 1997 to the fast growing industry and manufacturing sectors 5.3 percent in February 1999. The poorest in urban areas during the 1990s; the limited absorp- region, Northeast, was hit the hardest, with an tive capacity of agriculture due to production con- increase from 3.1 to 8.1 percent and a decline in straints, primarily scare land and water resources; real income of 25 percent. and the slow growth of rural industry as a result of • Remigration back to rural areas has led to market and policy failures that have promoted increased pressure on natural resources, and industrial concentration in Bangkok Municipal greater competition for agricultural land and Region. limited off-farm employment.

xii • A rural population that is empowered, secure, and content. • A rural economy that is balanced, sustainable, and equitable. • A rural development process that is holistic and centered on people and local community institutions. • A rural development partnership that involves local communities, NGOs, government, private sector, and academic institutions. 18. Similarly, there is widespread agreement about the key objectives for rural development that flow from this vision: • Enhanced human resource development of the rural population. • Strengthened local institutions, based on greater self-reliance and community participation. • Public expenditures for social and rural devel- • Increased income and employment generation, opment have been slashed: appropriations for particularly for the poor and those affected by social services, education, and public health the crisis. declined by 32, 11, and 15 percent over the originally approved FY98 budget. • A better protected environment.

• The social fabric is stressed, as a variety of 19. While there is broad national consensus about surveys document an increase in: conflicts the importance of sustainable rural development, among families and groups, the number of street there are still many divergent views within Thailand children, and the rates of child labor, prosti- about the specific strategies and implementation ar- tution, crime, and suicides. rangements for achieving the shared vision. The World Bank hopes that the rural development strat- 16. The crisis has precipitated a far-reaching review egy set out in the report will help bridge these differ- and restructuring of national economic and political ences, and map out a broad program of policy re- priorities in Thailand. During the current period of form, institutional development, and public invest- intense national debate, there is renewed focus on the ment that will be embraced by all elements of civil role of the rural sector in Thailand’s short-term re- society. covery and medium-term growth. For the first time 20. We believe that equitable and sustainable rural in many years, there is a national consensus among Government officials, the private sector, and civil so- development in Thailand will depend on five inter- ciety organizations (CSOs) that a new rural devel- related steps. opment vision and strategy is needed—one that 21. First, and most importantly, local mcomunity moves Thailand beyond the immediate crisis and organizations must be strengthene, din order to pro- lays the foundation for more balanced growth vide the institutional framework for people-centered rural development and redress the excessive centrali- A RURAL DEVELOPMENTV ISION FOR zation of political and administrative authority that THE 21ST CENTURY characterized the past. This does not mean a return to independent, segmented rural communities, but 17. A clear vision for rural development has rather, ensuring that local institutions have the neces- emerged in Thailand over the past two years, which sary human and financial capital to pursue their emphasizes: social and economic goals.

xiii 22. The key actions include: base of local governments, including the reform of existing taxes and improved collections of • Enhancing local participation in government existing charges and fees; establishment of a decision making, through development of new Local Government Civil Service Commission, community participation mechanisms; signifi- but only after local governments have received cant capacity building, and possibly some re- extensive capacity building; and preparation of structuring, of Tambon Administrative Organi- strategic reviews of key rural development zations and Tambon Councils; intensive training ministries, to identify functions to be decen- of central and provincial government staff tralized or privatized. responsible for community development; and • strengthening the institutional and regulatory Establishing a stronger monitoring and eval-ua framework for CSOs, including development of tion framework for community developme,nt a fund to support CSOs, streamlining NGO including better coordination of the various registration procedures, and timely passage of initiatives underway in NESDB, Social Policy the draft Community Development Organiza- Committee, and Social Investment Fund; and tion Institute. improved monitoring of the incidence of rural poverty and the effectiveness of poverty • Expanding poverty reduction programs in poor reduction programs. communities, through an increase in public expenditures for poverty reduction, particularly 23. Second, off-farm employment and rural enter- for primary health, secondary education, and prises must be expande,d in order to generate the in- sustainable agriculture; better targeting of creased employment necessary to absorb surplus poverty-related expenditures at both the house- workers and boost incomes, and capture the value- hold and provincial levels; and several key added of local agricultural production. This sector design changes to improve the efficiency and will have to become the new engine of growth in the progressivity of rural poverty programs, future, since the capacity of agriculture to expand is particularly the Poverty Alleviation Program, limited due to endowment constraints, the relative Tambon Development Program, and free profitability of other sectors in the economy, and the medical care and school lunch programs. continued aspirations of the younger work force for higher wage jobs. • Launching fiscal and administrative decentr-ali zation, through enactment of legislation de- 24. The key actions include: volving expenditures for local services, after • sufficient piloting; expansion of the revenue Creating the enabling environment for rural enterprise growth, particularly development of new rural industrial estates and supporting rural infrastructure; promotion of entrepreneurial skills and technology research; establishment of a Fund for Innovation Development; establishment of an effective network of public and private business service providers for small and medium enterprises (SME); and improving the rural employment information system. • Expanding rural credit for establishment of SMEs and micro-enterprise, sthrough additional capitalization of SIFC; possible consolidation of SIFC and Small Industry Credit Guarantee Fund; expanded training in risk assessment and credit evaluation for SME financial institutions; and elimination of interest rate subsidies on SME lending. • Promoting increased private sector and CSO partnerships in development of off-farm

xiv employment, as they have developed many innovative and cost-effective community enterprise programs that are ready for more widespread dissemination. • Strengthening vocational schooling and skills development in rural area, sincluding reform of the curriculum of vocational schools and skills training institutes; participatory identification of training priorities and programs for work force training; development of industry-managed in- service training; and expansion of rural entrepenuership development programs. • Improving the incentive and regulatory fram- e work, including passage of a new basic framework law for SMEs; rationalization of the diverse and various incentive programs at the Board of Investments and other agencies; review of the current minimum wage framework and labor law; and increase in urban property tax rates. ing and expansion of local community institutions for savings mobilization; provision • Reviewing the institutional framework for of technical assistance and funding for NGO industrial developmen,t to reduce duplication of programs; and introduction of simple means functions, strengthen linkages with the private tests to improve targeting to poor households. sector, and devolve functions to provincial and district levels. • Improving the policy framework for efficient 25. Third, rural finance markets must be strength- intermediation, particularly elimination of ened, in order to increase the financial resources of government controls on lending and deposit local communities and channel more funds to pro- rates; elimination of government intervention in ductive rural investments. The goal here is not in- the administration and lending operations of creased indebtedness for households, but greater BAAC and GSB; and streamlining of current community access to the investment loans, working legal regulations on cooperatives and farmers capital financing, and equity needed to establish new groups. economic activities that create jobs, raise incomes, • Reduction in the role of government in rural and reduce poverty. banking, as the large number of subsidized, 26. The key actions include: directed credit programs scattered throughout the central ministries face low repayment rates, • Transformation of BAAC into an independent create distortions in rural resource allocation, commercial rural ban,k which will require and other financial institutions are better a capital increase; elimination of restrictions equipped to provide intermediation services. on lending to non-agricultural activities; • elimination of controls on interest rates; elimi - Strengthening financial sector training and nation of subsidized loans for government supervision, including development of a projects, except if justified to redress a market supervisory framework for rural state financial failure; and introduction of more diversified institutions at the Bank of Thailand; establishing savings products. a prudential framework for community savings and microcredit groups; increased training for • Expanding microfinance for small farmers and GSB in credit evaluation and loan administra- poor households, including consolidation and tion; and organizational diagnosis and institu- expansion of government microfinance initia- tional strengthening of the Department of tives under one umbrella program; strengthen- Cooperative Promotion.

xv 27. Fourth, agricultural productivity must be increased, in order to address the food and income requirements of poor households, the raw material needs of the agro-processing sector, and continued export growth. While the sector will continue to shed resources in the future to fuel the growth of more productive parts of the economy, there is no question that agriculture will remain a core element of Thailand’s rural development strategy and that the country will retain some comparative advantage in agriculture production.

28. The key actions include:

• More effective management of scarce water resources, through a more participatory and transparent system for allocation of water, including the possible use of formal and tradable use rights; establishing new institutional mechanisms for stakeholder management of water resources at the basin, sub-basin and water user levels; streamlining and clarifying the institutional arrangements for operation of water supply delivery infrastructure and irrigation systems, with a reduced role for govern- modity markets, and regulatory compliance ment and a larger role for water users and other with health, safety, and quality standards. stakeholders; and the phased introduction of cost recovery and water pricing policies as part • Review and revision of the role of MOA, C of overall institutional reform. particularly devolution of functions to provincial and district offices, restructuring of the • Continued land reform, including acceleration of Department of Cooperative Promotion, and land titling, revision of the land tax system, and privatization of commercial SOEs. allocation of land and secure use rights to households who currently farm in national • Fine-tuning of the policy framewo,r kparticu- forest reserves. larly phasing out of the few remaining subsidies on certain types of fertilizers and seeds; • Greater focus on sustainable agricultural p-ro rationalization of pesticide policies; elimination duction, with an emphasis on food security for of price support programs (particularly for poor households, and integrated farming sys- sugar) and greater reliance on development of tems that diversify production risk and protect futures markets for major commodities; and the environment for non-poor households. elimination of the few remaining retail price • Reduced government intervention in production controls. decisions, since the government’s track record in 29. Fifth, the management of naturale srources must correctly anticipating price trends has not been good, farmers are already restructuring their be improved, in order to ensure the sustainability of production in response to market signals, and rural development. In the absence of an effective many of the technology recommendations have regulatory framework, strong management institu- been inappropriate and not adequately sup- tions, and adequate participation of civil society, ported by research and extension. Thailand’s past rapid economic growth took a huge toll on natural resources and the environment. Natu- • Refocusing the role of government to essential ral resource activities such as agriculture, forestry, public goods, particularly research and exten- fisheries and tourism still have potential to play key sion, redressing information asymmetry in com- roles in rural development, both directly as sources

xvi of livelihood and income for rural people, and indi- research and extension support for new rectly through the supply of inputs to value-added agricultural technologies to establish sustainable activities. To realize this potential, however, the cur- upland farming systems. rent trend toward degradation of key natural re- • sources must be effectively reversed, and the under- Improved management of coastal resources to lying causes redressed. reduce social conflicts and environmental degradation, through strengthening the • Enhanced conservation of forests and bio-di regulatory framework for integrated planning versity, through more effective enforcement of and management of coastal resources; the logging ban; more frequent monitoring of replanting converted mangrove areas and changes in forest cover; participation of local banning further conversion; and refocusing communities and CSOs in preparation and research and extension on sustainable implementation of management plans; and full aquaculture practices, including development of financing of recurrent costs of management disease resistant stocks. through increased user and service concession • fees. Enhanced management of capture fisheries to control overharvesting and the loss of resource • Increased watershed management to protect rents, through updating maximum sustainable headwaters and reduce soil erosio, n through yield estimates for major fishing areas and formal demarcation of watersheds and prepa- species; establishing a co-management ration of management plans in consultation with framework that integrates government, private local communities and CSOs; rehabilitation of sector, and fishing communities; reducing the denuded steep slopes; participation of local level of fishing effort; and significant increases communities in watershed protection; and in license fees and other charges.

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xvii

CHAPTER 1

New Vision for Rural Development

OVERVIEW OF RURAL SECTOR ment endowments, socio-economic conditions, and trends in government expenditures and policies. 1.1 Thirty-eight million people—63 percent of Thailand’s population—live in rural areas. About 92 1.5 The Northeast, covering one-third of the percent of these households are farmers and engage country’s land area and 44 percent of the rural in crop production and animal husbandry. In crop population, is the most populous and poorest region. production, paddy rice dominates (accounting for Per capita gross regional product (GRP) averaged about 35 percent of agricultural GDP), followed by about 27,000 baht in 1996, with a poverty rate of 19 rubber (20 percent), tree crops (15 percent), and percent. Unemployment and under-employment is vegetables (10 percent). In animal husbandry, beef widespread. Wholesale and retail trade provides the production dominates (about 35 percent of livestock largest share of GRP (21 percent), with agriculture, GDP), followed by pigs (25 percent), and geese (20 manufacturing, and services, accounting for 20, 14, percent). Altogether, agricultural activities account and 12 percent, respectively. for 11 percent of GDP, 50 percent of total labor, and 25 percent of total export value. 1.6 While the Northeast accounts for about 40 percent of total agricultural land in Thailand, it 1.2 A unique feature of Thailand is that on-farm contributes less than one-quarter of total agricultural agriculture only accounts for a relatively small share output, reflecting poor soils, erratic rainfall, and of net income for these households, declining from 54 seasonal drought and flooding. Despite extensive percent in 1976/7 to 36 percent in 1994/5. The government effort to promote multi-crop and crop- balance of their income accrues from either off-farm livestock combinations, monoculture of rice predo- agricultural activities (such as wage employment on minates among subsistence farmers. The low agricul- other farms, and rental of land, machinery, and draft tural productivity and low incomes have spurred animals) or non-farm activities (such as wage labor, massive forest encroachment—as well as largescale sale of goods and services, and remittances). migration to other regions for employment. 1.3 The remaining 8 percent of rural households 1.7 The North accounts for one-third of the are employed in a variety of areas, primarily as low country’s land area and about 21 percent of the skilled workers in the industry, manufacturing, population. Per capita GRP averaged 38,000 baht in construction, and transport sectors. However, a 1996, though there are significant variations in small shares work in professional, technical, ad- income across areas, with large pockets of poverty ministrative and clerical services. among upland hilltribes. Agriculture provides the 1.4 There are significant variations in the structure largest share of GRP (20 percent), dominated by crop of production, pattern of income and employment, production (77 percent of total output); wholesale and the level of development across the different and retail trade, manufacturing, and services, regions. This reflects different physical and environ- accounting for 17, 14, and 11 percent, respectively.

1 2 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

1.8 Despite a low population density, agricultural 1.12 The rural sector generally has good access to activities are concentrated in small inter-montane social services. In public health, there have been basins and narrow river plains. As a result, average significant reductions in infant, under-five, and farm size is relatively low, and there has been maternal mortality; gains in life expectancy; reduc- extensive migration in search of better farm land in tion in the incidence of malnutrition in children; and the northeastern area of the region and proliferation increased access to health education, contraception, of non-farm activities. Crop productivity is generally and health services. However, despite a large public high and the rate of forest coverage is relatively expenditure program in health, many poor rural good, though encroachment for shifting cultivation communities continue to face limited access to remains a problem. primary health care facilities. Similarly, in education, there is near-universal primary education; high 1.9 The South, with about 14 percent of the land female enrollment rates; and good progress in raising area and population, has a well developed economy, secondary enrollments, which had been neglected in with per capita GRP averaging about 52,000 baht in the 1980s. But further work is needed to raise 1996. Agriculture accounts for 39 percent of GRP transition rates for lower and upper secondary (including large shares from fisheries and rubber), education. reflecting good moisture and humidity in the tropical climate. Wholesale and retail trade, services, and 1.13 Since the vast majority of the population manufacturing account for 15, 10, and 7 percent, belong to the same religious and ethnic group, there respectively. Tourism, mining, and natural gas is relatively little cultural friction in rural areas. development have been growing rapidly in the However, there are large populations of ethnic region. minorities in the hills of the North and West, who have faced significant land use conflicts with 1.10 The Central Region, comprising the western Government over shifting cultivation practices, forest mountains and southeast coast, is the richest and use, and opium cultivation. most densely populated area. It includes about 20 percent of the land area and 17 percent of the 1.14 Overall, Thailand has a large, dynamic rural population. Per capita GRP averaged about 86,000 sector that has played a key role in the country’s baht in 1996 (excluding Bangkok Muncipal Region). economic growth and social development. This The economy is extremely well diversified among dynamism has been nurtured by the market-oriented industry (due in large part to the proximity to the development strategy that Thailand has followed for supporting infrastructure of Bangkok), agriculture the past three decades, which has emphasized the (the Chao Phraya Basin has rich soils and good water role of the private sector and sound macroeconomic supply), mining (granite cores in the west and and sectoral management. Unlike many other coun- basaltic cores in the east), and commerce. Manufac- tries in East Asia, the Government has historically turing accounts for the largest share of GRP (43 avoided a strong urban bias in its policies, such as percent), followed by wholesale and retail trade (12 low, controlled, invariant prices for agricultural percent), agriculture (11 percent), and services (6 products; excessive taxes on agricultural exports; percent). usury laws that undermine rural finance markets; and disproportionately high budgetary allocations 1.11 Rural infrastructure is well developed for urban over rural goods and services. throughout Thailand, with a good network of 1.15 Nonetheless, the past fifteen years of fast regional highways, feeder roads, communication economic growth has spurred an imbalance between lines, and electric power transmission networks rural and urban development. As reviewed in the reaching all provincial capitals and major towns. following chapters, this uneven development has Despite some bias towards infrastructure develop- arisen from a variety of policy, market, and ment in urban areas, the Government has been institutional weaknesses, including: committed to the development of village level infrastructure and has made good progress in developing • Poor macroeconomic management of the a network of laterite feed roads, water supply exchange rate and the large capital inflows programs, and village electrification. Pressing com- during the boom economy, which fueled an munity infrastructure requirements include protected increased demand for labor and capital in urban water supplies and on-farm irrigation systems. areas higher than factor market trends would A New Vision for Rural Development 3

warrant, and undermined agricultural less than 1 percent in the Bangkok municipal competitiveness. area. Since the poorest regions are also the most populous, the Northeast and North together • High effective rates of domestic protection, account for about three-quarters of the total which skewed resource allocation away from poverty problem in Thailand. rural activities (agriculture) to urban activities (industry and manufacturing). 1.18 Income inequality is growin,g despite the improvement in the incidence of poverty over the • Underdeveloped legal and regulatory past decade. Between 1988 and 1992, the income provisions regarding land titling and collateral share of the top 20 percent of households rose from for typical rural assets (land, crops, animals and 55 to 59 percent of GDP, while the bottom 20 percent farm implements) relative to urban assets, which fell from 4.5 to 3.8 percent. Consequently, while constrained rural finance markets. Thailand had substantially lower income inequality • Insufficient public investment in key rural social than other countries in the Region in the mid-1970s, it and economic requirements, such as local now is among the most unequal distribution in East community development, poverty reduction, Asia. and entrepreneurship training, which has 1.19 A 1996 World Bank poverty report indicated undermined human resource development. that the increase in inequality was largely due to the 1.16 As a result, the rural sector faces worrisome skewed distribution of formal sector jobs across long-term trends in the pattern, equity, and regions and sectors, and the limited access of the sustainability of growth—which have been poor to secondary and vocational education.2 In exacerbated by the short-term social and economic 1990, more than three-quarters of all workers had impacts of the crisis. only completed primary school, and by 1992, nearly half of the earnings inequality was attributable to differences in education background. KEY RURAL CHALLENGES 1.20 Rural employment is limite, d which has 1.17 Rural poverty remains a proble,m despite the spurred a massive out-migration of young workers to fact that Thailand’s impressive growth has raised urban centers. The average annual migration rate incomes for many rural households. According to increased from 420,000 workers in 1976-80 (of which new poverty lines developed by NESDB, the overall 80 percent was seasonal) to 992,000 in 1991-96 (of incidence of poverty fell from 33 percent in 1988 to 20 which 70 percent was permanent). As a result, the percent in 1992 and to 11 percent in 1996.1 During number of employed persons in agriculture dropped this period, the number of absolute poor fell by half, from 20.5 million in 1989 to 16.9 million in 1995, from 17.9 to 6.8 million people. But there are mainly from the ranks of 12-24 years old. These labor problems. dynamics reflect several factors. • The incidence of poverty is greatest in rural 1.21 First, the higher wages offered by the fast areas: 15 percent of people living in villages growing industry and manufacturing sectors in were below the poverty line in 1996, compared urban areas during the 1990s acted like a magnet for to only 6 percent in sanitary districts and 2 young rural workers (real daily wages in industry percent in municipal areas. rose from 108 baht in 1977 to 207 baht in 1995, • There are extreme regional disparities: 19 whereas real daily wages in agriculture stagnated percent of the Northeast lived below the poverty around 65 baht). line in 1996, followed by 11 percent in the 1.22 Second, while agriculture still accounts for a Northern and Southern regions, compared to large share of employment (39 percent during the dry season and 50 percent during the wet season), its 1 The new poverty lines developed by Medhi Krongkaew and NESDB apply improved methods of poverty measurement that incorporate detailed data on spatial price differences among provinces, which are a major 2 World Bank, Thailand: Growth, Poverty and Income improvement over the aggregated poverty lines introduced Distribution: An Economic Report, Report No. 15689-TH, by the World Bank in the 1970s. 1996. 4 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand absorptive capacity is limited due to production constraints, primarily scare land and water resources.

1.23 Third, the growth of rural industry, particularly small and medium enterprises, has been slow as a result of market and policy failures that have promoted industrial concentration in Bangkok Municipal Region.

1.24 Environmental damage is widesprea, d as Thailand’s past rapid economic growth has been accompanied by significant pollution and degradation of natural resources in rural areas.

1.25 Deforestation is a massive problem, with the rate of forest cover declining from 53 percent in 1961 to 25 percent in 1998, as a result of unsustainable concession management practices, infrastructure development, and farmer encroachment for agriculture.

1.26 Soil erosion and river sedimentation are widespread in the key watersheds in the North, largely CRISIS IMPACT due to weak watershed management and significant land use conflicts with upland hilltribes who have 1.30 After many years of high growth, the Thai traditionally practiced shifting cultivation. economy plunged into recession in the second-half of 1997 as a result of weaknesses in the banking system, 1.27 Water resources are over-exploited, as a result the relative appreciation of the Baht, declining wage of the burgeoning demand for water for hydropower, competitiveness, external sector shocks and inappro- irrigation, domestic, and industrial consumption. priate policy responses, and structural weaknesses in Similarly, water quality is deteriorating, as a result of key productive sectors. Domestic demand has col- pollution from domestic sewage and industrial lapsed, exports remain sluggish, corporate bank- effluents; only 14 percent of surface water resources ruptcies are increasing, and the financial sector is are now suitable for aquatic animals and general facing significant restructuring. The dollar pur- human consumption. chasing power of the baht has decreased by 40 percent, and high interest rates, designed to stabilize 1.28 Coastal resources are under great pressure, as the exchange rate and manage aggregate demand, a result of over-harvesting of marine capture have constrained investment. fisheries, where the catch per unit effort has declined from 265 to 25 kg per hour; poor environmental 1.31 The short-term economic outlook remains management of the large coastal aquaculture grim: GDP declined by 8 percent and private industry; and conversion of mangrove forests. consumption by 11 percent in 1998, with only marginal growth projected for 1999. The latest 1.29 Social capital is under-develope, das a result of unemployment figures show that 1,463,000 people several factors. Excessive political and administrative are unemployed and 989,000 underemployed (work- centralization in Bangkok has undermined developing less than 20 hours a week). When seasonally ment of local community institutions and grassroots adjusted, unemployment rose from 1.4 percent of the participatory mechanisms. The limited access to current labor force in the 1997 wet season, to 3.1 primary health care and secondary school education percent in the 1998 dry season, and to 5.3 percent in in many poor rural areas has slowed human resource the 1998 wet season. development. And many Thais believe that urbani- zation and migration have splintered family relations 1.32 The impact of the crisis on the rural sector in and social cohesion in villages. Thailand has been particularly severe and has A New Vision for Rural Development 5 exacerbated many of the long-term unsustainable trends. Box 1.1 Managing the Family Rice Bowl 1.33 The total number of unemployed in rural areas increased from 2.4 percent in February 1997 to 5.3 A recent study commissioned by IFAD3 highlights the percent in February 1999. The poorest region, impact of the crisis on women: informal sector jobs Northeast, was hit the hardest, with an increase from have been lost to men returning to villages from cities; 3.1 to 8.1 percent and a decline in real income of 25 available wage employment is being rationed to percent. Underemployment also increased by a maximize the number of workers; more time is spent similar amount, from 2 to 3.7 percent of the labor on domestic chores (such as cooking and sewing) in force. order to reduce household expenditures; and there is 1.34 The general impact of these labor market increased pressure to join the sex trade to generate changes on the rural sector is well known: increasing income. As a woman shopkeeper in a village outside unemployment and declining real wages in urban of Chiang Mai noted, “Women have the responsibility areas have resulted in a remigration back to rural to provide for the family. They go to the market and areas, leading to a decline in household remittances, find that they are unable to buy enough to maintain the family.” increased pressure on natural resources, and greater competition for agricultural land and limited off- farm employment. 1.38 The crisis has precipitated a far-reaching 1.35 The impact has been particularly harsh for the review and restructuring of national economic and poor (particularly those receiving state welfare, such political priorities in Thailand. A new constitution as pre-school children, the elderly and infirm, HIV was promugated in October 1997 that gave unpre- patients), and other vulnerable groups. Since many cedented emphasis to good governance, community poor households are net buyers of rice, the increase empowerment, decentralization, and social and in domestic food prices (arising from the depreciation environmental issues. Similarly, the Eighth Plan and of the baht and the increased demand for rice exports public sector investment program was restructured in other countries in the Region suffering from in January 1998, and again in January 1999, in droughts) undermined food security and consump- response to new stabilization efforts and the need to tion levels. A particularly worrisome development is redress the short-term impacts of the crisis. the increase in child labor and decrease in school attendance. 1.39 During the current period of intense national debate, there is renewed focus on the role of the rural 1.36 The proportion of poor is estimated to have sector in Thailand’s short-term recovery and increased from 11.3 percent in 1996 to 12.4 percent in medium-term growth. The Prosperity Decentraliza- the second quarter of 1998. Similarly, the income gap tion Policy Committee has focussed on the imple- is widening, with the top income group enjoying a mentation of a strong rural development agenda in slight increase in income and the middle income response to the crisis. A new national Sub-committee group facing a slight decline since 1996. As reviewed on the Rehabilitation of the Rural Economy and in Box 1.1, women are bearing a large share of the Society was established in April 1998, with burdens. responsibility for implementing a Plan for Social Rehabilitation and Sustainable Rural Economy 1.37 In addition to these social impacts, high prepared by a partnership of government, private interest rates and the depreciation of the baht have sector, and academic groups. Similarly, a new constrained rural credit and led to reduced National Social Policy Committee was formed in June consumption of fertilizer and other imported inputs, 1998 to provide policy advice for strengthening resulting in lower rice production and increased food communities, poverty reduction, and social reform. insecurity for poor households (output has also been affected by El Nino). Finally, reductions in government expenditures for rural infrastructure and social services have constricted rural employment and 3 Dev Nathan, et al., “Carrying the Burden of the Crisis: undermined rural health, education, and poverty Women and Rural Poor in Thailand,” Unpublished reduction objectives. mimeograph, August 1998. 6 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

1.40 For the first time in many years, there is a national consensus among Government officials, the private sector, and civil society organizations (CSOs) that a new rural development vision and strategy is needed—one that moves Thailand beyond the immediate crisis and lays the foundation for more balanced growth, increased employment and income for the rural poor, and improved natural resource management in the future.

A RURAL DEVELOPMENTV ISION FOR THE 21ST CENTURY 1.41 Thailand is one of the few countries in East Asia to have conducted a comprehensive national dialogue about its social and economic future, and reached a remarkable degree of consensus about the importance of redressing the rural-urban imbalance that had arisen during the past decade. This process started with the preparation of the Eighth Plan, was fueled by the crisis, and culminated with the passage about the specific strategies and implementation of the new Constitution. A clear and effective vision arrangements for achieving the shared vision. for rural development has emerged from this national dialogue, which emphasizes: 1.44 The Government continues to focus on the role • A rural population that is empowered, secure, of public sector policies and investments, and the and content. importance of restoring economic growth, improving international competitiveness, and integrating into • A rural economy that is balanced, sustainable, the regional economy. CSOs, on the other hand, are and equitable. stressing the importance of community institutions, • A rural development process that is holistic and ensuring local self-sufficiency, and developing social centered on people and local community capital. And politicians and the private sector, institutions. understandably, are more focused on the short-term requirements of restructuring the corporate sector, • A rural development partnership that involves rebuilding businesses, and finding jobs for local communities, CSOs, government, private retrenched workers. sector, and academic institutions. 1.45 The World Bank hopes that the rural 1.42 Similarly, there is widespread agreement development strategy set out in the report will help about the key objectives for rural development that flow from this vision: bridge these differences, and map out a broad program of policy reform, institutional development, • Enhanced human resource development of the and public investment that will be embraced by all rural population. elements of civil society. We believe that equitable • Strengthened local institutions, based on greater and sustainable rural development in Thailand will self-reliance and community participation. depend on five inter-related steps. • Increased income and employment generation, 1.46 First, and most importantly, local community particularly for the poor and those affected by organizations must be strengthene, din order to the crisis. provide the institutional framework for people- centered rural development and redress the excessive • A better protected environment. centralization of political and administrative 1.43 While there is broad national consensus about authority that characterized the past. This does not the importance of sustainable rural development, mean a return to independent, segmented rural there are still many divergent views within Thailand communities, but rather, ensuring that local A New Vision for Rural Development 7 institutions have the necessary human and financial requirements of poor households, the raw material capital to pursue their social and economic goals. needs of the agro-processing sector, and continued export growth. While the sector will continue to 1.47 Second, off-farm employment and rural shed resources in the future to fuel the growth of enterprises must be expande, din order to generate more productive parts of the economy, there is no the increased employment necessary to absorb question that agriculture will remain a core element surplus workers and boost incomes, and capture the of Thailand’s rural development strategy and that the value-added of local agricultural production. This country will retain some comparative advantage in sector will have to become the new engine of growth agriculture production. in the future, since the capacity of agriculture to expand is limited due to endowment constraints, the 1.50 Fifth, the management of natural resources relative profitability of other sectors in the economy, must be improved, in order to ensure the sus- and the continued aspirations of the younger work tainability of rural development. In the absence of an force for higher wage jobs. effective regulatory framework, strong management institutions, and adequate participation of civil 1.48 Third, rural finance markets must be society, Thailand’s past rapid economic growth took strengthened, in order to increase the financial a huge toll on natural resources and the environment. resources of local communities and channel more Natural resource activities such as agriculture, funds to productive rural investments. The goal here forestry, fisheries and tourism still have potential to is not increased indebtedness for households, but play key roles in rural development, both directly as greater community access to the investment loans, sources of livelihood and income for rural people, working capital financing, and equity needed to and indirectly through the supply of inputs to value- establish new economic activities that create jobs, added activities. To realize this potential, however, raise incomes, and reduce poverty. the current trend toward degradation of key natural 1.49 Fourth, agricultural productivity must be resources must be effectively reversed, and the increased, in order to address the food and income underlying causes redressed.

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CHAPTER 2

Strengthening Local Communities

2.1 The Eighth Plan and new Constitution give 2.3 In response, the Government has launched a unprecedented emphasis to improved governance, series of new initiatives to promote increased local empowerment of local communities in decision- participation and development. making, and community-based natural resource 2.4 First, more than 7,000 Tambon Administrative management. However, Thailand remains a highly Organizations (TAOs) and Tambon Councils were centralized country, with limited autonomy given to established in 1997 as new local administrative local communities in terms of functions, funding and bodies. However, they remain extremely weak, lack decision making. Consequently, building the institu- transparency in decision making, and require signi- tional and financial capacity of local governments ficant capacity building before becoming meaningful and community institutions to become more self- agents of rural development and community partici- reliant is a pressing priority for sustainable rural pation. Moreover, it is likely that some are too small development. to be efficient or viable units of local government, both in terms of delivering social and economic CHANGING STRUCTURE OFG OVERNMENT services, and raising revenues. 2.2 Political, administrative, and fiscal systems 2.5 Second, formal Provincial Civic Assemblies are have traditionally been highly centralized in being established in many provinces, which are Thailand: government services are concentrated in designed to facilitate the participation of civil society Bangkok, such as customs clearance, regulatory in development decisions. In addition, there are bodies, and higher education; the central government many unofficial civil forums being established at appoints chief local officials, determines local salaries regional, provincial, and district levels to encourage and approves local budgets; the central government consultations between local governments and local spends 93 percent of total general expenditures and communities. collects 95 percent of general tax revenues; and only 2.6 Third, the National Commission on Public 25 percent of municipal revenues are locally collected Sector Reform is preparing detailed regulations and and retained.4 As a result, local governments lack operational plans to implement fiscal and adminis- adequate resources and are constrained by weak trative decentralization, as follows. institutional capacity, particularly with regard to financial management, planning and service delivery, 2.7 The Working Group on Empowering Local and public infrastructure Government is reviewing the local government revenue act; identifying means to increase collections from traditional sources, such as land and house taxes, land development taxes, sign board and 4 Shared taxes with the central government account for 50 slaughter taxes; preparing a bill that would introduce percent of revenues and central government transfers and a local property tax; developing a proposal for subsidies account for the remaining 25 percent. an autonomous national agency to monitor

9 10 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand decentralization as well as local financial capabilities; and developing a plan to devolve functions to local Box 2.1 government, with the first phase covering water A Unique Tradition of NGO Activity supply, groundwater, roads, bridges, and other civil Dr. Puey Ungphakorn, a well known government offi- works, and a second phase covering health and cial, was the founding spirit of the NGO movement in education. Currently, draft legislation is being pre- Thailand. In the 1960s, he recruited university gradu- pared to define central-versus-local responsibilities; ates to serve as volunteers in rural areas, and in 1967 reform local budgeting and expenditure manage- he established the first local NGO, the Thailand Rural ment; assign adequate local revenues; define local Reconstruction Movement. The nascent NGO move- credit finance; and reform the intergovernmental ment received a strong boost during the Vietnam War, grant system. when international NGOs came to Thailand to help 2.8 The Working Group on Local Civil Service support the massive influx of refugees. This contact Administration has drafted a Local Government facilitated an exchange of ideas and techniques about Civil Service Act that would establish a new Local community mobilization and development, which laid the groundwork for strong cooperation and growing Government Civil Service Commission. This Com- support after the war. Thai NGOs became prominent mission would set general guidelines at the national during the period of social unrest in 1973 and 1976, level, but the personnel would be managed by the and proliferated at the local, provincial, and national province. This would enhance the movement of local levels in the 1980s. government personnel within a given province, Today, there are more than 10,000 official and while minimizing the potential disruption of national unofficial NGOs working in Thailand. The scope of transfers of local civil servants. The United Nations activities has expanded from basic human needs, such Development Program (UNDP) is providing key as education, primary health care, and livelihood, into assistance to define structures, systems and proce- more specialized fields, such as sustainable agricultural dures for local personnel management under its Pro- development, natural resources management and envi- moting Sound Governance through Decentralization ronment conservation, animal- and fish-raising, rural Project. enterprise, rural finance, slum-development, children programs, women in development, vocational training, 2.9 The Working Group on Reforming the and HIV/Aids treatment and prevention. Organization and Function of Local Governme nist establishing new criteria for the 7,000 existing TAOs and Tambon Councils, many of which are quite weak instrumental in bringing issues of community and unable to function as local governments without participation and good governance to national significant capacity building. attention during the preparation of the Eighth Plan 2.10 The World Bank is supporting the work of the and the framing of the new Constitution. Commission through the preparation of a new 2.12 The crisis has led to a renewed recognition of structural adjustment program that would provide the central importance of CSOs, as there is now a support for five key public sector reforms: poverty- strong consensus in Thailand that the country had based budgeting, expenditure management, civil unwittingly neglected its “immune system” over the service administration, tax administration, and fiscal past two decades: strong local community institu- decentralization. tions that represent people’s interests and provide a safety net during difficult times. A new partnership of government, private sector, and academic groups CHANGING ROLE OF COMMUNITIES have prepared a Plan for Social Rehabilitation and 2.11 Thailand has an extraordinarily large and Sustainable Rural Economy designed “to strengthen active network of CSOs, estimated at more than communities so that they can solve their problems 50,000 groups, comprising village, education, and and not only be self-reliant but also be able to lend religious groups; agriculture, finance and other support to those affected by the crises who need to be cooperatives; non-governmental organizations supported by their family and community.”5 (NGOs); foundations; associations; labor unions; and others. As reviewed in Box 2.1, these groups have played a critical role in supporting social and 5 “Plan for Social Rehabilitation and Sustainable Rural political change over the past 25 years and were Economy,” Social Working Group, TDRI, April 22, 1998. Strengthening Local Communities 11

2.13 As a result, many new programs have been 2.16 Second, there are cash-transfer programs, such developed to strengthen local communities and their as subsistence allowances for poor elderly and low- institutions. income families, provided by the Department of Public Welfare of MOLSW. • The Social Policy Committee has created the Pattana Thai Foundation to channel over 40 2.17 Third, there are in-kind transfers, such as low- million baht in government funds for establish- income cards for free medical care to poor adults ment of civic forums, community learning from the Ministry of Public Health, and a school centers, and monitoring and evaluation. lunch program for needy students operated by the Ministry of Education. • Legislation is to be submitted to the Cabinet to develop a new Community Organization Devel- opment Institute (CODI), which would support KEY TASKS FOR THEF UTURE the capacity building of local community institutions and coordinate the various government 2.18 The first priority is to enhance community agencies financing local economic development participation in government decision making, if activities. decentralization is to succeed. Local communities best understand their problems and their timely • A new Social Investment Fund has been estab- feedback through CSOs, NGOs, and civic assemblies lished in the Government Savings Bank (GSB), is critical for effective decision-making and people- with financing under the World Bank Social centered development. This entails three steps. Investment Project, which promotes decentralization and community development through 2.19 First, central and provincial governments need provision of funds for social and economic to develop new participation mechanisms that investments of local government, and commu - facilitate the input of farmers, villages, and rural nity groups. community institutions into policy making, as well disseminate information about public affairs widely • NGOs and donors have launched many new so as to increase their access to and understanding of initiatives to strengthen the institutional public issues. Box 2.2 summarizes a promising capacity and self-reliance of local communities, example of community participation recently such as the Integrated Social Reform Project of launched by Government. the Local Development Institute, the Rural and Social Management Institute of the Foundation for Thailand Rural Reconstruction Movement, Box 2.2 the Thailand-United Nations Collaborative Listening to Villagers Action Plan, and AusAID’s Small Activities Scheme. The Council of Social Ministers launched an ambitious and impressive model of community consultation in SPECIAL NEEDS OF POOR COMMUNITIES February 1999. A series of forums are being held in 12 provinces to solicit feedback from villagers about 2.14 The Government operates many different expenditure priorities for the new rural stimulus types of programs targeted to the needs of poor package, comprising 113 billion baht for eight different communities, as part of its overall plan to reduce the ministries. Villagers will meet with senior Tambon incidence of poverty to 10 percent by 2001 and to officials, deputy district chiefs, NGOs, and academic improve income distribution. experts, to work out investment proposals, which will 2.15 First, there are income generating programs then be forwarded to provincial authorities and central targeted to the poor, such as rural public works ministries. According to Minister Supatra of the Prime programs; the Tambon Development Program Minister’s Office, “Previously state funds went operated by the Office of the Prime Minister, which vertically from top to bottom, from a ministry to a allocates funding for the construction of rural province, a dis trict, a tambon, and a village. From now infrastructure at the local level; and the Poverty on, however, the subcommittee will coordinate and Alleviation Program operated by CDD, which help procure funds from relevant ministries to help the provides small interest-free loans to poor households rural organizations concerned.” for income-generating activities. 12 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

2.20 Second, TAOs and Tambon Councils require social services, whereas the Central Region significant capacity building to become effective tools receives the highest.6 for decentralization and participation. Key training • Improving the efficiency and progressivity of requirements include participatory planning, com- rural poverty programs. Key changes included: munity development, regulatory knowledge, and better identification of poor households in the financial management, budgeting and accounting, Poverty Alleviation Program; expanding the monitoring and evaluation, and administration. In role of private contractors in the Tambon addition, Government and civil society may want to Development Program; revision of targeting consider consolidating some of the smaller TAOs criteria for free medical care cards for low in order to ensure that each unit has a critical mass income groups, and for the school lunch of population and resources for effective local program; and introduction of a redistributive governance. means-tested pensions pillar for the elderly, and 2.21 Training is also required for central and a noncontributory flat-rate (poverty-line level) provincial government staff responsible for com- unemployment assistance benefit program. munity development, particularly in the Community 2.25 The third priority is to launch fiscal and Development Department and Office of Accelerated administrative decentralization. Four key actions are Rural Development in the Ministry of Interior. required. 2.22 Third, the institutional capacity and financial 2.26 First, legislation devolving expenditures for resources for CSOs need to be strengthened, so they local services should be enacted soon, to improve the can play a deeper role in local governance and the effectiveness of expenditures and strengthen local delivery of social and economic services. Key actions accountability. The central government’s role should include: (a) development of a fund to support CSOs, be limited to establishing policies, regulating as provided in the draft National Social Welfare Bill outcomes, and facilitating local provision (especially pending submission to Parliament; (b) streamlining building local capacity through training). A phased the registration process for NGOs, which is presently approach (including pilot experiments in a series of unnecessarily cumbersome; and (c) timely passage of provinces or selective functions) is recommended so the CODI proposal to facilitate coordination and that both the central government and the local dissemination of proven ideas. governments are prepared to assume their new roles. 2.23 The second priority is to expand poverty 2.27 Second, as additional responsibilities are reduction programs in poor communities, to ensure devolved, the revenue base of local governments that the benefits of rural development are more must correspondingly expand, including the reform equitable shared and the basic human needs for food of existing taxes (i.e. the introduction of a local shelter, education, and health are met. broad-based property tax) and improved collections 2.24 Key steps include: of existing charges and fees. Passage and full implementation of the draft Property Tax Act, which • An increase in the level of government expen- amalgamates the Land and Building Tax and Land ditures for poverty reduction, as the current Development Tax, would potentially provide spending (1.6 percent of total expenditures in municipalities with a significant stream of local 1990-95 and 2.0 percent in 1996) is too low revenues relative to Thailand’s poverty problem. Key 2.28 Third, the Local Government Civil Service priority areas are social safety net, primary Commission should be established, but only after the health, secondary education, and sustainable implementation arrangements have been carefully agriculture. worked out and local governments have received • Better targeting of poverty-related expenditures extensive capacity building in civil service manage- to the provinces, districts, and villages where ment. Similarly, local personnel management the levels and severity of poverty are the authority should be delegated to local governments greatest. A recent NESDB report highlighted the regional disparity of public expenditures, noting that the Northeast receives the lowest per capita 6 Nanak Kakwani, “Government Expenditures in outlays in agriculture, education, health, and Thailand,” Working Paper Series –WP3/97, NESDB. Strengthening Local Communities 13 over time, to strengthen the capacity of local the numbers of CSOs; the growth rate of off-farm governments to manage their own organizational employment and small and medium enterprises; and structure, staffing levels and staff appointments. availability of rural credit. 2.29 Fourth, the Public Sector Reform Commission 2.31 There are several promising M&E initiatives should proceed with the preparation of strategic underway that need to be coordinated: NESDB is reviews of the key rural development ministries. Key developing a new plan to evaluate government issues include: (a) the consistency between the performance for improved governance and agency’s strategic direction and functions, and the community participation in line with the Eighth Plan country’s new policies; (b) reduction in the targets; the National Social Policy Committee is significant duplication of functions that exists across developing indicators to monitor the social impact many government agencies and committees; (c) and effectiveness of government projects; and the improved coordination among agencies involved in Social Investment Fund has commissioned a M&E rural development; (d) the adequacy of performance; plan for its own sub-projects. and (e) the extent to which any functions should be 2.32 A related requirement is to improve the transferred to the private sector, contracted out, monitoring of the incidence of rural poverty and the delivered under some new partnership arrangement effectiveness of poverty reduction programs. Key with CSOs, or devolved to local governments. Prime steps include: developing a database on the candidates for this review include the Ministry of geographic distribution of actual expenditures by Agriculture and Cooperatives, the Ministry of central government and regional authorities; Interior, and Ministry of Industry, all of which have developing a multipurpose household survey system pressing decentralization issues. integrating income and other data on living 2.30 The fourth priority is to establish a stronger standards; conducting sample surveys of unit costs, monitoring and evaluation (M&E) framework for prices and subsidies of services delivered by public community development, to evaluate the perfor- providers (e.g. health services, education facilities, mance of government, CSOs, and private sector in fuel subsidies, energy subsidies, transport subsidies, delivering services to communities, and to facilitate housing subsidies etc); and preparing an annual identification and dissemination of best practices. “Distributional Report” providing an impartial audit Key indicators for strong communities include: basic of who benefits from public expenditure actuals health, education, income, and employment levels; every year.

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CHAPTER 3

Fostering Rural Entrepreneurship

3.1 Expanding off-farm employment and rural enterprise development is the number one priority Figure 3.1 (Map) for generating increased employment and incomes in Spatial Distribution of Industry in Thailand rural areas in Thailand, in view of the limited labor absorptive capacity in agriculture and environmental constraints on increased natural resource use. But the supporting infrastructure for industry remains concentrated in Bangkok, business skills are underdeveloped in rural areas, rural financing for off-farm employment is limited, and there are many competing and ineffective government rural enterprise programs. A new approach is needed to foster rural entrepreneurship, based on human resource development, improved competitiveness, and joint public-private partnerships.

INDUSTRIAL CONCENTRATION

3.2 The persistent problems of the spatial concentration of industry in Bangkok is well known, leading to regional economic inequality and severe urban congestion and pollution. The Bangkok Metropolitan Region (BMR) accounted for 57 percent one dot = 10 factories of total industrial GDP in 1996, compared to only 4, 6, and 8 percent, respectively, in the South, North, and Source: V. Wessels, OIE, Ministry of Industry, Northeast. Similarly, BMR accounted for 56 percent 1996. of total services, compared to 8, 10, and 13 percent, respectively, for the South, North, and Northeast Regions. 3.4 Whereas BMR has a fairly well diversified industrial base, industry in rural areas is 3.3 As a result, there is widespread regional concentrated in the agro-processing sector, mainly disparities in per capita income, ranging from 27,000 rice milling. As shown in Table 3.1, rice milling, baht in Northeast to 225,743 baht in BMR in 1996. textiles, and other food manufacturing accounted for Figure 3.1 provides a powerful visual illustration of about 60 percent of total investment and employment the uneven industrial development in Thailand. in the Northeast in 1995.

15 16 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

Table 31. draft Master Plan for Industrial Development. The Manufacturing Breakdown in Northeast (1995) focus has been on development of regional industrial estates and special economic zones, expansion of % of % of industrial sub-contracting to rural areas, promotion Manufacturing Activity Investment Employees of micro-businesses and community industries, Agro-Processing 62.5 60.6 business training for entrepreneurs, increased credit, o/w Rice Mills 11.9 21.0 and improved information networks. o/w Textile, Apparel, Leather 8.5 19.8 3.7 The key agencies for the government’s o/w Other 42.1 19.8 industrial policy are BOI, which provides a variety of incentives based on the type and location of the firm; Metal Products and Machinery 13.8 14.8 the Industrial Estate Authority of Thailand, which Non-Metallic Mineral Products 9.8 9.3 overseas development of industrial estates; and the Wood Products 3.6 7.3 Ministry of Industry (MOI), with responsibility for Other 10.3 8.0 industrial policy and promotion. Source: UNIDO, “Promotion of Industrial Competitiveness in the 3.8 MOI recently completed an internal reorgani- Disadvantaged Regions of Thailand,” DP/ID/SER.D/33, zation that has improved its strategic focus and March 1997. operating efficiency. It is now focusing on six key strategies: building technological capacity, through the dissemination of appropriate technologies for SMEs; 3.5 This uneven development reflects several improving incentives, to promote private sector invest- factors: ment in infrastructure projects that benefit local com- • Different physical and environmental endowments: munities, pollution control, and industrial relocation; Bangkok is the major port; and the Central streamlining regulations, particularly reductions in Region has the most favorable climatic condi- bureaucracy; organizational restructuring, through tions and largest groundwater availability. staff development and decentralization of services; improving information flows, through development of • Socio-economic conditions: the political and industrial data bases and improved outreach to the administrative systems have traditionally been public; and building partnerships with the private highly centralized in Bangkok; government sector, CSOs, and research groups to promote sub- services are concentrated in Bangkok, such as contracting, technology research, and improved customs clearance, regulatory bodies, higher industrial standards. education, etc.; and Thailand generally lacks the regionally-based ethnic or religious groups that 3.9 As noted above, financing for establishment of have spurred growth of alternative urban rural SMEs is limited. The Industrial and Finance centers elsewhere in Asia. Corporation of Thailand, Exim Bank, GSB, and commercial banks finance larger rural enterprises • Market and policy weaknesses: Board of Invest- (typically providing loans greater than 50 million ments (BOI) policies and government programs baht); the Small Industry Finance Corporation (SIFC) have provided strong incentives for urban finances small-to-medium enterprises (typically industrial development in the past; credit for providing loans between 500,000 and 50 million rural enterprise has been extremely limited; the baht); and the Department of Industrial Promotion infrastructure for rural enterprise development (DIP) in MOI, as well as a variety of NGOs, run is inadequate; and rural entrepreneurial skills revolving funds for small cottage industries and are weakly developed. micro-enterprises. Most of the state financial institution (SFI) and government lending is subsidized, in SME DEVELOPMENT view of the government social policy to foster employment in rural areas. 3.6 The Government attaches great importance to more balanced industrial development and the 3.10 SIFC is a small, well managed institution, growth of small and medium enterprises (SME). It jointly owned by the government and private banks, has promoted several new policies and programs to with total assets of 3.1 billion baht as of mid-1998. this end in the Seventh and Eighth Plans and the However, total lending is growing fast (30 percent in Fostering Rural Entrepreneurship 17

1997 and 65 percent in 1998), as Government has Box 3.1 channeled additional funds through SIFC to promote Building Rice Mills…and Communities rural employment in the wake of the crisis. In response to this increased activity, SIFC has recently Villagers in Kudchoom village in Yasothorn province completed an internal restructuring and improved wanted to build a rice mill in the mid-1980s so that the the administrative efficiency of credit evaluation. local community could capture the value added from processing. A young NGO worker helped arrange fi- 3.11 SIFC has a relatively healthy financial position, nancing from three local NGOs. The mill was con- with a capital adequacy ratio well above 8 percent structed in 1991, with an investment of 800,000 baht even after accounting for BOT’s new provisioning and 100 shareholders. Today, the small mill has be- requirements. However, the quality of the loan come an important enterprise, earning almost 2 million portfolio is weak and non-performing loans amount baht in revenues, employing 50 workers, and receiving to about 34 percent. SIFC has a relatively low cost of working capital loans from the Department of Agri- funds, since it relies heavily on low-interest loans culture Extension and Government Saving Bank. The from Government, GSB, MOF, and international Department of Cooperative Promotion recently sup- donors. ported a 3 million baht expansion of the facility, which doubled the capacity. The number of shareholders has increased to 1,060, who earned a 12 percent return on OFF-FARM EMPLOYMENT AND equity in 1997. The profits have been used to finance RURAL LABOR MARKETS critical local community requirements in Kudchoom, such as new village medical facilities and improved 3.12 Despite the limited development of rural irrigation supplies enterprises, there is still widespread off-farm employment in rural areas: more than 60 percent of farmers’ income now comes from activities off their 3.15 Second, there has been an influx of about one own farm, including sale of labor to other farmers, million legal and illegal foreign migrant workers in remittances from family members working in cities rural areas over the past few years to meet seasonal and overseas, and short-term dry-season employ- agricultural labor shortages. They are generally paid ment. Some of this employment comes from the SME much lower than Thai workers and, consequently, sector, particularly smallscale agro-processing, as have put downward pressure on rural wages, illustrated in Box 3.1. However, much of this thereby widening rural inequality. employment is low-paid and low-value, particularly 3.16 Third the employment information system, contract farming in the rural sector and construction including unemployment monitoring, is not well jobs in the urban sector. developed in rural areas. About half of rural 3.13 Rural labor markets function relatively effi- workers do not have information about job oppor- ciently, with quite a lot of inter-sectoral and seasonal tunities outside of their locales and, consequently mobility. The only real policy intervention, regional most hiring is through agents, personal networks, 7 minimum wages, appears not to be binding in rural and postings at the factory gate. areas (they do not cover agricultural labor and are 3.17 Fourth, the productivity of rural labor remains frequently ignored by rural enterprises). Four issue low, reflecting low levels of secondary school are of concern. education, inefficient vocational education training, and weak skills development in rural areas.8 As 3.14 First, young workers are turning away from reviewed in a recent World Bank report on education the rural sector, leaving an aging labor force. The in Thailand, the curricula of vocational schools are share of 15-24 years old in agricultural employment relatively rigid, unresponsive to employment declined from 37 percent in 1989 to 20 percent in demand, and have little general skills content. Unit 1997, largely as a result of migration to urban areas in costs of vocational secondary education are twice pursuit of higher wages (increased school enrollment rates and declining population growth rates also played a small role). As reviewed in Chapter 5, 7 John Middleton, et. al., Vocational Training in a Changing despite the recent remigration back to rural areas, it Economy: The Case of Thailand, World Bank,1991. is unlikely that these young workers will want to stay 8 Somsak Priebom, “Impact of the Changing Economy on on the farm after the crisis has subsided. Small Farmers in Thailand,” Kasatsart University, 1998. 18 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand that of general secondary education, and returns are lower than to general and academic secondary Box 3.2: education.9 Government agencies and NGOs run Losing Village Jobs multiple overlapping training programs for local A recent study commissioned by IFAD1 illustrates the communities, which need to be reviewed, prioritized, various impacts of the crisis on off-farm employment and subject to effective impact evaluation. in Khon Kaen. In Chanbot Village, 30 out of 40 silk weavers have been laid off in one shop; in Bank Wang CRISIS IMPACT ONO FF-FARM EMPLOYMENT Chai Village, a cooperative that produces soybean paste has suspended operations this year, as it is 3.18 The largest impact of the crisis on rural com- unable to sell last year’s inventory at local fairs; in Hai munities has been the loss of off-farm employment Saw Village, a 100 member herbal tea production and income, arising from the retrenchment of group has lost profits as a result of increased input community enterprises at the village level and the costs, which they believe cannot be passed on to severe reduction in employment and wages for consumers; in Nobua Village, the beauty salon, migrant workers in urban areas. Altogether, rural karaoke, and bars have closed down; and the Handi- unemployment, which traditionally totaled 0.2-0.3 craft Center for Northeastern Women’s Development million people in the wet season and 0.5-0.6 million reports that their members have cut back production, in the dry season, increased to 1.3 million people by as a result of a 60 percent increase in silk yarn costs February 1998. and 25 percent increase in cotton yarn costs. 3.19 The results of the February 1998 Labor Force Survey indicate that the unemployment rate in villages increased from 1.3 percent in the dry season currency depreciation are largely blamed for the of 1997 to 4.4 percent in the dry season of 1998 as a deterioration in output performance. Firms have result of the crisis; since agricultural employment did responded by reductions in employment, cutbacks in not fall, the decline is attributable to reductions in pay, and reductions in the hours worked per week. local off-farm employment.10 The combination of Layoffs have occurred most frequently in the small- weak domestic demand, tight credit policies, and scale, domestically-oriented firms. Almost half of increased input costs has led to the closing or cut those who have become unemployed are unskilled back of a variety of micro-businesses and community laborers under 30 years of age who have worked for enterprises, as illustrated in Box 3.2. less than three years at the firm—presumably, a large 3.20 The impact of the crisis on the larger rural and share of the rural work force that came to urban areas urban industries, which have been a critical source of for higher wages. employment for young rural laborers, is more dramatic. A recent survey of industrial firms by MOI Figure 3.2 highlights the adjustment underway in the garments, Capacity Utilization in Surveyed Industrial Firms textiles, auto parts, electronics and food processing sectors.11 Since July 1997, capacity utilization has fallen in approximately 70 percent of the firms 90 1996 H1 1997 surveyed (see Figure 3.2). Declining demand and the H2 1997 H1 1998 increasing costs of inputs associated with the 80

70 9 World Bank, Thailand: Education Achievements, Issues and Policies, World Bank, 1998. 60

10 Nanak Kakwani, “Impact of Economic Crisis on 50 Employment, Unemployment, and Real Income,” NESDB, undated draft. Capacity Utilization (%) 40 11 Nat Chulkarattana, et. al., “Thailand: The Road to Food

Corporate Recovery” summarizes the results of the Office Textiles Garments Autoparts of Industrial Economics and the World Bank’s 1998-99 Electronics Sectors All Industrial Survey covering 642 firms. Fostering Rural Entrepreneurship 19

KEY ACTIONS FOR THEF UTURE

3.21 The first priority is refocus the public sector on creating the enabling environment for rural enterprise growth. This includes:

• Developing new rural infrastructure and improving the maintenance of existing facilities (including roads, water supplies, and electricity and telephone lines) through development of industrial estates for SMEs and special economic zones. MOAC’s emphasis on agro-processing zones in rural areas is a good example. However, this must be done in conjunction with private sector investors and community groups.

• Promoting the development of entrepreneurial skills and technology research, through increased public sector investment and stronger incentives for private sector investment in human resource development and technological innovation (such as tax exemptions). The recent TDRI proposal to establish a Fund for Innovation Development would be an excellent mechanism to spur new technology and management development.

• Supporting the establishment of an effective network of public and private business service • Elimination of subsidized interest rates in SFIs providers for SME and micro-enterprise devel- for SMEs to support more efficient resource opment (with emphasis on accounting, inven- allocation, as international experience indicates tory control, and quality management). The that viable SME projects can service market rate German technical assistance program in DIP and loans. The increase in the margin is also needed the new Metalworking Industry Development to cover the rising cost of funds resulting from Institute are good examples that could be increased borrowing rates, hedging for foreign replicated more widely. exchange risk, and increased provisioning.

• Improving the rural employment information • DIP should review the scope for reducing or system. phasing out subsidies in its revolving fund, as availability of funding, not the price of loans, 3.22 The government must provide these support- appears to be the binding constraint for cottage ing services in a more decentralized and demand- and micro-enterprises. driven manner, as industrial deconcentration will only occur if more decision-making authority is • SIFC’s increased lending is an important delegated to municipal and district agencies that are development, but close attention needs to be more in touch with local investment requirements. paid to portfolio quality, reducing the level of In particular, devolution of functions from DIP to non-performing loans, and staff training in the provincial and district centers is a priority. areas of collateral assessment and risk management. 3.23 The second priority is to expand rural credit for establishment of SMEs and micro-enterprises, • There may be scope for consolidating SIFC and which is reviewed in more detail in the following the Small Industry Credit Guarantee Fund into chapter. Specific measures related to SME financing one agency that would provide both debt and include: equity financing for SME development 20 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

3.24 The third priority is to promote increased private sector and CSO partnership in development Box 3.3 of off-farm employment. Forging New Public/Private Partnerships

3.25 Private firms have pioneered several innova- PDA, the largest NGO in Thailand, launched the “Thai tive off-farm employment programs in poor areas, Business Initiative in Rural Development” in 1988. which could be replicated on a wider scale. For TBIRD encourages companies to work with villages example, the Pan Group has decentralized its pro- to identify business opportunities and develop duction to poor rural areas through the development commercial skills. For example, Bata Shoe Company of “village satellite factories” that produce one shoe has set up four village-level cooperative factories in component each, and “network center factories” that Buri Ram Province to produce the upper portion of assemble components into shoes. Similarly, Bang- canvas shoes; in addition, it has established village chak Petroleum Company has launched an impres- revolving loan funds and water supply systems, and sive community development program that is pro- provided extensive skills training. Similarly, Bangkok moting cooperatively owned service stations and Glass has promoted the production of brushes for transportation facilities, organic agricultural produc- cleaning glass molds and face masks for factory tion and community based agro-processing, and workers in two villages in Prachin Buri Province; in regional marketing of local products. Finally, the addition, it has provided school scholarships, water TBIRD program created by the Population and supply systems, and training in sustainable agricultural Community Development Association (PDA) is production. TBIRD has been a remarkable success: encouraging sub-contracting of production lines to villagers have gained employment close to their poor villages (see Box 3.3). homes and developed commercial skills; local 3.26 Similarly, many NGOs have developed inno- communities have reversed migration trends and vative and cost-effective community enterprise generated new income for local investments; and programs in Thailand that are ready for more wide- companies have benefited from low-cost expansion, spread dissemination. For example, the Appropriate improved product quality, and increased public Technology Association has organized women in Roi respect. The critical factors for success include: (a) Et, Sisaket, and Surin Provinces to work on natural careful selection of suitable villages and corporate dyeing and weaving for commercial use since 1986; sponsors; (b) recruitment of effective project staff who the Handicraft Center of Northeastern Women’s understand the village conditions; (c) scoring “quick Development has organized women in Khon Kaen wins” that solve some immediate basic needs and help Province to produce natural-dyed cotton and silk build trust among the partners; and (d) developing in- handicrafts since 1987; and Care International is come generating activities that relate to either the helping DIP implement a program that supports the work of the company or existing skills of the village. development of subsidiary processing operations for private sector factories in six provinces. • Reform of the curriculum and management of 3.27 While CSOs work well with local communi- the large vocational schooling system, with ties, they typically have limited experience in com- emphasis given to incorporating the “new basic” mercial feasibility analysis, business management, skills of problem solving while reducing the and marketing and distribution. Consequently, they share of curriculum devoted to specific narrow would benefit from stronger partnerships with the craft skills training. private sector, who are increasingly active in skills • Improve work force training through: develop- development in rural areas. ment of a new partnership of government, 3.28 The fourth priority is to strengthen vocational employers and workers to identify training schooling and skills development for rural workers. priorities and programs, possibly under the The former will prepare workers for a higher skills national Vocational Training Council; cor- economy and help them move from informal to responding revision of the curriculum of formal sector employment. The latter will help raise Ministry of Labor and Social Welfare (MOLSW) labor productivity, create off-farm employment skills training institutes; and development of opportunities, and raise incomes. Key steps include: industry-managed in-service training. Fostering Rural Entrepreneurship 21

• Expand rural skills development programs, such as the effective Entrepreneurship Develop- ment Program in DIP.

3.29 The fifth priority is to strengthen the incentive and regulatory framework. Key measures include:

• Promulgation of a new basic framework law for SMEs to ensure a consistent regulatory framework.

• Rationalization of the diverse and various SME incentive programs, including a review of the effectiveness of BOI promotion for Zone 3 and likely impact of the proposed Zone 4.

• Review of the current minimum wage framework and labor law, which if enforced, would undermine enterprise profitability and investment in the lower labor productivity and wage areas of the North and Northeast.

• Increase in urban property tax rates (particularly yet it still has some “private sector” functions in Bangkok) to reflect the social and environ - that could be shed: provision of subsidized mental externalities arising from industrial credit to micro-enterprises, setting up sub- concentration (politically difficult until after contracting arrangements, and preparing Thailand’s recovery), and transfer of this rate- feasibility studies for relocation of industries to setting authority and tax revenues to local rural areas. governments. • MOI, MOLSW, Ministry of Education, and 3.30 The sixth priority is to review and streamline Ministry of Interior all run a variety of skills the institutional framework for industrial training programs that would benefit from development, to reduce duplication of functions, improved coordination, perhaps under the strengthen linkages with the private sector, and umbrella of the National Vocational Training devolve functions to provincial and district levels. Council. • DIP, BOI, the National Science and Technology 3.31 Donors have exacerbated these institutional Development Agency, and other agencies mix weaknesses through lack of coordination of regulatory and promotional functions and have programs and funding. UNIDO is taking a wel- overlapping mandates in some areas. DIP is comed first step by convening a joint donor- clearly the leading agency and its recent re- government working group to develop an overall structuring has improved its focus and mandate; strategic plan for SME development.

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CHAPTER 4

Strengthening Rural Finance Markets

4.1 Thailand has a relatively thin and segmented other institutions, which account for about 48, 46, rural finance market that has nonetheless been fairly and 6 percent, respectively, of all formal credit. efficient at mobilizing savings and channeling funds Other institutions include the GSB, Government to commercial agriculture. The main institution, Housing Bank, and a variety of thrift and savings Bank for Agriculture and Agriculture Cooperatives cooperatives organized by MOAC. (BAAC), is one of the most efficient agriculture banks 4.5 Second, the volume of rural credit has signifi- in the Region, though it faces unnecessary govern- cantly increased, from about 40 percent of agri- ment intervention and weak financial performance cultural GDP in 1985 to 70 percent in 1996, when total after the crisis. A number of government agencies lending reached about 355 billion baht. provide directed credit for a variety of agricultural and rural development programs at subsidized 4.6 Third, the rural banking network has greatly interest rates, with questionable development impact. expanded: for example, the number of BAAC offices Commercial banks and GSB take the largest share of has increased from 648 in 1985 to 1,551 in 1997, and deposits in rural areas, but generally channel the the number of cooperatives from 1,059 (with a funds to urban investments. membership of 0.8 million people) in 1985 to 3,097 4.2 Consequently, development of a more com- (with a membership of 4.3 million people) in 1996. petitive, diversified, and deeper rural financial mar- 4.7 Fourth, fairly strong market segmentation has ket is a core strategy for expanding rural develop- arisen among institutions: BAAC and the Depart- ment in Thailand, particularly for increasing off-farm ment of Cooperative Promotion (DCP) of MOAC employment and small-scale agriculture, and generally serve small and medium farms and coop- reducing poverty. eratives; commercial banks generally serve large commercial farmers producing cash-crops for export CHANGING STRUCTURE OFR URAL FINANCE and rural industries; and NGOs, government programs, village credit unions, and informal 4.3 Rural Credit. The structure of rural credit has institutions generally serve the poor. changed dramatically over the past decade. 4.8 BAAC dominates agricultural credit, reaching 4.4 First, financial institutions have replaced local about 85 percent of all rural households. It is an money lenders as the main source of funds in rural unusually efficient and well-managed state financial areas. TDRI surveys indicate that the share of institution (SFI) that operated until recently under informal sector lending has declined from 56 percent the supervision of the Ministry of Finance (MOF). 12 in 1985 to 40 percent in 1995 in the Northeast. The BAAC has developed an innovative loan guarantee key rural finance institutions are now BAAC, mechanism based on joint liability groups that allows commercial banks, and agricultural cooperatives and it to deliver relatively small loans (average of $650 per client) with very low administrative costs 12 Nipon Poapongsakorn et al, “The Rural Finance Market (equivalent to 2.8 percent of total assets). The bulk of in Thailand and the Role of BAAC,” TDRI, January 1998. BAAC loans go to farmers directly through these

23 24 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand joint liability groups, with the share of cooperatives 4.13 Rural Savings. Rural savings rates are rela- in total loans declining to only 15 percent. It is tively high in Thailand, though the range of savings unique in rural Asia for the relatively large share of products and institutions is quite limited. Household its portfolio in medium- and long-term loans (45 surveys indicate that 70-90 percent of families have percent). savings deposits with some financial institution, though savings in kind are much larger than financial 4.9 BAAC has funded its large loan outreach savings. primarily through aggressive efforts to mobilize rural savings: the deposit-to-loan ratio has increased from 4.14 Commercial banks dominate institutional sav- 31 percent in 1986 to 78 percent in 1996. In addition, ings, accounting for almost 57 percent of deposits about 20 percent of its financial resources come from outside of Bangkok in 1998, followed by GSB (26 soft loans from Bank of Thailand (BOT), ADB, and percent), BAAC (14 percent), and Government other international agencies. Housing Bank (3 percent). Cooperatives supervised by DCP are playing an increasing role in mobilizing 4.10 The Government sets BAAC’s interest rates for deposits, with the number of members and total small loans below market rates and cross-subsidizes deposits rising from 4.3 million people and 18.9 them by the bank’s other operations. In addition, the billion baht in 1992 to 6.8 million people and 78.6 Government implements a variety of subsidized billion baht in 1996. directed credit programs through the bank (on an agency fee basis), and, until recently, only permitted 4.15 Deposits in BAAC come from three sources: BAAC to lend to farmers for on-farm or agriculture- individuals (about 47 percent of total deposits); related activities. government offices, which are required to deposit funds in state financial institutions (about 46 4.11 Despite these restrictions, BAAC has operated percent); and commercial banks, which have been profitably. It has generally maintained a timely loan required until recently to direct 20 percent of their repayment rate of about 85 percent, with much of the portfolio to rural areas, either as direct loans or as arrears balance repaid belatedly, leading to very deposits with BAAC (7 percent). small eventual loan losses (however, loan losses on 4.16 Several ministries implement programs to the government mandated policy-based lending have spur grassroots mobilization. The Community been much higher). With the significant growth in Development Department (CDD) in the Ministry of lending, net income increased steadily from 1989 to Interior is organizing thousands of villages to form 1994, maintaining a return on equity of 6.5-7.0 small, local credit unions; by 1995, there were over percent. However, higher rates of inflation and the 11,000 credit unions with almost 900,000 members consequent contraction in the lending spread in 1995- and 1.8 billion baht in savings. However, several 96 led to weaker financial performance before the credit unions have failed because they were created crisis: the return on equity fell to 3.9 percent in 1995. with minimal village participation in a top-down 4.12 DCP—which is responsible for promoting fashion. Similarly, DCP, in conjunction with GSB, agricultural cooperatives and supervising their has launched a new “one baht a day” savings business operations—is the second most important program to promote increased savings among source of funding for cooperatives. It provides short, cooperative members. medium, and long-term loans at a subsidized interest 4.17 In addition, as reviewed below, a variety of rate, ranging from 2-6 percent, and has a repayment CSOs and NGOs are developing community savings rate of 70 percent. Total lending has increased institutions. Most of these are informal without any dramatically, from 125 million baht in 1990 to 1.2 legal basis, though some are members of the Credit billion baht in 1996. The recent ADB Agriculture Union League of Thailand and registered under the Needs Assessment Study indicated that loan Cooperatives Societies Act. supervision and follow-up are weak and that additional capacity building is needed.13 4.18 Microfinance. Small farmers, the poor, and the landless have considerably less access to formal sector credit in rural areas, and, consequently, turn more frequently to moneylenders. BAAC does not 13 ADB, “Thailand: Agriculture Sector Needs Assessment target these groups and an analysis of its portfolio Study,” November 1998. indicates that it does not reach the poorest families. Strengthening Rural Finance Markets 25

The Government runs several cash and in-kind transfer programs: CDD provides funds to villages Box 4.1 for on-lending to poor households; and GSB and the What Makes Micro-Credit Work Urban Community Development Office (UCDO) of the National Housing Authority provide loans to The Thai-German Development Foundation (TGF) has community organizations. supported more than 400 micro-finance projects, in- volving about 40,000 poor farmers throughout Thai- 4.19 NGOs have been an important source of land. Key activities have included integrated farming, microcredit, but they face many constraints to fruit tree planting, handicraft-silk weaving, cloth efficient intermediation, including weak financial sewing, cattle and fish raising, bee-keeping, and devel- management and a restrictive regulatory framework. opment of fertilizer banks, rice banks, community rice Local NGOs have piloted many successful savings mills, village saving groups, and marketing demonstra- and credit programs in Thailand that could be tion centers. Their loan repayment rate is 85 percent, replicated more widely with additional funding. the same as for BAAC. 4.20 Examples of effective NGO micro-finance TGF has helped local communit ies build credit include: the village revolving funds and “vegetable histories, earn income, and, most importantly, develop banks” developed throughout Thailand by the Popu- credibility and self-reliance. The critical factors for lation and Community Development Association; success include: (a) the formulation and management fishery savings groups in 13 southern provinces of projects by the local groups themselves; (b) an ef- under the Promotion of Human Resources for fective appraisal and monitoring system (which in- Community Development Foundation, with working cludes extensive site visits by TGF before, during, and networks within the NGO Coordinating Committee after the project); (c) close coordination with key gov- on Development; women savings groups in Surin ernment agencies, such as CDD and local authorities in Province under the NET Foundation; community the project area; and (d) the reliance on loans, not forestry loans and “community rice banks” in Ubon grants, which imposes discipline on the use of funds Ratchathani and Amnart Charoen Provinces under and ensures sustainability of the program. the Progressive Farmers Association; and village banks in Roi Et Province under the Grassroots sector restructuring, and erosion of public confidence Integrated Development Foundation. Some of the have generated three adverse impacts on rural critical factors for success of these programs is finance. summarized in Box 4.1. 4.23 First, the crisis has undermined BAAC’s 4.21 Two promising new developments may financial position in three ways: strengthen the provision of microfinance in Thailand. • First, several microcredit and revolving fund Overdue loans for individual farmers increased institutions have banded together to form a new by 58 percent at the end of fiscal year 1997, “Bank Poor Network” to improve coordination and prompting demonstrations by farmers in the share best practices, including credit unions, savings northeast for a debt moratorium; groups, village banks, BAAC, GSB, Local Develop- • While BAAC has been required to pay higher ment Institute, UCDO, and BOT. Second, the pro- rates on deposits and borrowed funds to keep posed new Community Organization Development up with inflation, it has not received a Institute (CODI) may take over the responsibility for corresponding increase in lending rates, which the microfinance programs operated by GSB and has squeezed profitability; and UCDO. • The depreciation of the baht led to significant foreign exchange losses on BAAC’s large CRISIS IMPACT unhedged foreign currency position. 4.22 Compared to the commercial banks and non- 4.24 Consequently, BAAC’s capital adequacy ratio bank financial institutions in Bangkok and other fell to an estimated 3.1 percent at the end of June urban centers, the rural finance market did not suffer 1998, with a net capital of about 7 billion baht. The any great losses and is not subject to any extensive capital of BAAC, even after the capital increase of 3 restructuring following the crisis. However, the billion baht in October 1998 and 6 billion baht in spillover effects of the corporate recession, financial March 1999, is insufficient to ensure a capital 26 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand adequacy ratio of 8 percent, after taking into account off-farm activities but also promote better the need to amortize foreign exchange losses and diversification of risk. This will require additional provisioning in line with new BOT rules. widespread dissemination of the excellent German technical assistance program to develop 4.25 Second, credit to the rural sector has declined new procedures, products, and institutional during the crisis, despite a high level of liquidity in capacity for non-agricultural lending. the overall financial system. On the demand side, new credit applications are said to be limited due to • Elimination of government control on lending the economic slowdown, existing over-capacity in interest rates, which would improve BAAC rural industry, and cash flow still available to profitability, direct scarce investment funds to defaulting firms and individuals from non- the highest returns, and send correct price repayment of loans. On the supply side, higher risk signals to borrowers. aversion by BAAC and commercial banks, as well as • Phasing out of subsidized loans (and intro- provisioning needs for all loans in face of capital duction of new “rebate approach”) for “special adequacy pressures, are constraining credit growth. government projects,” which saddle BAAC with For example, BAAC disbursed 30 percent less funds bad debt and lead to inefficient rural invest- in the third quarter of 1997 compared with the same ment. However, it may be appropriate to retain period one year before; and in the succeeding two some of the poverty-oriented projects, if they are quarters, disbursements were 21 and 15 percent redressing an agreed market failure and lower. effectively targeting poor households. 4.26 Third, commercial banks are likely to with - • Introduction of more diversified savings draw further from rural markets, thereby reducing products to improve savings mobilization competition. Commercial bank lending to agriculture performance. declined by 5 percent in nominal terms in the first half of 1998, with a larger decline in the second half • Introduction of other operational reforms, in- of the year. Similarly, many banks are likely to close cluding restructuring of staff incentives, review down their rural passbook operations over the next (and possible phasing out) of BAAC’s tax few years, as part of their financial restructuring exemptions, and improved disclosure of loan strategy to reduce operating costs. losses, rescheduling, and provisioning. • The eventual setting up BAAC as a full-fledged KEY ACTIONS FOR THE FUTURE commercial bank separate from government, including an independent management and 4.27 The number one priority is the transformation board of directors, and complete separation of BAAC into an independent, financially solvent from its sister agency, the Marketing Organi- commercial rural bank. Key reforms include: zation for Farmers. • Despite the two recent capital infusions, another 4.28 The second priority is to expand microfinance increase in BAAC’s capital is needed to ensure a for small farmers and poor households. Key capital adequacy ratio of eight percent; as the measures include: current profit levels are insufficient to cover the required amortization of foreign currency losses • Consolidation and expansion of the various and provisioning levels. This should be microfinance initiatives operated by government accompanied by a detailed financial diagnostic agencies under one program (possibly the study, with a focus on the quality of the loan proposed CODI or Fund for the Development portfolio, appropriate provisioning policies for and Reconstruction of the Small Farmer), in farm and non-farm activities, foreign exchange order to minimize duplication, improve institu- risk management, interest rate policy, the level tional coordination, and expand microfinance of subsidies, and branching policy. resources for poor households. • Elimination of restrictions on the amount of • Strengthening and expansion of NGO micro- lending for non-agricultural activities and to finance programs, including the provision of non-farmers, which would not only redress the technical assistance for improved operating pervasive problem of limited access to credit for procedures and financial management, and Strengthening Rural Finance Markets 27

additional investment funds to expand opera- • There should be greater balance between gov- tions; and development of more innovative ernment and non-governmental representation multi-stakeholder groups like the new Bank on the boards of rural state financial institutions. Poor Network that facilitate sharing of lessons learned and best practices across microfinance 4.31 The fourth priority is to reduce the role of groups. government in the rural banking business, There is little justification for the large number of subsidized, • Strengthening and expansion of local commu - directed credit programs scattered throughout nity institutions for savings mobilization, in- MOAC, MOI, MOLSW, and other line agencies, as cluding village banks established by CSOs, many of these programs face low repayment rates, credit unions organized by Credit Union League create distortions in rural resource allocation, and of Thailand, and the “one baht a day” savings BAAC and other financial institutions are better programs established by MOAC and GSB. equipped to provide the intermediation services. In particular, DCP’s provision of subsidized credit to • Introduction of simple means tests in micro- cooperatives needs to be carefully reviewed. finance programs to improve their targeting to poor households 4.32 The fifth priority is to strengthen training and supervision in the sector, as follows. 4.29 The World Bank and Ministry of Finance are planning a joint study to review microfinance issues, • The recent transfer of prudential supervision for which will help identify additional measures to rural SFIs from MOF to BOT is a key step, but strengthen the access of the rural poor to credit further work is needed to develop an effective 4.30 The third priority is to improve the policy supervision framework for rural banking within framework for efficient and competitive rural BOT. intermediation. • Establishment of a prudential framework for • Lending and deposit rates should be determined community savings and microcredit groups by market forces. As in the case of commercial (such as operating guidelines and annual audits) banks, key rural finance institutions like BAAC, to ensure compliance with minimal accounting, SIFC, GSB, SIFC, and cooperatives should be supervision, and reporting standards. free to set their own rates, in view of their • requirements to cover costs, build up a reserve While GSB’s expansion into rural lending will for bad debt, and ensure financial sustainability. deepen competition, it lacks a “lending culture” and should strengthen staff skills in loan • Government should streamline current legal appraisal, risk assessment, and portfolio regulations on cooperatives and farmers groups management that impede competition for the provision of • loans to rural households. An organizational diagnosis of DCP should be completed to clarify its role in organizing and • MOF’s limited but occasional interventions in supervising cooperatives, with additional the administration and lending operations of training and technical assistance provided to BAAC, SIFC, and GSB should cease. help meet its revised mandate.

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CHAPTER 5

Improving Agricultural Productivity

5.1 Agriculture’s role in the economy has shrunk million in 1997. Nonetheless, agriculture remains a over the past two decades, in line with the increased key sector in several parts of the country, accounting investment in the manufacturing and service sectors for about 38 percent of GDP in the South, and about that fueled Thailand’s impressive growth. Nonethe- 20 percent in the North, Northeast, and West. less, the sector still accounts for about 50 percent of the total labor force and 25 percent of total export 5.4 As shown in Table 5.1, the growth rate of value. While the sector will continue to shed agricultural output has been low by regional resources in the future to fuel the growth of more standards and paddy yields remain the lowest in productive parts of the economy, there is no question Southeast Asia. This overall decline reflects both that agriculture will remain a core element of demand side factors, which reduced the share of Thailand’s rural development strategy and that the agriculture in total demand, and supply side factors, country will retain some comparative advantage in which drew resources out of labor-intensive agriculture production. agricultural industries into more capital and skill- intensive industries in manufacturing and services. 5.2 Despite a weak endowment with water However, agriculture’s contraction does not arise resources, Thailand has a relatively favorable from any decline in the price of agricultural output land/person ratio, well developed marketing net- relative to other traded goods industries. work, secure land-use rights in much of the country, and extensive agricultural credit system compared to Table 5.1 its main regional competitors of China, Indonesia, Agricultural Production Statistics from and Vietnam. Consequently, improving agricultural Southeast Asia productivity and competitiveness continues to be a priority, particularly to address the food and income Average Annual Growth Paddy Yields requirements of poor households, the raw material Rate of Agricultural needs of the agro-processing sector, and continued Country Output Per Capita Tons / ha. export growth 1974-84 1985-96 1994-96 Indonesia 2.2 1.6 4.4 LONG-TERM CHANGES IN RESOURCE USE Laos 4.2 -0.5 2.6 Malaysia 1.0 1.3 3.1 5.3 The agriculture sector experienced a slower Myanmar 2.8 0.7 3.2 average annual growth (3.7 percent) than the other sectors (10.3 percent) since the mid-1980s. As a Philippines 0.7 0.6 2.8 result, agriculture’s share of GDP fell from over 30 Thailand 1.8 0.7 2.4 percent in the early-1970s to about 11 percent in 1997, Vietnam 2.8 2.4 3.6 and the absolute number of employed persons in the sector dropped from 20.5 million in 1989 to about 17 Source: FAO Production Yearbooks.

29 30 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

5.5 The composition of production has signifi- not compete with imported feed and oils. Not only cantly changed since the mid-1980s, with a move did maize exports cease, but animal feed imports away from rice production to higher value increased tenfold and vegetable oil imports more commodities. Agricultural growth has been led by than quadrupled from 1985 to 1995. Second, the fishery (9.2 percent per year) and livestock (4.6 competing demand for water, especially in the Chao percent) subsectors. The growth of the crop subsector Phraya Basin (which also serves the Bangkok area), (2.8 percent) is dominated by rice, for which output has led to the imposition of water quotas in the dry growth has been low (0.5 percent), but growth was season for some of the Chao Phraya irrigation areas, more rapid for some cash crops, including sugar cane forcing many paddy farmers to look for less water- (6.3 percent), rubber (9.1 percent), oil palm (25.3 using technologies. While promoting diversification, percent) and fruits (9.5 percent). This pattern of it has also resulted in greater unreliability in growing growth reflected a response to export demand rice for exports. Finally, Thailand’s competitiveness (rubber, fisheries, broilers, rice); domestic demand, in a number of exports (e.g., rice, shrimp, processed especially those affected by income growth (live- fruits and vegetables and broiler meat) was reduced stock, fruits, oil palm, sugar); and new MOAC after 1994 when China devalued its currency and the development programs. baht remained pegged to the U.S. dollar.

5.6 The increased population pressure on arable land has resulted in farms getting smaller on the one CONSTRAINTS TOG ROWTH hand, and new expansion into forests and poorer quality areas, especially in the Northeast and 5.9 Several factors constrain further growth of agriculture. Northern regions, on the other. As reviewed in Chapter 6, this has resulted in the destruction of 5.10 First, there is little additional land suitable for protected forests and damage to key watersheds, cultivation expansion (except for extremely marginal especially in the upper reaches of the Northern sites, or the continued illegal conversion of protected region. Erosion, increased water run-off and the forests). Consequently, some agri-businesses are siltation of dams have increased as a consequence. now looking to source production from Laos and Aggravated by the sharply rising demand for water other neighboring countries. for non agricultural uses, water availability for irrigation has, at the same time, been substantially reduced. Table 5.2 Agricultural Labor Statistics from Southeast Asia 5.7 Labor emerged as a key constraint in agricultural production after the mid-1980s, when there was large migration from rural to urban areas Agricultural % of GDP % of Labor Productivity from Force in to participate in the boom economy. As a result, Country Ratio a/ Agriculture Agriculture labor shortages occurred, especially at harvest time, and large numbers of illegal migrants from 1971 1994 1971 1994 1971 1994 Myanmar, Laos and Cambodia entered rural Philippines 0.59 0.49 29.6 22.4 50.4 46.1 Thailand. In addition, as illustrated in Table 5.2, the productivity of agricultural labor has been low Burma 0.73 0.97 47.5 63.2 65.3 65.2 relative to overall labor productivity in Thailand and Vietnam na 0.40 na 28.7 na 72.2 to agricultural productivity in the Region. Malaysia 0.60 0.72 31.4 18.6 52.6 26.0

5.8 The agricultural sector has therefore been Indonesia 0.67 0.37 43.6 17.3 64.8 46.1 under pressure to adjust its production in response to a variety of constraints. Yield improvements have Thailand 0.36 0.21 28.6 11.5 79.2 56.0 been particularly significant for dry season paddy, maize, sugar cane and certain tree crops like rubber a/ Ratio of agricultural output per agricultural worker to average and oil palm. The structure of crop production has, output per worker in economy however, evolved differently for the various products. First, maize and annual oilseed areas Source: Thailand National Accounts Data and Labor Force declined to only the more suitable areas as it could Surveys. Improving Agricultural Productivity 31

5.11 Second, water for agricultural production is increasingly scarce, reflecting limited supplies (water availability per person is below the Asian average and the lowest in Southeast Asia), increased competition from industrial and urban consumption, and inefficiencies in management of water supply and irrigation distribution system.

5.12 Third, land reform is still a problem, with slow issuance of title deeds on private land, inefficient land tax policy, and tenure insecurity for the 20 percent of the rural population who farm on public land.

5.13 Fourth, despite the recent (and probably transitory) urban-to-rural remigration, the sector is likely to continue to face a seasonal labor shortage in the medium term, as younger workers return to higher wage jobs in the industry and service sectors after the crisis is over.

5.14 Fifth, research and development of agricultural technologies is neither adequately funded, were constrained by their international prices and the linked into the extension system, sufficiently fixed exchange rate policy. Agriculture's share of focussed on traditional farming practices, nor effec- GDP would have fallen in any case, as a consequence tively supported by the private sector. Similarly, the of economic growth, but the real appreciation extension system is weak, reflecting a top-down and accentuated this trend. bureaucratic structure and limited out-reach to small farmers. 5.18 Figure 5.1 illustrates three measures of competitiveness: the prices of traded goods relative 5.15 Finally, while Thailand has a relatively healthy to those of non-traded goods and services within sectoral policy framework, there are still a few Thailand; and the prices at which Thai traded goods inefficient policies and investment programs that can exchange internationally compared with the have spurred misallocation of resources. traded goods producd by other countries, based on IMF and Morgan Guaranty data. The first measure indicates a decline of the real exchange rate index DECLINING AGRICULTURALC OMPETITIVENESS from 0.7 in January 1988 to 0.4 in mid-1997, implying DURING THEB OOM a significant loss in the profitability of traded goods production within Thailand. External exchange rate 5.16 The macroeconomic framework and gov- changes alone do not explain the outcome, as a real ernment policies that contributed to the economic appreciation within Thailand was seen between 1990 boom from 1987 to 1996 undermined the com- and 1995, well before the appreciation of the US petitiveness of the agricultural sector in three important respects. dollar began. The principal cause of Thailand's real appreciation resided in forces operating within 5.17 First, the boom produced a real appreciation of the Thai economy, particularly the demand effects the prices of non-traded goods relative to those of of large foreign capital inflows, only partially traded goods, which undermined the capacity of the sterilized.14 traded goods sectors to attract resources within the domestic economy in competition with non-traded goods sectors. The reason for the real appreciation was that the capital inflow increased domestic demand for all goods. Non-traded goods prices rose 14 A more detailed discussion of the data is found in Peter as demand for them increased, but traded goods Warr, “Thai Agriculture Beyond the Crisis,” unpublished prices—which include most agricultural products— paper, 1999. 32 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

Figure 5.1 expenditures on agriculture fell from 11.7 to 8.4 Real Exchange Rate and Competitiveness percent of total expenditures, and from 2.5 to 1.6 percent of GDP. Moreover, the geographic composi- 0.8 tion of agriculture expenditures changed, reinforcing 0.75 poverty and income inequality patterns: the share of 0.7 agriculture expenditures to the two poorest regions, 0.65 Northeast and North, declined from 13.7 and 10.8 0.6 percent in 1992 to 10.7 and 9.2 percent in 1997,

0.55 whereas the share to the wealthiest region, Central,

0.5 increased from 4.3 percent in 1992 to 11.9 percent in 1997. 0.45

0.4 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 AGRICULTUREA FTER THE CRISIS

...... Morgan Guaranty Measure 5.22 While agriculture did not grow as rapidly as ------IMF Measure the rest of the economy during the boom period, it Traded / Non traded Price Ratio also has not contracted as severely during the crisis. Source: IMF, International Financial Statistics; and price data NESDB estimates that agriculture is the only sector from Department of Business Economics, Ministry of that grew in 1998, increasing by 2.5 percent; whereas Commerce, Bangkok manufacturing, construction, and services declined by 7.5 percent, 22 percent, and 7.1 percent, respec- 5.19 Second, in addition to the fixed exchange rate tively, contributing to an overall decline of GDP of 8 policy and the monetary treatment of the large percent. In the short-run, agriculture is expected to capital inflows, Thailand’s protection policy skewed increase its output and employment levels, as the resource allocation away from agriculture and large depreciation of the baht has increased the towards manufacturing and industry. A review of competitiveness of agricultural exports and restored effective rates of protection and domestic resource the profitability of certain crops vis-à-vis imports costs indicate that agriculture and agro-industry (such as maize and various annual oilseeds). received relatively little tariff protection in the past decade (with the exception of sugar, dairy product 5.23 However, the crisis may not provide as large a processing, coffee and tea processing, and tanning), stimulus to production as anticipated. MOAC data whereas the bulk of manufacturing and industry was indicates that the area planted to the main season rice heavily protected (notably automobiles, petroleum crop declined by 0.4 percent in 1998/99, with a refining, confectionery, alcohol refinery, and corresponding decline in output of 1.5 percent. cosmetics).15 Similarly, the second paddy crop, harvested in March-April 1999, is projected to drop by half, as 5.20 Thailand has greatly reduced the protection large amounts of land will not be available for provided to the industrial sector in recent years and production because of water restrictions enacted in the overall level of protection is now more moderate. response to the drought. Of the other major agri- However, tariff levels have continued to include high cultural products, only maize (primarily for animal peaks on some manufactured goods; and, in response feed) and cassava showed a significant increase in to the crisis, most tariffs were raised by 10 percent production, primarily as a result of the end of the and permanent increases were made in some of the drought induced by the El Niño weather patterns. highest levels. There was no significant change in production levels 5.21 Third, the composition of public expenditures of sugarcane, oil palm, soybean, and rubber. The shifted, with declining investment in agriculture. limited supply response reflects several factors. Between 1985 and 1997, the share of government 5.24 First, competitive devaluations by large agricultural exporting countries in the Region under- 15 See Thailand Development Research Institute, Domestic mined the relative profitability of some key exports, Resource Cost Estimates for Thai Industries, 1995, Bangkok, particularly rice and rubber. For example, good 1996; and unpublished estimates, Sunee Budsayavith, grade rice from Thailand is now priced at $275 per Ramkhamhaeng University, Bangkok. tonnage, compared to $238 per tonnage from Improving Agricultural Productivity 33

Vietnam and $242 per tonnage from Pakistan. In Figure 5.2 addition, the reduction in tax privileges under the Change in Rice Prices Generalized System of Preferences in the European (percentage change, year-on-year) Union as of January 1, 1999, will reduce the competitiveness of shrimp, processed seafood, and 120 fruit in European markets. 100 5.25 Second, the price responsiveness of Thai farmgate agricultural production is historically very low, 80 Bangkok wholesale particularly for rice. A recent TDRI report indicates Bangkok FOB that a 25 percent increase in rice prices would 60 Exchange rate produce only a 0.7 percent increase in area planted, a

1.3 percent increase in yield, and a 2.3 percent 40 increase in production.16 5.26 Third, reduced credit and higher input costs in 20 the wake of the crisis constrained the use of fertilizer and other inputs. 0

5.27 Finally, there has been limited transmission of -20 the increased Baht prices of export commodities to farmers. As shown in Figure 5.2, the year-on-year increase in the farm gate price of rice was 25 per cent Source: IMF, International Financial Statistics; and price data by March 1998 (compared to a wholesale price from Department of Business Economics, Ministry of increase of 48 percent and an exchange rate increase Commerce, Bangkok of about 60 percent), and 20 percent by June 1998 (compared to a wholesale increase of 70 percent and an exchange rate increase of about 55 percent). GOVERNMENT STRATEGY

5.28 The partial transmission of increased export 5.29 MOAC’s Framework for Restructuring the prices to farmers obviously raises concern, as it Agriculture Sector lays out an effective and sustain- undermines production incentives, rural incomes, able strategy for the sector, particularly its emphasis and, ultimately, economic recovery. While some on reducing risks for small farmers, increasing believe that local marketing agents are colluding to investment in research, improving export quality, control prices to farmers, it is highly unlikely that restructuring the role of MOAC, developing regional monopsonistic behavior is an issue, even in the short- production links, and monitoring and preparedness 17 run. The more likely explanations are: (a) exchange for natural disasters. It has outlined five strategic rate uncertainty over the months following the float- plans for the medium-term, for a total budget of 43 ing of the exchange rate, during which time market- billion Baht. ing agents held stocks between purchasing at the farm gate and selling at the wholesale levels; and (b) • Increase competitiveness of farm products for inadequate flow of information to farmers regarding export and import substitution (14.3 billion price changes at the border and consequent weaken- Baht), covering restructuring of production and ing of farmers' bargaining power with traders. The marketing systems, research and development, fact that the exchange rate has remained stable means measures to lessen the impact of water that these margins will decline in the immediate shortages, and promotion of agro-industrial future and are no longer a matter for concern. goods.

• Improve management of natural resources and 16 See Somporn Isvilanonda et. al., "Rice Supply and the environment (15.4 billion Baht), including Demand in Thailand: The Future Outlook," TDRI, Bangkok, reforestation, water and soil conservation, and January 1995. sustainable fishery development. 17 The work of Ammar Siamwalla, Chirmsak Pinthong and others has shown that, overall, rice marketing in Thailand • Development of agricultural institutes to is highly competitive, with relatively unimpeded entry and encourage community-based production (9.3 exit, and thousands of small agents at the farmgate level. billion Baht). 34 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

• Implementation of small-scale, sustainable Box 5.1 farming initiatives pioneered under His Majesty Losing Comparative Advantage in the King’s “New Theory” (3.3 billion Baht). Rice Production • Planning and programs for the 21st century (0.2 billion Baht). Thailand is the world’s leading exporter of rice, reflecting long-term comparative production advantages 5.30 In addition, the Government has enacted and a decline in per capita consumption domestically. several short-term measures to boost competitiveness Past productivity gains came mainly from yield im- and generate employment and income for farmers in provements, which boosted output from 528 kg/rai in response to the crisis. 1980 to 721 kg/rai in 1996. However, as shown in 5.31 First, a new agricultural stimulus package was Table 6.1, average paddy yields have now fallen below recently approved by the Cabinet, which includes other countries in the Region, mainly due to low labor $100 million for provision of credit lines, marketing productivity and inefficient management of water re- and management advice, and technology to improve sources. Similarly, the total planting area has agricultural quality and management; $85 million in declined, partly in response to restrictions on water for credit lines to promote alternative agricultural the dry-season paddy crop and to Government activities for farmers in livestock, fishery, mixed programs that promote cultivation of higher value, less farming, and farm product processing; and $15 water-intensive crops. The long-term sustainability of million for community reforestation projects. rice production will depend on improved demand management of water resources, mechanization of 5.32 Second, a variety of new policies have been transplanting methods, and continued adaptive promulgated to maintain export competitiveness and research.18 protect farmer incomes: BOT and Export-Import Bank are providing 40 billion Baht for packing credits for rice exporters; BOT, GSB, BAAC, and the Sugar 5.35 In the case of water, there is very limited scope Fund have approved 10 billion Baht in loans for expanding supplies, as the long run marginal cost for millers to buy sugar from planters; BAAC for the construction of new dams and reservoirs is has allocated 1.3 billion to pledge paddy from extremely high since most lower cost investments farmers early in the season; the Committee on have already been completed. Additional investment Policy and Schemes for Assistance has set aside is required for rehabilitation and maintenance, more than 2 billion Baht in 1999 to intervene in including improving water control infrastructure at support of black tiger prawn, chicken egg, and jute both the water delivery and irrigation scheme level prices; and the Government has scrapped import as well as the restructuring of large rice irrigation quotas and tariffs on ingredients for the animal-feed systems to meet the different needs of orchards, industry in order to bring down domestic prices of mixed farming, and other agricultural production meat. (particularly in the Chao Phraya Basin); and improving system efficiency at the farm level, including switching from “flood and drain” to more efficient types of irrigation. However these should be KEY ACTIONS FOR THEF UTURE financed primarily by beneficiaries, not the public 5.33 Some specific suggestions to enhance the sector. Government’s strategy and improve the productivity 5.36 In addition, significant improvement is needed and competitiveness of agricultural production are in government planning and management of the reviewed below. overall water delivery system. As reviewed in Chapter 6, the highest priority issues are establish- 5.34 First, more efficient use of the key factors of ing new institutional mechanisms for community production is required to raise productivity. This is particularly true for the principal crop for food security and exports, rice, where Thailand’s 18 Nipon Poapongsakorn, “Problems and Outlook of productivity lags behind Regional competitors (see Agriculture in Thailand,” TDRI Quarterly Review, June Box 5.1). 1998. Improving Agricultural Productivity 35 management of water resources (such as water user Agriculture Project that will establish a cooperative associations and river basin management institu- network for sustainable agriculture among govern- tions), introduction of rights-based allocation mecha- ment agencies, NGOs, and farmers; expand research nisms, as well as improving demand management, and extension work related to sustainable agricul- through the phased introduction of new cost ture; and provide credits for mixed farming systems recovery and water pricing policies (which will be tailored to the resource endowments and consump- politically difficult in the short-term but essential for tion requirements of poor households. long-term efficiency). 5.41 In addition, many NGOs have piloted effec- 5.37 As part of the introduction of water tariffs, the tive agriculture initiatives for two decades that are Government will need to address several technical ready for wider dissemination, including the Alter- and social issues. First, it will be difficult to measure native Agriculture Network, Progressive Farmer the volume of water used individually by farmers, Association, Haq Muang Nan Foundation, North Net since most of the irrigated area is served by gravity Foundation, Foundation of Education for Life and systems that do not easily permit volumetric charges Society, Technology for Rural and Ecological Enrich- for individuals. Therefore, it would be more feasible ment, and many others (see Box 5.2). to allocate and charge for water in bulk to a group, 5.42 Third, Government should reduce intervention and let farmers distribute the water among them- in production decisions and not try to pick winners selves and agree on the quantities consumed. Con- and losers among agricultural commodities. As sequently, establishment of water user groups are reviewed in recent TDRI reports, government essential for the introduction of water charges, in programs that direct subsidized credit for specific addition to their roles in water distribution and agricultural development activities have faced mixed system maintenance. Second, water tariffs may need success: the track record in correctly anticipating to be set so that a certain basic amount per group is at price trends has not been good; farmers are already a low price, or even free, but beyond that basic level restructuring their production in response to market (which is de-facto subsidized, although in a non- signals and simply join government programs to distortive manner), the price would reflect the scarcity of water. 5.38 In the case of land, titling needs to be Box 5.2 accelerated to strengthen land rights on private land New Agriculture Initiatives for the Poor (especially for collateral purposes); the land tax Nai Pai Sroisaklang, the leader of a network of 27,000 system needs to be overhauled to improve incentives farmers in the Northeast, has been a pioneer of sustain- for efficient resource use and discourage speculation able agriculture for almost thirty years. He emphasizes (with an exemption for small farmers); and the 1.5 self-reliance as the basis for agriculture, and encour- million households who currently farm in national ages poor farmers to move away from monoculture forest reserves, primarily in the uplands, need to be production of rice and develop a range of activities that allocated land and secure land use rights. As will meet all household needs and diversify production reviewed in Chapter 2, land tax revenues should risk. A critical step is the construction of a series of accrue to district governments for local services. ponds, which store rainwater during the rainy season to 5.39 Second, more emphasis should be given to supply crops during the dry season. The ponds are fer- sustainable agricultural production. For poor house- tilized by pig, chicken, or duck manure; stocked with holds, the emphasis should be, first, on ensuring food fish, such as carp, tilapia, or catfish; and surrounded by security; and, second, on producing marketable vegetable plots and fruit trees. Rice fields are con- surpluses for cash generation. For non-poor house- structed slightly lower than the banks to facilitate irri- holds, the emphasis should be on the introduction of gation flow and reduce the need for pesticides, as the integrated farming systems that increase yields while fish reduce pest problems. While this integrated ap- protecting the environment, diversifying production, proach requires significant training and inputs, it pro- and minimizing risks. vides multiple benefits to poor households: rice, fish, poultry, fruit and vegetable for a balanced diet; market- 5.40 Several well-designed programs have already able surpluses for cash generation; and diversified pro- been launched. For example, MOAC, with support duction for risk minimization. from DANCED, has initiated a new Sustainable 36 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand appropriate economic rents; and many of the tech- 5.47 In the case of quality control and environ- nology recommendations have been inappropriate mental monitoring, MOAC is developing effective and not adequately supported by research and measures, including inspection of plant and breeding extension.19 material, certification of commodities, and establishment of a “one stop service” with private sector 5.43 Unfortunately, the revised Eighth Plan and the participation for export quality. recently approved agricultural stimulus package both continue the tradition of government interven- 5.48 As part of this refocus on public goods, MOAC tion in production and marketing decisions, in- should divest several of its quasi-commercial func- cluding directed credit for export production tions that could be delivered through private sector (shrimp, rubber, and oil palm) and import substi- participation. In line with the Master Plan for State tution (dairy cattle production and high seas fishing). Enterprise Reform, MOAC should proceed with timely privatization of the following enterprises: Fish 5.44 Fourth, Government should redirect its focus Marketing Organization (staff of 350), Rubber Estate to essential public goods, particularly research and Organization (staff of 554), Dairy Farming Promotion extension; redressing information asymmetry in Organization (staff of 1,334), Thailand Plywood commodity markets; regulatory compliance with Company (staff of 1,112), and the Marketing health, safety, and quality standards; and sustainable Organization for Farmers (staff of 540). agricultural development for poor households. 5.49 Fifth, institutional roles and structures need to 5.45 In the case of research, the past reliance on the be reviewed and revised. In the case of MOAC, an private sector to provide technology through contract organization diagnostic study is needed to reduce farming has not been successful, and the government duplication of functions, strengthen linkages with the should provide increased investment for research as private sector and farmers, and identify functions to well as stronger incentives for private sector devolve to provincial and district levels. In the case partnership (such as tax breaks or subsidized loans of cooperatives (and the Department of Cooperative for R&D). The establishment of new agricultural and Promotion), their mandate, legal framework, financ- environmental research institutes is a welcomed step, ing arrangements, comparative advantages, and but their mandate and areas of focus need to be likely production niches need to be reassessed. better defined. In view of the sector’s long-term MOAC’s possible participation in the World Bank labor constraints, research should focus on increasing Public Sector Reform Loan would provide a good labor productivity, such as increased mechanization framework for this analysis, drawing on some of the of rice production. The recent ADB Agriculture preliminary diagnostic work completed in the ADB Needs Assessment Study provides excellent sug- Study. gestions for new institutional arrangements to improve research priorities, linkages with extension 5.50 Sixth, while the overall policy framework is and markets, and commercialization.20 healthy, a few sectoral policies need to be adjusted to ensure more efficient resource use, improved risk 5.46 In the case of extension, the organizational sys- management, and maintain long-term competitive- tem needs to be reviewed and overhauled, including ness. stronger links between researchers and extension agents, decentralization of services to provincial and 5.51 In the case of inputs, the few remaining district levels (but only after effective capacity subsidies on certain types of fertilizers (mainly for building has taken place), and greater focus on paddy) and seeds should be phased out. Similarly, farmer organizations and farm linkages. Again, the pesticide use should be rationalized by stricter recent ADB Study provides useful suggestions for enforcement of existing regulations, introduction of restructuring extension services. extension and financial incentives for Integrated Pest Management, elimination of free pesticide distribution to farmers, and introduction of an excise tax 19 Sectoral Economics Program, Agricultural (instead of the current duty free status) on pesticides. Diversification/Restructuring of Agricultural Production 5.52 In the case of outputs, price support programs Systems in Thailand, TDRI, August 1995. should be eliminated, particularly for sugar, the only 20 ADB, “Thailand: Agriculture Sector Needs Assessment crop that is heavily protected (however, the rice Study,” November 1998. mortgage scheme should be retained, as it has helped Improving Agricultural Productivity 37 redress the policy weakness in the banking system policies. In particular, the continued high level of that commodities in storage may not be used for legal protection for some manufacturing and industrial collateral). The increased reliance since the crisis on products remain a concern, which continues to subsidy programs to protect farmers incomes, distort incentives for long-term investment in administered by the Committee on Policy and agriculture. Schemes for Assistance, is understandable but 5.54 In the case of international trade, Thailand worrisome, as it will be politically difficult to remove should continue to maintain its impressive and these market interventions after the crisis. Instead of effective open trade policies, in conjunction with the focussing on price supports, the Government, in World Trade Organization (WTO), ASEAN, APEC, conjunction with the private sector, should develop and other international treaties. Continued reduc- futures markets for the major commodities to assist tions in agricultural protection will be an important farmers in managing price risk. Similarly, the retail policy reform to be pursued at the WTO negotiations price controls on sugar and vegetable oil, which are that begin at the end of this year. currently above world prices, provide little long-term benefit and should be phased out, as they have 5.55 The Government should take an extremely not been effective in stimulating more efficient cautious approach to the implementation of any production and impose high costs on domestic contingent protection measures under WTO, such as consumers. antidumping, safeguards, and subsidy/counter- vailing measure. Experience in other countries has 5.53 In the case of macroeconomic policies, the demonstrated that contingent protection measures long-term competitiveness of the sector will depend undermine investors confidence and are captured by on effective management of the exchange rate, domestic special interests, thereby creating very foreign investment flows, and domestic protection serious and costly restraints on trade.

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CHAPTER 6

Improving Natural Resource Management

6.1 In the absence of an effective regulatory is hotly debated. Enforcement of the ban is difficult framework, strong management institutions, and for several reasons: loopholes in the legislation allow adequate participation of civil society, Thailand’s the sale of some illegally felled logs; illegal logs can past rapid economic growth was accompanied by be passed off as legally felled logs, since the ban significant pollution and degradation of natural allows for felling of trees in private forest plantations, resources. Natural resource activities such as agricul- harvest of trees damaged by age or disease, and ture, forestry, fisheries and tourism still have poten - clearing for infrastructure projects; and illegal logs tial to play key roles in rural development, both can be disguised as imports (Thailand imports about directly as sources of livelihood and income for rural 3-4 million m3 per year). people, and indirectly through the supply of inputs 6.4 Encroachment is fueled by the need to provide to value-added activities. To realize this potential, food, income and shelter for increasing highland however, the current trend toward degradation of populations. Traditional shifting cultivation rotations key natural resources must be effectively reversed, have become shorter as a result of high hilltribe and the underlying causes redressed. population growth rates, increased competition for land from the lowland communities, and the inward FORESTS ANDB IODIVERSITY migration from neighboring countries. The combined effect of declining land productivity and increasing 6.2 Forest Trends. Forests covered about 53 population results in further forest encroachment, percent of the total land area of Thailand in 1961, but usually on land that is marginal for cropping. As were reduced significantly to about 28 percent by reviewed in Box 6.1, the problem has been 1989, when a nationwide logging ban in the country’s aggravated by the large remigration back to rural terrestrial forest reserves was enacted. The ban areas following the crisis. followed a catastrophic flood that raised both public awareness regarding watershed degradation and 6.5 Biodiversity Trend.s Thailand is on the fringe broad-based support for improved forest manage- of several different bio-geographic zones and thus ment. Since the ban, forest cover has dropped further supports extremely diverse fauna and flora. How- to around 25 percent in 1998. Nonetheless, the rate of ever, endemism is not particularly high, and Thai- decline has slowed from about 1.7 percent per year in land’s biodiversity importance is ranked as average. the 1980’s to 0.3 percent per year just after the ban, Five terrestrial protected areas (Doi Inthanon, Kaeng and down to 0.1 percent per year in 1995-98. Krachan, Khao Yai, Huai Kha Khaeng, and Thung Yai Naresuan) are considered to be of global 6.3 The bulk of the decline in forest cover was due significance. The protected area system covers 16 to the unsustainable practices of pre-ban logging percent of the total land area of the country. concessions. However, post-ban illegal logging and Additional parks and protected areas are proposed encroachment by farmers and forest clearing for and in various stages of application and approval, infrastructure in upland areas continue to contribute including 50 terrestrial national parks (6 million rai); to forest loss and degradation. Logging still occurs in 15 wildlife sanctuaries (3 million rai); and 3 non- virtually every forest in Thailand, although the extent hunting areas (0.2 million rai).

39 40 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

local communities; (e) participatory development of Box 6.1 management plans for protected areas, including Putting Pressure on Trees…and Government buffer zone activities; (f) involvement of local communities and NGOs in implementation of manage- Chai Ninthasaen, 65 years old, went to Bangkok in ment plans; and (g) full financing of recurrent costs 1987, with his two sons, three daughters, and three of management through increased user and service sons-in-law, to earn 8 baht a day as a construction concession fees. worker. Altogether Chai’s family earned 20,000 baht per year from a variety of jobs—until the crisis came and they were forced to return to their home village in WATERSHED MANAGEMENT Si Chompuhu in the Northeast. They recently joined about 640 families who made national headlines by 6.8 Watershed classification maps based on geo- encroaching on the Dong Larn forest reserve in Khon physical variables (percent slope, elevation, land Kaen. “We want only a piece of land to survive,” form, geology, soil type, forest cover), and detailed Chai explained. “We moved our village into an area near the krathin yak plantation and began cutting land-use regulations, were prepared from 1983 down trees to put pressure on the authorities….I through 1991 and approved by the Cabinet in 1992. really feel that they cannot blame us because we have However, most watershed areas have not been been totally ignored by all parties so far.” According formally demarcated on the ground. In addition, the to a local NGO, Assembly of God, there are more intended land-use does not necessarily match the than 4,000 landless families that are considering actual land-use, particularly for Class 1A and 1B similar encroachment on 62,500 rai in Khon Kaen, watersheds, which are the most ecologically sensi- Maha Sarakham, Kalasin, Sakhon Nakhon, and tive. Despite the restrictions on human occupation, Nakhon Ratchasima. many Class 1 watersheds are inhabited and farmed, reflecting several factors: pre-existing land uses were not taken into account during the initial classifica- 6.6 The main threat to terrestrial biodiversity is tion; the analysis was done on the basis of one square loss of critical natural habitats, chiefly through kilometer grids, which are of insufficient detail to encroachment and poaching in protected areas. take into account small, less steeply sloping areas Effective protection in parks is less than satisfactory. that may be used for farming; and land use Boundaries are often contested and encroachment is regulations have not been effectively enforced and common, even in areas gazetted for many years there has been significant encroachment since the (partly due to the fact that boundaries were mapping (see Box 6.2). formulated on the basis of remote sensing imagery, with little ground truthing, and seldom have been demarcated in the field). While many parks and wildlife sanctuaries have management plans, they are typically out of date, developed with insufficient participation of local communities, and are not being implemented due to insufficient budget and capacity.

6.7 Key Actions. Decisive actions must be taken to support enhanced conservation of national parks and wildlife sanctuaries. Key measures include: (a) more effective enforcement of the forest logging ban, through enhanced policing capabilities (surveillance, log monitoring and log trade control technologies), better prosecution, and tougher penalties; (b) more frequent monitoring of changes in forest cover using interpretation of satellite images and ground truthing; (c) increasing staff capacity through additional recruitment and focused technical training; (d) formal demarcation of protected areas, wildlife sanctuaries and buffer zones, in consultation with Improving Natural Resource Management 41

other soil erosion control measures as appropriate; (c) Box 6.2 engagement of local communities and NGOs in Land Use Conflicts in Watersheds protection of watershed areas; and (d) research and extension support for new agricultural technologies In Northern Thailand, about 1.4 million rai of forest to stabilize shifting cultivation and establish land were annually encroached in the 1980s, fueling sustainable upland farming systems, including agro- soil erosion rates of 150-200 tons per hectare year, forestry and community forestry. equivalent to the loss of 1 m3 of soil per year. In response, the Royal Forestry Department launched large-scale reforestation programs in the watersheds WATER RESOURCES of the Ping, Wang, Yom and Nan Rivers that feed the Chao Phraya River Basin. As a result, the hilltribe 6.11 Overuse of Surface and Groundwater villagers in Huay Kang Pla Village in Chiang Rai Sources. Thailand’s past three decades of rapid (who have practiced traditional shifting cultivation in economic development stimulated an explosive the forests since the 1950s) had some of their land expansion of demand for water services—for hydro- appropriated for natural forest regeneration and were power, irrigation and domestic and industrial water told to follow improved soil and water conservation supply. During the 1980’s alone, water demand systems on their remaining plots. The program has more than doubled, from 20,530 million m3 per year not worked: the farmers have not adopted the in 1980 to 43,000 million m3 in 1990. In response, the recommended conservation practices because of Government adopted an approach that focused inadequate tenure security and weak extension almost exclusively on development of new supplies services; and have destroyed almost half the new and distribution systems to meet these demands, forest plantings because of the need for arable land with little attention given to management aspects. and their anger over the land appropriation. 6.12 Nonetheless, water has become more scarce and competition has increased between the upper and lower basins; between hydropower and 6.9 In response to these land use conflicts, the irrigation; between flood control and storage of Royal Forest Department (RFD) has taken the reserves; among irrigation, industrial and domestic approach to gazette environmentally sensitive areas uses; and between in-stream and environmental, and into National Parks or Wildlife Sanctuaries, in the consumptive uses. In the absence of well-defined hope that this would provide more effective water rights and flexible allocation mechanisms, protection. Three Cabinet Resolutions issued in April scarcity-induced competition has led to heightened 1997 dealing with encroachment in forest areas were supportive of this approach. The draft Community Forestry Act recognizes that forest protection cannot be achieved without the joint efforts of communities and the Government. However, a more recent Cabinet Resolution in June 1998 takes a stricter approach, and permits possible relocation of people if necessary for effective management of conservation forests; the draft Community Forestry Act is currently being revised and may also adopt a more restricted approach.

6.10 Key Actions. Increased watershed management is needed to protect the headwaters of important river basins as well as prevent large scale soil erosion and downstream sedimentation. Key measures include: (a) formal demarcation of Water- shed Class 1A and 1B areas, and development of management plans for these areas in consultation with local communities; (b) rehabilitation of denuded steeply sloping areas, including reforestation and 42 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand conflicts among water users, and significant economic and social costs.

6.13 The worsening trend in water scarcity has become particularly apparent during the two most recent periods of drought in 1993-94 and 1998-99. In the 1998/9 dry season, water reserves were at an all- time low in the county’s two largest dams, Bhumibol on the Ping River and Sirikit on the Nan River, which serve the country’s main agricultural and industrial region as well as its chief population center. Due to the combined effects of unseasonably low rainfall and upstream water abstractions that have steadily increased over time, the inflows have decreased, abstractions have increased, and reserves in the dams have fallen to under 3.6 billion m3 (less than half the normal levels and well below their combined capacity of 16.3 billion m3).

6.14 While part of the 785 million m3 storage of a new dam to be completed within the next year on the Pasak River will be available for use in the lower and to curtail pumping from irrigation canals were Chao Phraya basin, there is very limited scope for ignored, and water allocation in effect was on a “first further expansion of surface water supplies, except come, first served” basis. through measures such as trans-basin diversions. 6.17 In addition to surface water, Thailand has The feasibility of several options for water transfer sizable unconsolidated aquifers that are used for into the Bhumibol or Sirikit dams has been under domestic and industrial water supply and irrigation. study intermittently for several years, but these However, the quantity of water that can be sustain- schemes are very costly and likely to involve significant environmental and social risks. ably pumped from these aquifers is not known in many cases, and pumping is not effectively regu- 6.15 As a result, water for agricultural production, lated. Even where the pumping rate has long been the single largest water use, is increasingly scarce in recognized as unsustainable, pumping goes uncon - the dry season due to increased competition from trolled. For example, in the Bangkok region, ground- industrial and urban water users, as well as demands water pumping of 1.5 million m3 per day is nearly for in-stream uses such as inland navigation and double the estimated sustainable yield of 800,000 m3 deterring saline intrusion from salt water along the per day from the aquifer. Similarly, an unsustainable coast. In a good year, only 35 percent of irrigable reliance on groundwater in some rural areas has area in the lower Chao Phraya, the country’s main developed in response to increasing water scarcity. agricultural area, receives sufficient water in the dry For instance, an estimated 50,000 irrigation wells season. Moreover, agricultural uses are the first were sunk in the lower Chao Phraya Basin in the cut in exceptionally dry years, such as 1993-94 and drought year of 1994, and a similar well-drilling 1998-99. campaign is underway in response to the current drought. 6.16 This situation is worsened by inefficiencies in management of dams and water supply and irriga- 6.18 Deteriorating Water Qualit.y Surface water tion distribution systems, and inflexible water alloca- quality in Thailand’s major rivers shows a tion systems that lock water into low-value uses. deteriorating trend. In 1997, the Pollution Control Water allocation is done through command and Department undertook a water quality survey of the control. Actual allocations are strongly influenced by country and found 14 percent of surface water political factors, and are widely seen as inequitable. resources are in good condition (suitable for aquatic At all levels conflict over water is becoming endemic. animals and general human consumption), 49 per- During the 1998-99 drought, instructions from the cent are in average condition (usable for agriculture Government to farmers to reduce dry season planting and general consumption), and the remaining 37 Improving Natural Resource Management 43 percent are of low quality. Pollution from domestic Resources Committee (NWRC) in the Secretariat of sewerage is a problem throughout the country, but the Prime Minister in end-1996. The NWRC oversaw surface water resources in Central Thailand are the the drafting of a new water law that had been most degraded, containing high levels of coliform intended to be submitted to Cabinet for approval, but bacteria. Another increasing concern is the rise of has recently been the subject of broad- based public ammonium nitrates in water, which endangers debate. aquatic life. Industrial pollution is severe in the Bangkok Metropolitan Region, especially the Chao 6.21 While it is unlikely that agreement will be Phraya and Lower Thachine Rivers, due to the reached on a water law in the near future, there concentration of industry there. Groundwater seems to be general agreement on some of the key quality is also thought to be deteriorating, but there principles contained in the draft law, such as the is insufficient monitoring to evaluate this trend. establishment of river basin organizations to facilitate management of water within hydrological bounda- 6.19 Institutional and Policy Framewor. kRespon- ries of major river basins, with national coordination sibility for water management is divided among 30 responsibilities falling to NWRC. Each river basin agencies in six ministries, with little coordination organization would consist of stakeholders from the across these agencies. In the irrigation and rural public and private sectors, as well as user groups, water supply sub-sectors, Government is still the and would be charged with setting policy, formulat- main supplier and financier of water services, leaving ing water resources development and management little role for the private sector and water users. The plans, regulating operation of key water-related beneficiaries of irrigation services pay little for the facilities, setting water allocation rules and over- services they receive—none of the capital costs and seeing water allocation and conflict resolution, frequently none of the cost of operating and main- especially in times of drought. Initial work, taining the systems. The result is a distorted and authorized by a Cabinet Resolution, has started on poorly-performing sector. There is an urgent need to establishment of a Chao Phraya Basin Organization address the allocation problem in a transparent way, and subsidiary sub-basin organizations. through defining water rights and developing innovative mechanisms to allow water to move 6.22 Key Actions. Integrated water resources among competing uses. management is essential for more efficient use and sustainability of increasingly scarce water resources. 6.20 In response to these weaknesses, the Gov- Key measures include: (a) creating a strong legal and ernment established the Office of the National Water regulatory framework for integrated management of surface and groundwater; (b) establishing new institutional mechanisms for increased stakeholder management of water resources, including establishment of basin organizations and subsidiary sub-basin organizations, and empowerment of water user groups; (c) allowing a more transparent, participatory and flexible system for allocation of water use rights; (d) streamlining and clarifying the institutional arrangements for operation of water supply delivery infrastructure and irrigation systems, with a reduced role for government and a larger role for water users and other stakeholders; and (e) phased introduction of cost recovery and water pricing policies as part of overall institutional reform.

COASTAL RESOURCES 6.23 Coastal resources play an important role in the economy: Thailand is one of the world’s largest producers and exporters of seafood, particularly cultured shrimp; coastal tourism is a major com- 44 Beyond the Crisis: A Strategy for Renewing Rural Development in Thailand

ponent of the large tourism industry; and coastal Figure 6.2 aquaculture has grown from a tiny industry a few Value of fisheries sector production by sub-sector decades ago to the second largest foreign exchange earner. However, the rapid expansion of economic 120,000 activities in the coastal areas, including capture 100,000 fisheries, coastal tourism, aquaculture, industrial estates, ports and harbors and other seaboard 80,000 development, has put coastal resources under great 60,000 pressure, and has led to a number of resource use 40,000

conflicts. (Million) Baht Thai 20,000 6.24 Fisheries. As illustrated in Figure 6.1, fisheries production in 1997 is estimated to have been 3.4 0 1981 1983 1985 1987 1989 1991 1993 1995 million tons, of which 2.7 million tons (79 percent) Year came from the marine capture fishery, and the Total Marine Capture remainder from coastal aquaculture, inland capture Inland Capture Coastal Aquaculture Freshwater Aquaculture fishery, and freshwater aquaculture. Of the 0.3 million tons produced from coastal aquaculture, declined from 265 to 25 kg per hour. Moreover, use nearly 73 percent was shrimp, 26 percent shellfish, of non-selective and destructive fishing methods is and the remaining 1 percent fish. on the rise; an increasing proportion of the catch is 6.25 However, as illustrated in Figure 6.2, the “trashfish,” which is used for fishmeal, and includes marine capture fishery contributed only 47 percent of many undersize and juvenile fish. the total value of fisheries production (estimated at 6. 27 Thailand is now the largest producer of 96 billion Baht in 1995), while coastal aquaculture cultured shrimp in the world. While Thai farmers contributed 43 percent, and the inland capture and have long farmed shrimp using traditional methods freshwater aquaculture subsectors each contributed and wild seed stock, the industry evolved rapidly about 5 percent. Ton for ton, coastal aquaculture is the most valuable subsector. with the introduction of hatchery technology and formulated feeds in the early 1980s. The area of 6.26 Marine capture fisheries continue to be signifi - shrimp ponds nearly doubled, from 44,770 ha in 1987 cantly over-harvested beyond sustainable yield. The to 71,887 ha in 1993, and production increased by number of fishermen continues to grow and the more than ten-fold, from 23,600 tons in 1987 to number of fishing boats, estimated to have numbered 260,000 in 1995. Production has declined somewhat 54,538 in 1995, far exceeds remaining resource in the last few years due to major disease outbreaks capacity; as a result, the catch per unit effort has resulting from continued reliance of the industry on wild stocks that have not been bred for disease Figure 6.1 resistance. Fisheries sector production by subsector 6. 28 While modern intensive practices are now 4,000 employed, the shrimp farming industry is still 3,500 dominated by smallholders, with about 80 percent of 3,000 the farms 1.6 ha or less in size. Much of the adverse ) 2,500 environmental impacts associated with the shrimp 2,000 industry arises from the difficulty of regulating the 1,500 Tons (1000 Tons activity of numerous small farmers, particularly 1,000 related to pond siting and effluent disposal. In

500 addition, the use of seawater in earthen ponds and uncontrolled discharge has caused salinization of 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 surface and groundwater in some coastal areas. Year Also, the discharge from untreated shrimp ponds Total Marine Capture typically contain high levels of organic particulate, Inland Capture Coastal Aquaculture Freshwater Aquaculture suspended solids and BOD, thereby contaminating surface and groundwater supplies. Improving Natural Resource Management 45

data whether shrimp ponds were developed directly from virgin mangrove or from areas that had already been cleared for other uses). The annual rate of mangrove loss has dramatically slowed down, from a high of 12,982 ha in 1979-1986, to 2,569 ha in 1991- 1993, and to only about 1,000 ha in 1993-1996.

6.31 Key Actions. Coastal resources need to be more effectively managed to reduce economic and social conflicts. Key measures include: (a) strengthening the policy and regulatory framework to support integrated planning and coordinated management of coastal resources; (b) minimizing the adverse impacts of major coastal activities through implementing land use planning and zoning of areas appropriate for aquaculture and tourism; (c) banning further conversion of mangrove areas and replanting converted areas as appropriate; and (d) refocusing research and extension on sustainable aquaculture practices, including the development of disease 6. 29 Fisheries in Thailand are for the most part resistant stocks. open access and are not subject to effective 6.32 Enhanced management of the capture fisheries management. The rapid development of aquaculture is needed to control overharvesting and the resulting was very much led by the private sector and small decrease in catch per unit of effort and loss of farmers, with little intervention or oversight by the resource rents. Key measures include: (a) updating DOF. maximum sustainable yield and maximum economic 6.30 Mangroves. Thailand has lost more than half yield estimates for major fishing areas and species; of its mangrove forest area, from 372,000 ha in 1961 (b) establishing a co-management framework for to 168,000 ha in 1993. Remote sensing data indicates cooperative management by government, private that two-thirds of this decline was due to the com- sector, and fishing communities; (c) reducing the bined effect of clear-felling for timber, firewood and level of fishing effort in line with MEY, through the charcoal, clearing for agriculture, salt evaporation systematic retiring of boats and gear; (d) and ponds, road and port development, and mining; the restricting entry of new effort and capturing a higher remainder was due primarily to shrimp farm devel- portion of resource rents in the fishery, through opment (although it cannot be determined from the significantly increased license fees and other charges.

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