Public Disclosure Authorized

THAILAND Public Disclosure Authorized

Oey A. Meesook Pranee Tinakorn Chayan Vaddhanaphuti

March 10, 1987 Public Disclosure Authorized Public Disclosure Authorized

Paper to be presented at the Conference on "The Political Economy of , Equity and ~rowth"in Fez, Morocco, April 25-May 4, 1987

NOTE ON MATERIALS FOR MOROCCO CONFERENCE

Enclosed please find Chapter 4-7 of the Thailand country study to be presented at the Fez Conference. These materials will be augmented by a revised version of the growth and distribution chapter which was presented at Lisbon. The revised material will be made available to the discussants as soon as possible. b The materials contained here are in first-draft form. Please note that marginal comments have been enclosed in brackets [I, to signal areas where clarification br elaboration of the material is needed. As ours has been a collaborative effort between a team in Thailand and another in Washington, D.C., we have been unable to out all the inconsistencies at - this stage. To help put these chapters within the context of the Thai story, we have provided a chapter outline below. The main chapter which has not been completed at this stage is Chapter 3, "The Roots of Development", which will cover the initial conditions, historical and geographical background, and describe several themes of the story.

Chapter Title

1. Introduction

Quantitative Account of Growth and Distribution

The R0o.ts of Development

Physical Background Historical Background (Political and social features: rise of the bureaucracy, politico- bureaucratic leadership) Economic structure circa 1950 Themes in Thailand's Development: openness, institutionalization, predominance of

The Central Decision and its Origins (1950-58)

The Politics of Development in Thailand (1959-198s)

Economic and Social Policies: 1947-85

The Resiliency of the System (1973-84)

Conclusion and Postscript

-i-

TABLE OF CONTENTS

CHAPTER 4: THE CENTRAL DECISION AND ITS ORIGINS ......

4.1 Political changes after the 1932 Revolution ...... 4.1

4.. 2 State Capitalism and Economic Nationalism ...... 4.7 4.3 Origins of the Central Decision: Private versus State Capitalism...... 4-13 4.4 The New Era of Development ...... 4.27 Annex 1

Table 1.1 List of Companies Controlled by Members of the Rachakru Clique ...... 4.30 Table 1.2 List of Companies Controlled by Members of the Si Sao Clique ...... 4.31

CHAPTER 5: . THE POLITICS OF DEVELOPMENT IN THAILAND. 1959-85 ......

5.1 The Initial Efforts of National Development. 1959-72 ...... 5.2 5.2 Development and Power Relations ...... 5.5 5.3 The Crisis of the 1970s ...... 5.15 5.4 The Return of the Military and the Conflict During 1979-1985 ...... 5.21

CHAPTER 6: ECONOMIC AND SOCIAL POLICIES 1947-1972 ......

6.1 Post War Policies of Undirected Growth and Some Reforms: 1947-1958 ...... 6.1 6.1.1 Macroeconomic Policies and Monetary Reforms ...... 6.3 a.) Fiscal Policy ...... 6.3 b) Monetary Policy and Exchange Rate Reforms ...... 6.18 6.1.2 Sectoral Policies in Favor of State Capitalism ...... 6.30 a) Agriculture ...... 6.30 b) Industry ...... 6.38 6.1.3 Some Unsuccessful Attempts at Redistribution ...... 6.44 6.2 The Push for Growth and Import Substitution Policy: 1959-1972 ...... 6.46 6.2.1 General Macroeconomic Policies ...... 6.47 6.2.2 ~uildingof Basic Infrastructure ...... 6.67 6.2.3 Industrial Development through Import Substitution Policy ...... 6.78 6.2.4 Industrial Policy as a Means of Rent Seeking ...... 6.92 6.2.5 Agricultural Policy ...... 6.94 Rice ...... 6.94 Irrigation ...... 6.100 Rubber ...... 6.110 Other Crops ...... 6.113

CHAPTER 7: POLICY ADJUSTMENTS AND THE RESILIENCY OF THE SYSTEM . 1973-84 ...... 7.1 7.1 Instability and Macroeconomic ~djustments...... 7.2 7.2 Labor and Wage Policies ...... 7.19 7.2.1 Labor Relations Policy ...... 7.20 7.2.3 Wage Policy ...... 7.28 7.3 From Import Substitution Industrialization to Export Promotion ...... 7.35 7.3.1 Factors Influencing the Change of Directions ...... 7.35 7.3.2 Attempts at Export Expansion ...... 7.39 7.3.3 Industrial Policy and Foreign ...... 7.55 7.4 Some Attempts Toward Redistribution ...... 7.60 7.4.1 The Price Support Program for Rice ...... 7.62 7.4.2 Limited Scale of Land Reform ...... 7.64 7.4.3 Financial Credit for the Agricultural Sector ...... 7.68 7.4.4 A Declared Decade of Rural Development ...... 7.73 CHAPTER 4

The Central Decision and Its Origins by mayan Vaddhanaphuti, Ranpsan Thanapompun, Ukrist Pathmanond

In order to understand how Thailand achieved the observed outcomes of growth and distribution we must examine the social and political forces which lie behind hail and's political economy and how these have shaped, the policy choices made. In the modern period a critical juncture for Thailand's development was reached in the late 1950~~the historical antecedents of which date at least to the 1932 Revolution. We have termed this juncture the tt central decision" since it marks a major policy shift in Thailand which affected the direction of the country's economic and political development for the subsequent decades. In this chapter we shall examine this decision, focussing on the political and social forces-which led to this turning point.

[A brief description and analysis of the main actors should follow here: 1) monarchy/sakdina, 2) technocrats~bureaucrats~middleclass, 3) military/factions, 4) businessmen/~hinese,5) farmers, 6)external actors

(, U.S.).

4.1 Political Changes after the 1932 Revolution

The Revolution of 1932 marked a critical juncture in Thailand's

political economy. After years of the gradual centralization of bureaucratic

control under the Monarchy, which was begun at the end of the reign of King

Rama V, there was a swift change in power away from the traditional "~akdina"

ruling class into the hands of a small group of young military officers and civilian bureaucrats. The bureaucracy, which was meant to be the administrative machinery serving the state in Thailand's modernization, had now gained a life of its own. It exhibited the ability to challenge the traditional system and to shift the center of power from the Monarchy to itself. This political restructuring and the development of the Thai bureaucracy are crucial to the story of the political changes in Thailand and to the way the problems of growth, poverty and equity were faced in the modern period . It is important to note that the Revolution of 1932 was initiated by a small group of middle-class bureaucrats, known as the People's Party ("~hana

at"), who did not have a popular base, and did not represent any particular political view. It was a heterogeneous group made up of two main elements, the military and the bureaucracy: 23 of them from the Army, 14 from the Navy, and 24 from the civilian bureaucracy (Chai-Anan 1982:6). These were men who had been exposed to the ideals of democracy and wanted to see a change from absolute monarchy to constitutional monarchy.

The members of the People's Party realized that the revolution was merely a change in political structure, and neither a change in Thailand's social relations nor in its economic structure -- in this sense it was Less than revolutionary. The Sakdina ruling class still controlled much of the land and important economic activities. Thus while the new ruling group controlled the state, it did not have clear control of the economy. Lacking a clear economic development policy and plan for the country at the beginning, the people's Party was unable to initiate economic reforms.

The ~eople's Party was more successful in replacing the absolute monarchy with constitutional rule. In the new constitution, it stated that "the absolute powers rest in the hands of the people." In addition, it

allowed the executive to exercise its full power in administering the

country's affairs without the consent of the King. The constitution also

created a strong executive, which the People's Party was able to keep under

its control until 1946.

In order to shift the center of power from the monarchy to the

constitution, the People's Party dissolved and transformed several important

organizations and agencies created by the "absolute monarchy" such as the

Council of War, the Privy Council, the Financial Council, the Royal Secretary

Office, among others. Most importantly, military power, which was formerly in

the hands of the king, was transferred to the ~rmy's Commander-in-Chief. Many

government officials in various ministries and departments were dismissed,

transferred or replaced by members of the People's Party. Senior members of

the Royal Family, who formerly occupied important political and administrative

positions, were asked to step down, and some went into exile. All of this was

part of a systematic attempt to limit the power of the monarchy. -1 /

The ~eople's Party also sought to change some of the fundamental

ideological views established in Thai society. A new ideology was needed to

legitimize the new order. Although the participants of the Party did not

subscribe to a particular political view, they shared the common ideology of

the new middle class which sought liberty and equality. This ideology had

gradually crystallized in Thailand's intellectual movement, tracing its roots

-11 The new government also limited the economic resources of the Royal Family by decreasing its stipend. The income of the Royal ~ouseholdwas reduced from 7-10 million bahts to 1-2 million per year and the incomes of the Royal Family were trimmed. back to the reign of Rama V. The Party also attempted to establish its set

of beliefs by removing several centuries-old state ceremonies which had served

to symbolize the bond between the king and his subjects, e.g., the Oath Taking

Ceremony. Traditional official uniforms and costumes were also abolished.

Early on the People's Party faced the dual problems of addressing the country's economic difficulties -- then in the midst of the world-wide depression -- and creating an economic base for the Party. The National Economic Plan promoted by Pridi Phanomyong, the civilian leader of the Party, was one such effort. The program was set forth in an effort to fulfill the

party's platform to promote the welfare of the people by establishing an

economic plan; it called for the nationalization of land, industry, capital

and labor (Landon, 1968: 61). Despite ~ridi's claims that the plan was not

communistic, he failed to convince others in the Party and the plan was 2 I rejected. - . Pridi went into exile. '.Subsequently,Phibun Songkram, a junior member of the ~eople's Party, became Prime Minister and invited Pridi to

return as finance minister.. phibun's plans for the economy advocated a self-

sufficient national economy to be realized through his doctrine of economic

nationalism ("~ath ~iyom"). While Pridi and Phibun held different views of

national economic policy, they shared the idea that state intervention was the

means to achieve their ends (Suehiro, 1985 2-36).

-11 Note, Thienwan, a progressive intellectual, and RS 130 Rebellion during King Rama VI'S reign. [These points need to be developed.] -21 Get citation from Landon on debate about the NEP and ~ridi'sviews 1) "people are poor because society makes them so"( p 3061, 2) "we may compare our Siamese people to children. The government will have to urge them forward by means of authority applied directly and indirectly to get them to co-operate in any kind of economic endeavour" (p 306) (Landon, 1968). Thus under Phibun's rule, particularly after 1938 when he emerged as

the distinct leader, the People's Party created state enterprises and took

control of existing industries, and by this means established its economic

base. 1' State enterprises were created to monopolize the distribution of imported consumer goods and domestically produced goods as a means to squeeze the Chinese middlemen and deliver goods to the rural population. 2' The state also established manu.facturing industries such as the Thai Lampang Sugar Mill,

Thai Industries Promotion Co., Ltd., and Thai Industry House, and took over some from Europeans and Chinese companies. 2/ In other

cases, the state collaborated with Chinese entrepreneurs to control the rice

milling industry and related activities such as commercial banks, insurance

and shipping services. The modus vivendi with the Chinese accommodated the

party's nationalist and anti-sinist ideology by positioning party members on

the company boards of directors while relying on Chinese managerial skills.

By the early 1940s, the state and the People's Party were in control

of many important economic activities and obtained the rewards of that

control. It is doubtful that the state was able to redistribute the economic

gains to the rural Thais. Most of the enterprises were not financially

successful and it seems that the only benefits accrued to the ruling group and

-1/ The fo-llowingdiscussion is based largely on Suehiro, 1985. -2/ Examples of this type of state enterprise are the Thai Niyom Phanich Co., Ltd, the Thai Niyom Insurance Co., Ltd, and the ~hangwatPanich Co., Ltd. Members of the People's Party also became shareholders or director members of these enterprises. -31 A shift to creating new manufacturing establishments, as opposed to nationalizing existing ones, was particularly notable after World War I1 (Golay, et al., 1969: 304). the bureaucrats. phibun's economic program continued through the war when the

state nationalized all companies belonging to the Allies.

After leading Thailand into a period of military chauvinism and

nationalism and a wartime alliance with , Phibun was forced to resign in

1944 when the Japanese defeat appeared inevitable. Pridi, who had organized

the (an anti-Japanese movement), became a national hero,

and was behind the formation of several civilian governments after the war.

This was a period of political and economic instability. was

. severe, caused by the strains of the wartime economy and the surge in money supply from fiscal deficits and Japan's military demands. - Thailand's monetary reserves were thin as its foreign assets were frozen overseas and its

holdings in yen became worth.less at the war's end. Furthermore, Thailand's

traditional markets for international trade had been disrupted by the war and

its infrastructure had been damaged by wartime bombi-ngs. The economic

instability was mirrored by.the instability of the post-war civilian

governments which changed seven times between 1945-47. There was growing

dissatisfaction with the government as inflation eroded real incomes in

Bangkok and the military, especially the war veterans, felt that they had lost

leadership of the country and were being neglected in the rewards of office.

The insecurity of the civilian government was heightened with the mysterious

death of the boy-King Rama VIII in 1946 which created an opening for the

military.

-1/ Between 1941 and 1945 the cost of living rose more than seven-fold (Trescott, 1971: 12).

TPEG-CR-4\4.02.87 In November 1947, the "Khana ~athapraharn"group led by Phin

Chunhawan, a retired general who represented the war veterans, and a group of military officers staged a coup d'etat. Phibun who collaborated with the

I1 Khana RathapraharnW group became Prime Minister for a second time. Both

Phibun and Phin wanted to restore military leadership in Thai politics

(Suehiro 1985:3-3). However, while Phibun wanted to pursue his doctrine of economic nationalism, Phin and his associates seemed to be more concerned with economic benefits for the military, especially the war veterans.

4.2 State Capitalism and Economic Nationalism

During the period 1947-57 Thailand was under the leadership of Phibun who carried on his nationalist and anti-communist policies. In the early years he fended off adversaries such as the Pridi group. In February 1949,

~ridiand his allies in the Navy staged an abortive coup known as the "~alace

Rebellion" which was suppressed by the military led by Colonel ,

Commander of the First Army. In June 1951, the Navy staged another coup attempt known as the a an hat tan Rebellion." Phibun-was held hostage but was able to escape. The coup was harshly suppressed by the Army and the Air

Force. These events established the supremacy of the Army over the other two

forces in Thai politics. In November 1951, the Army was able to stage a

"", suspending the I949 constitution and reestablishing the 1932 version which gave more powers to the executive office. From then on, Phibun had absolute power among the military groups (Suehiro, 1985: 3-4).

The "~hana~athapraharn" group, which had staged the 1947 coup and backed Phibun, represented the new ruling clique in Thailand which came to dominate politics after 1947. The key leaders of the group were Phin, Phao and Sarit. Phin was Army Commander-in-Chief; Phao Sriyanon, Phin's son-in-

law, was Director of the Police Department. Sarit, on the other hand, was

Commander of the First Army which controlled the area. Unlike the

participants of the people's Party who used democracy as their guiding

ideology and justification for seizing power, the "Khana Rathapraharn" group

did not have any clear ideological direction, except that provided by Phibun

whose reputation was based on his nationalist goals.

Ever since the 1932 Revolution Thailand had pursued nationalistic

economic policies. 1' During the the state enacted measures

to restrict certain occupations to Thai nationals in the hope of 'creating

employment opportunities for urban Thais. The People's Party feared that the

ethnic Chinese, who dominated commerce and industry, would sooner or later

rise to dominate the political structure and hence influence the process of

decision-making (Jacobs, 1971: 180-181). However, the degree and intensity of

Thaiification waxed and waned with the changes in government and in Thailand's

international relations, especially with (Golay, et al., 1969: 300);

Apart from restricting certain occupations to Thai nationals, another

important nationalist strategy had been to set up state enterprises to compete

'with foreign enterprises. The rationale of this policy was as follows. The

Thai economy was dominated by foreigners, either European or Chinese, and

unless the foreign domination was eliminated, the economy could not grow

steadily or independently. However, eliminating the role of foreign

-11 Nationalist sentiments had been aroused during the reign of King Rama VI. The King himself, under the pen name Atsawaphaahu, wrote a sensational essay, titled, h he Jews of the East" in 1914, condemning the exploitative behavior of the Chinese. Not until the People's Party, however, were policies implemented in pursuit of economic nationalism. enterprises would not succeed without state assistance since indigenous

entrepreneurs could not compete, mainly owing to differences in

entrepreneurial skills, capital, and technology. Thus the government had to

intervene by setting up public enterprises. As discussed earlier, the state

pursued various modes in acquiring-public control of industry and, as we shall

see later on, these methods were expanded 'by the new, post-1947 ruling clique.

A central issue for the political economy of this period is: what was

the motivation behind haila and's economic nationalism ? One line of

reasoning, associated with those in the ruling clique, was that the ~eople's.

Party after the 1932 Revolution and the military leaders after the 1947 coup

sincerely believed that the Thai economy was under foreign domination. In

, short, the goal of the policy of economic nationalism was primarily the

maximization of Thailand's social welfare. An alternative view, and the one .

which fits closest to the evidence, is that the policy sought to maximize the personal welfare of the leadership. -1 / The "~hana~athapraharn" group, unlike the Sakdina class, had no

economic base to support and strengthen its political power., and they

inevitably had to create their own base to have any hope of remaining in

power. As Jacobs put it, "the revolutionary clique needed to enlarge its 5 prebendary base to satisfy it clients in order to stay in power. It did not A yet have sufficient economic privileges or security equal to the royalist

faction which it replaces" [check this quote in original] (Jacobs, 1971: 181).

-11 This is not to imply that these two objectives are mutually exclusive. It is well established that the pursuit of self-interest by atomistic agents will lead to the greatest social welfare; however, when decision-making is centralized in a ruler or clique the pursuit of personal gain does not necessarily correspond with the pursuit of society's welfare. According to Jacobs, the establishment of public enterprises was

determined by patrimonial considerations rather than pragmatic economic

concerns. Once the new ruling clique was in power, they controlled these

enterprises and used them as a means to distribute rewards. The leaders of

the new clique then nominated their clients to fill the enterprises' staff

~ositions. The leaders themselves controlled the boards of directors; they

enjoyed all kinds of perquisites provided by the organizations; and they

reaped various financial allowances.

Thus the "~hana~atha~raharn" group used state controls to channel

economic benefits to themselves and their supporters. For example, the

establishment of the War veteran's Organization and the Thaharn Samakee served

these purposes. Many of the assets of business enterprises, which were

formerly the base of Pridi's group, were transferred to the War veteran's

Organization headed by Phin. Later the majority of its shares were ,

transferred to Eastern International Corp. Ltd., which belonged to Sarit and

his associates. The new leaders also were involved in reorganizing .

manufacturing as when Phin integrated 132 rice mills and 38 saw mills into the

Thaharn Samakee Corporation, Ltd. Both the War veteran's Organization and

the Thaharn Samakee were given monopoly rights to distribute Maekong liquor

and cigarettes produced by government factories, and for the butchering and

marketing of pigs. Special privileges were also given to Thaharn Samakee to

engage in rice marketing and the import and retailing'of foreign goods

-1/ This pattern of reorganization was followed in match manufacturing firms, ice manufacturing and . The military leaders also encouraged the system of "syndication" -- a system which asked for cooperation from Chinese business leaders to put selected industries under the control of the military group. upcountry (Skinner, 1957: 358). Phibun and his associates pursued this

interventionist policy more fervently than had been done in the past.

Perhaps the most dramatic example was that of the National Economic

Development Corporation Ltd., (NEDCOL) founded in 1954. Vice Premier Phin

obtained a line of credit from the Bank of America which was guaranteed by the

government. He deposited the money in the together with other

funds and distributed shares of NEDCOL to members of the "~hana~atha~raharn"

who did not actually buy them. The credit was used to finance state-owned

companies, e.g., the Supanburi- Sugar Mill, the Cholburi Sugar Mill, the

Northeast Jute Mill, and the Bang Phra Paper Mill. After accumulating

extensive debts the company became insolvent in 1957, bringing to public light

the excesses of the Phibun government. -11

That the nationalist program served personal goals is evident in its

own internal inconsistencies. As in the early period, the new clique

established a working relationship with Chinese entrepreneurs when that

provided the best means to obtain the economic fruits of a purportedly anti-

Chinese policy. This was a patron-client relationship. The Chinese

entrepreneurs provided economic gains for the military leaders; in return the

leaders provided political protection and patronage for the Chinese.

Consequently, private enterprises could not compete on equal grounds by

improving productivity and marketing efficiency; rather, it was the access to

political patronage which determined the prosperity of the firm. Several

leading entrepreneurs in the 1950s reaped these economic rents. The abuse of

political power for financial gain was prevalent throughout the 1950s. State

-11 The government had to nationalize NEDCOL and finance its debts.

TPEG-CR-4\4.02.87 capitalism, which the ~eople'sParty supported after 1932 as a means to countervail foreign economic domination, deteriorated into a bureaucratic capitalism (Prasartsel, 1979; Piriyarangsan, 1980).

Apart from the attempt to expand the economic base of the ruling group, two additional factors help to explain the growth of the public enterprise sector in the 1950s. First, salaries of civil servants were inadequate. The budget constraints on public expenditure and political constraints made it difficult to raise salaries. Thus when Phibun obtained control he needed axternative means. to reward both military leaders and civil servants. The inadequacy of government salaries forced some leading bureaucrats to cooperate with the cliques in setting up enterprises. They received economic rewards in return in the form of directorships,- bonuses,. committee attendance fees and so on.

Second, in the international political environment of the 1950s there was further impetus to the expansion of Thailand's public enterprises. Amidst the turmoils of decolonization and Communist insurgencies in Southeast ,

Thailand presented itself as a strategic country. Thus "a conservative and anti-Communist regime in Thailand became increasingly attractive regardless of its internal policies or method of achieving power" (Darling, 1965: 67). By the end of 1949 the was preparing to provide military and technical to Thailand under the "point Four program" of President Truman

(ibid :69). [Elaborate.] In 1950, the two countries signed agreements on . military, economic and technical co-operation. Besides bolstering the military government in Thailand, the subsequent inflow of foreign aid had some effect on the public enterprise sector. As Silcock puts it "to the Thai politicians and bureaucracy it seemed as if direct government operation were suspect abroad, but state-supported enterprises in which they could participate, were acceptable and might even qualify for foreign aid" (Silcock,

1967b: 262-?).

Eventually, the proliferation of business ventures among the members of the ruling clique created factions within the leadership. These were the

"Rachakru cliqueftand the "~iSao Deves Clique.." The former was led by Phin and Phao, and the latter by Sarit. The "Rachakru CliqueM participated in all sectors of the Thai economy and monopolized profitable industries (Suehiro, .

1985: 3-23). In addition, the "Rachakru clique" dominated policy formulation by occupying key posts in the Ministries of , Communication,

Agriculture, Industry and Interior. More importantly, Phao as Director of the

Police Department, was able to use US aid to build up the police force into a powerful paramilitary organization. (The Annex Table I shows the distribution of companies between these two groups and gives a sense of the extensiveness of these ventures.)

Unlike Phao, Sarit relied heavi1.y on income from the "legal" sphere, that is the national lottery, and several public and private enterprises.

Sarit quietly enhanced his power through his involvement with monopolistic firms and his control over the military which became the rival of Phao's police forces, while discontent between Phibun and Phao increased.

4.3 Origins of the Central Decision: Private versus State Capitalism

The particulars of Thailand's economic development in the 1950s were not promising. In 1953 the Government Organization Incorporation Act, B.E. 249611953 laid down the legal foundation for strengthening the growth of bureaucratic capitalism. By 1957, the last year of the Phibun government, the total number of public,enterprises was 141 (Riggs, 1966:304-310). This era of

state capitalism contributed to uneven growth and inequitable distribution

since firms were established without consideration for their appropriateness and financial viability and the allocation of state resources was carried out on the basis of patronage and not economic return. Referring to the period

Silcock concludes:

'IThe disadvantage of these enterprises is.not only a distributive one, of private interception of public fun-ds; patronage leads to a considerable waste of manpower, and the need to arrange commissions and the like in face of some professional scrutiny probably leads to both excessive and inappropriate capitalization. In addition, although private enterprises are normally allowed to compete with these state ventures there is a natural fear that government purchasing and even new regulations will be used to favour .state enterprises against private competitors" (Silcock, 1967b: 263).

Thus the 1950s saw the Thai economy growing without any clear-cut direction. The Thai government had no clear conception of what development

strategy Thailand should follow. Although the National Economic Council was established in 1950, its primary function was to conduct research and advise

the government on economic problems as a whole and on detailed questions related .to different sectors. Efforts to gear this agency in the direction of national planning proved to be futile. Despite the fact that a 'Committee for

the Formulation of the National Economic Plan' was established under this

organization, not even a single national economic and development plan was

formulated by it. Although the Ministry of Industry was set up in 1945, the

process of industrialization did not gain momentum until after 1960. The new

ruling clique after the 1947 coup, though revealing its intention to develop

the Thai economy, failed to do it systematically and efficiently. The failure

stemmed mainly from the unstable equilibrium among the military leaders, who

strove for personal security and interests rather than public interests and welfare. The 1959 World Bank report commented that the public development effort of the Phibun government had been unbalanced, uncoordinated and excessively diffused (IBRD,- 1959). The urge for economic reforms and development planning came from both internal and external sources. Internal politics forced Phibun to change his economic policy, while the U.S. government and international organizations, such .as the World Bank and the International Monetary Fund, exerted their influences upon the process of policymaking and the reorganization of the Thai bureaucracy. All these factors contributed to the genesis of the policy changes which emphasized private enterprise over state capitalism.

By the middle of the 1950s Phibun had already lost his control of political power. The balance of power was centered uneasily on the two rival military groups, namely the Si Sao Deves group under the leadership of Field

Marshal Sarit Thanarat, and the Rachakru group led by General Phao Sriyanon.

Trying to regain his political power, Phibun sought hopelessly for the support

of the masses and 1.eading foreign governments. It was about this ~imethat

the government promulgated its new economic policy, based on a model of a

welfare state with more liberalization of economic activities. The economic

liberalization included an industrial promotion act to attract foreign capital

and the end of the multiple exchange rate regime.

The widespread abuse of political power to capture economic gains

inevitably created the conditions under which private investment, either

indigenous or foreign, was hindered. In 1954 the government promulgated the

Industrial Promotion Act B.E. 2497, the first investment promotion law in the

modern history of the Thai economy. The primary motivation behind this law

was twofold. First, it would promote private investment, realizing that the Thai economy, without the thrust of private investment, was unable to grow at a satisfactory rate. Second, it would induce foreign investment, the expected benefits of which were both to relieve the insufficiency of indigenous capital and to gain from technology transfers. The law assured foreign investors that capital funds brought from abroad and profits made from them could be repatriated. Though it was doubtful that Phibun sincerely believed in the system of free enterprise, it seemed that he had no other choice. Thailand faced large balance of payments deficits and the need for new capital investment was acute. The very foundation of this Act was completely contrary to Phibun' s philosophy of economic national ism and represented a possible watershed in Thailand's growth strategy. However, the investment promotion measures were largely ineffective and proved to be a false start in shifting the focus of policy from state to private capital. The Act was subsequently criticized in the World Bank Report as follows:

11The Act is confused in its wording, difficult to administer, and gives the impression that applicants will be penalized rather than helped. The Minister of Industries, advised by a committee of Ministers and high officials, is in charge of its execution. Neither the Minister nor his committee has the staff necessary to evaluate applications, and neither has the power to confer benefits, since all recommendations have to be made to the Council of Ministers. Consequently, there is excessive delay in dealing with applications, and the results -- as might be expected -- are negligibleM (IBRD,- 1959: 98). The failure of the Act was not only the result of the content and the implementation of the Industrial Promotion Act B.E. 2497; indeed, the economic and political atmosphere at the time was not especially conducive to private

investment. As Ayal remarked, 'the effectiveness of the Act was further reduced by the continued tendency of the Thai government, or its individual departments, to build plants in competition with successful private enterprises. This has been particularly true of the Ministry of Defense and

its departments! (Ayal, 1961: 316).

Field Phibun also tried, also ineffectively, to set up a

social welfare program. The Social Security Act B.E. 2497 was promulgated in

1954, and the Department of Social Security was established under the Ministry

of Finance,in order the implement the program. Alongside this, the

government attempted to limit land holdings by enacting the Promulgation of

Land Code Act B.E. 2497, and at the same time to redistribute land by passing

the Land Redistribution for Social Justice Act B.E. 2497 in 1954. The

enactment of the Occupation Provision for B.E. 2499, and that of

the Social Welfare Provision for 'couples with Many Children B.E. 2499, in

1956, originated from the same philosophy. But the whole program proved to be

. ineffective; the government paid little attention to the implementation of these laws. Soon after the 1957 coup, some of these laws became impotent -de facto and some were repealed. The Department of Social Security was

abolished, the section concerning the limitation of land ownership in the

Promulgation of Land Code Act b.E. 2497 was abrogated, the argument given

being that it would hamper private investment. By the mid-1950s, Phibun

realized the underlying weakness of his control. The state capitalism policy

had only benefited a few members of the elite and not the Thai people.

Furthermore, Phibun's relations with the monarchy were strained, leaving him

with an even weaker popular base. To create popular support Phibun planned

major celebrations for the 2500th anniversary of the Buddhist Era in 1957 and

also created a democratic opening in Thai politics.

Phibun loosened his rein of dictatorship after returning in 1955 from

an overseas tour of democratic countries, including the and the United States. The government decided to allow the people to have more political freedom; Silcock described the episode as follows:

"Phibun Songkhram decided that he could strengthen his regime by winning popular support in free and open debate. He was anxious over increasing influence of one of his lieutenants, Police General Phao Sriyanon, and over the rivalry between him and the Commander- in-Chief, Sarit Thanarat. He had himself lost touch with the army, and hence instituted '~ydePark' opportunities for political oratory in ~angkok's Royal Park, hoping for a popular base for his own power. This led to a marked growth in political consciousness, leading up to the elections in 1957"- (Silcock, 1967a:- 19).

Political freedom was extended, af ter the promulgation of the

Political Party Act B.E. 2499 in 1956, to include the right to form a political party. Not only were the people allowed to exercise new political freedom, but they also had more economic freedom. After the enactment of the

Labor Act B.E. 2499 in 1956, the unionization of labor was legally accepted, and laborers could exercise their freedom to go on strike. Apart from all this, the government's policy towards the Chinese also changed; beginning in

1955 its repressive measures against them were gradually lifted. This policy change was one of the main factors contributing to the successful assimilation of the Chinese, and laid down the foundation for greater social stability thereafter.

The increasingly intense rivalry between Police General Phao and

Field Marshal Sarit caused political turmoil, the effects of which spread into the economic sphere. It ended with the victory of Field Marshal Sarit, who staged a successful coup in 1957. Thus, the effort on the part of Field

Marshal Phibun to regain his political power failed to materialize, partly because the government and its functionaries were no longer under his control. Nevertheless, the intent of the new liberal economic policy he promoted paved the way for other economic reforms advocated by technocrats, in cooperation with some international organizations.

The role played by technocrats in the process of economic reform

after World War I1 cannot be overstated. When the war ended, they engaged in

successive negotiations with the Allies, the main aim of which was to persuade

them, especially the British, not to treat Thailand as an enemy country

(Silcock, 1968; 1970). Technocrats also assisted in-the process of

rehabilitation and reconstruction of the Thai economy. As Stifel put it:

I!The thrust of technocracy was evideilt across'the range of government activitie.~in the 1950s, when prominent technocrats with western education were working to modernize fields such as education, public administration, and irrigation. A group of technocrats, associated with the Ministry of Finance, the , and other agencies responsible for financial management and planning,.was widely recognized as the most influential because of its cohesiveness, its common values, its achievements cutting across the entire economy, and the inspiration of service it provided younger officials." (Stifel, 1976: 1188)

One of the leading advocates of economic reforms was the Bank of

Thailand, which embodied hail and's conservative financial policies first laid

down by King (Rama V) and later reinforced by successive British

financial advisers. In the Annual Reports of the Bank of Thailand, the Bank

vigorously and steadily criticized both the misallocation of public resources

and the expansionary fiscal policy, and subsequently the use of state

enterprises for political patronage. This belief in financial conservatism

was further strengthened by the effects of excessive spending behavior and

widespread corrupt practices in creating an inflationary environment. The Bank of haila and's deflationary bias had its roots in the wartime

hyperinflation and the inequity it created. 1' The Bank itself was founded by

fl Prince Viwat to stave off the worst effects of Japanese occupation. - Among the major successes of ÿ hail and's technocrats was the

establishment of both fiscal and monetary rules to impose discipline on the

state. With the justified fear that excessive corruption might spread into

the fiscal and monetary policy spheres, the first generation of Thai

technocrats attempted to establish defensive mechanisms. The enactment of the

Treasury Cash'Reserve Act B.E. 2491 in 1948 is a case in point; it set up a

legal framework for .the procedures of hanGng in and withdrawing pub1 ic

financial resources to and from the Treasury. The promulgation of the Budget

Procedures Act B.E. 2499 in 1956 was in' the same spirit; the Act was

subsequently superceded by the Budget Procedures Act B.E. 2502 in 1959. Among

other things, it legally put constraints on the level of public expenditure,

and hence set a limit on budget deficits.

On the monetary front, the technocrats associated with the Bank of

Thailand succeeded in building up currency reserves, and preventing-

politicians from making use of them by allocating them to special off-budget

funds, with the-result that the baht became a strong currency during the

1950s. An Exchange Equalization Fund, the function of which was to stabilize

the value of the Baht, was subsequently set up in 1955. In the same year,

with the support of technocrats in cooperation with the International Monetary

Fund, the government decided to abolish the multiple exchange rate system, and

-I/ The 1945 Bank of Thailand Annual Report comments on the redistributive effects of inflation as follows: h he class of persons with fixed incomes suffers; while the merchant reaps a windfall profit simply by holding back his goods for a time. Inflation therefore involves an unfair redistribution of wealth in favor of the few. This by itself is bad enough. But in a country such as Siam [-Thailand], where trade is to a large extent in foreign hands, worse follows; for those.favoured few consist largely of foreigners." (p. 26). - adopted a single exchange rate. Since 1947 the government had relied on profits from the multiple exchange rate system for financing budget deficits, but it could not go on in the same pattern in view of the weak condition prevailing in the world market for Thai exports (Ungphakorn, 1967). The abolition of the multiple exchange rate system was coupled with the liberalization of international trade: the rice monopoly was disbanded, and export taxes were imposed on rice, rubber.and tin exports, instead of the former partial surrender of export revenue at the official exchange rate. It was indeed the vigorous efforts of the technocrats that successfully brought down the Rice Bureau; its profits, the major part of which had been illegally passed into the hands of military leaders, were now transformed into the rice premiums.

The Thai technocracy had a critical role in the reorientation of

Thailand's economic policies in the mid- and late-1950s. Additional leverage for reform was brought by external actors. Most important were the United

States and the World Bank. These outside influences also helped assist the transition to private capitalism managed after the ascendancy of Sarit in

1958. This was the central decision which provided the foundation for

Thailand's future economic development.

The genesis of economic policy changes during the 1950s cannot be completely understood without considering the role taken by the U.S. government. After World War I1 the United States helped Thailand in her attempt not to be treated as an enemy country by the Allies.

The year 1950 marked the beginning of America's active involvement in

Thailand's internal policies and economic policy making. Three agreements were reached between the two countries in that year: the Educational Exchange Agreement (July, 1950); the Economic and Technical Cooperation Agreement

(September, 1950); and the Agreement Respecting Military Assistance (October,

1950). From the American point of view, the aid provided to Thailand could be

justified and explained as follows. There had been a shift in the focus of

~merib7foreign aid policy from recovery alone to a combination of recovery,

development and improvement in military capability. In addition, several

international political events in the early 1950s created for many Americans

the spectre of advancing communist tide: the birth of the People's Republic

of China, the standoff in Korea, and the communist advances in Indochina.

Thailand stood out as the "non-communist world's next line of defense in

Southeast ~sia."

The role of the U.S. government in Thailand in the 1950s was three-

fold:

.Firstly, the U.S. government attempted to pressure the Thai

government to adopt a more outward-looking strategy of development. Once the

inflow of American aid.began, American advice obviously carried more weight.

The efforts to get Thailand to open up its economy were partially successful

in 1954, as described above. Following-- . the end of the Korean war in July ___"___ -.- --_ ---'---a 1953, Thailand faced a (deficit in hez' balance of payments accounty,of about 800 rbfitJ' --- --_ ------million baht. Coupled with the falling demand for rice and the loss of

profits on the rice monopoly, the Thai government faced serious economic

problems. On September 1, 1954, an agreement was signed between the two

governments to provide a guarantee for American investment in Thailand. In the following month the Phibun government revealed its intention to promote

foreign investment by enacting the ~ndustrialPromotion Act B.E. 2497,

following pressure from both the World Bank and the American government. Secondly, the U.S. government steadily poured aid into Thailand after

1951 as a strategic action in its policy. Between 1946-1973, the

U.S. provided Thailand with $646.1 million in economic assistance and $1,152.3 million in military aid (Thompson, 1975: 16). The American assistance had a significant impact on Thai internal politics and the choice of strategy for rural development. The aid provided for the Police Department not only elevated ~oGceGeneral Phao to becoming the most prominent leader of the

Rachakru clique, but also strengthened the Police Department so much that it became a .paramilitary force capable of counterbalancing the Army. While

American assistance was provided to the Police Department throught the C.I.A., the Army received its counterpart through the U.S. Defense Department. (~obe,

1977). Thus American aid abetted the increasing rivalry between the Phao and

Sarit factions, which ended in the 1957 coup. The U.S. government also aided

Thailand in the area of transportation. Investment in highways was not based on economic rationale, but'rather on national security. Up to the beginning of World War 11, the Thai government had paid little attention to the development of the rural sector despite the fact that primary agricultural products were its main source of foreign exchange earnings. For the sake of national security, successive governments decided to invest in the railway

system, even though the benefits of what later became the Chao Phya Dam

Project.were already well understood during the reign of King Rama V. It was

ironic that the very same argument for national security, which had been used

for the underinvestment in the agricultural sector before World War 11, became

the basis for accelerating rural and agricultural development after the War.

The economic benefits of Thailand's security-conscious rural development appeared in the lower transport costs and increased market access provided to rural areas (Feeny, 1982: 112). The improved marketing potential assisted in

the expansion of upland crops in the 1960s and 1970s much as the expansion of

the Northeastern and Northern railways significantly increased rice exports

from those regions in the 1920s (Ingram, 1971: 48). It was the concern for

national security th+t forced the Thai government to pay more attention to the

development of the rural and agricultural sector after the war, and it was the

AnErican assistance that subsequently established a rural development program,

based on a counter-insurgency strategy which emerged during the 1960s and the

1970s.

Thirdly, the Americans began to exert their influence in the field of

education after World War 11. In 1951 the number of Thai students studying in

the United States under the supervision of the Thai Civil Service Commission

was only 310; it increased to 850 in 1960 (Evers and ~ilcock,1967: 87). The

number was much higher if account is'taken of the.students not under the

supervision of government organizations. With American assistance higher

education institutions in Thailand were modelled after their American-

counterparts. Indeed, American scholarship began to play a leading role in

the pattern of social change in Thailand, for good or ill, the effects of

which were seen in the following decades. -1/

-1/ Recently American scholarship has been criticized by Peter F. Bell, who contends that: I' (1) American scholarship produced a set of paradigms of social life which fundamentally distorted the nature of Thai society; (2) these paradigms are rooted in the particular ideological values and goals of American society which seek to preclude alternatives to capitalist/social democratic form of development; (3) the paradigms serve -f (as a result of 'cult,@l imperialism') to deter the growth of an --indigenous scholarship and led to the extension of American academic values and programmes within Thai universities; (4) this scholarship was used- to manipulate the Thai people." (Bell, 1982: 61). The American influence in the policy-making process continued in the

1960s and spread into the first half of the 1970s. It was the Beitzel Report in 1959 that formulated the Thai government's industrialization policy, and brought about the major revision of the investment promotion law in 1962. No other policy has had such a profound impact upon the fate of the Thai people and the direction of the Thai economy more than that proposed by G.B. Beitzel, a-close friend of President Eisenhower. American advisers also commanded policy-oriented posts in various government organizations, and exerted their influence upon policy formulation. They were influential in formulating macro-economic plans for developing the Thai economy. The formulation of the first three national economic development plans (1961-1976) was partly influenced by these American advisers. A long-term advisory relationship was also established with the World Bank which was influential in the genesis of the central decision.

The International Bank for Reconstruction and Development (World

Bank) played an important role in the rehabilitation of the Thai economy after

World War 11. In 1950 the World Bank provided three loans to the Thai government: US$18 million for the Chao Phya Dam project, USS4.4 million for the ~an~kokPort project, and US$3 million for rehabilitation of the railways. Thereafter the World Bank further provided loans for the provision of infrastructure; a second Bangkok port loan for USS3.4 million in 1951; a second railway loan for US$12 million in 1955; and the Yanhee Hydro-electric project for US$66 million in 1957.

Apart from facilitating the provision of infrastructure for the Thai economy, the World Bank had pressured the Thai govenrment to prepare an overall public investment plan ever since the early 1950s. The Thai government at the time made decisions on public investment projects on a piecemeal basis. For example, the decisionmaking process leading to the highway program, backed by the U.S., was made on an ad hoc basis and justified for internal security purposes. The differing priorities of the U.S.,

Thailand and the World Bank were conflicting in regards to this program. In the end, Thailand got its road and the World Bank maintained its financial leverage in Thailand.

The World Bank established its advisory role and its legitimacy as an institution in Thailand during the 1950s. It was behind 'the scene in the promulgation of the Industrial Promotion Act B.E. 2497, and it played an important role, alongside the International Monetary Fund, in gearing up the Thai government policy towards a more liberal orientation, which brought about the adoption of a more outward-looking strategy of development and a single exchange rate system, coupled with the liberalization of international trade in the mid-1950s.

The World Bank achieved it greatest success in cooperation with the

Thai technocrats, in obtaining much-needed organizational reforms- of government planning between 1958-1960. As Stifel notes:

st he senior technocrats skillfully mobilized the support of foreign aid donors as a powerful lever in their internal political effort to make changes ... Although reserves were growing and Thailand was actually exporting capital to the developed world, they arranged development loans from the World Bank in order to secure the Bank's support both at the micro-level of the project implementation and in the macro-formulation of monetary and fiscal policies. The feasibility studies, competitive bidding, and control of expenditures required by the World Bank assured the technocrats that waste and corruption were minimized" (stifel, 1976: 1192-3). Organizational reforms of Thailand's administrative apparatus had been suggested occasionally by US government agencies, the International

TPEG-CR-4\4.02.87 Monetary Fund and the World Bank since the end of World War 11, but only after the transition from Phibun to ~arit's rule was this policy pursued. In 1957-

58 the World Bank undertook a one-year mission in Thailand, headed by P.T.

Ellsworth, which worked with a high-powered team of Thai technocrats seconded to the mission to develop a blueprint for an outward-looking development strategy in Thailand. The Ellsworth Report in 1959 se-verely criticized the C , Phibun government policy based on economic nationalism, specifitally commenting on government intervention in the direct production of goods and services. It supported the adoption of laissez-faire policies. Many of these goals were echoed in the National Economic and Development Plan (1961-1966).

The institutional changes took place with the creation of an economic

planning mechanism. The National Economic Development Board was formed by

reorganizing.the National Economic Council, and became a central planning

body;-though not exactly as envisaged by the World Bank, it was inspired by

it. The period also saw the establishment of various other new agencies designed to improve hail and's economic management: the Budget Bureau (1959),

the Office of Fiscal Policy (19601, the Board of Investment (1959), the

National Education Council (19591, the National Research Commission (1959),

the National Power Commission (19591, and the Export Promotion Committee

(1960).

4.4 The New Era of Development

The new development policies of the Sarit government relied heavily

on providing incentives to private industry. The 1961-1966 National Economic

Development Plan expressed the view "that in Thailand increased output will be

most readily secured through the spontaneous efforts of individual citizens, fostered and assisted by Government, rather than through Government itself entering directly into the field of production." It went on to say that "the key note of the public development program is, therefore, the encouragement of economic growth in the private sector and the resources of Government will be mainly directed to projects, both in the agricultural and nonagricultural sectors of the economy, which have this objective in view." The motivation behind this policy is .less clear than in the case of state capitalism of

Phibun. It seems that Sarit willingly adopted the philosophy of the Thai technocrats who had used external support for encouraging reforms in economic policymaking. The new policy of relying on private enterprise, however, provided several bonuses to Sarit's regime.

As has already been noted Sarit was no stranger to the use of political patronage, and after his death in 1963 the size of his estate revealed that he continued to benefit.from his political position up until the last. However, by switching to an emphasis on private enterprise he was able to cut off other groups which might have attempted to climb the same ladder to the top as he had done. The new policy orientation was also popular with the

US and the international agencies and by improving the level of administrative efficiency in the government bettered its chances of receiving external assistance. Besides these obvious benefits he also gained increased legitimacy with the people of Thailand. Sarit had great popularity as the

II uncorrupted" member of the ruling triumvirate and by changing state policy he was able to solidify that claim with the people and the bureaucracy.

The 1957 coup partially resolved the political rivalry between the

"Rachakru" and "Si Sao Deves" groups and marked the way for ~arit's rise in the 1958 coup. The political transition also marked the end of Phibun's democratic experiment. The new government repealed laws concerning basic rights and firmly strengthened its powers. The-right to form a political

party was ended with the revocation of the Political Party Act, B.E. 2498 in

1958. In the same fashion, the repeal of the Labor Act, B.E. 2499 ended the

right to unionize. The Sarit government also abolished the social welfare

programs initiated by the Phibun government. The concept of a "strong

executive" influenced the government in both its economic and political

conduct as Thailand moved into its golden age of development. - 4.30 - Annex I Table 1.1 List of Companies Controlled by Members of the Rachakru Clique ...... Banking and Commercial Sector Industrial Sector Commercial Sector ...... 1 . Co. Ltd . 1. Thai Fisheries Co. Ltd. I. Phituk Samakkee Co. Ltd. (1944) (1940) (1950)

2. The Bank of Ayudhya 2. The Thai Maritime Navigation Co. Ltd. 2. Thaharn Co-operation Ltd. (1945) (1940) Wood Dealers Co. Ltd. (1951 )

3. Thai Commercial Bank 3. The Thai Navigation Co. Ltd. 3. Sri Ayudhya Trading Co. Ltd, Co. Ltd. (1906) (1940) (1953)

4. Thai Prasit Insurance and 4. Thai Hong Co. Ltd. 4. Thai Thaharn Co-operation Warehouse Co. Ltd. (1947) (1948) Livestock Co. Ltd. (1953)

5. Asia Trust Co. Ltd. 5. Thai Jute Mill Co. Ltd. 5. The Export Thaharn (1949) (1951 ) Co-operation Co. Ltd. (1954)

6. Agriculture Bank Co. Ltd. 6. Samakkee Construction Co. Ltd. 6. Krungdhep Saha Korn (1950) (1952) Sura Co. Ltd. (1954)

7. The Ayudhya Insurance Co. 7. Thai land Fibre Corporation Ltd. 7. The Export Livestock Co. Ltd, Ltd. (1950) ( 1952 ) (1954)

8. Wi lson Insurance Co. Ltd. 8. North East Jute Mi l l Co. Ltd. (1950) (1953)

9, The Ayudhya Life Assurance 9. Thailand Sugar Corporation Ltd. Co. Ltd. (1951 (1953)

10. Oriental Life Assurance Ltd. 10. The Thai Jute Co. Ltd - (1951) (1954)

11. The National Economic Develop- ment Corporation Lt'd. (1954)

12. The Thailand Jute Development Corporation Ltd. (1954)

13. The Cholburi Sugar Corporation Ltd. (1956)

14. Thai Marble Corporation Ltd. (1956)

15. Arphon Bhond Bhanich Co. Ltd. (1954) ...... Source: Sungsidh Piriyarangsan, "Thai Bureaucratic Capitalism 1932-1960**, M.A. thesis, Faculty of Economics, , 1980: 226-93. Note: Years of registration given in parentheses. Table 1.2 List of Companies Controlled by Members of the Si Sao Clique

Banking and Financial Sector Industrial Sector Commercial Sector ______------_------

1. The Bank of Asia for In- 1. Thai Hong Co. Ltd. 1 . Menam Warehouse Co. Ltd. dustrial and Commercia (1939) (1948) (1946)

2. The Provincial Bank Ltd. 2. Vichitra Construction Co. Ltd. 2. Chamru Ltd. (1946) (1941 ) (1950)

3. The Thai Life Insurance 3. Rajata Sila Co. Ltd. (1951) 3. Eastern International Co. Ltd. (1942) Development Corporation Ltd. (1949)

4. Thai Former Banks Ltd. 4. Bangkok Shipping and Trading Co. 4. U-Thong Thai Co. Ltd. (1945) Ltd. (1951) (1951)

5. The Menam Warehouse 5. Thai Shale and Oil Co. Ltd. 5. Taharn Ayudhya Co. Ltd. l nsurance Co. Ltd. (1948) (1 953) (1951 )

6. Loem Thong Bank Co. Ltd. 6. Saensuratana Co. Ltd. 6. BhaDuong Sin Co. Ltd. (1948) (1 953) (1951)

7. The Thai Domu Bank Ltd. 7. Dhana Publ i sh i ng Co. Ltd. 7. Thanya Thai Co. Ltd. (1948) (1953) (1952)

8. The Capital Insurance 8. Jalaprathan Cement Co. Ltd. 8. The Bangkok International - Company of Thai land Ltd. (1954) Trading Co. Ltd. (1952) (1949)

9. The Union Bank of Bangkok 9. United River Transport Co. Ltd. 9. The Union Trading Ltd. (1949) (1954) Corporation Ltd. (1956)

10. Dhipaya Insurance Co. Ltd. 10. The Livestock Trading 10. Trade Union Cooperation (1951 ) Cooperat ion Co. (1955) Ltd. (1957)

11.The Thai Military Bank Ltd. 1l.Thai Line Cooperation Ltd. (1957) (1956)

12. Thai Saving Trust Co. Ltd. 12. The Eastern Mining Development (1957) Co. Ltd. (1956)

13. Thailand Steel Co. Ltd. (1956)

14. Loha Pas Pomich Co. Ltd. (1960)

15, Bangkok Thai Si lk Co. Ltd. (1960) ...... Source: Sungsidh Piriyarangsan, 1980: 301-307.

CHAPTER 5

The Politics of Development in Thailand

by Chayan Vaddhanaphuri

During the period 1959-1985, Thailand underwent dramatic socio- economic and political changes unlike any it had experienced previous1.y.

During these two and a half decades of development, the country faced po1i.tical and economic crises and challenges, both from within and without.

This era of Thailand's development can be divided into three periods: 1)

1959-1972, 2) 1973-1977, and 3) 1978-1985. The first period, 1959-1972, was the country's golden age of growth, during which the economy was guided by the first two National Economic and Social Development Plans and the new economic institutions ushered in with ~arit'srise to power. In this period the military provided political stability and kept order in the country. In the second period, 1923-1977, the Thai economy was buffeted by the first oil shock and the country's political structure experienced an opening up as more democratic rule replaced the regime of military leadership. It was during this period that several socio-political groups enjoyed greater freedom and became politically active; issues of democracy, poverty and human rights.were raised. Development goals and strategies were challenged. In the third period, 1978-85, the economy suffered a setback from the impact of the second oil shock. The military regained its power and the major socio-political forces came into open conflict. The interaction between these forces has determined the course of the development of Thai society into the late 1980s. 5.1 The Initial Efforts of National Development, 1959-1972

The period 1959-72 is best characterized as one of growth and stability. In contrast with the 1950s, a period of uncertainty for economic development and unstable political alliances, this period is characterized by growth-oriented economic policies carried out under the hand of the military

strong man, Sarit Thanarat.

It should be pointed out that Sarit was not only a.strong military - ?.-~ leader who controlled the military forces and had immense administrative power at that time, but he also had popular support since he came into the Thai political scene as the hero defending both democracy and the Thai people. He

suppressed the "palace Rebellion" in 1951 and subsequently demonstrated that he stood with the people when he ordered his soldiers not to shoot at the students protesting against the 1957 election which Phibun had manipulated.

After he became prime minister in 1959, Sarit increased his legitimacy further by reestablishing the traditional relationship between the monarch and the bureaucracy, proclaiming to the public that the king was, in

fact, the nation's leader. He reinstated several important royal ceremonies which had been abandoned, such as the Royal ~uard's Flag ceremony. He also arranged Eor royal visits to 14 foreign countries. The interaction between

the king and Sarit developed, in part, out of Sarit's own attempt to cover up

his weaknesses. As a general who had never been trained abroad and had a

reputation for heavy drinking, Sarit needed someone who could restore the

country's image and represent Thailand on the international scene. Whether or

not this was Sarit's real intention, the result was that the king became a

spokesman for the government on several key issues, and served as a link between the government and the people as well as governments of foreign countries.

Another cornerstone of ~arit'sregime was the institutional

restructuring of the Thai bureaucracy. After the October 1958 coup Sarit

began to reorganize the governments ' policy-planning mechanisms and to improve

administrative control, relying on the advice of Thai technocrats and the

nearly-completed Ellsworth Mission from the World Bank. These institutional

changes were discussed in Chapter 4. Sarit also established the Ministry of

Development in 1963 to take charge of activities related to agric~~ture,

cooperatives, irrigation, etc. To improve the country's administration he

initiated the reorganization of the Thai civil service by strengthening the

Civil Service Commission and introducing a position classification system.

Budgeting procedures were reorganized.and national economic planning was

implemented. Under Proclamation No. 57, Sarit was able to create agencies or

organizations directly under his personal supervision, thus enabling him to

strengthen his leadership. The result of these institutional changes was to

create a strong executive and increase the centralization of administrative

control under the Prime Minister (Thak 1979:276). Sarit, as the prime

minister, and his assistants took overall control of all components of the

office which formerly had been controlled jointly by both the prime minister

and the cabinet;

One of the most important tasks in which Sarit was closely involved

was the planning and implementation of the First National Economic Development

Plan. After meeting with high-ranking U.S. officials in 1958 in Washington,

D.C. Sarit seems to have changed his attitudes towards the U.S. and subscribed

to the philosophy of free enterprise which was actively promoted by the U.S. After his return to Thailand, the national economic development plan was drafted, drawing upon the World ~ank'sEllsworth Report, both in terms of philosophy and recommendations (i.e., feasibility studies for agriculture, industry, communication, health, and education). It should be noted that the philosophy of the Plan, as well as the translation of such philosophy into

-practice, were possible because of ~arit'sability to convince the cabinet members, including his assistants, that a free enterprise policy was plausible in Thailand. This philosophy, of course, was not new to Thailand since it had long been advocated by the Bank of Thailand and had the support of the civil service. 1' But it was satit's determination and leadership which led those around him to believe that his plans provided a necessary and viable solution to the country's problems.

To coordinate and direct national economic development, the National

Economic Council under the Prime Minister's Office was reorganized in July

1959; the word "developmentM was added to its title and its membership was enlarged. Sarit became the chairman ex officio. The National Economic

Development Council was given broad responsibilities to study economic issues and problems, to collect statistical information, and to make appropriate policy recommendations. The Council was a1 so entrusted to approve budget requests for development projects (Thak 1979: 278). An interesting feature of the Council was the fact that it was conceived of as a technical advisory committee to assist the Prime Minister in making decisions regarding development. Thus, its membership was heavily academic; it had forty-five

-11 The 1954 Bank of Thailand Annual Report, for example, advocated selling off government shares in public enterprises as a means to promote private enterprise (~ankof Thailand B.E. 249711954 pp.13-14) experts in the field of economic development. Thak rightly observes that the nature of the council shows "a notable aspect of ~arit'srule, namely the attempt to make effective use of Thailand's technical/academic elites and gain their political support in the process" (Thak 1979: pp. . In Sarit's own words :

" A new method in the revolutionary system is the prestige given to academicians/experts (Nak Wichakarn). In former times, academics received little status; economics was takehi as common sense and those who never studied economics could talk about the subject ... which led them to believe that they did not have to rely- upon- academic expertise. I have no such belief" (From National Economic Development Plan, 1961-1966, Bangkok, Oictober 20, 1960:6).

In 1960, the First National ~conomicDevelopment Plan (1961-1966) was

launched. The major aim of the Plan was to improve economic conditions by

building public infrastructure, inducing private investment, improving the

efficiency of the bureaucracy, increasing agricultural production, and

carrying out community development. In the same year, the National Education

Plan was put into effect. Higher education was extended to the provinces;

Thailand's development prospects were enhanced by the institution building

which took place under Sarit. In addition, it benefited from favorable

external economic conditions marked by expanding world trade, improving terms

of trade, and low worldwide inflation.

5.2 Development and Power Relations

The growth-oriented model of development which was introduced by

Sarit and supported by international agencies, such as the World Bank, the

Ford Foundation, and so on, had a tremendous impact on the power structure of

Thai society. The traditional institutions, namely the monarchy, the

bureaucracy, and in particular the military, underwent major changes and showed a remarkable ability to adapt themselves to the changing situation. As mentioned above, the relationship between the monarchy and the government was restored. The king once again symbolized the unity of the nation. The military, which was t 1 modernized" with the assistance of the US, became more powerful than before, and was able to expand its role considerably, in part because of the war in Vietnam and in part because of the strong measures taken against domestic communist insurgencies.-Besides the technical assistance provided by the US, a new management technology and ideology were also transferred and implanted among Thai military officers. Unlike the military in the 1950s which was heavily involved- with state enterprises (and received some benefits in the form of bonuses and allowance), the military in the 1960s and 1970s was able to draw upon resources outside of state enterprises.

Several high-ranking officers actually owned and operated business enterprises which were founded during the period 1' In addition, the counter-insurgency policy and other policy measures allowed some military officers -to siphon off some of the budget into their own pockets.

While the military became the unchallenged political force in Thai society and enjoyed its share of benefits, the various elements of the business class also benefited tremendously from the economic growth. ow ever, they did not follow the traditional way of accumulating wealth. After the

1932 and 1947 coups there developed a modus vivendi between the Thai military leaders, who held to a nationalist.ideology, and the Chinese, who made up

Thailand's business class. This symbiotic relationship allowed the military access to the economic rewards of business and provided the Chinese with

?- -11 Air Marshal Thawee Chulasap owned a tourist agency which arranged R & R programs for U.S. soldiers during the . ' political protection. Using this acquired position many businessmen were able to expand from the trade sector, traditionally a Chinese domain, to financial capital. Thus, in part, the interests of the trade and financial factions of

hail and's business class were co-joined.

It is interesting to mention that, while the Thai military was greatly influenced by American thinking, these financial capitalists gradually developed their own capacities and resources, and created their own sphere almost entirely independent from the bureaucracy. Some of them began to invest in other countries or to work in partnership with multi-national corporations. [What is the significance of these links: a) greater international awareness, b) desire for more open economic policies? etc.]

It should be noted that the policies of the Sarit regime encouraged the proliferation of numerous business groups competing with each other for a favored position in the Thai economy. Among these business groups, it should be pointed out that the traditional institution group [Define the traditional institution group] was the most economically powerful, and was able to assert itself as the leading group. This was due in part to its ability to diversify its business activities and, in part, to the close collaboration with the new ruling clique, i.e. the Si Sao clique led by Sarit. Such a collaboration led to several joint in different fields, for example, the hotel business he Saensurat Co. Ltd.), industries related to natural resources

(Thai Shale and Oil Co. Ltd.) and financing companies (Deves Insurance, Co.

Ltd.). In addition, after the 1960s, the traditional institution and the Si

Sao clique or the Sarit group received industrial promotion licenses from the government to invest in other activities. [Were these export industries or domestic goods producers?] The traditional institution and Sarit group were also able to draw on the resources of international companies to establish joint-venture investments in Thailand. Given the close collaboration between the group and Sarit in both economic and political spheres, it is not surprising that the traditional institution group was able to become the leading business group during this period, concentrating on finance and banking, the cement industry, the hotel industry, etc. The close association with the ruling clique, as well as its long experience in business, made the traditional institution particularly adept at utilizing laws and regulations to its own-benefit. It was able to adjust itself remarkably well to the changing political and economic situation. It was perhaps the most active and

~rogressivebusiness group in the 1960s as well as in the two decades which followed. [Did this close government-business tie create a precedent for future business interests? How did these groups utilize laws to their advantage? a) influencing the writing of laws, b) getting favo.rable treatment in the administration of laws, e;g., licensing.]

So far we have described a few major groups which expanded their roles and benefited from the development process. We should also discuss the role of the "middle class" which emerged out of the development process during this period. By "middle classtt,we refer to a broad spectrum of those who engage in managerial and administrative work as well as those who work in different professions, predominantly in the metropolis of the Bangkok and other regional towns and cities. It was during the 1960s that these urban- based professionals grew in number. here had been (over the decade of the

1960s) an enormous increase in people classified as administrative, executive, and managerial: from 26,000 in 1960 to nearly a quarter of a million in

1970. In addition there were 284,000 professionals and technical personnel (up from 174,000 in 1960): altogether half a million people in the middle and upper strata of Thai society, chiefly in government but also in the private

sector." (Girling, 1985: 177 citing Thailand Yearbook 1975-76 Ivan

Mudannayake ed. p. E 41 (Bangkok: Temple Publicity, 1975)). There was also a

tremendous expansion of unive~sitystudents up from 18,000 in 1961 to 100,000

in 1972, which represented future growth in haila and's middle class. (ibid p.

177 citing-rank Darling "Student Protest and Political Change in hail and"

Public Affairs, Spring 1974.)

Unlike some other countries, the Thai middle class was almost

invisible in politics. However, this does not suggest that they played no

part in the process of change. In fact, they provided legitimacy for the

changes that took place. For example, during the political changes of 1932

carried out by the military and civilian elites, there was real support from

the middle class which at that time was made dp of civil servants.

One of the results of Thailand's development has been the increasing

social differentiation both in the rural and urban areas. This social

differentiation also influenced hail and's middle class, particularly the

technocracy, which became differentiated along generational lines. The

institutional changes brought by Sarit were embedded in a new group of Thai

technocrats within the country's administrative apparatus. These new

technocrats were largely from middle class backgrounds and had gained their

position by merit and not social prescription. This group was quite different

from their counterparts in earlier decades, who were fewer and were largely ts from noble familiwor upper-class backgrounds.

These new technocrats distinguished themselves from the bureaucrats

who ran the government agencies by their own professional expertise. In the late 1950s and 19609, foreign technocrats were invited from the U.S. as well

as from the World Bank to help in formulating the five-year economic

development plan (Suehiro 1985) and to give advice to Thai bureaucrats in the

implementation of development programs. In the 19709, however, Thai

technocrats who were educated abroad were recruited to work for government

agencies, such as the National Economic and Social Development Board (NEsDB),

fFie Board of Investment (BOI), the Bank of Thailand, the Royal Irrigation

Department, among others. Through their long experience in planning and

administration they have increasingly become an integral part of the Thai

bureaucracy.

According to Stifel, technocrats are highly trained professionals who

have extraordinary influence over the formulation and execution of policy 4 /--->--, '/ because of thelr clinica1)expertise. Stifel classified technocrats in 1 'C- -- 6? Thailand into two groups: -the pre-WW I1 technocrats and the post-WW I1

technocrats. The first-group are men who were educated in England and other

European countries (see Wyatt 1968:200). It was estimated that, in the late

19309, there were over 500 Thai students studying abroad (Thompson

1941:786). Most of them belonged to the ruling class of the society. While

they were highly educated -and expos-ed to modernization, they st ill viewed

their society from the frame of reference shared by people of their

generation, the one which prescribed classical principles of conservative

finance. In other words, "the government balanced its budget and rejected

proposed investment in development projects as financially irresponsible" (Stifel 1976: 1187). They were concerned with progress, but still wanted to

-maintain the status quo. Dr. Puey Ungpakorn is an example of this type of

technocrat.- Dr. Puey served in various government posts, but is best known as the Governor of the Bank of Thailand from 1959-1970. From that post he espoused a "balanced budget1' policy which was a hallmark of the Bank's fiscal and monetary conservatism.

The second group of technocrats differs from the first group in

several aspects. Unlike the first group, most of them received their education and training in the U.S. (It was estimated that in the early 1970s,

there were about 6,000 Thai students studying in the U.S. alone.) They were

the new generation of technocrats who were part of the development era and guided by a new philosophy of development. To a certain degree, they were

"liberal" in the sense that they looked at society as if it must somehow

"develop" or change. They were equipped with a different kind of orientation

which they brought with them when working for the government. More

importantly, they were much demanded by the development agencies to plan,

advise, coordinate and implement haila and's development plans. Stifel

otiserves: "in sharing ~arit's impatience for results, they recognized the

conflict between the conservatism of their seniors and the possibility of

faster development. While equally dedicated to serving national interests,

the younger technocrats did not have a moral commitment to the value system

represented by financial virtue" (Stifel 1976: 1191-92). Unlike their

counterparts of the pre-WW I1 period, this group of technocrats subscribed to

the overspending budget policy which consequently led' to the tendency to

borrow money and to favor loans from abroad. While the rationale behind

overspending was for the construction of infrastructure in order to lay a firm

foundation for economic development, the actual implementation of the

construction programs by government agencies was, for the most part, rather

inefficient and ineffective. This is due in part to the management capability and the vision of the bureaucrats themselves. [i.e. the bureaucrats were incapable of carrying out the plans of the technocrats?]

The shift in the policy orientation of the post-war technocrats also had a bearing on the course of development in the last two decades. The deficit financing policy they pursued led to increased foreign debts. As Rungsarn observes, "the deficit budget policy implementation continued during the period of 1961-1985. In most cases, the deficit budget was more than 20 percent of the estimated annual revenue" (Rungsarn 1986:77). During the initial period of development, the government borrowed on the average US$ 50-

60 million each year from abroad. During the First Plan the government set out to borrow USS323.3 million; during the Second Plan, the amount was

USS334.7 million. However, during the Third and Fourth Plans, the amount of loans from outside was several times higher. In the Third Plan, the government borrowed US$ 1,303.7 million, whereas in the Fourth Plan, the amount jumped to US$7,181.7 million (see Pranee and Direk 1985:30). The reliance on external finance, as reflected in the increasing foreign debt, was indicative of the prevailing attitude of the technocrats of the post-WW I1 era who preferred to pursue the "deficit budget" policy.

It is noteworthy that up until 1960 the Government had to obtain specific legislative approval for increases in domestic and foreign debts under the Loan Acts (B.E 2496, 2502) and the Foreign Economic Aid Programmes

Act, B.C. 2502 (1959). (See Events and Acts p. 6 XVI G). Furthermore, under 41, the terms of the Yankee project loan (1957) Thailand had to consult with the World Bank if it increased its outstanding foreign debts above the level of that year (ibid XVII I). In 1960 budget procedures were reformed and the requirement for a Loan Act was ended if government borrowing did not exceed 20 percent of total expenditure. I' In the same year the World Bank ended its consultation requirement (Bank of Thailand Annual Report 1960, p.32). Thus in this year the legislative and institutional constraints on a deficit-financing policy were partially lifted; ironically it was the same year that saw the passing away of the chief architect of hail and's conservative financial policies, His Highness Prince Viwatanajai (August 22,-1960). -2 I

Since the technocrats played a significant role in the development process, it is important to understand the way in which they were recruited and the way in which they mediated the interests of different power groups.

During the period before 1959, the recruitment of technocrats was based upon

their professional expertise. They were invited to work as advisors to the

Prime Minister or to government agencies. However, after the National.

Economic Development Plan was launched, the technocrats were recruited to work

for specific technical agencies responsible for development. They were

invited from abroad as well as from within.

The role of the bureaucracy during the period between 1930-1958 was mainly concerned with law and order. However, after 1958 and into the 1960s,

the bureaucracy expanded its role to accommodate the institutional changes

during this period. The process of development which emphasized growth

required expertise and specialization in many areas. Thus, technocrats were

- - -11 The amendments to .the Budget Procedures Act B.E. 2502 also restricted the ability to undertake new debts to the Ministry of Finance, except when funds are for "temporary working capital for a period not exceeding one year in a state enterprise of a non-juristic person status ..." (Bank of Thailand, Annual Report, 1960, p.11).

-21 As discussed in Chapter 6.2.1, in 1972 Revolutionary Party Announcement No. 203 relaxed the constraints on government expenditure by allowing total expenditure, excluding principal payments, to exceed revenue by 1.25 times. considered indispensable. Indeed, they played an important role in policy formation and in planning and advising the bureaucracy.

At another echelon of government were the bureaucrats. During the

1960s they were charged with carrying out the new development program which often made demands which exceeded the means at their disposal. Thus the legitimacy of bureaucrats was called into question by groups outside the bureaucracy. In 1969 there was a clash between these groups inside and outside the government. In this situation, the technocrats acted as . intermediaries. But it was clear that the patron-client relationship which had existed before was breaking down. [What was the clash? how was this reflected in the erosion of patron-client relation? Is this implying that businessmen were the clients of bureaucratic patrons?]

Apart from these power groups which largely determined the course of development in Thai society during this period, there was another social group which can be broadly classified as the general masses. In effect, this group consisted of workers and farmers. This social group was prohibited by law from forming their own group or association. Thus, there were no labor unions nor farmers' associations during this period. By contrast, the government allowed the merchants and businessmen to form their own associations in order to facilitate their business. (For example, the Thai Chamber of Commerce, the

Association of Thai Industry, and the Association of Thai Commercial Banks.)

Under these circumstances and under the anti-communist policy of the government, both Thai workers and farmers were in a very weak position to bargain for their interests. At this time, they were not part of the countervailing forces in Thai society. 5.3. The Crisis of the 1970s

By and large, the main emphases of the National Economic and Social

Development Plans were the construction of basic infrastructure (for example, highways, irrigation facilities, and power systems) and overall growth of income and production. These emphases were more pronounced in the first two

Plans than the Third and Fourth Plans, which stressed improved economic efficiency, the reduction of population growth, and national security. The emphasis on building up infrastructural facilities obviously corresponded with the government's aims to induce foreign investment and encourage import- , substituting industrialization.

Though the effects of the growth-through-infrastructural-development strategy redounded to the rural sector, where the majority of the population lived, the strategy was not conceived as a rural development policy, but was viewed primarily as a means to increase national security. -/1 In certain .so- called "sensitive areas," rural development projects essentially became counter-insurgency activities, carried out by the military and the Accelerated

Rural Development Agency (under the Office of the Prime Minister). Strategic roads, dams, public health centers, schools, etc., were built in these areas in order to provide instant infrastructural "development" and to show that the government was concerned with the well-being of the rural people.

Particularly during 1975-1980, the government (under Prime Ministers M, R.

Kukrit Pramoj, M. R. , General Kriangsak Chomnand, and General Prem

-1/ This is particularly true of the Fourth Plan which, apart from building up infrastructural facilities in the "sensitive" areas, developed several psychological warfare programs, e.g., the Village-Defense Volunteer Unit and the Village Scouts, which were formed, trained, and financed by the state. Tinsulanond) earmarked a large sum of money, known as "ngeun bhan" (literally meaning, revolving funds), for similar kinds of development activities. TO channel these funds to rural areas during the dry season was in fact an attempt to reduce urban migration and to contain rural social and political discontent (Luther, 1978: 33).

The impact of these development plans has been generally to improve the well-being of the rural population as measured by rising per capita incomes and improving social conditions, such as access to health services, access to education, and the provision of basic necessities. However,

hail and's development strategy has been double-edged. It has been observed that the development strategies in general neglected the distribution of the benefits of growth. h hose who had had access to the economic and social infrastructural facilities gained the most, while those in the remote areas which had received little attention fr.om the government because'the national efficiency criteria ruled out such public investment lost out" (NEsDB, n.d.: -

5). [sic. Citation to what???]

It has also been pointed out that some of these basic infrastructural facilities, e.g., irrigation, led to an increase in income inequality between those who were in the state irrigation areas and those who were not, because the former could use water (without any charge) for their cultivation throughout the year (van der Meer, 1981: 189-190). This was because, to begin with, those who were in the state irrigation areas were generally better off in terms of their economic status. Land in these areas is of better quality, and transportation is better developed. The irrigation system enabled farmers to practice double- or multiple-cropping, and consequently drew more attention and services from agricultural extension officers. Thus, the state's irrigation project helped the already-better-off farmers to gain more and left those who were relatively poor, particularly in the non-irrigated areas, further behind.

In general, however, the development strategy favored the promotion of the industrial sector rather than the agricultural sector. Besides investing less money in the agricultural sector than in the industrial sector, the government also tried to control the prices of agricultural commodities

(rice, in particular) and promoted domestic production of fertilizer by imposing high tariffs on imported fertilizer -- which in turn made the prices of domestic fertilizer the highest in Asia and thus limited its use among farmers (~eerapong,1982: 83). More importantly, the government allocated less land for agricultural use than needed (van der Meer, 1981: 153). It often applied a double standard to those who occupied forest land [what double standard??]. Such a policy often created conflicts between.the. government and landless farmers who needed land for their cultivation. Despite the fact that there was an increasing need of land for agricultural purposes, the government did not make any serious efforts to implement land reform or change the land rent system which, until 1974, allowed the landlords to appropriate 50% of the yield as rent.

On the whole, the government strategies in "developing" rural areas reflected a lack of understanding of the inherent problems in Thai society.

More often than not, the strategies were designed to solve certain problems by correcting some "missing" factors and deficiencies as perceived by the state or by its personnel. Indeed, there were various attempts to provide more social services, for example, public health centers, schools, village newspaper centers, and the like, to upgrade the quality of life of the people in rural areas along with the implementation of the family planning program to

reduce population growth rate. However, they were often inefficient and

inadequate. One of the consequences of these development strategies was an

increased migration to urban areas, particularly Bangkok, for better social

services as well as employment opportunities. [Statistics on migration

increase.]

A main focus of our analysis of haila and's modernization has been the

self-adjustment of the two important traditional institutions: the monarchy

and the bureaucracy. However, the bureaucracy during the first decade of

development was too weak and thus failed to function as the impetus for

development. An example which is indicative of this failure was the

proliferation of many different, but overlapping, government agencies

including the increasing numbers of government personnel. [Was this the

.. bureaucrat's failure of the technocrat's?] The reason for issuing the

C~nstitutionB.E. 251111968 was to increase the power of the executive to the

extent that the Prime Minister had the power to state his policy without the

approval of the Parliament. This means that the Parliament would have no

power to pass a vote of no confidence against the government (implying a

strong executive government 1. A1 though ~hanom's government almost to tally adopted ~arit's strategies in development, i.e., using the bureaucracy as the

to modernize and develop the country, and by empowering himself

through the 2511 Constitution, he could not achieve the same extent and form

of development. The election of 251211969 turned out to be a loss for Thanom's party. [Not so; UTTP and Independents were a majority; Girling, p.

114. 1985.1 It won only a few seats in Parliament. This is not because there

was a split within ~hanom's group nor a failure to develop the bureaucracy, but rather to the overriding power of the extra bureaucratic forces which had their resources at their disposal. In fact, these extra-bureaucratic forces had a continual control of these resources. They had been involved in Thai politics through different forms and channels: business cliques, trade associations, and finally political parties. [Confused; seems to relate to point about clash of bureaucrats with outsiders.]

After the student uprising in October 1973, in which the military regime led by Thanom was replaced by the Sanya government, discontent and resistance became more frequent and visible in the form of demonstrations, protests, and strikes. Labor unions, which had previously been banned,

emerged and demanded better wages and working conditions. The Farmers'

Federation of Thailand (FFT) was formed in 1974 to protect the peasants'

interests (Turton, 1978: 122). For the farmers, their problems were low rice

prices, land loss and land shortage, an unjust land rental system, land

conflicts between the government and landless farmers, and rural

indebtedness. The general discontent and unrest were augmented by the

ineffectiveness of the general law, which addressed these problems, and the

inefficiency and unresponsiveness of the government officials who enforced

them. In addition, some of the discontent came from the harrassment and

suppression of innocent people by the government and the perceived

illegitimacy of the government because of corruption at various levels.

The failure of the government to solve rural problems induced

unprecedented reactions from the university students. Particularly after the 1973 uprising, university students joined the peasants in the latter's quest

for their own "development" and justice. Among other things, the students launched the "Farmer project" which aimed to study and help solve the problems which the farmers had with the Landlords, businesses, and government officials. For example, in several lowland villages in the Chiangmai-Lamphun

Valley where there was a high rate of tenancy and where the 50 percent rent rule was practiced, the students were present to make sure that the tenant farmers paid the landlords no more than the 33.3% share of the yield allowed by the Land Rent Control Act of 1974, which was passed largely because of the farmers' demand. [Demands made through the FFT?]

The students also played a major role in the expansion of the'FF~to hundreds of different villages, as well as in the protests and demonstrations staged by the farmers during the period 1973-1976. In addition, students engaged in rural development projects, for example, the Mae Klong integrated

Rural Development Project (MIRDP) in Central Thailand which was initiated by

Dr. (McNabb, 1979) and the Mae Taman Project in Mae Taeng

District, . 'In these two cases, the students were able to show that their rural development projects could serve the villagers better than the government's projects. However, in both cases, the students met with political confrontation with the authorities and the Village Scouts. They were accused of teaching communism to the villagers and were harrassed and threatened until they left the village. Interestingly enough, the MIRDP was described by the Interior Ministry officials as an insurgent activity and a private political venture launched by Dr. Puey (McNabb, 1978: 136). The Mae

Taman Project, which was informally supported by Dr. Puey, was also viewed by the local authorities in the same manner. The reaction from the farmers and university students during the mid-

1970s toward the government's rural development policy was in effect a reflection of the basic inability of the state to meet the needs of the farmers. The farmer-student alliance primarily aimed at solving the immediate problems which the former were facing. The alliance became a powerful political force which put pressure on the state and its officials to recognize the interests of the largest segment of Thai society. This movement, however, was not unopposed. students' rural development projects and activities were met with indifference, hostility, and violence. Both students and farmer movements were accused of being instigated bythe Communist Party of

-Thailand. Some student and farmer leaders were said to beleftist or communist. Several anti-student and anti-farmer movements, for -example,

Nawapol, the Red Guards, and the Village Scouts, were mobilized to. counter the

student and farmer movements. The conflict came to a head on October 6, 1976

when hundreds of students were massacred at Thammasat University by the military and police forces and these right-wing groups. Since then, the

farmers and the students have remained silent and quiescent.

5.4 The Return of the Military and the Conflict During 1979-1985

The 1980s have been an interesting period. Extra-bureaucratic forces

have been increasing their political and economic power, while the military

still plays a crucial role in Thai politics [Discuss # of recent coups 1981, '

1986, etc.]. However, the military-political leadership in the 1980s faced both internal and external problems. That is, it faced a situation of

economic scarcity and began to be challenged by other power groups. [Economic

scarcity as measured by what?] [See infra for military budget growth which is

ambiguous: is this a larger or smaller share of government pie?]

Since the revolution of 1932, the military has been directly involved

in Thai politics to such an extent that it has dominated Thai political life. Initially, the military took part in the revolution and then several military elites became members of the cabinet. Before World War 11, the military intervened in politics by staging coup d'etat, but, as Chai-Anan observes, the military leaders "were reluctant to assume active and direct political roles" (Chai-Anan, 1982: 3). They preferred to leave the elected politicians and technocrats to solve the country's problems, and would then intervene when they felt that the political game was out of order. In the

1950~~we witnessed a gradual expansion of the military in Thai political and economic spheres. Through the policy of state capitalism, initiated by the

Phibun regime, the military leaders enjoyed benefits thr.ough the control of political resources and through the symbiotic relationship fostered between themselves and Chinese businessmen. Several military leaders were appointed to become directors or members of boards of directors of several state enterpri.ses. On the other hand, they received bonuses or profit sharings from

Chinese-owned businesses which in return depended upon their protection (See

Skinner, 1957; Riggs, 1963; Suehiro, 1985). The role of the military in the 1980s reflects its attempts to adapt and modify its policy toward the changing political and economic environment. Within the military itself, new alliances based on classmate ties or political cliques were formed. The relationship between these mi.litary officers gradually changed from "patron-client" relationships to a new kind based on classmate ties. More factions in the military began to

emerge and resulted in greater competition for limited resources and limited positions in the military. The problem of the Thai military should become clear when we look at the military as a power group or political force which actively takes part in Thai politics and development. The military not only functions as the champion of the traditional institutions, but also acts as an interest group which has its own set of demands and competes for a larger piece of the pie.

This is in the nature of any interest organization. Like other groups in the

society which depend on the government budget, the military began to face a

problem due to the economic crisis at home and abroad. The resources at the

disposal of the government were limited; so was the share which the military

could have. This can be substantiated by the fact that the .growth rate of the

defense budget from 1961 to 1985 decreased overall. The growth rate was 3.66%

during 1961-1966 and increased to 19.97% during 1967-1971. However, it

dropped to 2.47% during 1972-1976, increased to 9.40% during 1977-1981, and

remained at 9.98% during 1982-1985 (Bank of Thailand, as appeared in Table 49

in Rungsarn, Public Sector and Fiscal Policy during 1945-1985, 1986). ,[Does

this imply larger or smaller share of government's budget?.]

. The problem of limited resources had a grave impact upon the military during 1975 when the situation in Indochina changed drastically. Wiwatchai

observes that U.S. military and economic assistance to Thailand decreased

drastically after the end of the Vietnam War (~iwatchai,Thailand's

Development Policy and the External Debt Problem, 1961-1979, 1982). [By what

amount, from what Level?] As a result, Thailand needed to find new sources of

finance. In 1976, the government issued an act called h he Loan Act for

National Defense B.E. 2519" (Pranee and Direk, 1985: 54-55), which allowed the

government to borrow money from external sources. It should be noted that

this act is in fact the first attempt to undertake external public debts for

military purposes and contrasts with the earlier Loan Acts for Reconstruction and Development of the Country B.E. 249611953; -- which were to finance government capital investments. This resulted in a new category of debt which

amounted to 10.0% of the total foreign debts [in what year??] (Pranee and

Direk, 1985: 37). It is the fourth largest of Thailand's public debts.

In the 1980s, the Thai military became involved in politics openly.

Now that it was unable to tap the resources of the business sector as it once

did during the 1950s, it had to depend on the government's limited budget. In

the 1980s, it was apparent that the military became increasingly competitive

and dominating in the decision-making process, particularly regarding budget

allocation. [e.g.??] It also became increasingly involved in the development

of the country. However, it should be noted that this effort was not only led

by the commitment to solve the country's existing problems as perceived by the

military, but was the response to the need to solve its own problems,

particularly when the military itself had never reduced its size and when

factions and cli,ques.within the military became ,more and more visible. .The f q,fl$ : difficulties which the Thai military 1980s‘i, rose because / there were more factions and cliques within the military so that a unified

military under a strong leadersh*~was no longer possible. In these

circumstances, there has been more competition and conflict between those who

prefer to use force and those who prefer to use ideas. -1/

A concrete example is the case of the dismissal of the ~rmyCommander-in- Chief, General Arthit Kamlang-ek, in 1986. The new Commander-in-Chief, General , an astute military leader, attempted to unify the military, redefine its role, and solve its inherent problems. He even stated that the military should be separated from politics. Chavalit became a new symbol of the military, representing the period when the military became more professionalized. Given the political and economic context surrounding the military, one may contend that this new direction pursued by Chavalit might be just a redressing of the military, covering up the hidden motive to compete for scarce resource. During the 1980s, another socio-political force which became increasingly powerful was the business group. It has been observed that there were 123 large business groups in Thailand which together owned 1,443 companies of different sizes, representing 94.5% of the total assets shared by all local business enterprises in Thailand. [Source???? date???.] Of these

123 groups, the 12 largest owned 7.1.6% o.f the total assets. -1 /

It should be mentioned that these large business groups shared some important characteristics. First, they operated as a network or conglomerate, formed through family or personal ties. Second, they specialized in certain areas of commercial or industrial activities [i.e., they were specialized companies but were also conglomerates?]. Third, although they had close links with foreign capital and transnational corporations, they were based, by and large, on local capital (see Hewison, 1983). Interestingly enough, these business groups operated independently of the military. Unlike the business enterprises in the early 1960s, which relied on a symbiotic relationship with the military-bureauc~acy, no business groups in the 1980s had military generals nor high-ranking civilian officers as members of their boards of directors.

In the 1980s, these business groups have also begun to expand their sphere of activities and move into . During 1977-1979, a few leading business groups (e.g., the Bangkok Bank group, the Crown Property

Bureau group, and the Thai Namthip group) set up joint-venture projects to ,

-1/ The leading business groups were, for example, the Crown Property Bureau, the Siam Cement Group, the Bangkok Bank group, the Industry group led by Sukri Bhodhiratanang, and the Charoen Phokaphan group which specialized in agricultural businesses. start high-tech industries. They planned to invest in the fertilizer industry, the petrochemical industry, and the tantalum industry. This seemed to be a new direction in the Thai economy; that is, this heavy industry focus drastically differed from the previous investments. These industries are based on natural resources and require large capital investment. More importantly, they require a different environment, i.e., a major restructuring of the economy as well as managerial support from the government. However, the attempt to embark on heavy industry among these leading business groups faced some difficulties. First, they faced the problem of capital accumulation and were not able to amass sufficient capital to invest in this scale of industry. Second, they faced the constraints set by the political and administrative environment, as well as the inefficiency of the government. That is, the government did not have a clear policy on heavy industry; it was not able to assist and facilitate the business sector in mobilizing economic resources'. More importantly, it was too slow to resolve local political conflicts as in the case of the Tantalum incident at Phuket in

1986. [Explain in footnote.] Another example of the failure was the fertilizer industry. [Explain.] Such failures came from the lack of ability to amass the large sum of capital required. The business groups which initiated the project had to rally support from the government which in turn invited more investment from other business corporations. Yet the government did not have clear policy objectives on this issue. Instead, the involvement of the government created some doubts. Without adequate information and management skills, the government could not convince the participating business groups on the issues of profitability and competition with other existing companies. More than that, it was uncertain whether the project would really benefit the local business sector.

The shift in industrial investment policy among these business groups in the early 1980s exemplifies a new dimension of hail and's development which requires a new political structure. New types of power relationships, as well as new management skills on the part of the government in the decade to come. It also shows the new direction of the politics of ~hai1andI.s development which is obviously far more complex than hail and's bureaucratic leaders have faced in the past; it will require new abilities for hail and's

~oliticalleaders. Especially after 1973, no political leader has been able. to manage the dynamics of power relations successfully. The interplay among the power groups, be it political or economi-c,has been so fluid that the' skills to manage conflicts alone would be insufficient. Unlike previous . decades when only. a skill in manipulating power relations or the power to enforce the "rules of the game" were adequate in the 1980s. The complexities of the politics of development require management skills that a political leader who knows only how to manipulate power groups cannot handle.

The conflicts and tensions in the Thai political and economic arena suggest to the students of Thai society that "political stabilityM is rather unreal. Indeed, there has been some stability and continuity in terms of the government, particularly if we are referring to the group of people who hold political offices or make decisions. However, if we look at the political system as an arena of power relations, it is quite apparent that the tensions and conflicts are always inherent and increasingly intensified. Even the military, which has long dominated Thai political life, is constantly being challenged by the business groups, not to mention the factions within the

military itself which can be easily identified.

One can contend that in the 1980s Thai political economic life has gained a new dimension -- one which can be explained by the dialectic i I?(, relationshp between the bureaucracy and the extra-bureaucratic forces (i.e., P, business group), mediated or sometimes interfered with by the military. The

new dimension of this relationship is critically different from the one that existed during the previous two decades -- the relationship which was based on the symbiotic principle. Given the differences between the two groups in

terms of origin, objectives and ideology, it is likely that the antagonistic

relationship between the two groups could be intensified.

The new dimension of Thai political and economic life 'calls into

question the conventional view on the role of the bureaucracy. Such a view

seems to be incapable of explaining the dynamics of the politics of : development in Thai society in the 1980s. It also misled our understanding of

the Thai political reality. From what has happened in the 1980s, it is quite

noticeable that the extra-bureaucratic forces have played a more significant

role, especially when more and more business elites "participated" in

politics.

It will be interesting to see how the two groups resolve their

conflicts in the years to come in the context of a society which has never

truly experienced radical change. This, indeed, will also require a new

dimension of political and economic analysis in order to understand the way in

which the two power groups resolve their ever-increasing conflicts and

tensions. CHAPTER 6

Economic and Social Policies: 1947-1984 by Pranee Tinakorn haila and's experience of growth and income distribution over the past

three decades is the outcome of several economic, social and political

policies. It is the purpose of this and the next chapters to highlight the

important economic and social policies that have had significant effects on

both income growth and distribution. The presentation will be divided into

three major periods separated by turning points or clear switches in important

policies. This chapter covers the first two periods, 1947-1958 and 1459-1972,

the first being a period of reforms and attempts at stimulating economic

growth, while the second is one of a push for growth through the policy of

industrial import substitution. The third period, 1973-1984, when the economy

I was substantially subjected to external shocks, is left for the next chapter. 6.1 Post-War Policies of Undirected Growth and Some Reforms: 1947-1958

Although Thailand did not suffer serious physical damage from World / War 11, her economy was quite seriously affected. Prior to the war, Thailand was dependent on the exports of four major commodities, namely rice, rubber,

teak, and tin, more than 70 percent of which was sent to the United Kingdom

and her colonies. The advent of the war brought with it a recession in the

country's trade which in turn hurt the domestic economy. Government revenues

i which had been dependent on trade taxes fell. There was an acute shortage of 1 manufactured goods of all kinds. Furthermore, the government's war-time

I alliance with Japan brought about an expansion in the money supply to meet the 1 needs of the Japanese forces occupying the country, resulting in an

inflationary environment. Various studies of the living conditions during the

TPEG-PT-614.2.87 war show that the war put considerable strain on certain segments of the economy. -1 / As the war came to an end, Thailand had to sign a treaty of indemnity with Great Britain and India in 1946 which compelled the Thai government to supply 1.5 million metric tons of rice free of charge. 2' At the time the price of rice was about 28 pounds per metric ton and the exchange rate was 60 baht to the pound. The total value of the burden at 2,520 million baht put the government in a fiscal crisis as its annual revenue then averaged only about 300-400 million baht. The Thai government was thus burdened .with not only financing reconstruction of various bridges, ports, buildings, and so on that had been destroyed during the war, but also reviving the economy and paying the war indemnity. The government had no choice but to engage in deficit financing--a policy to which it has become accustomed up to the present time. -3 / During 1946-1948, the country also went through political turmoil with eleven changes of cabinet under five different prime ministers. -4 /

In April 1948, Field Marshal Pibulsongkram, the war-time prime minister, again became the prime minister following a successful coup. He was backed by a strong military faction and remained in power until September 1957. It was during this period that there were some attempts at reforms and efforts to push for economic growth. However, the government's development effort was later described by the World Bank mission which visited Thailand during 1957- 1958 as lacking in objectives and without systematic planning. 5' Some studies though classified the period under Pibulsongkram as a continuation of economic nationalism policy which the Kana Ratsadon government had pursued since 1932. 61 We shall now discuss in detail the policies pursued during this period which greatly influenced both growth and distribution.

6.1.1 Macroeconomic Policies and Monetary Reforms

(a) Fiscal policy

As mentioned earlier, the Thai government came out of the war with huge expenditures but meager revenues. The need to make war reparations and to reconstruct the economy made it impossible for the government to cut its expenditures. The deficit budget practiced during the war continued with finances from treasury cash balances and public debt, both domestic and external. The main objective of fiscal policy during this time was economic growth without concern for stabilization or distribution issues.

As evidenced by the data shown in Tables 6.1 and 6.2, planned government expenditure exceeded planned government revenue in every during 1945-1960. Even under the severe inflationary environment of

1945-1947 and 1950-1953, the fiscal budget was not used to mitigate the inflation. The actual budget def2cit outcome showed deficits averaging about

53 percent of actual government revenue during 1945-1947 and 29 percent during

1950-1953. In all years, except 1953, the planned deficit exceeded the actual deficit. This followed the traditional pattern in Thai public finances of overestimating expenditure in excess of the capacity to spend while underestimating revenues.

The growth in government revenue was quite dramatic in the immediate post-war period. The average annual growth rate in nominal terms during 1946-

1950 was about 46.6 percent; this slowed down to 14.8 and 9.4 percent during 1951-1955 and 1956-1960 respectively, reflecting the fact that government revenue was substantially dependent on import and export taxes which had Table 6.1 Planned Government Expenditure and Revenue, FY45-FY60 illio ion ~aht)

Planned Planned Planned (3) Government Government Budget (4) = --- x 100 Year Expenditure Revenue Deficit (2)

Source: Comptroller General Department, Ministry of Finance. Table 6.2 Actual Government Expenditure and Revenue, FY45-60 (Mi l l ion Baht)

Budget Deficit as a percentage of Budget Deficit Actual Actual Actual Government Revenue as a percentage of Government Government Budget (3) GDP Year Expenditure Revenue Deficit (4) = --- x 100 (%1 (1) (2 1 (31=(1 )-(2) (2) %

Source: Comptroller General Department, Ministry of Finance. fallen sharply during the war. After the peace treaty in early 1946 trade began to pick up and this had a direct positive effect on government revenue. The growth rate of exports was over 100 percent per annum during

1946-1950 and that of imports 88.3 percent (see Table 6.3). Subsequently, the growth rate of trade slowed and fed back into a slower growth rate in government revenues. The data presented in Table 6.3 show clearly the dependence of government tax and total revenue on foreign trade.

In fact, the importance of trade taxes in total government revenue increased during the 1945-1960 period. As can be seen from Table 6.4, the proportion of total revenue derived from import-export taxes which was about

22.6 percent during 1945-1947 increased steadily to 36.5 and 50.5 percent during 1950-1952 and 1955-1957, respectively, before decreasing slightly to

48.7 percent during 1958-1960. The trend of increasing reliance on trade taxes was due not only to the recovery and expansion of fore'ign trade after the war but also to repeated increases in tariff rates and a gradual s-hift. from ad valorem to specific duties. 1' It should also be noted that import tariffs constituted.the major part of tariff revenue. The importance of export taxes in total revenue remained at around 7-8 percent throughout the period, including the rice premium which is merely another form of export taxes and accounted for a substantial part of total government revenue during

1955-1960.

Another source of revenue for the government was its monopoly control over the rice trade. The signing of the treaty with Great Britain in 1946 initiated the government's intervention in the rice trade which later led to the collection of the rice premium after the reform of Thailand's trade and payments regime in 1955. In order to meet the war reparations of 1.5 million Table 6.3 Growth Rate of GDP, International Trade, and Government Revenue, ~~46150-~~58160 (% per annum)

1. Growth Rate of GDP at Current Prices - 12.20 6.07

2. Growth Rate of Exports 107.47 15.41 4.21

3. Growth Rate of Imports 88.26 23.47 5.41

4. Growth Rate of Total Government Revenue in Nominal Terms 46.59 14.84 9.37 (in constant 1972 prices) - (7.93) (8.37)

5. Growth Rate of Tax Revenue in Nominal Terms (in constant 1972 ~rices)

Source: 1". GDP statistics from the Office of National Economic and Social Development Board.

2. International trade statistics from Thailand Statistical Year Book, various issues.

3. Fiscal statistics from Comptroller General Department, Ministry of Finance. Table 6.4. Structure of Thai Government Revenue in Nominal Terms, ~~45147- 58/60 (% of total government revenue)

Type of Government Revenue 1945-47 1950-52 1955-57 1958-60

1. Tax Revenue 61.48 1.1 - Income taxes 3.26 1.2 General Sales Taxes 3.39 1.3 Specific Sales Taxes 25.83 ' 1.31 Excise Taxes 23.42 1.32 Natural Resources Taxes 2.41 1.4 Import-Export Taxes 22.58 1.41 Export Taxes 4.84 1.42 Import Taxes 17.34 1.43 Rite Premium - 1.44 Others 0.4 1.5 Fees and Permits 6.37 1.6 Other Taxes 0.06

2. Sales of Goods and Services 0.61

3; Government Enterprises and Dividends 34.8

4. Miscellaneous Revenue 3.11

5. Total Government Revenue 100.00 100.00 100.00 100 .OO

Source: Thailand Statistical Year Book, various issues. tons of rice, the government banned all private trade and set up the Rice

Office which had the sole right to export rice. However, owing to the lack of resources and motivation, the Rice Office did not meet its objective of supplying hail and's rice indemnity. This led to further renegotiations until the conditions of the treaty were changed to allow a payment of 12 pounds 14 shillings per ton for the rice. This was well below the full market price, but helped ease the financial burden at the time. 81 Once the waitime dislocations were over, private export was allowed to resume but the government retained the Rice Office to provide revenues by collecting the monopoly rent from export licenses for the sale of rice. The licensing system was used as a means of imposing quantitative restrictions on rice exports and

became a source of corruption and bribery. In 1950, the quota rent was

officially required to obtain an application for the export license. When the

Rice Office was abolished in 1955, the government continued to obtain revenue

from the rice trade through the collection of the premium and export duty. -9 /

The revenue from rice during this period constituted a considerable

share of the government total tax revenue, as can be seen from Table 6.5.

Indeed, the revenue earned from taxing rice would be greater if we take into

account the fact that during 1947-1955 Thailand was under a multiple exchange

rate system whereby exporters for non-traditional export goods could sell

foreign exchange in the free market at the rate of about 60 baht per pound,

while major exports such as rice, tin and rubber were subjected to different

surrender requirements at the official rate of 40 baht per pound. For rice,

the surrender requirement was 100 percent of the total export value. This was

in effect a tax of one-third of the rice export proceeds which was registered Table 6.5 Government Revenue from Rice, FY45-FY60 illio ion ~aht)

Government Revenue from Rice Revenue Total Rice Rice from % of Tax Export Purchasing Rice Rice Total Tax Year Revenue Duty Tax Office Premium Total Revenue

Source: Comptroller General Department, Ministry of Finance. as an exchange profit earned by the Bank of Thailand rather than as tax revenue for the treasury.

Although the multiple exchange rate system was abolished in 1955, other taxes on rice remained. It is clear that the general government policy during this period was one of revenue generation and that, by the nature of these revenue sources, total revenue cou1.d be increased through economic growth and in particular growth in trade. Within this framework, rice, the foundation of the country's agricultural sector, bore a considerable burden.

Table 6.6 presents the structure of government expenditure by functional classification from which we can see that economic services constituted around 15-18 percent of total expenditure during 1945-1960, except

for the period 1950-1952 when it was 26 percent. The emphasis of the economic

services expenditure was on transport and communication throughout the

Another important item was the defense expenditure which averaged

around 15 percent during the 1950s. It can also be observed that social

services did not receive much attent.ion from the government, with a combined

share in total expenditure of less than 8 percent.

Another way of looking at government expenditure is by economic

classification which separates the expenditure into current (consumption)

expenditure and capital expenditure; the latter gives an indication of the

importance given to public investment. However, before 1961 the available

data do not permit such a classification since expenditure was classified as

ordinary expenditure, a non-investment type of extraordinary expenditure, or

an extraordinary capital expenditure. A close examination reveals that

genuine capital expenditures were mixed up in all these three categories in

some years during 1945-1961. This system of budgeting was so confusing Table 6.6

Structure of Government Expenditure in Nominal Terms FY 1945-1947 to FY 1958-1960 (% of Total Government Expenditure)

Functional Classification 1945-47 1950-52 1955-57 1958-60

A. Economic Services 15 .OO 26.38 17.99 18.53

1. Agriculture & nonmineral resources 3.05 6.93 4.99 4.96 2. and power 0.00 0.83 1.30 3.02 3. Other mineral resources, manu- facturing and construction 0.80 1.10 0.91 2.46 4. Transport storage and communication 8.48 11.98 9.18 7.90 5. Other economic services 3.26 5.55 1.60 0.16

B. Social Services 4.75

6. Education 3.22 7. Health 1.15 8. Social security and welfare 0.37 9. Other social services 0.01

C. General Services 38.52

10. General administration 14.05 11. Defense 20.28 12. Law and order 3.64 13. Other general services 0.54

D. ~nallocableExpenditures 41.14

14. General debt services 5.85 15. Subsidies not classified 0.00 elsewhere 16. General transfers to local government 0.65 17. Transfers abroad 2.90 18. Other unallocable expenditure 30.73

TOTAL 100.00

Source: Comptroller General Department, Ministry of Finance. that it received much criticism in the 1954 Bank of Thailand Annual Report, by

Puey Ungphakorn (1955), and by Puey Ungphakorn and Suparb Yossundara (1961).

Eventually an economic classification of government expenditure was adopted in the fiscal year 1961. Therefore, we must regard the data presented in Tables

6.7 and 6.8 only as approximations of actual government capital expenditures.

During the immediate post-war period the ratio of capital expenditure in the total expenditure-was not significant. However, it.averaged more than

20 percent during 1949-1955 and then.decreased to about 15-17 percent during

1956-1960. When capital expenditure is classified by function in Table 6.8, the data reveal that throughout the period most of the investment was for economic services, particularly in transport and communication and agriculture

(mainly irrigation). It is worth noting that the government did not invest much in the social sectors until the period 1958-1960, when it began to pay attention to education and health.

The data on total government expenditure per capita presented in

Table 6.9 also confirm that the government paid little attention to both education and health until later on in the period. The items with high per capita government expenditures were economic services and defense. It should

be noted that the unallocable expenditure item had the highest figure but part

of this was due to the fact that it included promotional and special salaries

item of all ministries combined. Another part was due to the general debt

service payments which had increased during the later period.

The fact that the government gave high priority to economic services

and defense rather than social services brings out two salient observations. Table 6.7 Government Capital Expenditure as a Percentage of Total, Government Expenditure, FY45-60 (X of total government expenditure)

Capital Expenditure as a Percentage Total of Total Government Capital Government Year Expenditure Expendi ture . Expenditure

Source: Comptroller General Department, Ministry of Finance. Table 6.8. Structure of Capital Expenditure by Functional Classification, FY45/47 - FY58/60 (5 of total government capital expenditure)

Functional Classification 1945-47 1950-52 1955-57 1958-60

A. Economic Services 94.08 88.59 87.26 78.46 1. Agriculture and Nonmineral Resources 18.55 21.14 20.16 14.68 2. Fuel and Power - 3.43 7.15 18.38 3. Other Mineral Resources, Manufacturing and Construction 1.45 3.65 4.70 12.58 4. Transport, Storage and Communication 41.03 39.59 46.98 32.69 5. Other Economic Services 33.05 20.76 8.27 0.13

8. Social Services 6. Education 7. Health 8. Social Security and Welfare 9. Other Social Services

C. General Services 10. General Administration 11. Defense 12. Law and Order 13. Other General Services

D. Unallocable Expenditure 14. General Debt Service 15. Subsidies Not Classified Elsewhere 16. General Transfers to Local Government 17. Transfers to Abroad 18. Other Unallocable,Expenditure

19. Grand Total 100 .OO 1 00.OO 100 .OO 100 .OO

Source: Camptroller General Department, Ministry of Finance. Table 6.9

Government Expenditure in Nominal Terms Per Capita FY 1945-1947 to FY 1958-1960 (Baht)

Functional Classification 1945-47 1950-52 1955-57 1958-6-0

A. Economic Services

1. Agriculture & nonmineral resources 2. Fuel and power 3. Other mineral' resources, manu- facturing and construction 4. Transport storage and communication 5. Other economic services

B. Social Services

6. Education 7. Health 8. Social security and welfare 9. Other 'social services

C. General Services

10. General administration 11. Defense 12. Law and order 13. Other general services

D. Unallocable Expenditures

14. General debt services 15. Subsidies not classified elsewhere 16. General transfers to local government 17. Transfers abroad 18. Other unallocable expenditure

TOTAL

Source: Comptroller General Department, Ministry of Finance. First, it is clear that the government was pushing for growth with some emphasis on building up the basic infrastructure. Second, the high defense expenditure reflected in part the demand for resources by different political- military factions. Ayal (1961) pointed out that the ministry with the highest annual budget allocation was always the Ministry of Defense followed by the

Ministry of Interior. 10' This reflected the fact that the country was in the hands of the military and police forces.

Although one could say that the government showed some intention to push for growth through its deficit budget, the priority it gave to defense seems to belie this interpretation. Indeed, if there was any intention to push for growth it was done without any guiding objectives. A World Bank team which came to Thailand during 1957 evaluated the government's development effort as follows: "~nvestmentshave been authorized without first trying to find out if they would serve urgent needs, if they would be as productive as other alternatives, or if the particular forms of investment chosen were the best means of attaining their objectives. Consequently, public development effort has been unbalanced, un-coordinated and excessively diffused." -!-!I One could also add that, because the public development effort was done through deficit finance, it showed that there was apparently little concern for stability. As discussed in the next section, the Bank of Thailand did provide one source of economic stability by accumulating foreign exchange reserves through a multiple exchange rate system. Furthermore, the tax structure, which depended mainly on indirect taxes (see Table 6.41, would have had a negative impact on the income distribution because of its regressive nature.

Although there were several adjustments to the tax structure during the period 1945-1960, the changes were made to increase government revenue rather than to correct the existing regressive structure. -121

(b) Monetary policy and exchange rate reforms

Prior to the Second World War, Thailand's monetary system was

relatively rudimentary. The monetary circulation consisted almost exclusively

of coins and currency. Domestic currency issue was solidly linked to

international reserves. 13' There were few commercial banks operating in

Bangkok and their credit was principally involved in international

transactions. The functioning of the monetary system prior to 1940 was

largely a response to conditions in the balance of payments.

The idea of a central bank first occurred to the Thai government in

1914 but a few British advisers to the Ministry of Finance had advised against

it. 14' In 1939, the Office of the ~haiNational Bank was se! up under the

Ministry of Finance, but it~didnot function strictly as a central bank. Two

years later Japan, which had occupied the country, offered to set up a central

bank for hail and along with Japanese advisers and officials.' Prince Viwat,

the director of the Office of the Thai National Bank, who had already started

training people in readiness for a central bank, strongly opposed the Japanese

idea, arguing that his office could perform the function of a central bank. s1 The government thus came under pressure to set up its own central bank or have the Japanese create one of their design. In 1942, the Bank of Thailand

Act was declared and the Bank of Thailand (BOT) was founded in December of the

same year with Prince Viwat as the first governor. Although the Bank of

Thailand was supposed to be an independent central bank organization, the law

stated that it was to function under the control of the Minister of Finance. The expansionary role of the Bank of Thailand during the war forced by the Japanese occupation was contrary to the historically conservative nature of the country1s monetary ~olicy.16' In reaccion to its expansionary role during the war, the Bank of Thailand subsequently reverted to conservative ways in its conduct of monetary policies.

In the immediate post-war period the main concern of the Bank of

Thailand was to bring stability back.to the monetary system. The expansion of

the money supply was enormous as the currency in circulation rose from

297,344,079 baht at the end of December 1941 to 1,009,120,348 baht in

September 1944. 17' At the end of August, 1945 it rose to 1,992,650,348 baht

--nearly a seven-fold increase--leaving the monetary reserve position rather

shaky (see Table 6.10). The ratio of liquid assets (gold held in Thailand and

an) to the value of currency was only 17 percent as the Yen exchange accumulated during the war became worthless. -181

A number of major measures were used by the Bank of Thailand to

combat haila and' s inflationary problems. 2' First, in February 1945, the

government issued a decree forbidding the use of the 1000-baht bank notes.

Those possessing such notes could turn them in to the Bank of Thailand in

exchange for a government saving bond at a 1 percent interest rate and a

maturity of one year. This measure removed 371.5 million baht of currency

from the public. Second, the bank rate was raised from 4.5 percent per annum

to 8 percent and the discount rate was also raised to between 4.5 and 7

percent. These measures were carried out in early 1945 in combination with

moral persuasion to the commercial banks to be cautious in their lending.

Third, in October 1945 the Commercial Banking Act was declared which gave the

power to the Bank of Thailand to set the cash reserve requirement between 9 Table 6.10

Monetary Position at the End of World War I1 (as of end of August, 1945)

(unit = baht)

1. Gold 338,959,093 (in Thailand (in Japan

2. Yen exchange

3. Treasury Bonds

4. Gold under custody in the U.S.

5. Pound Sterling and Sterling securities under custody in England 265,753,896

Total (1 + 2 + 5) 2,180,033,522

6. Note issues 1,992,650,348

Source: Bank of Thailand, Viwatchaiyanasorn: A Document Published in Remembrance of the Late Prince Viwat, April 1, 1961, Bangkok, p. 208. and 20 percent of deposits, of which at least half had to be deposited with

the Bank of Thailand. In November 1945, the Bank of Thailand set the cash

reserve requirement at 10 percent--a rate that remained in effect until 1962.

Perhaps the most important monetary policy during this period was the

exchange rate. In June 1942, the yen was established at parity with the baht

as part of the Pact of Alliance with Thailand. This overvaluation of the yen,

which previously was worth 1.557 yen per baht, increased Japanese expenditures I and hence the domestic money supply in Thailand. As shown in Table 6.10, the

war left the country with a small amount of foreign assets To cover the

domestic currency. The aim of the exchange rate policy then was to restore

the country's solvency while regulating the demand for imported goods from

both consumers and the government. On May 9, 1946, the government set the

official exchange r.ate at 40 baht per pound sterling, equivalent to a

devaluation of over 130 percent compared to the rate of 17.1 baht per pound in

1942. The Temporary Exchange' Control Act of 1946 also required all export

proceeds to be submitted to the Bank of Thailand at the official rate and

foreign exchange was sold only for approved imports in order to discourage

non-essential imports which had to be exchanged at the market rate of about 60

baht per pound.

Not surprisingly, the mechanism broke down as a result of black

markets and smuggling. In 1947, only major exports such as rice, rubber, tin

and teak were required to surrender foreign exchange at differential rates.

As of October 1947, the commercial banks were permitted to buy, sell, and

transfer foreign exchange without restriction, and were not bound by the

official rates except when acting as agents for the exchange control

authorities for the required export items. 20' This amounted to giving Table 6.11

Official and Free Market Exchange Rates: 1946-1960

Bank of Thailand Official Rates (B/*) Commercial Banks' Rates -c / Buying Selling -b / B, Buyi;7$ B,Selli~~$

Sources : a. From Bank of Thailand, Annual Report. b. Quarterly averages from Yang (1957: 171). c. The data during 1947-1949 are quarterly averages from Yang (1957: 171). The data during 1950-1960 are monthly averages from Bank of Thailand, Monthly Report. Table 6.12

Percentage of Export Proceeds Required for Foreign Exchange Surrender at the Official Rate during 1947-1955

Surrender requirements as percentage of total export proceeds As of As of As of As of 06/13/47 12/12/49 09/16/52 09/15/55

Rice

Teak

Tin

Rubber

Cement

Other exports

Notes: a. The 20 percent rate was for exports from the port of Bangkok, while the 25 percent was for exports from other ports. b. The surrender requirement for teak was abolished on March 31, 1948. c. The rate for rubber was uniformly set at 20 percent in February 1948. d. The 100 percent surrender requirement for cement was effective during September 25, 1947 to June 11, 1949 to discourage cement exports during that period.

Source: Bank of Thailand (19621, A Document Published on the 20th Anniversary of the Bank of Thailand, pp. 37-68. off.icia1 recognition to free market exchange transactions and effectively created multiple exchange rates. Tables 6.11 and 6.12 show respectively the exchange rates in the different markets and the foreign exchange surrender requirement of major exports during 1947-1955. The fact that the free market rates were higher than the official rates implied that the export items subjected to foreign exchange surrender were taxed at various rates, with rice being the most heavily and consistently taxed during the period 1947-1955.

Apart from the multiple exchange rate system which helped Thailand earch and build up foreign exchange reserves, the Korean War during 1950-1951, which led to a commodity boom, also helped the country to earn f.oreign exchange, especially from the exports of strategic commodities such as tin and rubber. Since imports had to be obtained at the free market rates which were higher than the official rate, this helped to curb private spending on imported goods. During 1947-1951, the country's balance of payments was in surplus and the foreign exchange reserve build-up was favorable, as shown in

Table 6.13.

It should be noted thae the multiple exchange rate system not only enabled the Bank of Thailand to build up public and international confidence

in the baht through the accumulation of foreign assets to back up notes in circulation, it also had several other favorable and unfavorable effects.

First, by purchasing foreign exchange at the official rates which were lower than the market rates, the Bank of Thailand was partly able to sterilize the money inflow from the commodity boom and thereby control domestic purchasing

power. This had a deflationary influence on the price level which partially

countered the government's fiscal defects. From Table 6.14 we see that the

price level became more stable compared to the earlier period even during the Table 6.13

International Reserves of the Monetary Authorities, 1945-1960 (in million U.S. ~ollars)

Foreign IMF Gold End of Period Go 1d Exchange Tranche Position Total

-Note a, Yen holdings were written off in May 1946. Source: The data for 1945-1954 are from Yang (1957: 170). The data for 1955 are from the first issue of Bank of Thailand, Monthly Bulletin (January 19619. The data during 1956-1960 are from Bank of Thailand, Monthly Bulletin (December 1969 1. Table 6.14

Money, Price Level and their Rates of Change

Wholesale Money Supply price index (mill ion baht) for Bangkok 1' % Change (end of period) -b1 % Change

Sources : a. The data during 1938-1942 are from Bank of Thailand (1961: 343) which reported that they were supplied by the Ministry of Commerce. The data during 1948-1960 are from Statistical Yearbook of Thailand, No. 22, 1945- 1955 and No. 24, 1963. b. Money Supply is the value of currency and demand deposits held by the ~ublic. The data are from Trescott (1971: Table A-4) which corresponded with the data during 1952-1960 from Bank of Thailand, Monthly Bulletin. 1950-1951 Korean War boom when the money supply expanded rapidly. Second, because the multiple exchange rate system taxed rice exports heavily, while during 1947-1954 the Rice Office retained the monopoly to export rice, the domestic price of rice was depressed below the world price. As Siamwalla

(1975: 145) points out, this cheap rice policy implicitly enabled the government to save on the expenditure side by not having to increase civil servants' salaries. Third, there was, of course, an impact on income distribution. However, this issue will be discussed later since it has to do with taxes on rice in general and not just the multiple exchange rate system.

Overall, the multiple exchange rate system seemed to be an effective means to restore the level of foreign exchange reserves and to restore

confidence in the value of the baht. Ingram (1971: 169) mentioned-that by

1951 the baht was convertible at the free rate and it was-already one of the

strongest currencies in the world.

In 1952, after the Korean War boom, there was a sharp deterioration

in tin and rubber prices and the rice market was also unfavorable. The usual

trade surplus after the Second World War turned into a deficit. The multiple

exchange rate system was no longer an effective means of absorbing the

purchasing power from the private sector as foreign demand was falling and the

government continued its budgetary deficit of over 1,000 million baht during

1952-1954 (see Table 6.2). In its 1954 Annual Report the Bank of Thailand

commented that the existing exchange rate system was no longer appropriate and.

in September 1955 the government decided to abolish the multiple exchange rate

system. As a result the exchange rate was unified and the Exchange

-EqualizationFund (EEF) was set up to stabilize the exchange rate. In the

same year, the government also revalued its international reserves as follows: 0.0444335 gram of fine gold equals 1 baht (from 0.0710937 gram previously), 1 pound sterling equals 56 baht (from 35 baht previously), and 1

U.S. dollar equals 20 baht (from previously 12.50 baht previously). A surplus of about 2.5 million baht accrued as a result of this revaluation and 1.26 million baht were used as the initial capital of the EEF. 22' Between 1956 and the early 1970s the exchange rate in the free market was quite stable. . In terms of the U.S. dollar, there were almost no fluctuations in the free market exchange rate for more than a decade.

Apart from setting the exchange rate in line with the free market rate, the purpose of establishng the EEF was also to maintain stability in the exchange market and stimulate trade. -23' The end of the multiple exchange rate system was seen as a major monetary reform whereby trade was liberalized. However, even though the exchange-rate was no longer explicitly used to tax exports, the maintenance of its stability could sometimes lead to overvaluation or undervaluation of the real rate that would affect the traded- goods sector. Furthermqre, the taxes on.rice, rubber, and tin were switched into the rice premium, export taxes on rubber, and tin royalties so that the domestic prices could be cushioned from external fluctuations. -24' The taxes on the major commodity exports of the country thus remained.

Before leaving the discussion on monetary policy we should also mention the autonomous expansion of the commercial banking sector during the immediate post-war period. Prior to 1940, there were ten commercial.banks operating in Thailand; six were foreign-based banks and only four were domestic (see Table 6.15). During the Second World War, the operations of the European and the United States-based banks had to be closed down. This opened up the opportunity for Thai entrepreneurs to take up the banking business. As Table 6.15

Domestic and Foreign Commercial Banks Stil I in Operation and Year of Establishment

Domestic Banks (Thai Names) Year Foreign Banks (Country of Origin) Year

Siam Commercial Bank (Thai Panich) 1 906 8 Shanghai Bank (England)

Nakorn Thon Bank !/ (Nakorn Thon) 1933 Chartered Bank (Eng l and )

First Bangkok City Bank (Maha Nakorn) 1934 Banque de I I ndoch i ne et de Suez () 1897

Bank of Asia (Asia) 1939 Four Seas Communication Bank (S i ndapore) 1909

Siam City Bank (Nakorn Luang Thai ) 194 1 Bank of Canton (Hong Kong) 1919

Union Bank of Bangkok (Saha Tanakarn Krungtep) 1943 Mercent i le Bank (England ) 1923

Bangkok Bank of Commerce (Krungtep Panicharakarn) 1944 International Commercial Bank of China () 1947

Bangkok Bank (Krungtep ) i944 Indian Overseas Bank (India) 1947

Thai Farmers Bank (Kas i korn Thai ) 1945 Bank of America (Un i ted States ) 1949

Bank of Ayudhya (Krungsri Ayudhya) Mitsui Bank (Japan)

Laem Thong Bank (Laem Thong) Bank of Tokyo (Japan)

Thai Dhanu Bank (Thai Dhanu) 1949 Chase Manhattan Bank (United States) 1964

Bangkok Metropol i tan Bank (Sr i Nakorn ) 1950 United Malayan Bank () 1964

Thai Mi l i tary Bank (~aharn'Thai ) 1957 European Asian Bank (.West ) 1978

Siam Bank b/ (Siam) 1965

Krung Thai Bank " (Krung Thai ) 1966

Notes :

a. Formerly Wang Lee Bank (unt i 1 1985 ). b. Formerly Asia Trust Bank (until 1985). c. Honthol Bank and Kaset Bank joined with Ministry of Finance as the only shareholders.

Source: Rerngchai Marakanont (1978: 156-163) and Bangkok Bank, Statistical Data on Commercial Banks in Thailand, 1985. the data in Table 6.15 show, during the war years (1941-1945) there were six newly established domestic commercial banks and during 1948-1957 there were four more. This accounts for ten of the present sixteen banks now in operation. The most notable leading entrepreneurial families who set up their banks during this period are the Sophonpanich (who own the Bangkok Bank, now the largest bank in the country), the Lamsam (who own the Thai Farmers Bank, presently the second largest bank), and the Techapuibul (who own the First Bangkok City Bank, Bank of Asia, and Bangkok Metropolitan Bank). -251

Apart from war opportunities which led to the expansion of the domestic commercial banking sector, there was also the mult.iple exchange rate system which opened up the opportunity to earn substantial profits from the exchange rate margins. By the time Thailand entered the 1960s, the commercial banking sector was.-alreadywell established and functioning soundly.

6.1.2 Sectoral Policies .in Favor of State Capitalism

Thailand has always been, and still is, an agriculture-based economy. The rapid growth and expansion of the industrial sector has taken place as a result of conscious efforts by the government. As the data in

Table 6.16 indicate, Thailand emerged from the war pretty much an agricultural economy. The share in 1947 of the agricultural sector in GDP was 60 percent and in employment was about 85 percent. However, even in the 1950s we could already see a declining trend of the agricultural sector in its contribution to income while that of other sectors were increasing. Apart from the effects of the macroeconomic policies already described we shall now investigate other sectoral policies that helped to shape the economy in this direction.

(a) Agriculture

Until recently, agricultural policy in Thailand centered around rice Table 6.16

Some Statistics Indicating Relative Sectoral Importance, 1947-1960

In current prices In constant 1972 prices Average Annual 1947 1950 1956 1960 Growth, 1951-60

1. (in million baht) 15,838.9 43,360.9 60,311.6 71,367.3 5.2

2. Percentage share of - Agriculture - Mining and Quarrying - Manufacturing - Construction - and Water Supply - Transportation and Communication - Wholesale and Retail Trade - Banking, Insurance and Real Estate - Ownership of Dwellings - Public Administration and Defense - Serv i ces

3. Population (whole kingdom) 17,442,689

a / 4. Total Economically Active Population - 8,992,098 - 10,200,680 26,257,860 (2 14 yrs) (115 yrs) (2 11 yrs)

- in agriculture - in manufacturing

-Note : a. Note the difference in definition of the economically active population for the three years.

Source : 1. GDP data For 1947 are from Statistical Yearbook of Thailand, No. 22, 1945-55. GDP data for the period 1950-1960 are from NESDB unpublished revised data.

2. Population data in 1947 are from the same s.ource as GDP; 1956 from Statistical Yearbook of Thailand, No. 23, 1956- 58; 1960 from Statistical Yearbook of Thailand, No. 24, 1963. which is the main staple. Rice farming has been the major occupation of the majority of the Thai population for over a thousand years. Rice exports in substantial amounts, however, only began over a hundred years ago in the reign of King Rama IV who saw that the export of rice would benefit rice farmers by raising the price of rice. 26' From that time on until the advent of the

Second World War the rice policy was one of essentially free trade with some emphasis on land expansion. After the war, there was heavy involvement OF--the government in the rice trade, particularly with emphasis on its pricing. We shall, therefore, divide our discussion into two parts: production pol'icy related to land and irrigation, and pricing policy.

Prior to the opening up of the country as a result of the Bowring

Treaty in 1855,.rice farming was for subsistence only. Land was abundant and population was sparse. The expansion of rice cultivation was achieved through opening up new frontiers and there were no serious problems of Land disputes. Although all land was supposed to belong to the King, commoners did have the right to occupy a piece of land as long as they put it to use. The size of the occupied land was said to be between 25-50 rai (or 4-8 hectares). The land occupier would notify the government officials, pay the land tax, and be issued a document certifying his right to use the land.

Although commoners could not claim the right of ownership from the King, land could be bought, sald, mortgaged, or given away as inheritance or for.

favor. -271

The opened up the country not only to Western

influences but also to the commercialization of rice production. By 1900, the

traditional subsistence nature of Thai agriculture was rapidly disappearing.

Ingram reported that, between the 1850s and 1930s, the volume of rice export-s increased 25-fold and the share of exports in total rice production increased from about 5 percent in 1850 to about 50 percent in 1900. 28' Increases in production and exports of rice depended, to a large extent, on land expansion. Although many canals were dug in the earlier period, it was during the reign of King Rama V that a systematic approach to irrigation development was adopted. The most notable project was the Rangsit Canal which was constr'ucted under a concession granted to a private,company in 1889. The Rangsit Pr0jec.t, though initially conceived as a response to external demand for increased rice production, represented a case where the decision for land development served the interests of the ruling class.

First, although King Rama V realized the importance of canal developments for further agricultural expansion, the royal treasury lacked the funds to finance the needed projects. Second, private entrepreneurs would not undertake irrigation projects if they were not granted assurance of recouping their large investments. Third, cana-l developments would raise the treasury revenue from taxes on land which would otherwise lie idle and yield no income.

Fourth, agricultural expansion from canal developments meant higher production and exports which would render income to the treasury from export taxes. King

Rama V granted a 40-year concession to the Siam Land, Canals, and Irrigation

Company to develop the Rangsit Project with the promise that the company would have the ownership rights to land extending 40 Sen (25 Sen = 1 kilometer) on either side of the canal. 3''The Company was formed by Praongchao Sai

Snidvongs, a prominent member of the royal family and also a member of the

Privy Council and the King's personal physician. -30 / The Rangsit system, the largest and most successful, was not able to satisfy the ever-increasing demand for irrigated land. Numerous other projects were also undertaken to open new lands for cultivation. The

extensive land development led to two distributional consequences. First, it

brought about large-scale landowners and tenant farmers, in contrast to the earlier widespread owner-operator arrangements . 21' Second, it led to serious land disputes as there were conflicting claims on the newly developed lands.

The existing property rights system was inadequate to deal with such problems

. and finally in 1901, a new law on land was proclaimed which spelled out the

land ownership system and the reform of the administrative process in issuing title deeds with the adoption of the Torrens System of land titling. -321

Changes in the land rights system and laws were minimal until 1954, except for

changes in lahd tax rates.

The interest in irrigation development, however, did not stagnate,

although most projects were small and of an intensive nature, Projects were

separated, with a complete network of water delivery system in the area of

each project. Table-6.17 presents the information on state irrigation

projects during 1902-1960. After the change from absolute monarchy to

constitutional monarchy in 1932 more attention was paid to irrigation

development in the Northeast whereas previously it was concentrated in the

central region. Up to the Second World War which temporarily put a stop to

irrigations work, the benefits derived from these irrigation projects were

limited.

During 1946-1949, the war reparations of 1.5 million tons of rice and

the increasing population pressure made it necessary to expand rice

production. At this time the importance of large irrigation projects was

recognized and the Chao Phya Dam project, first suggested by J. Horran van der

Heide in the reign of King Rama V, was reconsidered. In 1950, a loan was Table 6.17

State Irrigation Projects, 1902-1960

Period of lrrigable Area Construction Project TYpe (hectares) Reg ion

1902 - 1924 Phasicharoen, Damnernsaduak, Sansaeb Canan, Tha Kai, I CD 48,000 Central Bang Kanak, Klong Phra Kanong, Klong Dam

,1915 - 1924 South Pasak ID " 108,800 Central Chiengrak - Klongdan l CRD 106,880 Central

Suphan (Phophya) ID 49,920 Central

1928 - 1936 Mae Faek I 10,560 North 1933 - 1954 Nakorn - nayok ID 91,840 Central 1933 - 1949 Mae Wang I 1 1,840 North

1935 - 1955 Suphan (Samchook ) ID 48,800 Central

1937 Makamthao ID 12,000 Central

1937 - 1941 Mae Ping Kao 6,240 North

1939 - 1957 Lam Takong ( lower part) 13,500 Northeast 1939 - 1958 Tung sair it 24,480 Northeast 1939 - 1959 Huay Saneng 7,616 Northeast Tung Sangbadan Northeast

Huay Nam Marn Northeast

Huay Luang Northeast

Mae Khong Basin Northeast

Ban Toom Ban Tew Northeast

Petchbur i (Right Bank ) Central

Mae Klong River Bank (temporary project) Central

West Bank Chao Phya Central

Mae Kuang North

Petchburi (Left Bank) Central

Mae Lao North

1951 - 1952 27 small tanks SI - Northeast 1952 - 1963 Greater Chao Phya ID 912,000 Central 1952 - 1957 Chao Phya Dam - Central 1958 - 1964 Bhum i pho l Dam - - North

Note:- Types of Irrigation: C = conservation of water in the plains; I = irrigation; D = drainage; R = land reclamation; F = flood control; S = storage of water; H = hydroelectric power generationTPEG-PT-6/4.2 .87 Source: Royal Irrigation Department. obtained from the World Bank to start the greater Chao Phya project which consisted of the Chao Phya Dam at Chainat and eleven subprojects.

Construction started in 1952 and was completed in 1964 The project benefitted an area of about 912,000 hectares in the Central region. Another important large dam was the Bhumipol Dam which was constructed in 1958 and was the first multi-purpose project. Apart from storing water for planting in

240,000 hectares in the Ping riveFbasin and 400,000 hectares in the Chao Phya project area, it is also used for flood control, hydroelectric power generation with a capacity of 560,000 kilowatts, saline water protection, navigation, and fishery.

In 1960 the area under completed state irrigation projects totalled

1,015,360 hectares, of which about 75 percent were in the Central region, 13 percent in the Northeast, 9 percent in the North and 3 percent in the South.

The irrigated area was about double that in 1950. The data.in.Table 6.18 show . that the irrigation projects completed by 1960 accounted-for about 17 percent of the wet season rice planted area and that the dry season rice planted area was negligible. Thus hail and's rice production still depended very much on natural conditions.

The rice pricing policy between the post-war period and 1960 can be summarized as .follows. Throughout this period the agricultural sector had been taxed quite heavily, first through the Rice Office and the multiple exchange rate system (during 1947-1955) and then through the rice premium

(since 1955). The importance of various taxes on rice in the government's total revenue during this period can be seen in Table 6.5. If the exchange profit earned by the Bank of Thailand from rice by using the multiple exchange rate system is included, its importance would be even greater during 1947- 1955. -331 Table 6.18 Comparison of Irrigated Area I and Rice Planted Area in the Wet Season and Dry Season, 1950-83

Dry Season Irrigated Area 1 Rice Planted Area %------% ------Year Wet Season Rice Planted Area Irrigated Area 1

Source: Royal Irrigation Department, Office of Agricultural Economics, Ministry of Agriculture h Co-Operatives, Agricultural Statistics of Thailand, various issues. Irrigation Project Area where construction has been completed. When the Rice Office was in operation, there was so much bribery and corruption that a group of honest civil servants suggested its abolishment. z1When this office was finally abolished in 1955, the rice premium was introduced to insulate the domestic price from external influences. Although the rice premium was meant to function for a limited time, it continued to be used by the government as a means of obtaining revenue up to the 1980s.

Since it was doubtful that the tax burden was shifted to foreign consumers, the impact of the rice taxes was felt mainly by rice producers.

This had serious implications on the country's income distribution since rice farmers and their families constituted the major population group in the country and, except for a small number of large-scale farmers, are known to be among the poorest. On the other hand, there may have been some positive impact from the rice taxes since low rice prices very likely encouraged diversification. This diversification could not take hold in the 1950s as the basic infrastructure was not available to make other crops readily marketable. However, during the later period, the d.iversification of'the Thai agricultural sector was became more evident. -351 The data in Table 6.19 show the significance of various crops in the total value added for all crops during the period 1950/1952-1980/1982.

(b) Industry

Before World War 11, Thailand had developed a small manufacturing capacity. There were two major types of manufacturing activities at the time, one being rice and lumber milling, and the other the production of cottage and Table 6.19

GDP Originating from Crops at 1972 Prices, 1950-1952 to 1980-1982 (in percentage of total value added)

Average Average Average Average 1950-52 1960-62 1970-72 1980-82

Paddy

---. Rubber Coconut Maize and sorghum Groundnut Mung bean Castor bean Soy bean Cassava Tobacco Cotton Kenaf, jute and ramie. Kapok 1.51 Sesame 0.29 Garlic, onions, shallot & chilli 2.04 Vegetables 2.41 Fruits 15.90 Other crops 0.50

Total value added

Source: Data for 1950-1969 are unpublished revised data from NESDB, for 1970- 1985 from NESDB printouts and NIT, 1985 edition. handicrafts. In 1919, the British consul reported that there were only seven

factories in Bangkok. 36' It was believed that the late start of factory-type

manufacturing was attributable mainly to the Bowring Treaty of 1855 which

imposed a 3 percent limit on import duties. The constraint on tariff revenues

led to the imposition of "inland transit duties" on internal shipments of

certain articles, at an average ad valorem rate of about 10 percent. 21' The

.- low import duty and the inland transit duty were a distinct discouragement to

local entrepreneurs. Other factors were the small size of the market and lack

of resources such as capital, entrepreneurship, skilled labor, and power.

Ingram (1971) reported that, as late as 1952, Thailand had not a single

hydroelectric plant, and most electricity was generated by burning rice

husks. Power was expensive, inadequate and highly unreliable. -381

In 1926 the Bowring Treaty was revised and there was a new law

concerning tariff rates. A number of import duties were increased and the

inland transit duties abolished. It was reported that, although the purpose

of higher import tariffs was to increase government revenue, many industries

were established as a result of them. During the 1930s and 1940s many new

industries were set up. The curtailment of imports which came with the

outbreak of World War I1 also provided additional protection and stimulated

the growth of domestic manufactures. -39/ As a result of the shortage of manufactured goods during and

immediately after the war, the government started to pay attention to

industrial promotion. However, the industrial development policy in the

decade following the end of World War I1 was characterized by heavy

involvement of the government in manufacturing activities through state

enterprises. Such involvement was justified under the umbrella of the policy - of economic nationalism which could be traced to the fear of foreign domination going back to the Bowring Treaty of 1855.

The Treaty opened the economy to free movements of resources internationally; foreign capital, labor, and entrepreneurship flowed freely into the country. As a consequence, the Thai economy was dominated by foreigners, either Chinese or Westerners; this became a cause of concern to the Thais, especially after the overthrow of the absolute monarchy in 1932.

The country's leaders after the 1932 revolution until the 1950s turned this concern into a policy of economic nationalism whereby the government expanded its role into industry by establishing many state enterprises.' Muscat (1966:

197-98) described the nature of state enterprises in Thailand as "bureaucratic capitalism," pointing out that they were creatures of the state and benefitted the members of the bureaucracy, both civil and military. In a span of 25 years between 1932-1957 the government set up a total of about 140 public enterprises. Riggs (1966: 305) obtained a list of these enterprises under

different ministries in 1957 from the Audit Council of Thailand and the.list

is duplicated here in-Table 6.20. Only a few among these were created before

the 1932 revolution. -41/

Apart from the sentiment of economic nationalism which was directed

mainly against local Chinese entrepreneurs, there were also other reasons for

the expansion of state enterprises during this period. As Jacobs (1971)

argued: first, the ruling elite might have wanted to create employment

opportunities for the Thai outside the bureaucracy which was facing financial

stress during that time; second, the revolutionary clique of 1932 needed to

enlarge its financial base to satisfy its clients in order to stay in power. z1 These two reasons could be the genuine interests of the early Table 6.20

Number of State Enterprises by Ministry in 1957

Ministry Number of State Enterprises

Industry

Interior

Agriculture

Finance

Defense

Education

Public Health

Transportation

Economic Affairs

Others

TOTAL

Source: Fred W. Riggs (1966: 305). ruling clique after 1932 but it is doubtful if they were the motivation for those in power during the post-war period.

Several other observers of the Thai modernization process have

suggested that the later establishment of state enterprises was motivated by opportunities to seek personal gain. 43' Not only did the ruling leaders themselves become board members of various enterprises from which they could

extract personal gain, but the higher-level positions in most public enterprises were also filled on the basis of patronage. In fact, officials

earned economic gains both lawfully from their official position and unlawfully by

using their power to trade with the private firms they had set up.

Another quite far-fetched but theoretically possible reason was that

these state enterprises could be sources of government revenue, However,

because of their inefficiency, in practice they became a drain on the

government treasury instead of a source.of revenues. These enterprises were

sharply criticized later by the World Bank mission which came to Thailand

during 1957-1958 which found them to be poorly planned, badly managed, and

unprofitable. -44 /

Toward the end of the 1950s, the policy on industry had changed from

state capitalism to the encouragement of private enterprises. This was a

crucial turning point in the development process of the country. The details

and origins of this central decision have already been discussed in Chapter 4.

We shall now look into other policies during this period which represented, or

appeared to represent, the government's effort to influence income growth and

distribution. 6.1.3 Some Unsuccessful Attempts at Redistribution

The discussion so far has centered on major policy issues that were

directed at growth. Although these measures were intended to stimulate growth

and bring stability back to the economy after the Second World War most of

them appeared to have undesirable effects on the distribution of income.

Obvious examples are the regressive-nature of the tax structure, the multiple

exchange rate system which heavily taxed rice, the rice premium and other

taxes on rice, and sectoral policies which favored the industrial sector.

Since the agricultural sector contained more than 80 percent of the population

during this period and they were known, on average, to be living under poorer

conditions than their urban nonagricultural counterparts, the above policies

did not seem to help increase their share in an expanding economic pie.

Apart from the above mentioned policies aimed at growth, there were

-also some minor attempts, with'no apparent success, toward a more equal income

distribution.

First, in 1950, in response to the concern over the hardship faced by

tenant farmers, the government passed an act to control farm rental rates.

The maximum rental rate was set at 25 percent of the value of production.

However, if the yield per rai was less than 40 tang the rental rates decreased proportionately. 41' This law was supposed to control rental rates in 22 provinces, mainly in the central region, where the tenancy rate.was the

highest. Nevertheless, owing to many loopholes in this act, it was largely

ineffective. In any case, there was no serious law enforcement. K.

Pipatseritham (1978: 134) claimed that a survey of the central region in 1965

found that most tenant farmers had to pay around 35 percent of their

production and in some areas the rate was as high as 50 percent. The step taken by the government can be viewed as a token gesture to appease the concern over the farmers' plight.

Second, in 1954, the government passed a law to allocate land for greater social justice. Many farmers, by force or by ignorance, had lost their land to influential individuals and this law was supposed to correct the situation. 46' But this law was short-lived as the supreme court later declared it to be unconstitutional. -47 I

Third, also in 1954, the Land Code Act was passed by the

Pibulsongkram government. Although the main purpose was to put all the various laws on land into one place as stated in the footnote of this act, there were some sections (sections 34 through 49) which set out the limits on the size of landholdings by person and by various legal entities. For example, section 34 set the maximum size of land any person could hold as follows: not more than 50 rai for agriculture, not more than 10 rai for industry, not more than 5 rai for commerce, and not more than 5 rai for residential purposes. This law was supposed to come into effect seven years after its proclamation so that large-size holders could have time to distribute their land.

But history has to record that, apparently for his personal gain,

Sarit Tanarat, the next military leader who overthrew Pibulsongkram, abolished these sections (34 through 49) in 1960, just one year before the law came into effect. 48' Had these sections of the Land Code Act of 1954 become enforced, li" a much more e ual distribution of land in th%c,ountry would have been --LA----- ,,,, --- ,--\-- created. The rest of the Land Code Act of 1954 with amendments in 1977, 1978, and 1983, remains in use up to the present time. Fourth, there was a token attempt to introduce social security in

1954 but this project was given very little budget and attention. During

1954-1958, the budget allocated for this purpose was only 1.89 million baht. SJAgain, when Sarit Tanarat came into power he abolished this project. We can see that between the immediate post-war period and 1958, the main concern was to bring stability back to the economy and there were some -ad -hot efforts to push for growth. There was little interest in income distribution and, although there were some distributional measures introduced during this period, they were either ineffective or short-lived. In fact, since the resources of the government were mainly drawn from the agricultural sector, this must have had a negative impact on income distribution.

6.2. The Push for Growth and Import Substitution Policy: 1959-1972

This period covers the first two economic development plans that symbolized the Thai government's first organized attempts to modernize the country. Earlier attempts at planning the public role in economic development had been criticized as haphazard and with organizational limitations. -501

However, given the dislocations caused by the war, the average annual growth rate of about 5 percent per annum during the 1950-1960 could be viewed as

favorable. The 1960s are regarded by most economists as the golden age of growth and stability, with an average growth rate per annum of 7.5 percent

accompanied by modest inflation which remained below 4 percent per year most

of the time. In addition, Thailand was already quite an open economy and

hence subject to external fluctuations; it was able to benefit from the

favorable world economic environment at that time.

The most conspicuous policy used to stimulate economic growth during

this period was the industrial policy of import substitution. There was a clear switch of direction from the previous state involvement in industry to the encouragement of private enterprises. Laws to encourage private investment, both domestic and foreign, were enacted and modified to attract investment in the industrial sector. There were several tax exemptions for the industrial sector, while the agricultural sector continued to be heavily taxed through various measures. However, the government apparently put resources back into the agricultural sector through the expansion of irrigation and its efforts at rural development. In addition, the building of basic infrastructure such as roads, ports, and soon, although not originally intended to help the agricultural sector also had some beneficial impact on crop diversification. We shall begin with a brief discussion of the general macroeconomic policies pursued during this period and the government's effort at building basic infrastructure. A large part of the discussion, however,

'will be devoted to industrial policy.

6.2-1. General Macroeconomic Policies

The major objective of macroeconomic policy during this period did not differ much from that of the previous decade in that growth and stability were given first priority. However, the conduct of fiscal policy became more disciplined as experiences during 1945-1958 had shown that powerful politicians had misused government resources for their own personal benefits. There were myriad examples of improprieties in the various state enterprises and the most conspicuous failure of public involvement in enterprises was the case of NEDCOL (see Chapter 4). In fact, many fiscal reforms were initiated toward the end of the 1950s and carried out under the leadership of many officials from the Ministry of Finance and the Bank of

Thailand. The most notable among these were Puey Ungphakorn, Boonma Wongsawan, Sommai Hoontrakul, Pisoot Nimmanhemintara, Suparb Yossundara and Krongtong Chutirra. 51' Puey Ungphakorn, who served as an economist in the Ministry of Finance during 1949-1956, as Director of the Budget Bureau during

1959-1960, and as Governor of the Bank of Thailand during 1959-1971, was particularly well known for his honesty and integrity and his readiness to stand up against corruption. -52/ Apart from the monetary reforms in 1955 already mentioned, there followed other important reforms to introduce more discipline into the budgetary process and to create public confidence in the commercial.banking system. In addition, Puey Ungphakorn was influential in setting a code of conduct for the coordination of monetary and fiscal policy and debt management which has been used up to the present time. -53/ The first important fiscal discipline introduced was the Budget

Procedures Act of B.E. 2502 (1959) which pet a limit on the public debt which should in turn set a limit on budget deficits. This Act also spelled out the rules and regulations in budget preparation and use of public funds. The limit set on the public debt was later relaxed by a Revolutionary party's

Announcement in 1972 (No. 203, September 6, 1972) which limited total government expenditure, excluding principal payments, not to exceed 1.25 times the planned revenues. This Act has been in use up to the present time.

Second, the ignominious case of NEDCOL showed the danger of providing public guarantee for private debts. The rule was thus set that the government could only guarantee public debt (including that of public enterprises). The laws which set this limit were the Power of the Ministry of Finance to

Guarantee Debt Act B.E. 2510 (19671, the Revolutionary party's Announcement No. 110 (March 31, 19721, Amendments to the 1967 Act in 1976, and the

Revolutionary party's Announcement No. 17 (November 8, 1977).

Third, many important institutions were set up during this period

(see details in Chapter 5). Those important in the conduct of macroeconomic policies and the planning of economic development were the Fiscal Policy

Office, the Budget Bureau, and the National Economic. Development Board -- (NEDB). The Fiscal Policy Office, established in 1959, was to give advice to the Minister of Finance on fiscal policy issues; Puey Ungphakorn held the directorship of this office during 1960-1962 while he was also the governor of the Bank of Thailand. Also in 1959, the Budget Bureau was set up with the help from the Public Administration Service of the United States. The Budget

Bureau was to consider.the priority and coordination of various government organizations-in addition to the routine consideration of the government's annual budget. The National Economic Development Board was created in 1959 to be responsible for the overall development planning of the country and to evaluate all investment projects of public organizations and public enterprises.

Fourth, the yearly determinationsof the government budget on expenditure was no longer left to the hands of powerful politicians. In its stead an ad hoc committee consisting of representatives from the Ministry of

Finance, the Budget Bureau, the National Economic Development Board and the .

Bank of Thailand would jointly consider the limit to the government's yearly expenditure. The general rule followed was that the government annual budget should not create an inflationary pressure above the productive capacity of the economy. The increase in money supply was not to exceed the rate of economic growth by more than 2-3 percent. 2' This general rule was based on the quantity theory of money and was the basis of macroeconomic policy throughout the 1960s.

Another change worth mentioning was the reclassification of government expenditure by economic and functional categories. The change in classification occurred in the same year as the change in fiscal year.

Previously budgetting was done on a calendar year basis but starting in 1961 the fiscal year was changed to October 1 to September 30. As a consei&nce, the 1961 fiscal year data covered only nine months. -551

The above measures and changes in budgetary practice may have imposed more discipline but the general role of the budget deficit as a growth stimulant continued. We can see from Tables 6.21 and 6.22 that, throughout the 1960s, 1970s, and even in the early 1980s the government continued to use an expansionary ,fiscal policy. The major changes from the previous period lay in the fact that more emphasis was put on fiscal discipline and the reduction of the state's direct involvement in industrial.activities through its promotion of private investment and production.

Comparing the actual budget deficits during the 1960s with those of the 1950s we can see that on average the size of the budget deficit as a proportion of GDP had increased. The pattern of government expenditures as shown in Tables 6.23 and 6.24 revealed that the major portions of government expenditure were put into providing general services of which defense took the largest share. The expenditure on social services was second in-importance and most of it was for education. In terms of the expenditure on economic services the government seemed to give priority to infrastructure, as shown by

the high proportion in transport, storage, and communication plus fuer-and

power during 1960-1972. Most of the expenditure in the agriculture category was for construction of irrigation facilities. Table 6.21 Planned Government Expenditure and Revenue, FY61-FY85 (Million ~aht)

Planned Planned Planned (3) Fiscal Government Government Budget (4) = --- x 100 Year Expenditure Revenue Deficit (2) (1 (2) (3)=(1)-(2)

Source: Budget Bureau. -N.B.: The 1961 statistics cover only nine months. Table 6.22 Actual Government Expenditure and Revenue, FY61-FY84 (Mi l l ion Baht)

Actual Actual Actual Budget Deficit as Budget Deficit Fiscal Government Government Budget Percentage of as Percentage Year Expenditure Revenue Deficit Government Revenue of GDP

Source: Budget Bureau.

-N.B.: The 1961 statistics cover only nine months. Table 6.23 Structure of Thai Government Expenditure by Functional Classification, FY60-62 - FY83-85 (Percentage of Total Government Expenditure)

Functional Classification 1960-62 1965-67 1970-72 1975-77 1980-82 1983-85

Economic Services 22.69 26.57 27.08 24.93 19.34 16.06 Agriculture and non-mineral . resources . 6.49 7.77 10.16 9.1 1 8.81 8.77 Fuel and power 4.53 2.35 1.39 0.50 0.73 0.25 Other mineral resources, /- manufacturing and construction 3.01 1.82 1.05' 0.51 0.34 0.29 Transport storage and communication 8.49 14.03 13.50 10.55 9.18 6.34 Others 0.17 0.61 0 -98 4.26 0.29 0.40

Social Services 27.85 27.89 27.2 1 30.19 29.49 30.18 Education 18.95 16.45 18.03 2 1.98 21.60 21.55 Health 3.08' 3.62 2.91 3.87 3.95 4.75 Social security and welfare 4.49 4 -02 3.43 3.10 2.46 3.18 Others 1.32 - 3.80 2.84 1.24 1.49 0.70

Genera I ..sew i ces 40.47 ' 33.23 33.25 32.27 33.65 33.49

General administration 8.81 5.98 4.31 3.79 3.44 3.93 ' Defense 19.81 15.33 18.90 18.81 19.29 20.43 Law and order 9.72 7 -32 6.84 - 6.25 . -5.63 5.65 Other general services 2.13 4.59 3 -20 3 -42 5.29 3.49

Unallocable Expenditures General debt services Subsidies not classified elsewhere 0.00 0 .OO 0 .OO 0.39 0 .Oo 0.00 General transfers to local government 1.62 1.85 0.80 0.46 0.40 0.37 Other unallocable transfers abroad 0.03 0.04 0.02 0.03 0.02 0.01 . Others 2.55 5.37 4.01 4.06 5.61 4.84 Interest on provident fund 0 .OO 0.00 0 .OO 0 .00 0.51 . 0 .00

Grand Total -100.00 100.00 100 .oo 100.00 100 .oo 100 -00

Source: Bank of Thailand (worksheets). Table 6.24 Government Expenditure Per Capita in Nominal Terms by Functional Classification, FY60-62 - FY83-85 (Baht per capita)

Functional Classification 1960-62 1965-67 1970-72 1975-77 1980-82 1983-85

Economic Services .Agriculture and non-mineral resources Fuel and. power I Other mineral resources, manufacturing and construction Transport storage and communication Others soc i a l Serv ices Education Health Social security and welfare Others

General Services General administration Defense Law and order Other general services

Unallocable Expenditures General debt services Subsidies not classified elsewhere General transfers to local government Other unallocable transfers abroad Others Interest on provident fund

Grand Total

Source: Bank of Thailand (worksheets). Analysis of the data by economic classification as presented in

Tables 6.25 through 6.27 shows that between 20 and 30 percent of total government expenditure went into capital. The trend was increasing during the first two development plans in the 1960s and early 1970s but declining afterwards. This was because in the early phase of development planning more emphasis was put into building basic infrastructure which required large capital outlays. We can see from Table 6.27 that transport, storage and communication took the highest share of government capital expenditure during the 1960s-and 1970s.

The more rapid expansion of government,expenditure compared with revenue, coupled with the fact that current expenditure also expanded quite rapidly in the late 1960's and early 1970s, made it necessary for the government to rely heavily on public debt, both domestic and external. The problem of' interest payments became quite serious later in the. early 1980s.

On the revenue side, Table 6.28 'shows that there was a slight

increase in the importance of tax revenue compared with the previous period.

Within the tax structure there appeared to be an increasing trend in income

taxes, general and specific sales taxes, while the share of customs duties had a decreasing trend, ref1ectin.g declines in both the export and import duties and the rice premium as sources of government revenue. Starting in the 1975

fiscal year, the revenue from the rice premium no longer was registered as

government revenue but was transferred to the Farmers' Aid Fund which was

established in 1974.

The ratio of government revenue to GDP remained at around 12-13

percent throughout the 1960s and 1970s. Also the tax-GDP ratio was rather Table 6.25 Structure of Thai Government Expenditure by Economic Classification, FY60-62 - FY83-85 (Percentage of Total Government Expenditure)

Economic Classification 1960-62 1965-67 1970-72 1975-77 1980-82 1983-85

Current Expenditure Goods and services Interest payment 4.68 Subs idies 0.30 Transfer to income accounts of households 5.78 Transfer to local government for current operation Current transfer abroad

Capital Expenditure Fixed capital formation 19.30 Government agencies 15.22 Government enterprise 2.1 1 Capital transfer to local government 0.10 Other domestic sector 0.03 Direot loan and advances to local government 0 .OO Other domestic sector 0.08 Purchase of f i nanc i a1 ass'ets or repay- , ment of financial liabilities Domestic sector 0 .OO Abroad 0 .OO

Subtotal 98.45

Other gross financing provided to government enterprise' 1.55

Grand Total

Source: Bank of Thailand (worksheets). Table 6.26 FY60-62 - FY83-85 (Baht per capita)

Economic Classification 1960-62 1965-67 1970-72 1975-77

Current Expenditure 208.30 290.35 491.45 939.91 Goods and services 174.22 240.07 401.55 765.63 Interest payment 12.32 20.98 49.88 88.07 /-Subsidies 0.78 0.13 0.15 5.60 Transfer to income accounts of households 15.22 18.35 25.44 44.08 Transfer to local government for current operation 4.49 9.78 12.62 34.26 Current transfer abroad 1.27 1.04 1.81 2.27

Capital Expenditure Fixed capital formation Government agencies Government enterprise Capital transfer to local government Other domestic sector Direct loan and advarrces to - . local government Other domest i c sector Purchase of financial assets or repay- ment of financial liabilities Domestic sector Abroad

Subtotal

Other gross financing provided $0 government enterprise 4.25 1 1 .OO 3.86 11.11 24 .O 1 33.15

Grand Total

- -

Source: Bank of Thailand (worksheets). Table 6.27 Structure of Government Capital Expenditure by Functional Classification, FY60-62 - FY83-85 (Percentage of Total Government Expenditure]

Functional Classification 1960-62 1965-67 1970-72 1975-77 1980-82 1983-85

Economic Services Agriculture and non-mineral resources Fuel and power 19.48 6.64 4.26 0.46 2.54 0.6 1 Other mineral resources, manufacturing and construction 10.77 2 -94 2.30 0.68 0.29 0.27 Transport storage and commun i cat ion 26.56 38.10 35.24 30.67 37.67 28.86 Others 0.10 0.85 2.77 8.74 0.54 0.99

Social Services Education Health Social security and welfare Others

General Services General administration Defense - - . 'Law and order Other general. services

Unallocable Expenditures General debt services Subsidies not classified elsewhere 0.00 General transfers to local government 0.00 Other unallocable transfers abroad 0.00 Others 1.33 Interest on provident fund 0.00

Grand Total 100.00

Source: Bank of Thailand (worksheets). Table 6.28 Structure of Thai Government Revenue in Nominal Terms, FY61-62 - FYBO-82 (Percentage of Total Government Revenue)

Type of Government Revenue 196 1 -62 1965-67 1970-72 1975-77 1980-82

A. Tax Revenue Income taxes Personal income tax 6.01 5.55 '7.07 Corporate income tax 3.27 4.43 4.75

General Sales Taxes Business tax Stamp duties

spec i f ic Sa l es Taxes Exc ise taxes Taxes on natural resources 1.97 2.67 2.07

Customs Duties 47.52 37.61 30.23 Export duties 5.19 2.85 1.35

Import duties 31.53 ' 26 ;29 27.05 Rice premium 10.78 8.39 1.80 Others 0.02 0.09 0.02

~eas'and perm i ts Other taxes

B. Sales of goods and services 2.60 2.69 2.63 C. Government enterprises and dividends 5.54 6.31 7.52 D. Other government revenue 2.76 4.52 4.97

Tax revenue/GDP ratio 1 1.02 1 1.38 11.42 Government revenue/GDP ratio 12.37 13.17 13.46

Source: Bank of Thailand (worksheets). stable at 11-12 percent. Both these ratios were low in comparison to other countries at the same level of development, indicating that the country did not reach its full taxable potential. Many international comparisons during the 1960s and 1970s also confirmed that the Thai government had a relatively

1-ow tax effort. -561

While the fiscal policy was expansionary in nature, the monetary policy also appeared to be in consonance with the fiscal policy while maintaining internal stability. As the data in Table 6.29 show, the rise in the money kept pace with the rise in the gross national product, as shown by the income velocity of money remained fairly stable. The share of currency in money supply had a slowly declining trend from about 65 percent in 1963 to about 62 percent in 1973. The tremendous increase in deposits of all kinds reflected the spread of commercial banking services during this period. In particular, the rapid rise of time deposits indicated not only an increase in private sa.vings but also greater public confidence in the monetary and banking system.

Apart from the exchange rate reform started in 1955, there were also other measures introduced to build up the stability and public confidence in the country's currency and the banking system. In 1958, the Currency Act B.E.

2501 became effective in August and earlier acts were repealed. Previously, it was required that note issue had to be backed 100 percent by gold or foreign exchange while at least 60 percent of the reserve had to be in liquid assets. However, in 1953 the government began to borrow from the reserve, thus depleting the foreign currency reserve and replacing it with government securities. The 1958 Currency Act changed the composition of currency reserve Table 6.29 (Mi I I ions of Baht)

Money Supply Held by Public Time and Savings Deposits Currency as held by Public at Income Velocity Domestic Money $ of Money Commerc ia l Banks of Money iYear Currenc Deposits Suppl Savings Total (GNP ' Ms )

Source: Monetary statistics are from Bank of Thailand, Monthly Bulletin, January 1977. GNP data to calculate velocity are from NESDB. by allowing 40 percent of it to be in the form of government securities, thereby giving more flexibility in Bank of Thailand credit operations. -57 /

In 1962, the Commercial Banking Act B.E. 2505 was proclaimed which gave the Bank of Thailand more control over the banking system. The main features of this act were the power given to the Minister of Finance for prescribing reserves between 5-50 percent of total deposits; allowing government securities as part of required reserves; requiring ceilings on interest on deposits, loans, discounts, and other charges to be set by the

Bank of Thailand and approved by the Minister of Finance; and setting criteria and conditions for opening new commercial banks and branches. It can be seen from Table 6.15 that five new commercial banks opened during the 1960s, of which three were foreign and two were domestic. However, there was in reality only one new domestic Bank, Asia Trust (presently Siam Bank), in 1965 because the Krung Thai Bank was a combination of two already established banks that merged in 1966. The 1962 Act stipulated that foreign banks were not permitted to have branches, an exception being allowed for a-branch of the Chartered

Bank in Phukec established before this act. 58' On the other hand, the Bank of Thailand was quite permissive in permitting branches of domestic banks. At the end of 1953 there were fewer than 100 bank branches but the number

increased to 494 in 1966 and 731 in 1972. The regional distribution in 1972 was 271 branches (37 percent) in Bangkok-Thonburi and 460 (63 percent) in' other provinces. 59' We can see that although there was a rigid control on the number of banks, the 1962 Act having required that the establishment of a new bank could take place only upon the authorization of the Finance Minister,

the increasing need of banking services was adequately provided for through a

network of branches which were liberally opened. Another important financial role of the Bank of Thailand during this period was its pursuit of a low interest rate policy. There were legal ceilings on both the deposit and loan rates as can be seen from the information provided in Table 6.30. The ceilings on interest rates were set with the intention that they might prevent severe competition among banks which might lead to insolvency. Besides, the resulting low cost of capital should promote a high level of investment which was the aim of industrial policy at that time. However, the low interest rate policy did not seem to hurt the saving rates especially during the 1960s (see Table 6.31). This could be due to the fact that the inflation rates remained low and hence the real rates of interest on savings were still positive throughout most of the

The task of maintaining internal stability is very difficult for an open 'economy such as Thailand. But the world condition during.the 1960s was also one of modest inflation and the domestic price performance moved with the world trend. We should, nevertheless, give credit to the monetary policy in maintaining stability .in the exchange rate movements which created an

atmosphere of confidence in .international trading and investment. We can see

from Table 6.32 that the movement of the baht vis-a-vis the U.S. dollar during

the 1960s was within a very narrow range of the par value established with the

IMP in 1963. The monetary authorities could do this mainly because the export

performance and the capital inflow were favorable, thus rendering surplus in

the balance of payments in most years. (1975a) also observed

that the inflationary impact of the balance of payments surplus was

significantly toned down by the "fiscal drag" in the government expenditure

pattern, which rendered a fiscal surplus (as defined by receipt- Table 6.30 Consumer Price Index and Real Maximum Deposit Rates, 1960-84

Real Maximum Deposit Rates Time Legal Ceiling Year CPI Bk. % w CPI Savings (6-12 mos.) of Loan Rate

-a/ through h/: Real maximum deposit rates were calculated based on the following announced rates of maximum deposit rates:

.Effective date Savings Time (6-12 mos.) . -a/ May 1, 1962 4.5 8.0 -b/ June 1, 1963 4 -5 6 .O -c / April 5, 1966 3 -5 6 .o -d/ January 31, 1974 4.5 7 -0 -e/ October 1, 1979 5 -5 7 -0 -f/ January 15, 1980 8 -0 10.0 g/ .July 1, 1981 9 .o 11 .O -h/ March 5, 1984 9 .o 13.0 Sources : 1. Announced maximum deposit rates are from Kamchorn Sathirakum (1985). 2. CPI for Bangkok Metropolis, 1979-84 from Bank of Thailand Monthly Bulletin December 1985, 1975-79 from Bank of Thailand Quarterly Journal December 1981, 1969-75 from Bank of Thailand Statistical Bulletin December 1979, 1964-69 from Bank of Thailand Monthly Bulletin December 1975, 1960-64 from Bank of Thailand Monthly Bulletin December 1968. The series with base year 1976 were convertd into the base year 1964-65 (October 1964-September 1965 = 100). 3. The inflation rate and the real maximum deposit rates can be calculated from the above provided information. Table 6.31 Gross Domestic Investment, Gross Domestic Saving, and Foreign Saving (Percentage of GDP)

-GDI -GDS -F S -GDS Years GDP GDP GDP GDI (1 (2) (3)=(1)-(2) (4)

Source: NESDB.

Note: GDI = Gross Domestic Investment. GDS = Gross Domestic Saving FS = Foreign Saving GDP = Gross Domestic Product Table 6.32 Exchange Rates and Balance of Payments, 1961-73

Balance of IMF Par Value Free Market Rates of Payments (million ~aht) Year with US$ Exchange (B/$) a/ (+ surplus) Buying Selling (- deficit)

-a/ Simple average free market rates 0.f exchange (on demand) of all commercial bariks in Bangkok ('closing). -b/ Announced on October 20, 1963. -c/ Announced on July 15, 1973 and changed the margin of fluctuation from 1 percent to 2.25 percent.

Source: IMF par values are from Bank of Thailand (1985: 10, 12). Rates of exchange (B/US$) during 1965-73 are from Bank of Thailand, Statistical Bulletin, December 1975, during 1961-64 are from National Statistical Office, Thailand Statistical Yearbook, No. 30, 1972-73. Balance of payments are from Bank of Thai land. expenditures and domestic borrowing) concurrently with the balance of payments surplus.

Although one could regard the above macroeconomic environment as a result of well coordinated fiscal and monetary policy and debt management as described by Puey Ungphakorn in his 1972 lecture (see footnote 53), some writers might find it too flattering to the government and would rather describe the role of government as passive, given the very stable world economic environment at the time and the likelihood of the stabilizing nature of the Thai economic mechanism. 60' Whatever the case may be, one has to underline the stabilizing impact of the world economic environment on the Thai economy during the 1960s since later experiences during the 1970s and 1980s clearly revealed the susceptibility of Thailand's open economy to the world environment.

6.2.2 Building of Basic. Infrastructure

Prior to the 1950s haila and's basic infrastructure, particularly roads and electricity, was very underdeveloped. As of 1949 there were only

845 kilometers of all-weather highways in a kingdom of 513,115 square kilometers. It was impossible to travel by road to either the Northern or

Southern borders. It was reported that in 1952 the roads that did exist did not form a connected system and were wholly inadequate to the development of the country (Caldwell 1974, p:35). Furthermore, electricity was in short

supply and frequent brownouts and blackouts were the rule. Private establishments had to provide themselves with their own electricity. Although the railway system was relatively well developed (with 3,272 kilometers of route operated in 1950 as compared to 3,735 in 1983), it was heavily utilized during the war and had suffered extensively from bombing. Piped water supply, though available since 1914, was limited only to Bangkok and not adequate for residential use, let alone for industrial production.

Attempts to build up the basic infrastructure of the country had in fact started in the 1950s, especially with resources from the United states' aid to Thailand under the Point Four Program of President Harry Truman. -611

The aid was, of course, given primarily on the basis of American national interests in its efforts to stop the communist influences, since Thailand stood out as the "non-communist world's next line of defense in Southeast

~sia". 62' Cnldwell (1974: 28) pointed out that, of the total of $580 million in gross obligations during the 1951-1970 period, two-thirds were justified to the U.S. Congress on grounds of economic and political instability rather than economic development. Nevertheless, the United States Operations Mission

(USOM) had been instrumental in the early building of major highways in

Thailand during the 1955-1960. The most famous highway was the Friendship

Highway which, from its opening in 1958, provided the first convenient ground access to the Northeast other than the railroad.

It was during the 1960s that the government's efforts at building infrastructure became much more serious. In 1959, the World ~ank'sEllsworth mission recommended that the Thai government provide basic "physical facilities" to encourage private and domestic enterprise to develop. -631

Later, the first economic plan (1961-1966) of Thailand echoed: "Over the next three years the construction of irrigation works, the building and improvement of roads and other means of transport, the provision of inexpensive electric power, and other physical 'infrastructure' projects will claim the bulk of government expenditures". 64' And indeed during its first (1961-1966) and second (1967-1971) development plans, transport and communications were given first priority in the government budget allocation. -65 / The importance given to building basic infrastructure during this period cannot be seen from the government budget alone; many infrastructure projects drew resources from external loans which do not show up in the current government budget. Table 6.33 provides data on external public debt

incurred during 1961-1981 showing that power and transport and communication accounted for 65 percent and 80 percent of total loan commitments during the first and second plan periods respectively. The rate of loan disbursements in

these two sectors also confirmed that they were given first priority in the

first two plan periods (1961-1971).

The major source of financing for these loans was the World Bank which accounted for roughly 45 percent of total commitments during the first

plan and 43 percent during the.second. Other important sources of loans

during this period were the government of the United States and ~erman~and

the Asian Development Bank (ADB). -66/ By 1970, the improvement in basic infrastructure was quite

significant as can be seen by the statistics shown in Tables 6.34-6.36. In

1970, there were 8,260 kilometers of all-weather (concrete and asphalt) state

highways and 1,479 kilometers of all-weather provincial highways. The

statistics continued to rise rapidly during the 1970s and reached 13,733

kilometers of all-weather state highways and 8,670 kilometers of all-weather

provincial highways in 1980. In addition, there were stone and soil roads

which provided access to rural areas except during the rainy season. In 1985, the total length of all state highways was 15,218 kilometers and that of

provincial highways 21,017 kilometers. The contribution of the improved Table 6.33 External Public Debt: Commitments and Disbursements by Economic Sector (In Millions of U.S. Dollars)

Economic Sector 1st Plan Period 2nd Plan Period 3rd Plan Period 4th Plan Period 1 96 1 -66 1967-7 1 1972-76 1977-8 1

A. Commitments

Agriculture and irrigration Industry Transportation and communications Power Public utilities Public health Education Social development Defense Others

Tota I 323.3 (100%) 334.7 (100%) 1,303.7 (100%) 7,181 .7 (100%)

B. Disbursements

~gricu l ture and irrigation l ndustry Transportation and cmunicat ions . Power Public utilities Publ ic health Education Social development Defense Others

Total 248.4 (100%) 239.3 (100%) 605.6 (100%) 4,977.0 (100%)

Source: Pranee Tinakorn and Direk Pattamasirivat (1985: 29, 37). Table 6.34 Length in Kilometers of Highways, 1963-85

State Highways Provincial Highways Concrete Stone Concrete Stone and Asphalt and Soi l Under and Asphalt and Soil Under Year (all weather) Aggregate Total Construction (all weather) Aggregate Total Construction (1 ) (2) (3=1+2) (4 (5 1 (6 1 (7=5+6) (8)

Source: Department of Highways, Ministry of Communications, Annual Report, 1985, Appendix 8, Table 6.35 Some Statistics on State Railway Services, 1945-83

Route Passengers Freight Year Operated Carried -11 Carried (tons) (Km)

-11 Passengers in all classes. Source: National Statistical Office, Statistical Yearbook: Thailand, No. 22-23. - 6.73 -

Table 6.36 Electricity: Installed Capacity and Energy Generated, 1960-82

A) Installed Capacity (103 KW)

Internal Year Total Hydro Steam Combustion Others

6 B) IZnergy Generated (10 Kwh) -2/

-l/ Before 1965 data are for the Yanhee E1ectricity.Authority which are located in Bangkok Metropolis as well as at Bhumipon 1965 data are for the whole kingdom.

Source: National Energy Administation, Ministry of Science, and Energy as reported in National Statistical Office, Statistical Yearbook: Thailand, No. 31-33, 1974-84. transport infrastructure, though difficult to measure, has been very important

to many agricultural products in enabling them to reach both the strategic

provincial markets and the export outlet in Bangkok. The roads have also

provided provincial markets with the many industrial goods produced in the

Bangkok areas.

The statistics on the state railway services provided in Table 6.35

also show the improvement in railway services after the war damage. During

the 1960s and 1970s the services provided by the state railways, in terms of

passengers and freight carried, appeared to increase steadily as its network

of routes was quite well developed in the 1950s. As early as 1970 the length

of routes operated seemed to reach a peak at 3,735 kilometers until 1983. It

should also be noted that the weight of freight carried by railways has been

declining since 1980; this may be due to the tremendous improvement in highway

networks throughout the country.

As for poker, although Ingram (1971) reported that there was not a

.single hydroelectric plant in 1952, the supply of electricity had greatly

improved through the construction of several multipurpose dams during the

1960s. The most notable are the Bhumiphol Dam (completed in 19641, the Kang

Krajan Dam (completed in 19661, the Dam (completed in 1972) and the

Srinagarind Dam (first phase completed in 1980). These four dams account for

about 77 percent of the total installed capacity of the hydroelectric power

plants existing in 1982. In terms of annual generation, however,

hydroelectric power accounts for about 20 percent of total electricity

production in 1984. The Electricity Generating Authority of Thailand (EGAT),

known as the Yanhee Electricity Authority when it was formed in 1957, has

greatly expanded its generating capacity through the construction of various power plants: hydro, thermal, gas turbine, diesel and combined cycle. Its existing installed capacity was 6,525 MW in 1985 and electricity generation was about 23,074 million kwh. -671 The per capita consumption of electricity in 1985 was 387 kwh as compared to only 19.3 kwh in 1962. 68' However, it was those in the metropolitan area (~reaterBangkok ~rea), used the most, 1491 kwh per capita as compared to 217 kwh per capita in the provincial areas (outside the

Metropolitan Electricity ~rea). The lowest electricity consumption per capita is in the Northeast (86 kwh), fallowed by the North (148 kwh). The share of the population with electricity in the whole kingdom in 1985 was 56.7 percent;

83.5 percent in the Bangkok Metropolitan Area and 52.6 percent outside.

Compared to the share for the whole country in 1971 of only 18.5 percent, this must be viewed as a substantial progress. ' -691 In comparison to the rapid development of transportation and power, the rate of expansion in piped water supply has been much less impressive.

Although the data in Table 6.38 show that the number of piped wdter consumers increased from 150,443 in 1968 to 519,487 in 1984 in the Bangkok Metropolitan

Area, the state piped water supply was only available for 15 other provinces outside the Greater Bangkok Area (Bangkok, Nonthaburi, Samut Prakarn). For those who do not benefit from state piped water, use of ground and rain water is prevalent, especially in the rural areas. The less rapid expansion of state water supply in the provincial areas is quite understandable given the fact that the Provincial Water Authority was established only in 1978 while the Metropolitan Water Authority had been in existence since 1967.

Previously, both organizations functioned as the Provincial Water Works

Division and the Public and Municipal Works Department in the Ministry Table 6.37 Electricity Consumption Per Capita, 1977-85 and Rate of Electrification in 1985

A) Electricity, Consumption Per Capita by Region (~wh)

Who 1e Year Kingdom North Northeast Central South MEA -11

B) Rate of Electrification in 1985

Rate of Electrified -Rate of Electrified Districts and Municipalities Population

North Northeast Central South Whole Kingdom MEA Area 11 PEA Area -?

-11 Area supplied by Metropolitan Electricity Authority, i.e., Bangkok, Nontaburi, and Samut Prakarn. -21 Area supplied by Provincial Electricity Authority. Source: National Energy Administration, Electric Power in Thailand, 1985. Table 6.38 Some Information on Consumers of Piped Water

A) Municipal Water Authority (Bangkok Metropolis)

Year Number of Consumers

Source: MWA, Annual Report, 1968-85.

B) provincial Water Authority (Except Bangkok ~etro~olis) (Year 1981)

Percent of Piped Water Consumers Province in Total Po~ulation

Central : Chonburi Lopburi Rajburi Saraburi

North: Chi engma i Lampang Nakornsawan Pitsanuloke

Northeast: Khonkaen Nakornrajsima Ubonrajthani Udornthani

South: Chumporn Nakornsrithammaraj Songkhla

Average

Source: PWA, Annual Report, 1982. of Interior. Another important factor that retards the growth of piped water supply is the pricing policy which subsidizes consumers and puts constraints on the financial resources available to expand its coverage.

Nonetheless, with regard to the overall infrastructure, we must say that the policy to provide for basic facilities for industrial development emphasized during the 1960s.has.beenquite successful. The statistics, however, revealed the concentration -of power and utilities in Bangkok and its suburbs.

6.2.3 Industrial Development through Import Substitution Policy

The contribution of the manufacturing sector to GDP was about 12 percent in the 1950s and has increased over time to about 21 percent by the early 1980s. It is second only to the agricultural sector which has a contribution of about 24 percent in real terms. Since the start of the

National Economic and Social Development Plan in 1961 the growth of the manufacturing sector has always been higher than the overall growth of GDP

(see Table 6.39). Its growth rate was around 10-11 percent during the two decades of the 1960s and 1970s. This rate had dropped by about half in the early 1980s mainly because of the world recession during 1979-1982 and the recent protectionist policy adopted by some major industrialized countries.

The rapid development in industry did not and could not take place spontaneously in an agricultural-based country like Thailand. Rather, it was a result of deliberate policy that has not only created a favorable environment but also provided protection and incentives to such an extent as to be viewed by some economists as excessive. Table 6.39 Structure and Growth of Industry

Share of value added (percent) Growth of value added (percent per annum) 1951-60 1961-70 1971-80' 1981-85 1951-60 1961-70 1971-80 1981-85

Mining and quarrying 9.06 7.63. 5.85. 4.93 3.40 10.70 7.03 5.18 Manufacturing 69.03 62.91 70.53 71.43 . 4.77 11..10 10.06 5.44 Construction 20.85 26.93 1,7..6 6 16.25 12.22 10.16 7.14 1.40 Electricity and water supply 1.05 2.53 5.96 7.39 20.52 27.87 13.08 9.83

Total industry 100.00 100 .OO 100.00 100.00 6 .O 11.1 9.2 2.4

Share of industry in GDP 18.03 21.75 26.63 29.27

Gross domestic product (GDP) 5.30 8.21 6.93 5.28

Source: Computed from NESDB data at 1972 prices. As discussed in Chapter 5, in the early 1950s the U.S. government had started to exert influence on the Thai government. Among several agreements signed between the two countries, one signed on September 1, 1954 was to provide a guarantee for American investment in Thailand. On October 12, 1954, the first law of investment promotion was enacted; it was called the

Industrial Promotion Act B.E. 2497. There were other reasons, apart from the

U.S. influence, for the enactment of this law. After the Korean war boom ended in 1953, Thailand faced a balance of payment deficit of about 800 million baht. 70' With the falling demand for rice and the loss of profits on the rice monopo.ly, the,government faced serious economic problems and it was hoped that the 1954 investment law would attract foreign capital to ease the balance of payments problem. In the 1954 Act foreign firms were granted the right to repatriate capital and profits. Promoted f2rms could also receive a number of tax concessions and exemptions but it was not clear which type of industry could be promoted and how since Section 16 of this Act only stated:

ItThe type of 'industry to be promoted, size, and promoted conditions will be declared as Royal Decree. 11 -711 The 1954 Industrial Promotion Act was largely ineffective. The ambiguity of the statements in the Act, the excessive delay in handling applications, and the fear of entering into competition with the state enterprises led to the failure of the Act to induce substantial private investment. 12' During the four years and two months that this Act was in force, there were 93 applications for promotion and only 11 companies were granted rights and.benefits under the provisions of the Act. Finally, because of the legal process, only six qualified, out of which two were state enterprises, two were Indian-owned companies, one was a joint-venture between the Americans and the British, and one was purely American owned. -73 / 1.t should be noted here that a few days after the 1954 Act was enacted, a private corporation called the National Economic Development

Corporation (NEDCOL) was established by a group of leading military officers

(the Rajakroo group led by Field Marshal Pin Choonhawan and Police Director-

General Pao Sriyanont) who, referring to this Act, pressured the government

into guaranteeing NEDCOL'S foreign loans. -741 Established with an authorized capital of $2.4 million, only $144,000 of which was ever paid in, NEDCOL managed to get government-guaranteed foreign loans and supplier credits

totaling $32 million. By the end of 1957, however, it was clear that NEDCOL was bankrupt. Later investigation under a new regime (the Sarit government)

showed that less than half of the credits r.eceived were actually invested in plant and equipment; the rest "disappeared". -751 Partly because of the failure of the Act to promote substantial

investment and partly because the 1959 World ~ank's Ellsworth Report heavily

criticized the Act, the government under Sarit enacted a new law in October

1959, called the Promotion of Industrial Investment Act B.E. 2503. 76' In

addition, the Board of Investment (BOI) was established in 1959 to render

assistance to would-be industrial entrepreneurs and investors. The Industrial

Finance Corporation of Thailand (IFCT) was also created in this year with

active support from the World Bank to provide financial assistance for

enterprises expected to make a contribution to the country's economic

development.

The 1960s started with a new investment law and the newly created

Board of Investment which was empowered to encourage domestic and foreign investments in industry and to negotiate conditions of investment agreements subject to the cabinet's approval. Among the many incentives provided by the

1960 Act were a guarantee against nationalization and competition from the state (this had not been given in the 1954 Act), exemptions of import tariff on capital goods and raw materials, two years of income tax holiday in the first five years, and permission to export manufactured products and repatriate profits. However, the measures provided by the 1960 Act were deemed inadequate for the rapid expansion of private and foreign investment.

This evaluation was given in what is known as the Beitzel report which recommended that the Sarit government provide more fiscal incentives for investors and give the Board of ~nvesementmore authority and responsibility in its investment promotion efforts. 11' As a result, a new Investment Act was enacted in January 1962. The 1962 Investment Act was further amended in

1965 and 1968 and guided the operations of the Board of Investment throughout the 1960s until it was replaced by a new law in 1972.

The 1962 Investment Act and its amendments made the Board of.

Investment operations more flexible and independent. It allowed the Board of

Investment to issue promotion certificates and to add to the list of activities under promotion as well as impose conditions upon the approval of the Prime Minister. This procedure required much less time than the issuing of a ministerial legislation which was required by the previous Act. In addition, more'incentives were provided in the new Act. Since the 1962

Investment Act was quite crucial to the development of industries in Thailand which rapidly expanded during this period, some detailed analysis of the incentives provided by the Act seems appropriate here. Incentives provided by the 1962 Act may be grouped into four categories as follows. -78 /

Fiscal Incentives

1. Exemptions from duties and business taxes on imported capital

equipment required to set up the plant. (Sections 19(2), 19(3) of

the Act.)

2. Eligibility for reduction in duties and business taxes on imported

material inputs. The promoted industries in group A receive total

exemptions, group B 50 percent reduction, and group C up to one-third

reduction. (Sections 5, 20, 21, 22.)

3. Exemptions from corporate income taxes for a period of five fiscal

years. (Section lg(41.1

Protective Measures

1. Restriction of imports of goods in the same classification as those

of promoted firms within the period deemed appropriate by the 'Board

of Investment. (Section 23(1).)

2. Increase in tariff rates for imported products which are in the same

classification as the promoted products. (section 23(2).)

Export Promotion Measures

1. Permission for promoted firms to export products except for reasons

of security and economic necessity. (Section 19(7).)

2. Exemption or reduction of export duties for the products of promoted

firms within the period deemed appropriate by the Board of

Investment. (Section 23(3).)

3. Exemption or reduction of business taxes for promoted firms that

export their products within the period deemed appropriate by the

Board of Investment. (Section 23(4).) Guarantee and Other Permissions

1. Guarantee that the government will not establish new state

undertakings to compete with promoted firms and will not nationalize

private promoted enterprises. (Section 18.)

2. Permission, under normal circumstances, for the promoted firms to

repatriate capital, interest and principal payments on foreign loans,

profits arising from foreign-capital, and obligations assumed by the

promoted firms. (section 19(5).)

3. Permission for skilled workers and industrial experts to enter the

country in the number and period deemed appropriate by the Board of

Investment. (section 19(6).)

4. Foreign limited companies or registered partnerships authorized by

the Board of Investment as promoted industries may own land for

industrial purpose even in excess of the maximum area provided by

.other laws. (section 19(1).)

Group A industries seemed to be characterized by those which either utilized local raw materials or those which had a potential for both backward and forward linkage effects. Silcock (1967) classified Group A as containing a large number of very capital-intensive industries. Group B contained mostly assembly industries, also with large potential linkage effects. Group C comprised industries of such a variety that it is difficult to discern a common characteristic among them. -79 I By 1965, eligibility for promotion had been extended to 140 industries and by June 1969 the number of promoted firms in operation numbered 316 with investments totaling 8,930 million baht. As the data in

Table 6.40 show, the bulk of promotion went to the consumer goods industry which accounted for 40.8 percent in terms of number and 50.7 percent in terms of investment. Although the capital goods industry ranked second in terms of number, its total investment was lower than that of the intermediate goods.

It thus appeared that during the 1960s the promoted industrial activities focused upon the import-substitution industries producing mainly consumer goods. This should come as no surprise in light of the fact that firms granted promotion would obtain a sufficiently high level-0.f tariff protection for their finished products combined with exemptions for their imported raw materials. Behind the incentives lay a policy of conserving the domestic market for local producers. Several studies which came out in the 1970s also confirmed that during the 1960s the import substitution industry, particularly the consumer goods industry, received the highest effective rate of protection.- -81/ . . As a result of the active promotion and protection policy, the rate of investment increased rapidly during the 1960s. The growth rate of real gross fixed capital formation during the period was on the average about 16 percent per annum compared to only 10 percent during the previous decade.

Such high growth rates of investment came mainly from the private sector. The gross domestic saving rate during this period was quite high, increasing from about 18 percent in 1960 to about 23 percent in 1969. In 1970, the manufacturing sector accounted for 16 percent of GDP in real terms. Within this sector, the consumer goods industry accounted for 62.3 percent of the value added, the intermediate goods industry 22.8 percent and the capital goods industry 12.5 percent. The 1960s also witnessed the emergence of the

and machinery industries, both of which had been nonexistent in the -. previous decade. -

TPE~-p~-6/4.2.87 Table 6.40 Total Investment in Manufacturing by Promoted Firms (in operation) (1959-June 1969)

No. of firms Investment in o~eration (million Baht) .

Consumer Goods Beverages 5 Tobacco - Textiles 68 Furn-itureand fixtures - Printing and publishing 1

Subtotal

Intermediate Goods Wood and cork 2 1 Paper 2 Leather and leather products - Rubber and rubber products 4 Chemicals . 10 Nonmetal1 ic minerals 15 Petroleum products 1

Subtotal . -53 (16.8%) Capital Goods Metal and metal produits 29 Machinery except electrical machinery 9 ~lectrical-machinery 16 Transport equipment 26

Subtotal Miscellaneous -54 (17.1%) 857.4 (9.6%) Total

Source: World Bank, Current Economic Pos.ition and Prospects of Thailand, Volume 111: The Industrial Sectors, August 1970, p. 87. It should be noted that, despite the rapid increase in domestic production of the manufacturing sector, the import of industrial products was still substantial in 1970. Table 6.41 classifies imports by commodity group and shows that the import of manufactured goods accounted for almost 30 percent of total imports. However, if we define industrial products broadly to include mineral and lubricants, chemicals, and machinery, the proportion of imported industrial product would be nearly 90 percent, indicating that Thailand's industrial development has been very dependent on imported industrial products.

On the export side, Thailand enjoyed an increasing trend of manufactured exports in this period. As the data in Table 6.42 show, the proportion of manufactured exports in the total increased from about 1 percent in 1960 to 15 percent in 1970, despite the fact that the industrial policy focused on import substitution. '

Towards the end of the decade it had be~ome'evidentthat the

impiementation of the Act along the lines of import substitution was leading

the economy into structural difficulties. A large raw material import bill was being created by the new promoted industries. In addition, the rapid

industrial development required, and brought about, a substantial increase in

fixed capital formation which turned out to have a high import content owing

to the incentive system which gave duty exemption to imports of machinery and

capital goods. As Marzouk (1972) rightly points out, the encouragement of

capital-intensive techniques with low contribution to employment led to

inefficiencies in the allocation of scarce capital resources. It also

discouraged the development of a domestic -building industry. In fact,

as early as 1963 the Bank of Thailand in its annual report had already Table 6.41 Imports by Commodity Groups (Mi l l ions of Baht

Commodity Group 1955 1960 1965 1970 1975 1980 1984

Food Beverages and tobacco Crude materials Mineral fuels and lubricants Animal and vegetable oils and fats Chemicals Manufactured goods - Mach i nery Miscellaneous manufactures Miscellaneous transactions and commodities Gold

Total 7,503 9,622 15,433 27,009 66,835 188,686 245,155

Source: Bank of Thailand, Monthly Bulletin, various issues. Table 6.42 Exports by Commodity Groups (Mil lions of Baht)

Commodity Group 1955 1960 1965 1970 1975 1980 1984

Food 3,665 Beverages and tobacco 8 Crude materials 3,211 Mineral fuels and lubricants - Animal and vegetable oils and fats 8 Chemicals 12 Manufactured goods 62 Mach i nery - Miscellaneous manufactures 27 Miscellaneous transactions and commodities 1 29 Re-exports -

Total 7,121 8,614 12,941 14,772 45,007. 133,197 175,237

- . Source: Bank of Thailand, Monthly Bulletin, various issues. warned against the protection policy and urged the government to pursue a policy of export promotion. -82/

By the end of the period the limits of import substitution were being reached when the economy faced a chronic and increasing trade balance and deteriorating balance of payments (see Table 6.43). In addition, although the growth of manufacturing had made a substantial impact on GDP, it had little

effect on total employment. In 1963 the first' industrial census was conducted /- and showed some 221,000 workers employed in manufacturing establishments.

83/ Allowing for the lack of coverage of small enterprises, total employment

in manufacturing was probably about 250,000, which represented only 1 percent

of the work force. In 1968 a World Bank report estimated employment in manufacturing to be not higher than 400,000 workers, which accounted for only

2.3 percent of the work force. -841

Having evaluated the and her industrial policy, a

World Bank mission'recommended in 1970:

I' haila and's industrialization is thus now at a crossroads. The current trend of import substitution is toward more electrical product and motor vehicle assembly, gradually increasing the Thai-made content in these products, and toward petrochemical industries. Tariff increases would be necessary for all of these industries. An alternative approach would be to move towards a less protected, more competitive industrial structure with more attention to increased efficiency in primary processing, added emphasis on mass consumption goods, and vigorous prom on of export oriented manufacturing production. -ssi This report and its recommendation, though essentially echoing the

Bank of Thailand's warning in 1963, seemed to have some effect on Thailand's

subsequent industrial policy. Table 6.43 Balance of Payments, 1960-69

Trade balance -956.3 -269.1 -1,962.6 -3,117.0 -1,960.6 -2,556.3 -4,479.4 -8,150.2 -10,650.0 -11,310.7

Net services 114.2 320.1 508.4 686.2 732.6 1,443.8 4,105.9 5,913.1 6,148.5 5,954.4

Current account balance -842.1 51 .O -1,454.2 -2,430.8 -1,228.0 -1,112.5 -373.5 -2,237.1 -4,501.5 -5,356.3

Unrequited transfers 770.3 546.0 910.9 1,138.2 775.1 796.4 963.9 1,198.2 1,547.5 1,187.2

Private 52.2 97.8 106 .O 144.9 ' 130.9 146.2 216.3 173.8 140.4 89.2 Central government 718.1 448.2 804.9 993.3 644.2 650.2 747.6 1,024.4 1,407.1 1,098.0 U.S. grants 678 .O 406.7 555.7 636.8 395.7 357 -4 438 -8 799.6 1,172.4 864.3 Other 40.1 41.5 249.2 356.5 248.5 292.8 308 .8 224.8 234.7 233.7

Balance on goods, services, and unrequited transfers -71.8 597.0 -543.3 -1,292.6 -452.9 -316.1 590.4 -1,038.9 -2,954.0 -4,169.1

Capital movements 402.3 853.9 1,495.8 1,645.0 1,643.6 1,665.3 1,518.8 2,250.1 2,444.0 2,897.6 Direct investment 60.9 120.9 1 56.0 346.8 374.2 870.3 570.6 894.4 1.239.7 1,057.5 Other private long term 328.2 563.0 1,344.0 1,287.7 1,003.3 295.4 543.7 1,126.0 811.3 1,671.9 Other private short term 59.6 72.7 5.6 -20.9 36.3 185.4 354.6 71.1 96.8 186 .O Local and central government -46.4 97.3 -9.8 31.4 229.8 314.2 49.9 158.6 296.2 -17.8

Net errors and omissions 6 19 -2 195.5 342.4 596.3 239.6 635.8 1,195.2 101 .8 959.1 357.7

Overall balance 949.7 1,646.4 1.294.9 948.7 1,430.3 1,985.0 3,304.4 -1,313.0 449.1 -913.8

Source: Bank of Thai land. 6.2.4 Industrial Policy As a Means of Rent Seeking

Although the industrial policy of expanding private and foreign investment during the 1960s came mainly from external influences, one question still remains: why did the Thai leader (Sarit) embrace and expedite such a policy?

It was rather clear in the late 1950s that public enterprises had failed to function profitably. Thus they could not be a reliable source for government revenue, nor could they be lasting sources for personal gain for those in power. The case of NEDCOL which went bankrupt and exposed official corruption was clear proof that the policy of expanding state enterprises was not viable in the long run. An alternative, therefore, was economic expansion since taking a share of a bigger economic pie would be easier and perhaps more conveniently justified. We cannot confirm whether this was really Sarit's perception but certainly the increase in his own personal wealth which was revealed after his death gives support to the above hypothesis.

Before the revolution in 1957 and later in 1958 when Sarit became

Prime Minister, he had been the Deputy Minister (1951) and Minister of Defense

(1957) and had used his power to establish 18 private companies. It was reported that these companies covered a wide range of businesses (e.g. match industry, construction, banking, shipbuilding) and were not that profitable to him. In his will, dated early 1960, it was indicated that, apart from other physical assets, he held about 10 million baht in cash. When he died in

December 1963, the leg=l fight for inheritance among his wife, his sons, and his numerous mistresses revealed that his cash holding was well over 2,000 million baht. -86/ During the period 1959 to 1963, six of his private companies received promotion certificates from the Board of Investment, nine companies of his associates also received promotion certificates, as did three American companies in which he made joint investments. 87' It was quite clear that the policy of expanding private investment was also expanding Sarit's personal wealth. After his death in 1963, his policy of promoting private enterprises was continued, to the benefit of both economic growth and the wealth of his successors.

It should also be noted that during this period the country witnessed an expanding role of the banking sector. The average growth rate of this sector was about 16 percent per annum during 1961-1970. This high rate of growth came as no surprise s2nce there was a large amount of foreign capital inflow in response to the Investment promotion Act; the government also spent a great deal of money in building basic infrastructure and the private sector itself saw an opportunity to make profitable investments. The flow of money went through and expanded the banking sector. Within the banking system there were only sixteen domestic commercial banks and thirteen foreign banks. The

Commercial Bank Act B.E. 2505 (1962) limited the number of commercial banks and the number of branches of foreign banks. In so doing it increased the financial power of the few families who owned the local commercial banks. A case study of four banker families by Punner Bualek (19851, all of Chinese origin, showed that during this period the industrial businesses of these families expanded tremendously through the use of credits from the family banks.

The picture that emerges is one where business opportunities were more widely open for private entrepreneurs. The gain appeared especially large for those who knew how to coopt political leaders co their benefits. At the same time political leaders, mainly the military, also prospered through the industrial promotion policy. Thus the most important turning point in the country's industrial policy was the 1959-1960 period when the government abandoned the previous nationalist policy of expanding state enterprises and seriously adopted an investment promotion policy that rested on private initiatives.

6.2.5 Agricultural Policy

As Thailand entered the 19609, the agricultural sector was still the most important in terms of its contribution to income and employment.

However, its share in gross domestic product has steadily declined over time,

as can be seen from Table 6.44, owing to the slower growth of this sector in ' comparison to most others. The relatively slower growth was a consequence not only of taxes levied on the agricultural sector but also of the development policy which nurtured and protected the industrial sector and created a bias against the agricultural sector.

As the data in Table 6.19 show, rice remained the most important crop in terms of agricultural income and, more importantly, export earnings. It is no surprise then that agricultural policy has centered around rice. We shall first examine the rice policy during this period and then briefly discuss other crops, the emerging importance of which have recently acquired more government attention.

Rice

The policy concerning rice during the 1960s was basically a continuation of the rice taxation. Since 1955 the rice premium has been collected as an export licensing fee by the Ministry of Commerce. In Table 6.44 Average Percentage Shares and Growth Rates of GDP by Sector (at 1972 prices)

Share Growth Rate Industrial origin 1951-60 1961-70 .1971-80 1981-85 1951-60 1961-70 1971-80 1981-85

Agriculture Crops Livestock Fisheries Forestry Mining and quarrying Manufacturing Construction Electricity and water supply Transportation and communication Wholesale and retail trade Banking insurance and real estate Ownership of dwellings Public administration and defense Services Gross domestic product (GDP)

Source: Computed from NESDB national income data. addition to the premium, there has also been an ad valorem export duty on rice at 5 percent levied by the Ministry of Finance since 1952. Furthermore, the rice reserves requirement, which was another form of taxation on rice, was introduced in 1962. This measure requires exporters to sell certain quantities of rice at below market prices to the government before they are permitted to export. The proportion varies over time. This rice reserve is put into the Public Warehouse Organization, a public agency charged with maintaining rice reserves to meet the needs of government-to-government sales and the "cheap rice" program introduced during 1966-1968. The cheap rice program was designed to appease the urban consumers when rice prices soared as a consequence of the tight world market. This program ended in 1982 when the margin between the cheap rice price and the market price was phased out.

During its operation, it benefited mainly the Bangkok consumers who received

70 percent of all cheap rice in 1974, but its benefits gradually dissipated to . . other areas as the Bangkok proportion declined to 46 percent in 1982. -951 " All three measures, namely rice premium, export duty, and rice reserve requirement amount to taxes on rice or more explicitly transfers of resources from the agricultural sector to the government. Table 6.45 show the revenue figures earned from the rice export duty and premium during the 1960s and early 1970s. We can see that there were fluctuations in the amount of

revenues earned each year depending on the world market condition. However,

since 1976 all proceeds from the rice premium have gone directly to the

~armers'Aid Fund (FAF), established in 1974, which is supposed to return the

resources to farmers. Unfortunately, the allocation of funds by the Farmers'

Aid Fund during 1975-1983 has not provided much benefit to rice farmers, as

pointed out in a study by R. Thanapornpan (1984). dm9 ??? QY\ 1iA I-mm Lam9 mmm am * UUO dLICrr .. ., u aJ rn N 9LM* I OQU 4- 19 9 m* mm Crr dUEl 3OI- MC Ltn C aJU* -4 > Cr, LaJaJ u- ah X U QQ~C LIW aJ aJ a Len Q 34 .w aJ9.d h 5NruB C aJ hC > 0 us: 012 3 L mu Q xauu ac $4.3 LI Q Oru 4 a.4 4-rr a a aJ mm LIZ @I- OwQd* w CUCL -0 1 3 mtn -0 EaJI- 0) 0 3 3b UP.d CCL LLEal 1 al >a OalLalC v)*am a Apart from the above measures, licenses have also been required for rice exports since the postwar period. At times licenses are given almost on request but most of the time there are export quotas for which licenses are given based on historical performance. Export restrictions sometimes yield quota-rents to rice exporters. The calculation of taxes on rice based on rice

reserve and quota requirements is not straightforward but requires some assumptions; Siamwalla and Setboonsarng have estimated the tax equivalent of various interventions in rice in their study (1986).

There appear to be at least three major objectives in the

government's intervention in rice. First, the collection of government

revenue was probably the most important between the early postwar period and

1965 when rice taxes accounted for as much as 15-25 percent of the total tax

revenue (see Tables 6.5 and 6.45). However, the importance of revenue from

rice taxes has decreased since then as the government became better able to

expand its revenues from other sources. The second and third objectives are

domestic price stability and low rice price for consumers. These two

objectives were reflected in the "stable" and "low" domestic price of rice

even when there were wild fluctuations in the export prices. Figure 6.1

provides evidence 'of low and stable domestic price'of 'rice resulting from

various tax measures as calculated by Siamwalla and Pinthong in their 1985

study of the price trend during 1959-1983. They concluded that the change in

the quantity and rates of various export taxes on rice had a close

relationship with the differences between the export and domestic price of rice which indicated that the government increased export taxes when the export prices were high and vice versa. 96' Thus the stability of the domestic price of rice has been achieved at a low level mostly to the benefit Figure 6.1

Movements of F.O.B. and Bangkok Wholesale Prices of Paddy (Deflated by GDP deflator at 1972=100)

n F.O.B. price + Bangkok wholesale price

Note: Paddy price is calculated from rice prices by using the following conversion. One ton of paddy can be converted into 450 kg. of 5 percent rice, 150 kg. of broken A1 rice and 60 kg. of broken C1 rice.

Source: A. Siamwalla and C. Pinthong (1985), p. 59. The data used to plot this graph are not provided in their study. of urban consumers because the majority of rural people grow rice for their own consumption. The farmers with marketable surpluses are those who bear that part of the tax burden which cannot be shifted to foreign consumers.

Irrigation

Apart from the above measures agriculture has been greatly affected by the government's irrigation policy. Although irrigation facilities do not benefit only rice, but also other upland crops--and for some large multipurpose dams there is also the benefit of hydroelectric power--the main. purpose of irrigation construction has been to expand the area under rice cultivation and to improve yields. We have seen from the discussion in

Section 6.1.2 that the government's effort at irrigation during the 1950s had doubled the irrigated area by 1960. Since 1961, with a continuum of National

Economic and-Social Development Plans, irrigation in Thailand has been developed in a continuous and more systematic manner, emphasizing different types of projects at different times. The account of state irrigation projects constructed during the period 1961-1984 is provided in Table 6.46.

During the first and second plan periods (1961-1971) the emphasis was on large irrigation projects in the North and Northeast. In 1971, the total irrigated area amounted to about 10.6 million rai or 1.7 million hectares (see

Table 6.47). This, however, was below target levels set by the Plan since the completed irrigation projects did not benefit as large a planted area as expected owing to lack of canals and laterals to deliver water at the farm level. Thus in the following development plans, 1972 up to the present, the construction of large projects was confined to the continuation of the ones already started and emphasis was shifted to the acceleration of small Table 6.46 State Irrigation Projects, 1961-84

Period of Irrigable Area Construction Project Type (hectares) Region

Kang Krajan Dam SIFH Central Sirikit Dam SIFH North Mae Tang I North Lam Phra Phloeng SIFH Northeast Lam Pao SIFH Northeast Petchburi (extension) ID Central Kiu Lorn Dam S IFH North Lam Takhong Dam SIF Northeast Tha Chiat I South Greater Mae Klong Dam I Central Left Bank I Central Nampong ID Northeast Krasiao Dam SIFH Central Nam Un SIFH Northeast Pranburi Dam SIFH Central Pat tani ID South Yang Chum Tank S I Central Dom Noi PD Nottheas t Huay Saneng Tank S I Northeast Huay Luang Dam SIF Northeast Bangban PD Central Phitsanulok (Stage I) ID North Bang Phra Dam SIF . Central Muno h CDF South Mae Ngat Dam SIFH North Mae Kuang Dam SIF North Groundwater Devt. P North Tha Dan (Stage I) I Central Moon Bon SIFD Northeast Nong Kor Tank S Central Lam Takong .(upper Part) Northeast

Note: Types of irrigation: I = irrigation; D = drainage; S = storage of water; F = flood control; H = hydroelectric power generation; P = pumping; C = conservation of water in the plains.

Source: Royal Irrigation Department, "~rojectsCompleted to the end of 1983 and under Construction in 1984," (Large and Medium Size Projects), April 1985. Table 6.47 State l rr igation Project Areas where Construction has been Completed

North Northeast Central South Whole Kingdom Year 1,000 hectares Percent 1,000 hectares Percent 1,000 hectares Percent 1,000 hectares Percent 1,000 hectares Percent

Source: Royal Irrigation Department. irrigation projects as supplements to the various existing irrigation projects to make them complete with distribution and drainage canals, ditches and dikes, feeder roads, and laterals. In 1983, the irrigated area increased to

20.9 million rai (3.35 million hectares) which is about 29 percent of total paddy land and about 18 percent of total farm land.

In addition, the Royal Irrigation Department has played a role in the construction of people's irrigatiqn projects which are initiated, operated and maintained by the people for the benefit of the local farmers in the area.

Most of these are small projects the construction of which takes less than a year. People's projects existed in Thailand before state projects, especially in the North. Most of them are small weirs to divert water to the fields.

The ~eo~le'sIrrigation Project Act in 1939 stipulated the operation criteria in order to avoid conflicts in water use, and to provide governmental support in the construction, in cooperation with the people. Such construction was undertaken by both the Royal Irrigation Department and the provincial committee. Table 6.48 provides data on the budget allocated to the Royal

Irrigation Department, as well as that allocated for state and people's irrigation projects, during 1961-1983.

The distribution of irrigated areas, however, is very uneven among regions. In 1950-1951, about 92 percent of total irrigated area was concentrated in the Central region, about 7 percent in the North, and less than 1 percent in the Northeast and the South. This inequality has declined by 1983 but there is still a concentration in the Central region whose share has dropped to 56.3 percent while the share has increased for the North to

20.8 percent, the Northeast to 13.4 percent, and the South to 9.5 percent (see

Table 6.47). Table 6.48: ROYAL IRRIGATION DEPARTMENT ANNUAL BUDGET AT CURRENT PRICES,

Millions of Baht

Total Operation & Construction Year Budget General Maintenance State Projects people's Projects

Note: In 1982 there was a significant drop in general expenditures while operation and maintenance expenditures rose sharply as compared with 1981. The drop in general expenditures was due mainly to the drastic cut back in general administration budget, which more than outweighed the moderate increases in engineering and machine and equipment services budgets. The large increase in operation and maintenance budget, on the other hand, was attributable to the more than doubling of water allocation and maintenance budget in nominal terms as well as to significant increases in budget allocations to irrigation projects under the Irrigated Agriculture Development Plan, such as Nongwai, Nam-un, Northern Chao Phya Stage 11, Nam-pong Stage I1 and Northeastern Region Project Stage 11. In 1983, however, general administration as well as operation and maintenance budgets were back to their trend level. There was no more budget allocation to Nongwai Project and Greater Maeklong Project, and the expenditures on the Northern Chao Phya Project tapered off signifi- cantly.

Source: Royal Irrigation Department. The impact of an expansion in irrigated area has been not only the expansion of rice planted area by making dry season cropping possible but also to increase rice yields in irrigated areas as compared with rainfed areas.

The extent to which the wet season rice planted area is irrigated is indicated by the ratio of irrigated to wet season rice planted area. This ratio, as shown earlier in Table 6.18, has increased slowly from 11 percent in 1950 to

22 percent in 1970 and 36 percent in 1983. The ratio of the dry season rice planted area to irrigated area also increased from almost negligible in 1960 to 8 percent in 1970 and 19 percent in 1983.

The above ratios vary greatly among regions as shown by the data in

Table 6.49. While over 50 percent of the total wet season rice planted area is in the Northeast and 20 percent in the Central region, the ratio of irrigated to wet season rice planted area is highest (102 percent) in the

Central and Lowest (9 percent') in the Northeast. This suggests that all the planted area in the Central region is under irrigation while a large

'proportion in the Northeast is still rainfed. The ratio of the dry season planted area over irrigated area is also highest (26.9 percent) in the Central region and lowest (7.8 ~ercent)in the Northeast. Since the early 1980s the dry season crop has contributed more than 2 million tons (about 10 percent) of the rice output. The availability of the dry season rice crop has enabled

Thailand to expand its rice export from about 1.5 million tons per year in the early 1970s to almost double that amount in the 1980s.

Needless to say, the increase in rice output and exports was due not only to the expansion of cultivated area but also the improvement in the rice yields, especially in the irrigated area. Table 6.50 shows that the rice yield in the irrigated area is considerably higher than that in the Table 6.49 lrrigated and Rice Planted Areas by Region, 1983

Reg ions Whole North Northeast Centra l South K i ngdom

Irrigated area 695.52 447.68 1,884.80 318.72 3,346.7 (1,000 ha.) (20.78%) (13.38%) (56.32%) (9.52% ) (100.00%)

Rice planted area (1,000 ha.) Wet season 2,059.04 4,819.68 1,840.16 579.52 9,298.4 (22.14% ) (51 -83%) (19.79%) (6.23% ) (100.00%)

Dry season 66.56 35.04 506.88 25.60 634.08 (10.50%) (5.53%) (79.94%) (4.04%) (100.00%)

lrrigated area Wet season planted area (percent ) 33.78 9.29 1 02.42 55 .OO 35.99

Dry season planted area (percent ) 9.57 7.83 26.89 8.03 18.95

Double cropping

rice area , (percent ) 3.23 0.73 27.54 4.42 6.82

Source: Office of Agricultural Economics, Ministry of Agriculture and Cooperatives, Agricultural Statistics of Thailand, crop year 1984/85. Table 6-50 Comparison of Rice Planted Areas and Yields in Irrigated and Unirrigated Areas and the Whole Kingdom, Wet Season, 1958/59 - 1983/84

Yield (ton/hectare) Ratio of Ratio of Produc- Irrigation Outside ProjectArea Irrigation Outside tion in Project Project Project Whole to Whole Project Project Whole Area to Whole Year Area Area Kingdom Kingdom (9) Area Area K i ngdom Kingdom (J)

Source: Royal lrrigation Department, "Report on Rice Production in lrrigation Project Areas, Crop Year 1983/84," September 1984. unirrigated area. Over time, the.irrigated yield has increased slightly from about 2.2 tonlhectare in the 1959-1960 crop year to 2.4 tonlhectare in the

1969-1970 and to about 3 tonlhectare in the early 1980s. The unirrigated yield has increased from about 1.1 tonlhectare in 1959-1960 to about 1.4 in the 1980s.

The yield differences between irrigated and unirrigated areas in the dry season, however, is not as large as in the wet season (Table '6.51), mainly because unirrigated land which can be planted in the dry season is usually located near a water source which provides sufficient water to allow the use of high yielding varieties and chemical inputs as in the irrigated areas.

There is also a favorable impact on farm employment during the dry season. As crop caring takes more man-days per hectare in the dry season than in the wet season, 97' the expansion of dry season rice planted area should help to increase labor employment during the dry season.

For the initial push to improve the irrigation facilities in-the

1950s, Feeng (1982) seems to give more credit to foreign organizations, particularly the World Bank. He argued that the Greater Chao Phya Project proposed since 1902 was not taken up by the government until 50 years later when a loan was available from the World Bank. The World Bank has indeed been instrumental in pushing for and providing loans for projects connected with irrigation and other basic infrastructure, particularly during the 1950s and

1960s. Stifel (1976), however, found that senior Thai technocrats were influential in the design and recommendations of the 1957 World Bank mission which resulted in the 1959 Ellsworth report.

Thus while the government has consistently drawn resources from the agricultural sector through various tax measures, it also has put some Table 6.51 Comparison of Rice Planted Areas and Yields in Irrigated Areas and the Whole Kingdom, Dry Season 1975-1985,

Planted Area ( 1000 hectares ) Yield (ton/hectare) Project Area Ratio of Project Area Project Area Whole Kingdom Year to Whole Kingdom (2)

Source: 1) Royal Irrigation Department, "planted Area and Yield of Dry Season Rice in Irrigation Project Area", various issues.

2) Office of Agricultural Economics, Ministry of Agriculture and Cooperatives, Agricultural Statistics of Thailand, crop years 1982/83-1984/85. resources into the construction of irrigation facilities which expand cultivated area and improve the output yield. The net resource flow between the government and the agricultural sector, however, is not a straightforward calculation since it involves other implicit taxes and subsidies and also other crops.

The important fact remains that the irrigation facilities constructed during the last three decades have benefited the agricultural sector although its contribution to improving rural poverty may not be substantial. The benefits of irrigation are concentrated mainly in the Central region while the smallest share goes to the Northeast which was, and still is, the poorest region in the country.

Rubber

Rubber is another crop which has been one of the principal exports of

Thailand. ~ikirice, it has been subjected to taxes for a long period. The export of rubber was first taxed in 1935 on a specific rate basis but later in

1938 it was changed to an ad valorem rate of 7 percent. This rate was in force until 1955 when the flat rate was changed into a progressive structure.

During the time when the multiple exchange rate was in use rubber export was also subjected to the foreign exchange surrender (see Section 6.1.1 (65)).

When the World Bank's Ellsworth report came out in 1959, it suggested that Thailand had a large potential for rubber and recommended that the government introduce some sort of program to encourage replanting with new high-yielding trees. 99' In 1960, the Rubber Replanting Aid Fund Act was passed which brought an additional tax on rubber export called a "cess". Of the cess collected, 5 percent is allocated to the Rubber Research Center, 95 percent to the Office of the Rubber Replanting Aid Fund (ORRAF) which spends 90 percent for replanting activities and 5 percent for administrative expenses. E1 Both the cess and export duty are levied at progressive rates with respect to price. The rates of export'duty have been changed many times. The first significant reduction in duty rates was introduced in 1981 owing to the rapidly declining rubber prices.

Although the revenue from rubber export has not been significant in the total tax revenue, the calculation of Siamwalla and Setboonsarng (1986) has shown that duty and cess combined have made rubber one of the most heavily taxed agricultural commodities. They also give several reasons why rubber farmers have never raised any political challenge to the government, unlike those in other crops. First, the progressivity of the tax rate must have acted as an automatic stabilizing mechanism. Second, rubber exporters are not required to obtain. the type of export licenses required for rice which precludes the need for discretionary measures by the government. Third, the flow of rubber output is relatively steady throughout the year.o Therefore, . farmers can hold on to their output if they want to sell later on, while those of other crops, such as-rice and sugar cane, have to sell their output at the harvest season. This means that occasions for political organization to push for an immediate action by the government need hardly arise.

In addition, one cannot overlook the role of the Office of the Rubber

Replanting Aid Fund in acting as a liaison between the government and the rubber farmers. The study by Tinakorn (1980: 88-93) found that most of the allocation of replanting fund (96.7 percent) in 1979 went to small farmers

(less than 50 rail who represented the majority of rubber farmers. Besides, the extension services provided by the ORRAF officials, valuable or not, may serve as an indication of care from the government. 101' These factors may have acted to dampen political opposition. - 6.112 - 1 / Table 6.52 Percentage Share of Principal Exports, 1960-1985 -

l tems 1957 1960 1965 1970 1975 1980 1985

a. Principal Exports

1. Rice 2. Rubber 3. Tin 4. Maize 5. Tapioca products Jute and Kenaf Shrimps Tobacco Leaves Sugar Mung beans Fluorite Sorghum Cement Teak .

b- -Others

- Molasses n.a. 0.2 0 -3 0 -3 1.1 - 0.3 . 0.4 - Wood Products 0.01 0 -07 0 -04 0.2 1.1 1.0 1 .o - Garments - 0.03 0.1 0.1 2.2 3.4 12.2 - Integrated Circuits - - - - - 4.6 4.3 - Precious Stones 0.1 0 -2 0.6 0.9 1.7 2 -4 3.3

Total 1 00 -0 100 .o 100.0 100 .o 100.0 1 00 -0 100.0 C- -

(Value in million baht) 7,540 8,614 12,941 14,772 45,007 133,197 193,366

-1/ Figures may not add up to 100 because of rounding. -2/ In the June 1986 publication, garments, integrated circuits and precious stones are classified as principal exports and items 6,8,10-'14 are no longer principal export items.

Source: Calculated from Bank of Thailand Statistical Bulletin, January 1977 for 1957-1975; from Bank of 'Thailand Quarterly Bulletin, June 1986 for 1980 and 1985. Other Crops

We can see from Table 6.52 that the importance of rice has rapidly

decreased from 48 percent in 1957 to 17 percent in 1970. In fact, the

importance of the three traditional export items, namely rice, rubber and tin,

has decreased from 73.7 percent of the total export earnings in 1957 to only

43.0 percent in 1970; this proportion fell further to only 21.6 percent in

1985. We can also see from Tahle 6.19 that agricultural output has become

less concentrated in rice and rubber; from the early 1970s we can see the

emerging importance of other crops such as sugarcane, maize, cassava, and

others.

The expansion of the maize output in the late 1950s and -during 1960s

was due to export demand. Prior to 1962, there was no government intervention

in maize exports. However, frequent violations of export contracts by

domestic exporters with respect to both quantity and quality led to government

involvement in the export of maize through the insistence of Japan and .

Taiwan. Standards of maize export were set and each exporter had to obtain an

export license from the Ministry of Commerce. The main markets for Thai maize

were Japan and Taiwan who normally concluded a sales contract with the Thai

Maize Traders Association. The contract usually 'lasted for one marketing

season. There were also non-contract markets. The government would issue

monthly export quotas on the basis of historical performance for both

markets. This system seemed to function well until the late 1970s when maize

traders realized that the contract market was not beneficial. A study by

Kenjing (1980) found that during the 1970s the export prices obtained from the

non-contract markets were higher which led to a movement of maize exports away

from the contract market. The significance of Japan and Taiwan had decreased considerably and the need to have export quotas to ensure that maize exporters keep their contracts no longer existed. In 1981, the quota system came to an end and maize exports again became totally free.

The quota system which operated until 1981 created a quota rent.

Although trading of quotas was not officially allowed, it was widespread. The work by Siamwalla and Setboonsang (1986) provides a calculation of the quota- rent. They also argue that the low-keyed politics of maize is due to the fact that maize farmers are unorganized small farmers and it is also primarily an export crop. Like rubber, more than 90 percent of its output was directed to exports. The growth of a domestic broiler industry which increased the share of domestic consumption has not Led to any political pressure mainly because it is a domestically oriented industry. As such, any movements in the maize price can bepassed on to consumers.

In contrast to the low-keyed politics of maize, sugar is a major export which has received constant political attention because of its more organized structure in terms of both the industry and the sugar cane growers. The first two centrifugal plants in the country were built in 1937 and 1941 and were government owned. The rise in sugar price during the wartime stimulated the establishment of many privately owned sugar mills and the sugar industry grew rapidly after the war, partly as a result of rather high import tariffs and quantitative restrictions. -1021 In the early development of the modern sugar industry, the sugar mills had to compete with the domestic production of muscovado in the purchase of sugarcane. To ensure the supply of sugarcane to feed the modern mills, the factories began the system of forward purchase contracts with the sugarcane growers. To minimize the transaction cost, only the large sugarcane growers were contracted. However, owing to the presence of a large number of small growers, the system of "quotamen" who act as intermediaries between factories and small growers evolved. The quotamen usually are large farmers who contract to supply sugarcane. Before the 70130 system of revenue sharing was legislated in the 1984 Sugar Act, the cane growers were very much subjected to

the mercy of the mills at harvest time, given the perishability of the

sugarcane, the volatility of the sugar market and the binding contract with

particular mills. Thus cane growers quickly formed themselves into associations as early as in 1964 to engage in collective bargaining with the mills. Despite the relatively small importance of sugar in the Thai economy,

the cane farmers are the focus of political attention every year through the

bargaining efforts of their associations.

The Siamwalla and Setboonsang study (1986) shows that the

-relationshipbetween growers and millers prices indicates that the

organization of growers had little impact until the mid 1970s when the

government began to take a more active role in the bargaining. The government

policy on the sugar industry since the Second World War has been to protect

the sugar industry as a whole through various measures of cross subsidy

between domestic and world markets. As it cannot control the world price it

aims for a level of producer price by setting the consumer price. There have

been no export duties on sugar although there was a cess collected during

1962-1966 to be put into the Sugar Industrial Aid Fund. During 1968-1983 the

government attempted to control prices by detailed regulation on production

level but this system failed when the world sugar prices moved sharply upwards

as in 1973-1974 and 1980. The present 70130 revenue sharing is supposed to

end the yearly conflict between the growers and the mills. The details of these various measures are provided by Siamwalla and Setboonsang study (1986) which concludes that an interest group model is best to analyze sugar politics whereas for rice it is a bureaucratic politics model. -1031 Another crop which has become a major export item is cassava or tapioca. As the data in Table 6.52 show, the share of tapioca exports in total export earnings in 1957 was less than 2 percent but has rapidly increased during the 1960s and 1970s mainly as a consequence of foreign demand, especially from the European countries who use tapioca products for animal feeds. In 1970, Thailand exported about 1.33 million tons of tapioca products, 87 percent of which went to West Germany and the . In

1978, the quantity exported reached 6.29 million tons at an export value of

10,982 million baht which made tapioca products the top export earner in that year, surpassing rice which fell to second place.

'Government policy on cassava trade has been free trade until 1980 when, as a result of European pressure, Thailand initiated a voluntary export restraint agreement whereby it would limit its exports of cassava to the

European Community. This agreement was ratified in 1982 and allowed Thailand the following cassava exports: 5.5 million tons in 1982, 5 million tons in each of 1983 and 1984 with a further 0.5 million tons allowed in either year, then 4.5 million tons in each of 1985 and 1986 with 0.5 million tons allowed in either year. 104' With the above export quota agreed to, the Thai government started the task of quota' allocation among the exporters. Siamwalla

(1983: 90) mentions that the Ministry of Commerce, the main negotiating arm of the Thai government, cooperated actively with the Europeans in imposing quota allocation instead of resisting them. The probable reason for this eagerness may lie in the generation of quota rent which the Ministry of Commerce would have the power to allocate.

It should be mentioned that the rapid expansion of cassava exports during 1960s and 1970s was possible due to the tremendous increase in the supply of cassava, mainly in the Northeast and Eastern regions of the country. This in effect points to the supply responsiveness of farmers in these regions. However, since cassava is a high bulk product, a good road system is essential to transport it to the ports. Thus the contribution of a good network of roads in the Northeast to the rapid expansion of cassava exports cannot be overlooked.

As Silcock wrote in 1967: "~ecentimprovements in transport, both by rail and by road, have clearly increased the possibility of switching from subsistence agriculture both to export crops and to cultivation of fruit and vegetables for the home market." 105' He was also of the opinion that the effect of the depression of rice price throdgh various taxes had sbme'effect on the long-run movement of 'subsistence farmers from rice into other crops.

The debate over the effect of rice taxes has been a bitter one among Thai

scholars and policymakers involving large conflicting evidence which cannot be

fully documented in this study. 106' Whatever the case, we can say that the

combined effect of various policy measures coupled with the favorable impact

of foreign demand has helped Thailand to become more diversified. The signs

o'f diversification in agricultural output and exports can beseen as early as

in the late 1960s and early 1970s (see Tables 6.19 and 6.52).

Footnotes

1. Thamsook Numnonta (1977, 1978); Ubon Chirasawat (1974); Samsak Nilnopakoon (1984: ch. 2); and Shu-chin Yang (1957: ch. 2).

2. For details of the agreement between Thailand and Great Britian see Direk Chayanam (1966).

3. The Thai government had con'sciously followed a halanced budget practice since the fiscal crisis during the reign .of King Rama VI which was continued even after the change from absolute to constitutional monarchy in 1932. See Porripen Huntsakul (1975) and Batson (1984).

Matichon Weekly Magazine, August 24, 1986 (a special report on cabinets. since Kana Kamakan Ratsaden until General Prem).

IBRD (1959: 11).

See, for example, Skinner (19571, Ayal (19611, and Suthy ~rasartset. (1979).

Ayal (1961: 32).

Bank of Thailand (1962) and ~irekChaiyanam (1966: 709-763).

For more details about the policy on rice exports in the immediate post- war period see Ayal (1961: 159-189)', Mousny (19641, Ingram (1971: 87- 92), and Siamwalla (1975).

Ayal (1961: 63).

IBRD (1959: 11).

Rangsan Thanapornpun (1986: 22).

Trescott (1971).

Rerngchai Marakanont (1978: 255). -Ibid., p. 256. An excellent brief account of hail and's conservative monetary policy during the period 1850-1950 can be found in Ingram (1971: 170-174).

Bank of Thailand (1961: 345).

The Yen was no longer considered a legal reserve on May 1, 1946. See Bank of Thailand (1952: 8). Bank of Thailand (1952: 6-7) and Rerngchai Marakanont (1978: 320-333).

Shenoy (FER, January 18, 1951: 71).

Bank of Thailand (1985: 3) and Phairach Krisanamis (1973: 434).

Bank of Thailand (1985: 4-71.

Puey Ungphakorn (1976: 162) and Bank of Thailand (1962: 67).

Bank of Thailand (1962: 68).

Punnee Bualek (1985).

There was also some diplomatic reason due to pressure from foreigners. See Ammar Siamwalla (1979: 164-165).

For more details of 'the land ownership rights system see Noparat Nonsatom (1977) and Oratip Tessiri (1981).

See Ingram (1971: 37, 8, 24, 53).

S. Arsvai (1978: 8).

Suntharee Arsvai (1978: 2-31.

Johnston, D.B. (1976: 27-44).

Noparat Nonsatom (1977: 106).

For example, see Ammar Siamwalla (1975: 145).

See Puey Ungphakorn (1976: 161).

For example see Silcock (1967: 231-2571.

These were one cement plant, three aerated water plants, a soap factory, a cigarette factory, and a Leather factory. It appeared that the British consul's definition of factories excluded rice and lumber mills. See Ingram (1971: 133).

Muscat (1966: 187). See, for example, the works of Ayal (1969), Skinner (1957), and Suthy Prasartset (1979). See details about the establishment of state enterprises in the early period in Uthai Sintusarn (1953): "State Enterprises."

Jacobs (1971: 130-131, 181).

See Siffin (19661, Puey Ungphakorn (1972) and Sungsit Piriyarangsun (1983 1. IBRD (1959: 90-94).

K. Pipatseritham (1978: 100, 133) and Ministry of Agriculture and Cooperatives (1982: 124).

See footnote in the Pra ~ajabanyatChad Teedin Pua Kwam pen Tham Nai Sangkorn B.E. 2497.

K. Pipatseritham (1978: 101).

For more details of the gains in Sarit Tanarat's personal wealth, see section 6.2.

R. Tanapornpun (1986: 37).

IBRD (1959: 11-15).

Puey Ungphaborn (1976, 161).

Puey Ungphaborn received the Magsaisai Award for his hanorable public services in 1965. See details in Rangsan Thanapornpum (1986 (editor): 27-49).

Puey Ungphaborn (1972).

Dr. Puey described this general rule as a "theory of the balloons." He stated: "There is a balloon representing the national product, which needs to be inflated by 8 percent. For this purpose a second balloon, the money balloon, should be blown larger by 10 percent. There are three pumps which can inflate (or deflate) the money balloon, namely the foreign payment pump, the government pump, and the private sector pump. If any pump happens to blow too much air in, the other pumps must go easier." Ibid.

Bank of haila and, Annual Report (1961: 1). See for example Latz and Morss (1967), Lent and Hirao (1970), Bahl (19711, Chelliah, Baas and Kelly (1975), and Tait, Gratz and Eichengreen (1979). Bank of Thailand, Annual Report (1958). Rerngchai Marakanont (1978: 161). 59. (1981: 58)

60. See, for example, Ammar Siamwalla (1975a: 28-30)

61. Caldwell (1974: 38-41). 62. -Ibid. p. 42. 63. IBRD (1959: 20-21).

NEDB (January 1964: 9)

NEDB (Second Plan 1967-1971: 9).

See Pranee Tinakorn and Direk Pattarrasiriwat (1985: 41-51).

NEA, Electric Power in Thailand 1985.

NEA, Electric Power in Thailand 1971, 1972.

Ibid.

Silcock, T.H. (1967: 15).

Industrial Proinotion Act. B.E. 2497, Section 16.

72. Samsak Tambumdertchai (1975: 90).

73. Ukrist pathamanon (1983: 46). 74. -Ibid, p. 75. '~aldwell,J.A. (1974: 10).

76. In fact, in December 1958, the military government under Sarit had promulgated "~nnouncement of the Revolutionary Party No. 33 and 42" to replace the 1954 Act. This was in effect an investment law before the enactment of the 1960 Act.

77. A special report prepared by a team under the direction of George B. Beitzel, "Expanding Private Investment for haila and's Economic ~rowth," Bangkok, November 1959. This report was based on arrangements agreed. upoi between the governments of Thailand and the United States.

78. See details in Promotion of Industrial Investment Act, B.E. 2505. 79. C. Isarangkoon (1969) noted that the only common feature of industries in Group C was that they must be modern which was demonstrated by the insistence on the use of machinery to be approved by the Board of Investment. Chirayu Isarangkoon (1969: 233).

See, for example, Trairong Suwankiri (19701, Narongchai Akrasanee (1973) and Yongkithikul (1973).

Marzouk (1972: 310-311).

This number was much smaller than the 471,027 reported as occupied in manufacturing in the 1960 Population Census which included domestic and handicraft workers, and therefore did not represent employment in manufacturing proper.

IBRD (1970: 6). -Ibid, p. 55. U. Pathamanon (1983: 132). Ibid , pp. 138-145. K. Pipatseritham (1981: 76-78).

P. Bualek (1985: 246-2811.

K. Pipatseritham (1981: 76-78).

P. Bualek (1985: 225-246).

K. Pipatseritham (1981: 76-78).

P. Bualek (1985: 281-312). 94. ,Ibid pp. 215-224. 95. For more details about politics involved in this program see A. Siamwalla and S. Setboonsarng (1986: 55-62).

96. A. Siamwalla and C. Pinthong (1985: 57-63).

97. This is because problems of insects and pests are usually more severe in the dry season so that farmers tend to spend more time in the fields between planting and harvesting than in the wet season.

98. P. Tinakorn (1980: 48-55).

99. IBRD (1959: 69-71).

100. P. Tinakorn (1980: 78-84).

101. Impression from interview by P. Tinakorn during the field work for the 1980 study. 102. More details on the history of sugar in Thailand can be found in Pitsanes Jessadachatr (1977).

103. A. Siamwalla and S. Setboonsarn (1986: 116-117).

104. A. Siamwalla (1983: 89).

105. T.H. Silcock (1967: 245).

106. Interested readers can read R:Thanapornpun (19851, The Economics of the - Rice Premium: Frontier of Knowledge, (419 pages). CHAPTER 7

Policy Adjustment and the Resiliency of the System, 1973-84

by Pranee Tinakorn

In comparison to the earlier period, the 1970s and the early 1980s were full of disturbing events, the most disruptive of which were the two oil price increases in 1973 and 1979. -1/ During 1977-83 most countries in the world experienced high inflation, especially the non-oil exporting developing countries, with annual inflation rates typically in the range of 20-30 percent compared with 5-10 percent in the industrialiqed countries. The world economy also experienced a recession during 1979-82, with a drop of around 2.5 percent in the volume of world trade in 1982. -21 The high real rate of interest in later years also contributed to a debt crisis in a number of developing countries. On the political side, the end of the Vietnam war in 1975 led to the withdrawal of U.S. bases from Thailand in 1976.

Domestically, this was a period when the middle class began to make their voices heard in politics and the business class started to assume a more explicit role in policymaking. On October 14, 1973, a popular uprising against the military government led to the downfall of the Thanom-Prapas regime. -31 This event has been seen by many as representing the middle class struggle for democracy. There was also a pronounced change in the anti- communist policy in 1980. Instead of an open arms fight with the Communist

Party of Thailand (CPT), the policy (known as Order 66/23) switched to mass psychology. This policy has met with some success since the CPT appears to be disintegrating. There has been more concern for rural development during this period, and also more cooperation between the government and the business class. It is against this background that we shall examine the major changes in economic policies that took place during the 1970s and early 1980s. The adjustments of both policies and the economy to external shocks give some indication of how well the government and the economy can adapt to the world's changing conditions.

7.1 Instability and Macroeconomic Adjustments

The rates of inflation in Thailand during the 1970s and early 1980s are much higher than the earlier period (Table 6.30). The country faced double-digit inflation in 1973, 1974, and during 1979-81 when the OPEC countries again raised oil prices dramatically. Thus, the government,could no longer conduct its macroeconomic policies within favorable stable conditions. However, as far as fiscal policy is concerned there seems to have been no major changes in policy directions. The weight given to economic growth appears to dominate other aspects of fiscal policy. Although the government started to show more concern to the distributional issue in its policy statements, the instability caused mainly by external shocks'diverted its resources toward stabilization measures while maintaining its growth objective during this period.

The practice of deficit spending, both in the planned and actual budgets, continued up to the present time, although the growth rates of public expenditures varied greatly from year to year. -4/ However, fiscal policies since the 1960s have been conducted with more discipline following the reforms already mentioned (section 6.2). The persistent budget deficit necessitated government borrowing from both domestic and foreign sources. In the 1960s and early 1970s low interest rates made debt service payments a negligible problem. Furthermore, with regard to external debts, the government tended to rely heavily on official sources during the first three plan periods (1961-66,

1967-71, and 1972-76). During the fourth plan period (1977-811, it began to depend much more on private financial institutions whose terms are much less favorable than the official ones. Tables 7.1 and 7.2 provide information on external loans and their terms during the 1961-83 per-iod.

The dependence on private financial sources of funds was due in part to defense loans; the government started to borrow from private foreign sources for defense purposes in 1975. In 1976, the Defense Loans Act was passed to legitimize the 1975 defense borrowing and to enable the government to borrow more for defense purposes subject to a limit of 201,000 million baht. However, when defense borrowing approached this limit another act was passed in 1981 to empower the government to borrow from foreign sources for defense purposes as long as the sum of defense borrowing plus external borrowings for other development purposes does not exceed 10 percent of the

-expenditure budget in each year. -5/ Unlike development loans, the terms of defense loans are not concessionary (Table 7.2). Because of the acceleration of defense borrowing during 1976-81 (as the limit of 20,000 million baht, approximately US$1,000 million, was quickly exhausted), the debt service burden from defense loans rose rapidly and in 1983 accounted for as much as 49 percent of direct government debt service payments. -6/

In addition, during the fourth plan period we also see an ' acceleration of external borrowings by government enterprises, guaranteed by the government. The rapid increase of defense borrowing and government- guaranteed state enterprise borrowings, coupled with the rapid increase in world interest rates in the late 1970s and early 1980s (LIBOR increased from Table 7.1 External Debt Commitment by Source, 1961-83 (percent

US$ IstPlan 2ndPlan 3rdPlan 4thPlan millions (1961-66) (1967-71) (1972-76) (1977-81) (1961-81 ) 1982 1983

Official Sources lnternational organ- izations IBRD IDA ADB . IFAO . OPEC Foreign governments United States West Germany Japan Others Private Sources Financial institutions Supp I iers cred it Tota I

-Note: IBRD = l nternational Bank for Reconstruct ion and Development (World Bank). IDA = International Development Association. ADB = Asian Development Bank. IFAD = lnternational Fund for Agricultural Development. OPEC = Organization of the Petroleum Exporting Countries. Other foreign countries include the United Kingdom, Canada, , , Kuwait, France, New Zealand, , , and Australia.

Source: Calculated from Bank of Thailand data, as reported in P. Tinakorn and D. Pattamasiriwat (1985:45), 0 al- - TI- +I-

'am'a Y?". ??? om- 000 CY CY-

mmvr OQC --+ma r Q- L. L .- al r 03 ++T .-InI-al 36) L LC0 In OalT =+TI- OC3 0 a- - m. LI- In OlOZC c- 0 .- 0 v In al- 3QU -.-Cal UL)-+ X ma av L L - Q .+ 1310 -=-a CSCL SS? ogoal+ I- n m In InC C 0 C .- -op2w0 0 + z aloal- +a+- QLO LULV al +r+v InUlnal 0.-alal LC L U alsalx + +al CUC .- 0- .- -1 + a +- N In .- C iuC +In 0- mc- L al O 0 ? .; --LC QalQ v vln C>C alo)alC .-0 8, t C+ m + -=229 .- QCQ 333 0- U+ = .F $ - U-ln ocmal ::.2 0-OL COL al - LL a 9.3 percent in 1978 to 16.05 percent in 1981) I/ greatly increased the burden of the debt service payments on the budget. The share of general debt services in total government expenditure rose from around 5 percent during the

1980s to 11 percent during 1980-82 and 15 percent during 1983-85 (see Tables

6.23, 6.24, 6.25). The high debt-service ratio during 1983-85 resulted in the government's decision to set a Limit on public external borrowing at US$1,300 million in 1985, and US$1,000 million each in 1986 and 1987. -81 The cabinet also relaxed the limit of the debt-service ratio to 11 percent from the previous 9 percent which could not be maintained. When combined with the private external debt, the debt-service ratio for Thailand in 1983 was about

20 percent. -91 [share of GNP or X?] The limits set on public external borrowings mean that in the next few years the growth rate of the economy will be reduced, ceteris paribus, as a result of the decrease in foreign resources. The lesson 1earn.ed is that the- public sector has tended to overspend, thus enabling the country to grow faster than permitted by domestic resources alone. This practice was satisfactory in the beginning phase of borrowing in the context of the stable economic environment of the 1960s and early 1970s. However, when the environment became much more volatile, heavy dependence on foreign resources became Less problematic. The high debt-service payments made it possible for resources to be drawn out of the country than coming in through foreign borrowing in a given year. This negative net flow would be a burden on the external balance as well as on the internal economy. The low tax-GDP ratio already mentioned in Chapter 6 can thus in part be explained by the fact that the government had been able to tap resources from foreign countries rather easily to finance its budget deficit. While the tax-GDP ratio has been around 11-12 percent for the past two decades, the ratio of government expenditure to GDP has increased from around 12.5 percent during 1960-62 to 18.2 percent during 1983-85. The increasing budget deficit has been financed through public debt, both domestic and external. However, the current lack of a consolidated budget, in ~hichboth the budgetary and extra budgetary funds are shown for both government agencies and state enterprises, does not allow an analysis to the degree of dependence of the public sector on public domestic debt and public external debt.

Another interesting issue is the crowding-out effect that government expenditures can have on the economy. However, research work on this topic is rather scarce. The examination of the pattern of public and private sector investment during the period 1961-71 (first two development plans) indicates that there was a positive relationship between the two variables since most public investment was concentrated in infrastructure activities which very likely provided a stimulative effect on and complemented private sector activities. This pattern is not repeated in the 1972-85 period when public and private sector investments tend to move in opposite directions (see

Figures 1 and 2 which are based on the data in Table 7.3). [This needs to be analyzed further. ]

In a Bank of Thailand study using 1970-81 data, Ganjarerndee found

that, in a static simulation, increases in government investment, though putting upward pressure on interest rates in the credit market, did not have a

significant crowding-out effect as the positive impact of higher growth pushed up the level of private investment. Nevertheless, a dynamic simulation of the

same model and period showed that some crowding-out occurred but the effect was quite small. A possible explanation for such a small crowding-out effect

Table 7.3 Private and Public Fixed Capital Formation and their Proportions to GDP in Constant Prices (million baht and percentage)

Gross F ixed Private Investment Public Investment Capital Formation Percent Percent Percent Year Leve l of GDP Leve l of GDP Leve l of GDP

1970-85 at constant 1972 prices

Source: NESDB, National Income of Thailand, various issues. e - estimate is that both the public and private sectors have depended on foreign finances quite substantially. External resources, however,, have recently become more difficult to obtain and this should have an impact on the growth rate of the economy in the next few years. Apparently, it has already had a deterrent effect on the Eastern Seaboard Project, a gigantic project targetted in the fifth plan (1982-86) for industrial and community development in the eastern seaboard region.

On the monetary side, the most prominent shift in policy concerns the exchange rate. The traditional stable exchange rate policy pursued during the

1960s could no longer be maintained as the world financial conditions changed in the early 1970s. After the breakdown of the Bretton Woods System in late

1971, the U.S. in 1971 and 1973 devalued the dollar by 7.89 percent and 1-0 percent, respectively. In order to maintain a stable rate with -the U.S. dollar, the baht was devalued accordingly (see Table 7.4). Although the major industrialized countries had adopted some sort of floating exchange rate since

1973, the Thai monetary authorities still attempted to maintain a stable exchange rate of the baht vis-a-visthe U.S. dollar, apparently in the belief that the stable par value had previously helped to build confidence in the world trade system and that Thailand had benefited from it. -101 The Exchange Equalization Fund (EEF) was quite instrumental in maintaining the stable value of the baht vis-a-vis the U.S. dollar between

1963-78. The Fund bought and sold unlimited amounts of U.S. dollars every day to maintain the par value within the margin agreed with the IMF. However, several major world monetary crises in the early 1970s revealed that the par value system could not be maintained. On March 8, 1978, the Thai government adopted a "basket of currencies'' approach by linking the baht to a group of Table 7.4 Exchange Rate Adjustments, 1955-84

Effective Date Details

March 1955 A new baht parity was set at 0.0444335 gram of fine gold or 20.00 baht per U.S. dollar.

October 20, 1963 Devalued the baht by fixing the baht parity at 0.0427425 gram of fine gold, or 20.80 baht per dollar.

May 8, 1972 Devalued the baht by 7.89 percent along with the depreciated dollar in December 1971. The exchange rate remained at 20.80 baht per dollar.

March 23, 1973 . Devalued the baht by 10 percent in accordance with the depreciated dollar in February 1973. The exchange rate remained at 20.80 baht per dollar. July 14, 1973 Revalued the baht by 4 percent; the-exchange rate went back to 20.00 baht per dollar.

March 8, 1978 Adopted the "basket" approach linking the baht to a group of currencies of major trading partners. The baht was revalued to 19.80 baht per dollar.

November 1, 1978 Introduced the system of daily fixing of exchange rates.

May 12, 1981 Devalued the baht by 1.1 percent to 21 baht per dollar.

July 15, 1981 Devalued the baht by 8.7.percent to 23 baht per dollar, and abolished the daily fixing system.

November 5, 1984 Devalued the baht by 14.8 percent to 27 baht per dollar, and reintroduced the "basket" pegging.

Source: Sathirakun, Kamchorn (1985:312). currencies of major trading partners. 111 Eventually on April 21, 1978, theIMF members signed an Article of Agreement to abolish the par value and let each country adopt an exchange rate system suitable for its own situation.

Another major change was the "daily fixing" method introduced by the EEF on

November 1, 1978, whereby the EEF and the commercial banks jointly determined the exchange rate, instead of the EEF being the sole determining agent as in the past.

During the period that the daily fixing method was in use, the Bank of Thailand claimed that it had helped the development of the exchange market and stimulated forward activities since commercial banks bought and sold foreign exchange with the EEF daily, so as to reach the equilibrium rate.

However, the rise of the dollar value in 1981 and the deterioration in the country's balance of payments created a speculative mood that the baht would be devalued. In the first half of 1981 the EEF intervention in the exchange market was substantial in order to prevent the rapid decrease in the baht value. As a result, international reserves were rapidly depleted and finally on July 15, 1981, the announcement of the baht devaluation by 8.7 percent was made and the daily fixing method was abolished. The exchange value of the baht was again determined solely by the EEF and tied closely to the U.S. do1 lar . The movement of the external exchange market again affected the Thai currency in 1984. The value of the baht was rising rapidly together with the dollar value which resulted in an overvaluation of the baht vis-a-vis other important currencies such as the British pound and German mark. The overvaluation of the baht would, of course, hurt the-trade balance and consequently the domestic economy. The monetary authorities decided to make adjustments on the exchange system of the baht and, on November 2, 1984, reintroduced the basket of currencies approach; the exchange rate of the baht was set at 27 baht per dollar, a devaluation of about 15 percent. This readjustment appears to have mitigated the trade deficit in 1985 (see

Table 7.5).

It is clear that disturbances in the world economy were the determining factors that forced the Thai monetary authorities to depart from the traditional stable exchange rate policy. The volatility of the world financial system in the 1970s and 1980s necessitated the domestic adjustments in contrast to the stable period of the'1960s.

Another important policy issue concerning the exchange rate is the effect of commercial policies on the real exchange rate. Several studies have shown that, prior to the recent adjustment, the nominal exchange rate of the baht had been overvalued. Many studies give only point estimates of the equilibrium exchange rates for a particular year. However, SiamwalLa and

Setboonsarng (1986) have recently provided time series estimates of the equilibrium exchange rates for the period 1961 through 1983 (Table 7.6). The most important factor causing overvaluation has been import taxes which give protection to domestic industry. It is evident that the overvalued exchange rate has discriminated against export producers, especially of the primary commodities, although the impact of rice taxes has been observed to decline

'over time.

Apart from the above adjustments in exchange rate policy forced basically by external conditions, the Bank of Thailand undertook another major shift in monetary policy in 1984 by having. recourse to quantity control in addition to the price (interest rate) control. Alarmed by the huge deficits Table 7.5 Exchange Rates and the ~alanc'eof Payments (BOP), 1974-85

Current Free Market Rates Trade Balance Account Balance ' IMF Par Value of Exchange (B/$) -a/ BOP (m. ~aht) (m. ~aht) (m. ~aht) Year with US$ Buying Selling (- deficit) (- deficit) (- deficit)

-a/ Simple average free market rates of exchange (on demand) of all commercial banks in the Bangkok Metropolis. -b/ The par value system was abolished on March 8, 1978. The exchange value of the baht has been tied to a basket of currencies since then. Source: IMF par values are from Bank of Thailand (1985). Rates of exchange and BOP items are from Bank of Thailand, Monthly Bulletin, January 1980, and Quarterly Bulletin, June 1986. Table 7.6 Actual and Equilibrium Exchange Rates (baht per do1 lar, nominal

Actual ~~uilibrium Equilibrium Alternative Estimates Exchange Exchange Rate Exchange Rate Concept of Year Rate (EERI ) a/ (EER2) b/ Exchange Rate Estimate Source ------Akrasanee- (1973 ) Chatdarong ( 1975 - - - Ajanant et al (1984) - - - (EERl -) Sornman- (1981) - - Anantpiriyakul (1985) - Tawarangkwn (1984 )

-a/ EERl is the equilibrium exchange rate taking account of the commercial policy impact but ignoring current account deficit. -b/ EER2 includes adjustment to el iminate the current account deficit.

Sources: 1. Actual exchange rate: Bank of Thailand (simple average buying rate). 2. Equi l i brium exchange rate: see Siamwal la and Setbwnsarng (1986: 158-165). in trade and the balance of payments in 1983, the Bank of Thailand decided to take a drastic measure against the previously rather free expansion of domestic credit by subjecting the commercial banks to a maximum credit expansion rate at 18 percent of the 1983 level. The aim of this policy was to contain imports but the increase was applied to total credit expansion.

Although the import and the size of trade balance were reduced in 1984, there was a tradeoff in terms of a slowdown in investment and long-term growth. The .

18 percent credit ceiling was abandoned by the Bank of Thailand in August

1984.

The structure of financial institutions in Thailand also became more diversified in the 1970s. In 1969-70 there was an upsurge in finance business as two large commercial banks established two big finance companies in the form of joint ventures with foreign banks. Prior to this the finance and securities business had been rather inactive. -121 After a few years there was such an impressive growth both in terms of number and activities that the monetary authorities felt it necessary to introduce systematic regulations on the finance business. In September 1972, the Finance Business Act was proclaimed in the Revolutionary party's Announcement No. 58. This Act brought the finance business under the control of the Ministry of Finance and the Bank of Thailand so that finance companies are now required to apply for licenses from, and to be regulated by, the monetary authorities instead of the Ministry of Commerce. The Act also acknowledges four major areas of finance business, namely, finance for commerce, development finance, sale and consumer finance, and housing finance. With a separate license finance companies are also authorized to engage in securities business such as dealing, underwriting, and brokering. The existence and growth of finance companies apparently reflect public'demand, particularly for consumer credit. During 1973-74 there was a sudden rise in the popularity of hire purchase, especially of automobiles, which could be explained by the inflationary expectation of the consumers.

-131 As finance companies are not subject to the same legal ceiling rates as the commercial banks they can charge higher rates, sometimes up to 20 percent per year while the legal ceiling rate was 15 percent during 1974-79. With no ceiling on loan rates, they can also attract savings from households by offering higher rates of interest than commercial banks. In 1977, finance companies accounted ior 1.0.8 percent of tdtal household savings mobilized by financial institutions, compared with only 1.9 percent in 1971. -141 The growth in the number of finance companies from only 14 in 1969 to 118 in 1976 reflects the liberal attitude of the monetary authorities, as well as the lucrativeness of this business during the 1970s.

Although the finance companies are potential competitors of the commercial banks, the regulations governing them indicate a complementary rather than competitive role. Their sources of funds are confined to large depositors as they can draw funds from the public by issuing promissory notes which must be above a certain amount. They are then forced to rely to a great extent on credit lines from commercial banks and funds from business corporations. They can also tap funds from unorganized markets rather than commercial banks since they are not subject to the legal ceiling rates.

Furthermore, considering that about 30 finance companies have Thai banks as major shareholders, active competition between finance companies and commercial banks is rather difficult to conceive. The Bank of Thailand also set different minimum capital-risk asset ratios for commercial banks and finance companies. This ratio was 2 percent for finance companies in 1976 compared with 9.0 percent for commercial banks. The ratio was later raised to 3.5 percent but this was apparently still too low as it could not protect depositors from the mismanagemept of the

Raja Finance Company in 1978. In 1979, the ratio was raised to 5 percent but several finance companies started to face financic problems in 1981 when the ratio was once again raised to 6 percent--still about 2 percentage points less than that of the commercial banks which is presently set at 8 percent. The finance companies can thus expose themselves to a greater default risk than commercial banks. In 1979, a famous finance company, Raja, became insolvent owing to tight money conditions and the loose operation within the company. . . The insolvency of Raja and several other finance companies in 1983-85 has made depositors more aware of the risk involved in earning higher rates of interest

from them. Although the growth of finance companies in the past 'reflected the expanding need of the growing economy for larger and more diversified credit markets, the liberal attitude of the Bank of Thailand in letting this happen and its inability to provide control and careful examination of the operation

of these finance companies were held responsible for the recent financial

crisis.

7.2 Labor and Wage Policies

Although on the books labor policy.has existed for a long time, the

role of workers in influencing labor laws and wages has been negligible until

the 1970s. The minimum wage had never been used in Thailand until 1973. The

development of the industrial sector has made labor an important issue despite

the fact that most of the work force in Thailand is-still in the 'agricultural

sector. In this section we look at labor relations policy and wage policy. TPE~-p~-7/4/1/87 7.2.1 Labor Relations Policy

Writing in 1953, E.L. Fogg observed that "[iln Thailand, the term

"organized labor" is, for the time being, a self-contradiction. Only a small fraction of the workers are organized. Labor organizations are removed from the laborer and often represent outside interests at work ;o control the

1.aborer." -151 Later works on labor movements in Thailand seem to support Foggts observation. -161 Since the signi-rig of the Bowring Treaty in 1855 until the 1950s the major urban labor force was comprised mostly of Chinese immigrants while the majority of the Thai labor force stayed in agriculture and were appropriately considered farmers rather than laborers. In this context, the government was not much interested in issues concerning labor welfare or industrial relations.

The first worker association in Thailand was formed in 1897 and named the Tramway Workers' Association, as it was formed by tramway workers under . . the Danish Siam Electricity Company. -171 However, this association.cannot be considered a labor union in the modern sense since it was for the purpose of members' welfare and mutual assistance rather than for political purposes or sfor bargaining with the employer. Other worker associations were for the purpose of members' welfare as well.

The significance of laborers and their union activities came with the industrial expansion after the 1932 revolution. After the Second.World War,

Pridi Panomyong, in accordance with his political and social ideology, set up in 1944 a trade union called the General Trade Union Association. Three years later the name was changed to Central Labor Unions (CLC). -181 The main reason for government support for the union was- the desire of the government to become a member of the United Nations and - it needed a vote from Russia. When Field Marshal Phibunsongkram came into power in 1947, he set up another trade union, the Thai Labor Union (TLU), in 1948 to offset the political influence of the CLU. It was reported that management and financial support for the TLU came mainly from the government. -191 Thus, the establishment and operation of the first two trade unions in Thailand did not come from the workers themselves but rather through the desire and manipulation of influential political Leaders. There was no law to govern the activities'of the.trade unions until the Labor Act of 1956 was enacted. -201 This act spelled out the protection of labor in regard to working hours, holidays, welfare, and so forth, but, most importantly, it.legalized the establishment of trade unions and set up a code of conduct for labor disputes. The short-lived period during which this act was effective (January

1957-October 1958) was considered the golden moment of labor union activities. Field Marshal Sarit Thanarat repealed the Labor Act when he came into power in 1958, although some parts of this act concerning working hours, holidays, compensation, and so.forth, were retained by several notifications . / of the Ministry of Interior. -211

The Revolutionary Party Announcement Number 19 on October 31, 1958, which repealed the Labor Act of 1956, stipulated that disputes between employer and employee would be arbitrated by the Ministry of Industry. (In 1965 the dispute settlement procedure set out in the Revolutionary Party

Announcement No. 19 was revised and became an act, but labor unions were still not allowed.) Although labor unions were banned from 1958 to 1972, a number of labor disputes leading to work stoppages still occurred (see Table 7.7).

However, strike actions during this period were not of much significance. Being a member of the International Labour Organization, while banning labor unions and their activities, put Thailand under heavy criticism by the ILO and other member countries who allow free labor movements. In addition, the policy of private industrial expansion during the 1960s also created a larger pool of urban 1aborers.which resulted in more conflicts between employers and employees. The modern large factories no longer contain the patron-client relationship between employer and employee which seemed to have retarded the development of worker class consciousness in the past.

Finally, the government yielded to the pressing conditions and promulgated a new labor law permitting the formation and registration of non-polit ical worker associations in March 1972.

The 1972 labor law gave power to the Ministry of Interior to make announcements concerning labor protection, minimum wage, and labor relations, including establishment and control of employer and worker associations. The sections on labor relations were later repealed by the Labor Relations Act of

1975. Prior to the promulgation of this Act, both employers and workers had become more alert and active in the protection of their own interest and found the existing decree unsatisfactory. The ouster of the ruling military clique in 1973 brought a new constitution'to Thailand in 1974 in which the right of both employers and workers to form unions was explicitly guaranteed. This led to the proclamation of the Labor Relations Act of 1975 which has been in effect up to the present time. Apart from spelling out the procedure for dispute mediation, this Act allows workers to form national associations in the same trade across provincial boundaries and permits associations to merge Table 7.7 Labor Disputes and Work Stoppages, 1958-84

Labor Disputes Work Stoppages Average Man-Days Workers Workers Man-days Lost per Striking Year Number Involved Number Involved Lost Worker per Year a/

-a/ Calculated from Man-days lost divided by involved workers. Source: For the period 1958-72, from Ministry of Interior, Department of Labor, Yearbook of Labour Statistics, 1977. For the.period 1973-84, from NESDB, Population and Manpower Division, Fact ~fi,- - which reports that the data are from the Department of Labour. into a national federation. 221 However, it is stated in the act that the unions must be restricted to non-political activities and must not disturb the internal order of the country. -231 Table 7.8 provides a series on the number of labor unions throughout

the whole kingdom during the period 1972-84. The distribution of labor unions

is about equally divided between the Bangkok Metropolis and other regions of

1-the country. However, those in Bangkok are the more vociferous and more

active in the labor movement. Table 7.9 provides data on the number of both

labor and employer organizations in 1985, from which it is evident that the

number of employer organizations is much fewer. The fact that there is only

one employer association federation and one employer council in the whole

kingdom compared with sixteen labor union federations and four labor union

councils may indicate that employers are much more united and better organized

than employees. I-t may al.so be anindication of the lower transaction costsJ

involved and of greater benefits among the employers.

Writing in 1977, Mabry observed that, "The dominant philosophical

trend in the Thai labor movement since 1972 has been conservative... In fact,

there has been little ideology in the Thai labor movement other than

pragmatism. Thai (union) leaders remain keenly aware that survival of the

movement requires accommodation to political power realities. Because leaders

of the movement have espoused traditional Thai values of morality, deference

to legitimate authority, and political independence, the movement has remained acceptable to the established government." -241 In turn, weak labor organizations are preferred by the Thai ruling elites. Influential

--.governmentaland military leaders commonly hold directorships in large

e-nterprises; they share the businessman's fear of the economic power of trade Table 7.8 Number of Labor Unions for Whole Kingdom, 1972-84

Bangkok Metropolis Regions Whole Kingdom Year Initial Withdraw Initial Withdraw Initial Withdraw Total

Source: Central Registration Office, Labour Relations Division, Department of Labour. Reported in Yearbook of Labour Statistics, 1984, Table 7.9 Number of Labor and Employer Organizations in Whole Kingdom, 1985

Organization Bangkok Metropolis Regions Total

Labor organization Labor unions Public enterprise labor unions 8 1 Private enterprise labor unions 137

Labor union federations 5 11 16

Labor union councils 4

Employer Organization Employers associations Employers associations federation Employer councils

Source: Labor Relations Division, Department of Labor. Reported in Yearbook of Labour Statistics, 1985. unions. The technocrats in the government view economic development as a dominant national objective; as far as they are concerned, strong labor unions can produce a climate inconducive to business investment. Though some of them may be sympathetic to the labor movement, they too tend to prefer weak labor organizations.

There are other reasons which help to explain the historical weakness of labor organizations which has persisted up to the present. Writing in

1986, a Thai labor expert offered the following additional factors concerning the nature of the labor market in Thailand. -251 First, most of the urban workers come from the rural sector through temporary migration. Their objective is to return home eventually. Thus they see no need to organize and participate in union activity. Second, the supply of labor in Thailand has rapidly increased (about 3 percent per year) which puts employers at an advantageous position. Workers in the formal ,sector are reluctant to join union activities for fear of losing their jobs which are better paid than in the informal sector. Third, a majority of industrial establishments in the country are of small and medium scale. The employer/employee relationship tends to be more personal in such establishments which deters the development of union activity.

Our observation in this matter, therefore, is that during the 1970s up to the present time the government, through international pressure and the favorable democratic atmosphere during the 1973-76 period, has tried to accommodate the demand from workers by abandoning its hard line attitude towards the labor movement. However, owing to several factors in the Thai setting and careful manipulation by the government, the labor movement in

Thailand has not been able to bargain effectively to protect their interests vis-a-vis the employers. While the government has always given all-out

support, both de jure and de facto, to the development of the entrepreneurial

class since the Sarit Thanarat regime, its policy toward the labor movement has been

at best lukewarm support; at times it has been outright suppressive. -261 7.2.3 Wage Policy

The minimum wage was first introduced in Thailand in April 1973

following the promulgation of general labor laws and the legalization of labor

unions in 1972. The Ministry of the Interior is empowered to set the -minimum

wage through its notifications. Since its inception until 1985, the legal

minimum wage has been adjusted fifteen times. Table 7.10 provides data on

nominal minimum wages during 1973-85 while Table 7.11 presents both nominal

and real minimum wages for the Bangkok Metropolis.

The percentage increase in the legal minimum wage has generally

exceeded the inflation rate, with the exception of 1976 and 1977. It was

particularly high during the democratic period and was minimal following the

bloody massacre at Thammasat University which effectiv.ely suppressed the

democratic movement.

The minimum wage prior to 1978 probably did not have much of an

impact on wage,movements. Since the minimum wage rate was set below the

' average market wage rate for the unskilled. -271 It was not until 1978 that the minimum wage rate was set more or less in line with the average market

wage in which case it should have some impact on the market wage movements.'

Because the minimum wage has not been, and cannot be, strictly enforced, the rate of compliance is low to moderate, applying mostly in the large

establishments in the modern sector. Table 7.10 Minimum Wage Rates by Notification of the Ministry of Interior (baht per day)

- Notification Number Date of Effectiveness Zone 1 b/ Zone 2 b/ Zone 3 b/ Zone 4 b/

April 15, 1973 January 1, 1974 June 14, 1974 October 1, 1974 January 16, 1975 October 1 , 1977 Aug. 28-Sept. 30, 1978 October 1, 1978. October 1 , 1979 October 1 , 1980 October 1 , 1981 September 27, 1982 October 1, 1982 October 1 , 1983 January 1, 1985

-a/ Notification No. 6 was issued on August 23, 1977. Notification No. 7 was issued on August 26, 1977. -b/ The coverage of each zone vaiies slightly among different notifications. Zone 1 covers mainly Bangkok and surrounding provinces. The details of coverage are as follows: Notification No. 1: Zone 1 includes Bangkok, Nonthaburi, Pathumthani, and Samutprakan. Notification No. 3: Zone 1 includes the above provinces and Samutsakorn and Nakornpathom. Notification No. 4: Zone 1's coverage is the same as in No. 3. Zone 2 includes Kanjanaburi, Nakornnayok, Ayudhya, Prachinburi, Lopburi, Rajburi, Prajuabkirikhan, Chainat, , Chiengmai, Petchaburi, Suphanburi, Singburi, Saraburi, Samutsongkram, Angthong, Trad, Rayong, Chonburi, Chanthaburi, Udonthani, Nakornratchasima, Khonkaen, Ubonratchathani, Krabi, Trang, Chumporn, Pattani, Narathivat, Satun, Songkhla, Ranong, Yala, Nakornsrithammarat, Pattalung, Surathani, Pangnga and Phuket. Zone 3 includes all other provinces not in Zones 1 and 2. Notification No. 5: Zone 1 as above. Zone 2 as above but excludes Udonthani, Nakornratchasima, Konkaen, and Ubonratchathani. Notification No. 7: Zone 1 to Zone 3 as above. Zone 4 includes Phayao. Notification No. 10: Zone 1 to Zone 2 as above. Notification No. 11: Zone 1 includes above provinces and Ranong, Pangnga, Phuket, Chonburi, Saraburi, Nakornratchasima, and Chiengmai. Zone 2 includes all other provinces not in Zone 1. Notification No. 12: Zone 1 as above. Zone 2 includes above provinces and Mukdaharn. Notification No. 13- Zone 1 as above, but excluding Chonburi, Saraburi, Nakornratchasima, and No. 15 Chiengmai. Zone 2 includes Chonburi, Saraburi, Nakornratchasima, and Chiengmai. Zone 3 includes all other provinces not in Zones 1 and 2.

Sources: Ministry of Interior, Notification of Minimum Wage Rates, Numbers 1 through 15. Table 7.11 Consumer Price lndex and Real Minimum Wages in the Bangkok Metropolis

Real Minimum Wage c/ Nominal Minimum Wage a/ Consumer Price lndex b/ (in 1976 prices) Year Level % Change Level % Change Level $ Change

-a/ Calendar year. In cases where there are several rates in one year, an average weighted by the number of effective days is used. -b/ Consumer price index for Bangkok Metropolis, 1976 =.loo. -C/ Nominal minimum wage deflated by CPI. -Source: Tabl'e 7.10 and Bank of Thailand, Monthly Report, January 1980, and Quarterly Bulletin, June 1985 for CPI. In a comprehensive study on wages Poapongsakorn (1981) found'th although the nominal average wage of the unskilled in the non-agricultur, sector had risen during the 1970s, the real wage adjusted by the consumer price index had stayed constant with a declining trend in 1980. -281

[clarify] For the agricultural sector, the available data are insufficient 1 for the comp-lete analysis of the labor market. However, Poapongsakorn used the results obtained from two World Bank studies and concluded the following. -29/ There are large seasonal variations in agricultural wage rates and large variations among regions. Both the nominal and real wages in the central and northern regions stayed constant between 1965 and the first oil crisis in 1973, after which they tended to rise in response to the commodity boom during 1973-76. Nevertheless, the wage rates in the agricultural sector remain below those in the nonagricultural sector.

. The low wage rates in the agricultural sector and the phenomenon of generally low wage rates in Thailand can be explained by the fact that the government has deliberately maintained a Low wage policy for a long time through its policy on the pricing of agricultural outputs, particularly rice. Because rice is the main staple and therefore a wage good, the low price of rice through various policy measures already described has kept the labor wage low not only in the agricultural sector but also in the nonagricultural sector. The low income received by rice farmers did not provide an incentive for them to improve the technique of production nor to increase their.labor demand. The low price of rice has also meant a low cost of living for urban workers, making it possible to live at subsistence level with low urban wages. Besides pricing policy, the sectoral bias in favor of industry

pursued by the government since the early 1960s has distorted the factor-price

relationship between labor and capital. The low price of capital through

various tax exemptions has lured enterprises to become more capital intensive

than otherwise. This has not helped to expand the demand for labor in the

industrial sector. Another factor which also adds to the persistency of low

wages comes from the increase in population and with it the expansion of the

labor force. Although the rate of population increase after 1970 has been

lower than that for the period 1960-70, the rate of increase of the labor

force has been higher because of the change in the age structure. The labor

force participation rate increased from 66 percent in 1974 to 73 percent in

1981, and the average rate of increase in labor force participation during the 1970s has been much higher than that of the 1960s. -301

Even with the introduction of the minimum wage law in 1973, the :f government has never shown a serious intention to set it above the average _--- ___ - - -- _ __ - - -- - market rate. In its notification concerning the determination of minimum wage ' [ .-- -- in 1972, the Ministry of Interior announced that a minimum wage should be \ determined such that it is enough for a worker and two members of his family

to live on. Three years later, in 1975, the second notification on the

determination of minimum wage specified that a minimum wage should be

determined such that it is enough for -one ~orkerto live on. This guideline has been used up to the present. Besides, there has never been any serious

enforcement of the minimum wage law. Poapongsakorn (1981:59) offered the

opinion that such behavior of the government meant that the minimum wage law

was only a token gesture to be used to pacify laborers and the international

organizations. The low wage rates, perhaps, can be a factor in explaining the generally low unemployment rates in Thailand. -311 The Labour Force Surveys show that during 1974-76 the average unemployment rate was only 0.64 percent and that it increased to 1.14 percent during 1977-81. -32/ As the Thai economy encountered economic recession in 1982, the rate started to climb. During the second half of the 1970s and early 1980s, there was a sizable adjustment of

Thai laborers to the generally low wage conditions at home and the increasing labor demand from the middle-eastern countries. The oil crisis in 1973 and its aftermath created many nouveau riche countries in the OPEC world. Their, demand for migrant workers, especially in construction industry, quickly expanded as a result of their desire for rapid development in basic infrastructure. Thai workers, especially from the Northeast with the lowest average income of all the regions, quickly responded to this opportunity and began to migrate to the middle eastern countries. Although external migration involved a large relocation cost, Roongcheevin et. al. (1982) found that the (4fl income earned from working the same job in other countries is between 2.3 to

5.3 times higher than that earned at home. -331 After working for a year, a worker on an average can send home their earnings amounting to about 100,000 baht. -341 When compared with the average annual household income for the whole kingdom of 40,536 baht in 1981, the income earned from working.abroad is obviously very attractive. -35/ For many, it evidently more than outweighs all other costs and problems involved with external migration. The increasing number of Thai workers abroad can be seen in Table 7.12. It is worth noting that with the recession to the Thai economy in 1982, the number of external migrant workers rose sharply. Table 7.12 Number of Thai Workers Abroad, Registered at the Department of ~abour, by Reg ion, 1975-84

Middle East 6 Africa Asia Year Saudi Arabia Other?/ Other!/ Other c/ Total

-a/ Includes Bahrain, Dubai, Iran, Iraq, Israel, Jordan, Kuwait, Oman, Qatar,United.Arab Emirates, Yemen, Algeria, Libya, Ethiopia, and Tanzan i a. . . -b/ Includes Malaysia, , and Macao. -C/ Includes U.S.A., wake Island, and France.

Source: Department of Labour, Overseas Employment Services Division, as published in NESDB, Fact Wok on Labour, Employment, Salaries and Wages, May 1982, for the data during 1975-78, and December 1985 for the data during 1979-84. Apart from bettering their own lot, external migrant workers have had a favorable effect on the country's balance of payments through their remittances. Table 7.13 shows the increasing trend and importance of these remittances. However, such external labor demand may become saturated and the government has to be prepared for future problems when such favorable conditions no longer exist.

7.3 From Import Substitution Industrialization to Export Promotion

As mentioned in Section 6.2.3, by the early 1970s the promotion of

industrial investment through import substitution reached its 1-imits. Apart

from its contribution to rapid economic growth, it had had little effect on

employment and appeared to have adverse effects on the balance of trade and

the balance of payments. We first discuss several factors which influenced

the direction of industrial policy toward export promotion and then examine

the various policy measures used to move the economy that direction.

7.3.1 Factors Influencing the Change of Direction

We left the discussion on the industrial policy during the 1959-72

period with the recommendation of the World Bank study in 1970 for Thailand to

move toward the promotion of export-oriented manufacturing production. The

Asian Development Bank study on 's economy published in 1971

also warned Thailand of the limits of import substitution and recommended an

orientation.toward .the export market. A361 Again in 1972, the World Bank gave

a similar warning and recommendation. A371

In fact, such warnings and recommendations appeared as early as in

1963 in the Bank of Thailand annual report, when Dr. Puey Ungphakorn was the

governor. The Bank of Thailand 1963 report stated that the protection of

import substitution industries would create high-cost and inefficient Table 7.13 Remittances Sent by Thai Workers from Abroad (through BOT), 1975-83 (million baht)

Total as % Total as $ From Saudi From Al l of Merchan- of Services Year Arabia Singapore Others Total dise Exports Exports

-a/ The figures for the total during 1976-78 are from N. Poapongsakorn (1983:140).

Source: Bank of Thailand as reported in NESDB, Fact Book on Labour& Employment,Salaries, and Wages, May 1982 for the data for 1975-78; December 1985 for the data for 1979-83. The values of merchandise and services exports are from Bank of Thailand, Quarterly Bulletin, December 1981 and June 1986. enterprises and recommended the government to promote export industries. -38/

It is probable that such thinking had been prevalent among many Thai technocrats so that when the recommendation came from the two prominent international organizations, it was quite readily taken up by the Thai government.

The factor most influential in changing the policy direction was perhaps the many serious economic problems faced by the Thai economy during that time. First, although the import substitution policy had been able to slow down the average increase in the imports of consumer goods to about 3.3 percent per year during 1960-72 (Table 7.141, the average rate of increase of all other imports exceeded 10 percent per year. Because the promotion of investment law provided exemptions and reductions of import duties on capital goods and raw materials, it was attractive for producers to bring in these imported goods. Therefore, the dependency on imported goods remained in-the face of evident structural change. The rate of increase in total imports . exceeded that of total exports, thus resulting in a chronic and increasing trade deficit. Furthermore, the deficit in the balance of payments in three consecutive years (1969-71) caused a great deal of anxiety for the government. In addition, the decline of the inflow of foreign investment during 1970-71 and the redu'ction of the United States military expenditures in

Thailand before the end of the Vietnam War.in 1975 did not offer good prospects for the country's balance of payments. -391

Second, the domestic market for consumer goods was small and limited. Although the expansion of import substitution industry was relatively easy in the early phase when ready markets for imported consumer goods which had been shut out by protection and quantitative r.estrictions, the difficult phase came when the industrial expansion was hampered by the TPEG-PT-7/4/1/87 Table 7.14 Value and Proportion of Imports by Economic Classification, 1960-72 a/ (million baht)

Compound Annua l Growth Rate 1960 1963 1966 1969 1972 1960-72 (percent)

Consumer goods 3,365 (35 .O )

Intermediate products 1,746 and raw materials (18.1)

Capital goods 2,367 (24.6 )

Other imports b/ 2,144 (22.3

Total imports 9,622 12,803 18,504 25,966 30,875 10.2 . .

-a/ Numbers in parentheses are percentage shares. -b/ Other imports include and parts, fuel, lubricant5, and misc.ell~aneous imports.

Source: Customs Department as reported in Bank of Thailand Monthly Bulletin, December 1973 and December 1979. smallness of the domestic market and the need to Look for an export market arose. The growth rate of value added of consumer goods during 1971-72 slowed down slightly from the previous years (Table 7.15). However, the Limited market for the consumer goods may be more clearly seen through the comparison with that of intermediate and capital goods which had much higher growth rates. Besides growing from a smaller base, it also indicated that the markets for intermediate and capital goods were still far from saturation.

Third, despite the rapid expansion of industrial output and its importance in the overall growth rate, the contribution of industry to employment had been modest. The proportion of Labor employed in the manufacturing sector only increased from 3.4 percent in 1960 to 4.1 percent in

1970 (Table 7.16). The actual employment data must be Lower, but for the purpose of determining the Long-term trend, the data on the economically active population taken from successive censuses should be more reliable and comparable. -401 More than 60 percent Of the labor force employed in manufacturing have been concentrated in the central region since 1960 up to

1980, about half of which is concentrated in Bangkok. -411 The relatively small share of manufacturing in employment frequently Led to criticism of past industrial policies,

7.3.2 Attempts at Export Expansion

Given all the above factors, it is not surprising that among the stated objectives in the third economic and social development plan (1972-76) were the correction of the balance of payments problems and the increase in overall employment through policy measures to promote exports and adjust the import structure. -42/ In 1972, the investment promotion law was replaced by the National Executive Council Announcement No. 227 (B.E. 2515) which was intended to give greater incentives to export industries. Also for the first TPE~-p~-7/4/1/87 Table 7.15 Average Proportion and Growth Rate of Value Added in Manufacturing, 1959-72

Average Proportion Average Growth Rate (percent) 1959-62 1963-66 1967-70 1971-72 1959-62 1963-66 1967-70 1971-72

Consumer goods 75.7 70.3 62.7 60.4 8.2 7.6 9.3 7.2

Intermediate goods 15.7 19.2 23.4 25.1 3.5 19.9 14.2 15.1

Capital goods 7.9 9.4 12.0 12.3 9.8 15.1 18.7 10.5.

Others 0*7 1 .I 1.9 2.2 17.1 28.4 26.9 1.8

Total manufacturing 100.0 100.0 100.0 100.0 7.5 10.5 1 1.6 9.3

-Source: Calculated from NESOB data in constant 1972 prices. Table 7.16 Population and Economically Active Population by Industry, 1947, 1960, 1970, 1980 -a/

Total population 17,442,689 26,257,916 34,397,374 44,824,540

Economically active 8,992,098 13,772,104 16,652,267 23,140,437 population -b/ (100.0) (100.0) (100.0) (100.0) Agriculture, forestry, 7,623,181 11,334,382 13,201,901 16,642,693 hunting, and fishing (84.8) (82.3) (79.3) (71.9)

4- Mining and quarrying 4,805 29,568 86,647 92,167 (0.05) (0.2) (0.5) (0.4)

Manufacturing 195,875 471,027 682,640 1,319,639 (2.2) (3.4) (4.1) (5.7)

Construction

Electricity, gas, 2,182 15,535 25,287 61,999 water, and sanitary (0.02) (0.1) (0.1) (0.3) services

Commerce - 706,974 779,904 . 850,485 1,606,345. (7.9)' - (5.7) (5.1) (6.9)

Transport, storage, 65,860 and communications (0.7)

Services

Banks and other -- financial institu- tions, insurance, and real estate

Activitites not 111,374 adequately described (1.2) or unknown

-a/ Figures in parentheses are percentages. -b/ The definition was 14 years and over in 1947 and 11 years and over for 1960, 1970, and 1980.

Source: 1947, 1960, and 1970 data are from NSO, Statistical Yearbook: Thailand, Nos. 22, 24, 31, respectively. 1980 data are from NSO, -Population and Housing Census, 1980. time, the investment law showed concern for the locational distribution of

industries. Many features of the 1972 investment law were the same as those

in the 1962 Act and its amendment. We shall note here only the major

differences.

(a) Fiscal Incentives

There was no longer any exemption or reduction of imported material

1- inputs for promoted firms but the exemptions on imported capital equipment

remained. The grace period of income tax exemption for promoted firms was

also changed from 5 years to between 3-8 years.

(b) Export Promotion Measures

Permission for promoted firms to export products was retained and

products of promoted firms were also exempted from export duties and business

taxes. There were additional incentives through the exemption of import

duties and business taxes for imported material inputs and for products to be

re-exported.. Promoted firms were also allowed a 2 percent deduction on the

increase of income over the previous year for income tax purposes, when the

income arises from export activities.

(c) Locational Policy Measures

The idea of investment promotion zones was -first introduced in the

1972 law. In addition to all the normal rights and benefits stated in the

law, firms in promoted zones would receive many additional tax and duties

exemptions and/or reductions. (For more details of these additional benefits

see footnote 43.) It should be noted that many features of the 1972 investment law

-- remained the same as in the previous law with protection for domestic

- industry. Although with regard to fiscal incentives the exemption or reduction of import tariffs on imported material inputs was no longer granted,

there was an additional protective measure stated in Section 27 of the 1972

law: the Bank of Thailand was empowered, subject to the cabinet's approval,

to set special fees on imported products which were in the same classification

as those of the promoted firms. In addition, the activities eligible for

promotion were extended to include transportation, fisheries, commercial

agriculture, animal husbandry, business and export trade, tourism, and land

development for industrial areas. The 1972 investment law also allowed a

considerable degree of discretion to be exercised by the Bank of Thailand in

granting incentives.

In response to the additional incentives given, the number of

applications for promotion in 1973 was triple that in 1972, although the

number of firms that actually received promotion certificates from the Board

of Investment only doubled (see Table 7.17). It should be noted that,

- although the number of applications dropped by more than half in 1974,

probably because of the uncertainty about the political climate and the effect

of the 1973 oil shock, the number of firms granted promotions in 1974 was the

highest ever in any single year. This could be due to the attempt of the

Board of Investment to stimulate investment by speeding up the granting of

certificates for firms that had applied in the previous years.

In 1975 and 1976 there was a further drop in the number of

applications to 111 and 119, respectively, as compared to 552 in 1973 and 228

in 1974. The drop in the number of applications for investment promotion

during this period is understandable given the fact that the oil crisis had

created a cost-push inflation for the Thai economy and the "democratic period" of 1973-76 witnessed some political instability as demonstrations, protests,

and strikes abounded. Furthermore, the ending of the Vietnam War in 1975 TPEG-PT-7/4/1/87 n n 9 n ?m C 22 n ;t It,2 n qer m- 15 I

Q m 'I ?m "r.2 % '" 2251 n n -n 22 R - .ma -2 9 ,' ? 4, , '?'I 2. -'In n n -'I ,

15 C C - .N ?'I, 2 $2 11 QCn - - 3 fis r-i-4 ,,, - 2 '0. 2 'I' Y? $ - 'I N 'I- - - - i 'I . - d~OI :rr:- r $5C ?? gar s - -N N - C. 95 9-, s 'I 20 n (Y.. - s. . N'I.

- 9,- 3- ?C 2 2n i? S8 2m N KC- rr! 4 'I - 'I C --CN 48 n - .. .. C 8. $s ?"" 0.9. 0.9 Cbn CCN 3 CC CC z g2 3 ?lo* 5. n'I n'I 'I - .. .. ? U) n 0.0. 0.9. NQN rn s 22 i%Z 'I CC CC -en C C -. -'I. -2 2 2n resulted in not only a decrease in the U.S. military expenditures in Thailand but also a prevalent fear of communism. Among these uncertainties, the general investment level naturally slowed down especially in real terms. The

Board of Investment, however, was very concerned about the situation; in its

1976 annual report, written after the October 6 massacre, it expressed disapproval of the labor movement and overall political instability. The

Board of Investment had also prepared for amajor revision of the investment promotion law which it considered necessary to bring back a favorable climate for investors. On April 29, 1977, the Investment Promotion Act B.E. 2520 was enacted and has been in effect up to the present time.

The 1977 Investment Promotion Act puts the Prime Minister as the chairman of the Board of Investment and the Minister of Industry as the vice chairman. The prime Minister has the authority to appoint not more than 10 other competent individuals to act as members and the Secretary General of the

Board of Investment is a member and secretary to the Board. This is seen as an improvement in status for the 'Board of Investment since previously all its members were appointed by the Cabinet. The provisions of this Act give the

Board of Investment considerable discretionary authority to determine the list

of activities eligib1.e for promotion; to select investment projects that are

to receive promotion privileges; to set conditions for these projects; and to

determine the extent and the length of duration of promotion privileges.

Furthermore, the Investment Service Center (ISC) was established by this Act

to assist investors in obtaining permission and services related to

investment. -44/

The various incentives provided by the 1977 investment law are

summarized in Table 7.18, from which we can see that more fiscal incentives, Table 7.18 Summary of Various Incentives Provided in the Investment Promotion Act, B.E. 2520 (1977) a/ Fiscal Incentives 1. Exemption from import duties and/or business taxes on machinery as may be approved by the 001.

2. If the BOI finds it inappropriate to grant the above benefit, it may grant a reduction of 50 percent of the rate of import duties and/or business taxes, or none.

3." Up to 90 percent reduction of import duties and business taxes on imported raw and essential materials.

4. Exemption from income tax on the net profit for a period between 3 to 8 years as prescribed by the BOI.

5.* If losses are incurred during the period of income tax exemption as above, the promoted firms are permitted to deduct such losses from the net profits accrued after the expiration of the exemption period but not more than five years after the expiry date of such period.

6.* Fees of goodwill, copyright, or other rights from the promoted firms will be exempted from computation of taxable income for a period of five years subject to rules and procedures prescribed by the BOI.

7.* Dividends derived from promoted activity during the period of income tax exemption will be exempted from the computation of taxable income.

Protective Measures

1. The BOI has the power to impose special fees on imports of products of the same kind as those produced by promoted firms. .The rate imposed depends on the BOI's consideration.but will not exceed 50 percent of the imported prices inclusive of freight and insurance.

2.* In the case where the BOI considers that the above imposition of special fees is inadequate to protect the promoted firms, the Ministry of Commerce shall ban the imports of those products in accordance with the law on the control of exports and imports.

3." Governmental agencies, organizations, or enterprises will not be allowed to get exemptions of import duties and business taxes on imported products of the same kind as those of the promoted firms.

Export Promotion Measures 1. Permission to export products of the promoted activity at all times except for reasons of economic and security necessity. 2. Exemption of both import duties and business taxes on raw and essential materials imported for producing products for export.

3. Exemption as above on items for re-exports.

4. Exemption of both export duties and business taxes on products of the promoted firms.

5." Permission to deduct from the assessable income for income tax payment an amount equal to 5 percent of the increased income over the previous year.

Guarantee and Other Permissions

1. Guarantee that the government will not nationalize the activity of the promoted firms, and will not undertake a new activity in competition with the promoted firms.

2." The government will not monopolize the sale of products of the same kind as, or similar to, those produced or assembled by the promoted firms.

3." The government will not impose price controls on products of the promoted activity, except in economic and security necessity, but in no case shall the controlled prices be lower than those deemed appropriate by the BOI.

4. permission to repatriate capital and its returns, interest and principal payments on foreign loan and obligations subject to restriction'set by the Bank of Thailand during times of balance of payments diff.iculties. ' Conditions are the same as in the previous law.

5. Permission to bring in skilled workers, experts, and their families and to own land remains the same.

Locational Policy Measures

These remain essentially the same as. in the 1972 investment law. -b/

-a/ The asterisked items indicate the change or additional measures not existing in the previous investment law.

-b/ See footnote 43. Source: Compiled from Investment Promotion Act, B.E. 2520, (1977), published in Rajakitjanubeksa, No. 94, Section 38, special issue, May 4, 1977. more protective measures, more export promotion measures, and more guarantees

are provided while there is no change in the Locational policy measures.

In response to the better incentives provided by the new Act, the

number of applications for promotion in 1977 more than doubled that in 1976.

The average number of applications per year during 1977-84 was around 300

compared to 230 during 1972-76. Table 7.17 also provides data on total

investment made by promoted firms which began operation in each year. These

figures can be taken as the Lower bound of investment made by promoted firms

since there were more promoted firms than those which began operation. When

we compare the Level of investment made by these firms with the gross fixed

, investment data from the national income accounts, we can see that it

represents between 2-6 percent of the gross fixed investment during 1973-84.

The level of investment indicated by firms granted promotion certificates,

however, exhibited much greater fl.uctuations and varied between 3 to 30

percent of the gross fixed investment during the same period.

As for the effect of export incentives, a study by the Fiscal Policy

Office, Ministry of Finance, in 1984 reported that there were 37 promoted

firms beginning operation during 1978-82 that were involved in exportable

activities. This represents only 15 percent of all promoted firms commencing

operation during the same period. About 69 percent were still involved

in importable activities. The rest were in non-traded and unclassified sectors. -451 It is impossible to make inter-period comparisons since such figures for the earlier period are simply not available.

It appears that although the government had the intention to promote

exports of manufactured goods by revising the investment promotion law in 1972

and again in 1977, yet the structure of incentives given by the law is still biased toward import substitution industry. In addition, the tariff policy, originally intended for government revenue, has provided a general protection for the domestic industrial enterprises whether they receive promotion rights and benefits from the Board of Investment or not. Before 1964, tariff collection was for the purpose of government revenue even though it must have had some -protective effect. In 1964, there was a major revision of tariff rates which meant, for the first time, protection of domestic industry.

During 1964 up to 1985 there have been several tariff revisions, with the general trend of increased protection for finished products and decreased protection for intermediate goods. +/

There have been over 30 studies on the calculation of protection rates at various times and for various sectors. We shall summarize here only the major findings for the industry as a whole rather than go into details of specific industries. Table 7.19 shows that high protection has been provided to import substitution and consumer goods industries especially during the

1960s. In fact, the bias against exports, as indicated by the effective rates of protection, continues into the 1970s and early 1980s even though many regard the period 1972-76 as an export.promotion period. -471 Judging from the policy measures during the 1970s this assessment may not be incorrect because it was in the 1970s that efforts to provide incentives were made in several directions whereas in the earlier period incentives were clearly for only import substitution industries.

1n.addition to the export incentives provided through the Board of

Investment for the promoted firms, all exporting enterprises, whether promoted or not, can also benefit from the following export promotion measures. First, the Bank of Thailand has had an export rediscount facility for all types of Table 7.19 A Brief Summary of Selected Studies on Effective Rates of Protection

Studies Data Period Summary of Findings

T. Suwankiri (1970) 1964 High protection for consumer P. Wongwuthiwat (1975) goods and intermediate goods; bias against capital goods and exports . N. Akrasanee (1973) Import substitution is more P. Wongwuthiwat (1975) protected; bias against export industries.

N. Akrasanee (1975) 1971 Bias against exports (negative P. Wongwuthiwat (1975) ERP); high protection for consumer goods.

1974 Protection for products sold domestically more than for export s . N. Akrasanee and 1971 Great variations of protection S. Jongtanasarsombat 1974 rates among subsectors. In 1978 (1980 1978 consumer durables and transport equipments received highest effective rates of protection.

Minis try of Finance ( 1984 ) 1975 Effective protection for 1982 manufacturing activities discriminated against manufactured exports to a greater extent in 1982 than in 1975. Also more variations in 1982 than in 1975. exports since 1958. During 1959-84 the commercial banks could get a rediscount rate of 5 percent per year from the Bank of Thailand for the export

Loans that they provide at not more than 7 percent per year. Since September

25, 1984, the rates have been changed to 5 percent and 8 percent for small exporters and 7 percent and 9 percent for Large exporters. -481 Although this is a short-term liquidity measure, it helps to reduce interest costs for exporters. The proportion of such export Loans for manufactured.exports has increased from 10.5 percent in 1963 to 57.8 percent in 1983, while that of agricultural products has decreased. -471 Second, since December 1971, the

Fiscal Policy Office has given exporters a tax rebate (with the exception of income taxes and royalties from natural resources) for the total amount of taxes in the process of export production. The Customs Department, since

September 1971, has also operated an import duty refund scheme for exporters who import raw materials for.their export production. Exporters have the opportunity to apply for t'he tax rebate or import duty refund or a combination of both for their export production. -501 Third, the Export Service Center was set up in April 1975 under the Ministry of Commerce to assist exporters on marketing problems and to provide information on Thai export products to

foreign buyers. 511

Another justification for calling the 1970s an export promotion

period is that the expansion of manufactured exports was rapid during this period and such exports made an increasing contribution to the growth of output. The data taken from the World Bank study in 1980 and presented in

Table 7.20 show that the major source of growth in manufacturing output during

1966-78 was from domestic demand. While import substitution had a significant contribution during 1966-72, its weight was very small during 1972-75 and - 7.51 -

Table 7.20 Sources of Growth in Manufacturing Output, 1966-78

Domestic Demand Import Export Period Effect Substitution Demand

Source: World Bank, background paper to the report: Industrial Development Strategy in Thailand, 1980, p. 29. became negative during 1975-78. The contribution from export demand, however, increased from about 6.5 percent during 1966-72 to 8.5 percent during 1972-75 and 28.2 percent during 1975-78.

Given the fact that during 1973-74 there was in general a commodity boom in the world market, the rapid expansion of manufactured exports and its greater contribution during this period should not be a surprise. The export boom in certain products such as animal feeds, thread, and yarn was so great that the government had to ban these products from export temporarily in

1973. This continued through to 1974 when several other conimodities were added to the temporary list of products under export control. -521 Tables 7.21 and 7.22 show, respectively, the data on the value of exports and the ratio of export to the production of manufactured products for certain benchmark years. 531 We can see that during 1970-80 exports grew at an average rate of about 33 percent per year. This growth has slowed down significantly during

1980-84 owing partly to the world recession during 1980-82. The ratio of ' manufactured exports to total exports exhibits an upward trend during 1970-

84. The ratio of manufactured export to total manufactured output, which indicates the degree of export orientation in manufacturing activities, has also increased from about 5 percent in 1970 to 11.9 percent in 1975, 13.6 percent in 1980, and 14.3 percent in 1984.

.From the information above on export expansion and the results of many studies on effectives rates of protection, we may safely conclude that although the tariff structure is still very protective for goods sold on the domestic market, the export incentives provided by the present investment Act and the performance of the export industry indicate that Thailand has moved toward an export expansion phase during the 1970s. Table 7.21 Value of Manufactured Goods Exports, 1970, 1975, 1980, and 1984 (million baht)

Major Industry Group

Food processing a/ Beverages Tobacco manufactures Text i l es Wearing apparel and footwear Leather, leather products and footwear Wood products Furniture and fixtures Paper and paper products Printing, pub1 ishing, and allied industries b/ Chemicals and products Petroleum products Rubber, rubber products, and industries c/ Non-metallic industries Basic metal industries Metal products General machinery (except electr ica l )

~lectricalmachinery . ' Transport equipment Miscellaneous

Total manufacturing . exports a/, b/, c/ 3,681.7 22,955.1 64,382.6 95,895.3

Total exports 14,772 45,007 133,197 175,237

Ratio of manufactured exports to total exports (percent ) a/ Excludes rice and tapioca products even though in the lnputdutput table they are included in food processing industry. -b/ Mote the particularly high value in 1975 due to export value of stock, share, bond, documents, and checkbooks at the value of 3,430.6 million baht. -c/ Excludes rubber sheets and latex.

Source: (1) Export data are from Department of Customs, Foreign Trade Statistics of Thailand, 1976, 1975, 1980, 1984. Total exports are from BOT, Monthly Bulletin, December 1979 and December 1985. (2) The classification of export data by major industry group is based on the codes of BTN, 1/0 and TSlC from Department of Labour, Thailand Standard Industrial Classification, 1972 and NESDB, lnputdutput Sector Classification and Related Commodity Classification, mimeo, 1975. Table 7.22 Ratio of Exports to Output in Manufacturing (percentage)

Major Industry Group 1970 1975 1980 1984

Food processing -a/ Beverages Tobacco manufactures Textiles Wearing apparel and footwear . Leather, Leather products, and footwear Wood products Furniture and fixtures Paper and paper products Printing, publishing, and allied indust- tries b/ chemicals and products Petroleum products Rubber, rubber products, and plastic indus- tries c/ ~on~metailicindustries Basic metal industries Metal products General machinery (except electrical Electrical machinery Transport equipment Miscellaneous

Total manufactured exports ---a/ ,b/ ,c/

Notes and Sources: See Table 7.21. The data on manufacturing output are from NESDB, "~anufacturin~by Major Industry Groups and by Industries: Total Income (~ewseries)," 1970-85. 7.3.3 Industrial Policy and Foreign Investment 541

The many investment promotion laws of the past two decades were meant to attract foreign investment as well as private domestic investors. As a result of official encouragement direct foreign investment has substantially increased from an inflow of only 72 million baht in 1960 to 16,735 million baht in 1984 (see Table 7.23). Direct foreign investment flowed into all types of industry but the majority appeared to be in the manufacturing sector up to the early 19709, with a relative share of about 50-75 percent of the initial paid up foreign capital. Since the latter half of the 1970s the bulk of foreign investment has been in trade and services. Within the manufacturing sector, the majority of direct foreign investment was in intermediate products, consumer non-durables, and processed food (see Table

7.24). Early in the period textiles alone accounted for.about 40 percent of total foreign investment but dropped drastically later. The industries with an increasing role of direct foreign investment are machinery and equipment and electrical appliances.

The countries that have had major shares of foreign investment in

Thailand are developed countries, making up roughly 80 percent of the total during 1961-77 and about 70 percent during 1978-84. The share of the developing countries increased during more recent years. The major developing countries that have invested in Thailand are Hong Kong, Malaysia, Taiwan, and

Singapore. Among the developed countries, the most important ones are Japan, the United States, the United Kingdom, and West Germany. Thailand, like most host countries, has preferred joint ventures to totally foreign-owned companies. However, this preference was not enforced until 1972 with the enactment of the Alien Business Law which put limits to the legal ownership Table 7.23 Private Direct Foreign Investment Inflows, 1960-84 (millions of baht)

Direct Total X Share Equity Investment Direct of Equity Year Investment Loans* Investment in Total

Notes: ... = Not available. * = Medium- and long-term loans from parent or related companies. ** = Including oil concession fee, 1,070 million baht, received in June 1974.

Source: Bank of Thailand. Table 7.24 Direct Foreign Investment in Thailand: Initial Paid-up Capital, 1915-84, by Type of Industry and Period (mll l ions of baht)

Type of Industry Before 1945 1 94 5-60 1 96 1 -66 1967-7 1 b 1972-76 1977-81 1982-84

Agriculture, forestry, and fishery - ( -1 - ( -1 14.9 ( 5) 7.8 ( 5) ?9.1 ( 19) 34.1 ( 43) 45. (37)

Oil exploration and mining - ( -1 0.4 ( 1) 20.5 (15) 19.8 ( 36) 32.2 (47) 45.2 (41) 36.9 (41) Oil exploration - ( -1 - ( -1 - ( -) 2.4 ( 2) 2.3 ( 4) 1.2 ( 1) 2.5 ( 2) Mining and quarrying - ( -1 0.4 ( 1) 20.5 ( 15) 17.4 ( 34) 29.9 (43) 44.0 (40) 34.4 (39)

Manufactures Processed food Beverages and tobacco Construction materials Intermediate products I Intermediate products II Consumer nondurable goods Consumer durable goods Machinery and equipment Transport equipment and parts

Construction

Trade 10.1 ( 9) 140.3 '( 67) 146.4 (139) 215.7 (279) 131.4 (428) 239.4 (947) 582.5 (1,154)

Serv ices - ( -) 92.8 ( 10) 87.8 (73) 240.0 (168) 253.6 (261) 114.8 (434) 274.4 (624) Transportation and travel - ( -1 1.8 ( 3) 23.5 '( 17) 19.8 (44) 45.1 ( 78) 19.8 (159) 49.1 (184) Housing and real estate - ( -) - ( -) 16.3 ( 12) 72.8 (22) 123.8 ( 17) 21.4 (33) 88.4 ( 69) Hotel and restaurant - ( -1 72.8 ( 3) 34.8 ( 17) 72.9 (22) 54.2 (44) 19.8 ( 89) 90.4 (126) Other services - ( -) 18.1 ( 4) 13.2 ( 27) 74.4 ( 80) 30.5 (122) 53.8 (153) 55.5 (245)

Financial institute - ( -1 11.5 ( 6) 8.5 ( 7) 116.7 (58) 235.9 ( 57) 170.2 ( 25) 107.9 (20)

Total 38.5 ( 12) 576.3 (128) 1,170.5 (41 1 1 1,732.1 (787) 1,590.3 (1,170) 871.7 (1,874) 1,687.1 (2,259)

Share of manufacturing in total (percent ) 73.8 (25.0) 57.5 (34.4) 75.0 (36.0) . 63.4 (25.7) 54.4 (28.3) . 22.0 (16.6) 34.3 (12.9)

-Note: Figures in parenthesese are the number of firms. Source: Department of Cmmercial Registration; Ministry 06 Cmmerce. and control of foreigners and aliens in certain fields of business. During the period 1945-84, about 86 percent of firms with direct foreign investment had less than 50 percent foreign ownership; while 12.6 percent had between 50-

99.9 percent and only 1.7 percent were wholly-owned foreign subsidiaries (see

Table 7.25). A study by Pongpisanupichit (1985) concluded that the Al-ien

Business Law did succeed in limiting the foreign ownership in the listed activities but without any notable negative impact on the amount of total direct foreign investment.

Although direct foreign investment inflows averaged about 5 percent of gross domestic investment during 1970-84, its role in manufacturing was much more significant. Pongpisanupichit (1985:416) estimated that about 35.6 percent of haila and's manufacturing output in 1976 was supplied by foreign subsidiaries in the countries. He also found that a significant portion of direct foreign investment in manufacturing was granted promotion from the . Board of Investment. It was estimated that up to the end of 1977 about 47.8 percent of total direct foreign investment was granted promotion. -551 .

There is no doubt that foreign investment has contributed to the growth and product diversification of haila and's manufacturing sector.

Foreign subsidiaries are among the largest companies in many manufacturing groups, notably textiles, chemicals, petroleum, electronic and electrical products, and transport equipment. -561 They also practically control or dominate markets for some products and some of the country's scarce natural resources, particularly minerals, have been greatly exploited by foreign subsidiaries. -571

Many studies found that the direct income effect of foreign investment is quite small. -581 The factors which seem to limit the income M "Idm generation of foreign subsidiaries are the capital intensive technology and the high degree of dependence on imported inputs, resulting in small linkage effects to the local economy. The capital intensive nature of most foreign investment also results in small employment generation effect. Raewsoneti et. al. (1981) found that the elasticity of employment with respect to foreign investment in promoted subsidiaries was quite small.

Although the Thai government had hoped that foreign investment could help alleviate the country's trade and payments problem, it found instead that a substantial amount of profits and dividends as well as other service payments were remitted abroad by foreign investors. Table 7.26 shows the figures on the outward remittance of profits and dividends, interest on private foreign loans, management fees, and foreign payments for copyrights and patent royalties by major foreign investing countries. The data reveal that during 1970-84, the outward remittance of foreign exchange resulting from

foreign investment was 62.2 percent of the net inflows of private foriegn capital. The United States appears to receive the largest amount of outward remittances from Thailand, 36 percent of total remittances and far.exceeding

the net inflow of private capital from the United States to Thailand.

7.4 Some Attempts toward Redistribution

The democratic period during 1973-76 in Thailand enabled many underprivileged groups to make their voices heard; this generated some

interest in the issue of poverty and income distribution. Although most

government policies are still geared toward economic growth, the 1970s saw

some moves toward redistributive measures, though in retrospect mostly

unsuccessful. In this section, we shall discuss the various measures used by

the government with the stated intention of redistributing income. Table 7.26 Outward Remittance and Net Inflows of Private Foreign capital, by Country, 1970-84 (millions of baht)

Net Inflows Management of Total Out ward Interest Fees and Copyrights Total Private Remittance x 100 Profits and on Private Technology and Patent Outward Foreign Net Inflows Country Dividends Foreign Loans Payments Royalties Remittance Capital* (percent)

Total 25,351,3 49,703.2 3,755.4 6,778.4 85,588.3 137,604.3 62.20

Japan 3,391.7 2,956.1 270.6 3,542.1 10,160.5 14,302.9 71.04

U.S.A. 12,197.4 15,772.8 1,443.2 1,544.1 30,957.5 18,434.9 161.93

U.K. 3,751.9 4,394.9 530.5 314.1 8,991.4 10,925.1 82.30

West Germany 352.3 742.2 118.3 180.8 . 1,394.1 3,615.8 38.56

Hong Kong 1,292.4 11,791.7' 273.0 118.6 13,475.7 31,929.8 42.20

Others 4,365.6 14,045.5 1,119.3 1,078.7 20,609.1 58,395.8 35.29

* = Includes direct investment, portfolio investment, and other loans.

Source: Bank of Thailand. 7.4.1 The Price Support Program for Rice 591

Of all the redistributive measures introduced by the government, the private support program for rice probably received the most political clamor, but it was also the most unsuccessful. Some sort of price support program has been in effect since 1965, but inasmuch as the declared support price was below the market price the program was useless. However, when the market price dropped below the support price as it did between 1969-72, the program was still not very effective as the funds available were never large enough to buy more than 200,000 tons per year while the average annual production of paddy during the same period was 13.4 million tons, with about half of it marketed.

During 1973-75, there was rapid inflation in the world commodity market and the expo.rt price of rice was high. Despite the extremely high rate of premium the farm-gate price was-very satisfactory to the farmers. In 1975 the export price of rice started to decline and farmers began to make their voice heard. -The democratically-elected government of Kukrit Pramaj was again active in the rice price support program. However, the problem that had plagued the program in the earlier years (insufficient funds, inadequate personnel, inexperience and refusal to acknowledge the connection between low rice prices and the export tax) continued to hamper the programs that were implemented during 1975-83.

There is a great deal of politics involved in the price support program of each crop year. If the Minister ox Agriculture (and his political party) was the advocate and chosen implementer then the Marketing Organization for Farmers (MOF, formed in 1974 as a public enterprise affiliated to the

Ministry of Agriculture and cooperatives) would be the responsible agency. If the Ministry of Commerce (and the associated political party) was to be responsible then the Public Warehouse Organization, a public enterprise affiliated with the MOC, would be responsible. The source of funds for this operation has generally been the Farmers' Aid Fund which was established in

1974 and derived its funds from the rice premium. An alternative source is the profit from the government-to-government tiade in rice, particularly when the MOC or PWO is involved. The eagerness to participate in the price support program each year springs from the fact that this is a popular program advocated by the leaders of the farmers despite its minimal impact on the general Level of rice prices. Politicians can make use of their participation in this program to win votes in their next election.

In some years rice mills were chosen as an instrument to act as government agents in.the program because of their marketing skills and storage capacity. In a study by. Pinthong (1984) of the distribution of the benefit and burden of rice'market interventions by the MOF in 1982183, it was estimated that, of the economic rent generated by the program, 53.8 percent went to millers and exporters, 26.7 percent to government officials and political parties, 6.3 percent to farmer leaders, and only 13.2 percent to the farmers, and these were generally the better-off farmers.

The price support program has never had adequate funds to raise the general level of farm-gate prices for rice. It may have some local and short lived effect only. In a study by Pinthong and Tinakorn (1984) on the effect of price support programs for the crop year 1980181, it was found that the high price received by farmers in the year 1980181 were due mainly to the rise in the world price. Rice purchased by the PWO to support the rice price was not only a redundant policy but also incurred a large public expenditure with benefits going mostly to those millers who could sell rice to the PWO. TP~~-~T-714/1/87 The last major price support program was implemented in 1983 when the method of finance was commercial bank loans. When the short-term notes fell due the PWO could not pay and the full cost of the program seemed finally to be realized by the Cabinet. After this disastrous experience, the program in succeeding years was much more modest in scale and became in effect a way of buying farmers' protests. g/ 7.4.2 Limit@d Scale of Land Reform

Before the Agricultural Land Reform Act was enacted in 1975 there had been some previous attempts to limit private land ownership. -611 However, owing to the vested interest of the ruling elites, such attempts had failed.

The promulgation of the Agricultural Land Reform Act in 1975 marked an important break with the past in the legal concern for land distribution. Of course, several factors taking place in the early 1970s were responsible for the passage of this act. The most important one was the political 'condition in Thailand during the 1973-76 democratic period, during which the elected government was more sympathetic to the idea of redistribution. Other important factors were the inherent social and economic problems in the rural sector, particularly the emergence of land shortages, high ratio of tenant farming, and increased indebtedness of farmers and land forfeitures, which all led to an upsurge of political activity by farmers after October 1973.

The land reform bill was passed by the National Assembly on January

17, 1975, and became a promulgated law in March 1975. In letter, it is meant to improve the system of rights to, and holdings of, agricultural land.

Section 10 of the Act states that an agricultural land reform fund would be set up to finance expenditures thus incurred. The principal sources of funds would apparently be the government budget. Other sources included donations from foreign governments or international organizations or private individuals, allocations from the Farmers' Aid Fund, and interests and other benefits increased through the fund. In order to improve the system of agricultural land ownership, the government can allocate state land through reclamation and leasing or it can purchase or expropriate private land in order to allot it to farmers. Land reform areas are to be announced by subsequent royal decrees after complete surveys with priorities given to areas with high tenancy and low productivity.

Although the act allows a large landowner in reform areas to occupy an area of 50 rai if he is engaged in agriculture and 100 rai if he is engaged in livestock production, the law includes provisions whereby certain categories of large owners can appeal to retain land up to 1,000 rai if an owner can prove that he had cultivated the land for one year or more before the act became effective and that he can continue fruitfully to cultivate the land; over 1,000 rai can be retained if he can prove that a great deal of investment in the land had been made with support from the government. -621 Large landowners can also delay and avoid purchase or expropriation by appealing to a petiti0.n committee and even take the case to the courts which are known to have a time-consuming process. It thus appears that the land reform act was not designed to result in a rapid and forceful seizure of property from large landholders and its redistribution to tenants and agricultural laborers. Rather, it represents a pragmatic act by the ruling elite to yield to the pressing demands of the largest segment of Thai society amidst the political crisis of the time.

Since the law became effective in 1975 until the end of fiscal year

1981 there are 32 provinces with declared land reform areas, 12 in the central region, and 10 each in the north and the northeastern regions. The total coverage of declared land reform areas was 6,363,023 rai with 69.6 percent being state land (4,430,236 rail, 29.6 percent private Land (1,879,011 rail, and 0.9 percent land donated by the King (53,686 rai). -631 The total area of over 6 million rai under the land reform program up to 1981 represented approximately 5.2 percent of the total farm holding land in the country in the same year. 641

The slow progress of land reform projects are due not only to resistance from landlords but also from the lack of persistent interest from the government. Pipatseiithan estimated in 1978 that a complete land reform throughout the country within 15 years would cost at least 3,000 million baht a year without considering the effect of inflation. 651 This amount represented over 40 percent of the total budget of the Ministry of Agriculture and Cooperatives in 1978. When we compare the estimated figure with the government budget allocated for land reform presented in Table 7.27 we can see that the government has not been serious in its land reform efforts. In,fact, when the danger of political crisis caused by peasant movements was suppressed under military rule after October 1976, the budget for the ARLO in 1978 which was approved in 1977 was cut to about half of the previous year. Suehiro (1981:343) observed that, "... from the time the land reform was promulgated and entered the initial stages of implementation, they were already showing

signs of retardation. This tendency was only spurred on by the advent of authoritarian government with the coup d'etat of October 1976." Table 7.27 Annual Budget of the Agricultural Land Reform Office, FY76-85 (million baht)

------Proportion Land, Total Total of ARLO Fiscal Salaries Construction, Other Budget Budget to MOAC Year and Wages and Equipment Expenses of ARLO of MOAC (percent)

Source: Budget Bureau, Annual Expense Budget, 1976-85.