Faculty of Economics, Thammasat University
THAMMASAT REVIEW OF ECONOMIC AND SOCIAL POLICY Volume 4, Number 1, January - June 2018 ISSN 2465-390X (Print) ISSN 2465-4167 (Online)
Bounded Rationality and Malaysian Housing Policy Consilz Tan, Leland Entrekin and David Butler
Changing Thailand’s Future with Tax Reform Thorn Pitidol
Role of Education Policies in Bhutan and its Impact on the Economy Deki Wangmo
THAMMASAT REVIEW OF ECONOMIC AND SOCIAL POLICY Volume 4, Number 1, January – June 2018 ISSN 2465-390X (Print) ISSN 2465-4167 (Online)
Thammasat Review of Economic and Social Policy
Thammasat Review of Economic and Social Policy (TRESP) is a double-blind peer reviewed biannual international journal published in June and December. The journal is managed by the Research Committee under the supervision of the Academic Affairs Division of the Faculty of Economics, Thammasat University. Our editorial board and review panel comprise of academicians and practitioners across various areas of economic and social policies. The goal of the journal is to provide up-to- date practical and policy-oriented analysis and assessment of economic and social issues, with particular focus on Asia and the Pacific region. However, research findings from other parts of the world that are relevant to the theme of the journal may be considered.
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Our journal is dedicated to serve as a platform for debate and critical discussion pertaining to the current issues of public policy. The outcome of such research is expected to yield concrete policy implications. Some of the targeted issues include urban and regional socio-economic disparities, ageing society, healthcare, education and welfare policies, environmental and natural resources, local communities, labor migration, productivity, economic and political integration, political economy, macroeconomic instability, trade and investment, fiscal imbalances, decentralization, gender issues, behavioral economics and regulations; and law and economics. The journal makes its best effort to cater a wide range of audience, including policymakers, practitioners in the public and business sectors, researchers as well as graduate students. Articles should identify any particular issue concisely, address the problems of the research explicitly and supply sufficient empirical data or strong evidence and substantial argument to support the discussion of policy initiatives asserted by the author(s). Theoretical and applied papers are equally welcome provided their contributions are policy-relevant.
Advisory Board Dean, Faculty of Economics, Thammasat University, Thailand Ian Coxhead, University of Wisconsin-Madison, United States Tran Van Hoa, Centre for Strategic Economic Studies, Victoria University, Australia Suthipun Jitpimolmard, Khon Kaen University and Thailand Research Fund, Thailand Medhi Krongkaew, National Institute of Development Administration, Thailand Duangmanee Laovakul, Thammasat University, Thailand Arayah Preechametta, Thammasat University, Thailand Sakon Varanyuwatana, King Prajadhipok's Institute, Thailand
Editor-in-Chief Euamporn Phijaisanit, Thammasat University, Thailand
Associate Editor Pornthep Benyaapikul, Thammasat University, Thailand
Editorial Board Kirida Bhaophichitr, Thailand Development Research Institute, Thailand Brahma Chellaney, Center for Policy Research, New Delhi, India Aekapol Chongvilaivan, Asian Development Bank, Manila, Philippines Emma Jackson, Bank of England, UK Armin Kammel, Lauder Business School, Vienna, Austria Somprawin Manprasert, Bank of Ayudhya, Thailand Gareth D. Myles, School of Economics, University of Adelaide, Australia Voraprapa Nakavachara, Chulalongkorn University, Thailand Songtham Pinto, Bank of Thailand, Thailand Pathomdanai Ponjan, Fiscal Policy Office, Ministry of Finance, Thailand Watcharapong Ratisukpimol, Chulalongkorn University, Thailand Sasatra Sudsawasd, National Institute of Development Administration, Thailand Maria-Angeles Tobarra-Gomez, University of Castilla-La Mancha, Spain Soraphol Tulayasathien, Fiscal Policy Office, Ministry of Finance, Thailand
Editorial Assistants Darawan Raksuntikul Sorravich Kingsuwankul Panit Buranawijarn
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Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Editorial Introduction 1 ARTICLES Bounded Rationality and Malaysian Housing Policy 6 Consilz Tan, Leland Entrekin and David Butler
Changing Thailand's Future with Tax Reform 26 Thorn Pitidol
Role of EducationPolicies in Bhutan and its Impact on the Economy 56 Deki Wangmo
Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Editorial Introduction In this issue, Consilz Tan (KDU University College, Selangor Malaysia), Leland Entrekin and David Budler (Murdoch University, Perth, Australia) produced a very insightful article on the behavioural implications of Malaysian housing policy. Their article, “Bounded Rationality and Malaysian Housing Policy,” sketches that households encounter a plethora of choices and it is challenging for cognitively constrained human agents to make unbiased decisions. This study uses the framework of boundedly rational behaviour to attempt to understand investment decisions in the real estate market in Malaysia. This study examines two areas of literature to inform the methodology and findings of the study: the investment decision, and bounded rational behaviours. The authors comprehensively examine the literature in both areas, and to combine them to contribute to the existing body of work. The data for this paper is based on a self-administered questionnaire distributed by the authors to real estate investors in Malaysia who had sold at least one property in their lifetime. Respondents were required to evaluate statements according to a seven-point Likert Scale (from Strongly Disagree to Strongly Agree). Based on data collected, the authors used an independent samples t-test to assess the statistical significance of each motivator. The results showed that individual investors in the Malaysian real estate market displayed cognitive biases of anchoring, endowment effect and loss aversion, and herding. These results should help inform policymakers in crafting policies to achieve greater sustainability in the Malaysian housing market.
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The second article, “Changing Thailand’s Future with Tax Reform” by Thorn Pitidol (Thammasat University), is one of the outcomes of the "Policy Community on Taxation", a collaboration between Friedrich-Ebert-Stiftung (FES) Thailand, Thailand Development Research Institute (TDRI), and the Faculty of Economics, Tป hammasat University. It provides a glimpse into issues related to taxation in Thailand and offers various perspectives to solve the problems. In summary, the recommendations for Thailand’s tax reform are as follows:
1. Generating tax revenue while reducing inequality: This principle aims at redistributing income from the rich to the poor. 2. Expanding tax base while reducing unnecessary tax privileges: To further reinforce the above principle and boost fiscal sustainability, reforms must ensure that more people are included into the tax base for personal income and corporate income tax. Rebates favouring the rich like LTF and RMF should be lifted. 3. Expanding tax revenue from wealth-based taxes: Other forms of taxes on wealth should be considered. Some examples are inheritance and land taxes. This principle would help in reducing inequality and wealth accumulation, though should be executed with care. 4. Reviewing current tax benefits: This principle concerns reconsideration of certain policies that use tax rebate to promote investment. Such tax policy should be regularly assessed to ensure that it fulfils the objective set. Other investment promotion policies that ease cost of doing business should be considered. 5. Restructuring government expenditure: Revenue generation and expenditure structure must be planned out in such a way that would promote welfare of the poor and 2 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
the disadvantaged so not to exacerbate the inequality problem. 6. Developing new forms of taxes: Earmarked tax is one option for revenue generation, which is reserved for a specific purpose. This would create transparency of how such tax is being utilized. Another option is tax on capital gain (i.e. stock market) to promote equality in Thailand. 7. Promoting fiscal decentralization: Local authorities should be allowed to collect their own taxes. This would allow them to have more revenue, and also reduces financial burden for the central government. This would increase the degree of local autonomy and administration power. 8. Adopting tax measures to solve environmental problems: Environmental tax is another area that can be introduced into Thailand’s tax reform. Apart from generating more tax revenue, this would enhance Thailand’s competitiveness in terms of external trades with countries with strict environmental standards. Also, the government can choose to raise the cost of some products (i.e. plastic bags) or subsidize environmental friendly ones. 9. Promoting fiscal transparency: This principle concerns the openness of information related to tax revenue and expenditure, which would impart the sense of trust among the public (i.e. so the public know they indeed benefit from tax payment in some ways). 10. Restructuring political structure: A tax reform would be incomplete if a political dimension is not considered. As tax reforms would concern some stakeholders politically and economically, actions should be taken to promote people’s participation in the reform process.
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The third paper from a practitioner’s research paper, “Role of Education Policies in Bhutan and its Impact on the Economy” by Deki Wangmo of the Department of School Education, Ministry of Education of Bhutan analyses and reviews the link between education and economic growth, particularly in the context of Bhutan, and provides policy recommendations for fostering greater economic growth through education policy reform. Bhutan began its system of formal education in the 1960s, and today provides 11 years of free basic primary education up to the age of 16. After the age of 16, students, depending on academic ability, are either diverted into further education or technical colleges. Bhutan spends roughly 18% of its national budget on education, approximately 7.3% of GDP. The paper discusses the positive impact of education on the economy. The economy of Bhutan has been growing by 8%, on average, since 2000, and GDP per capita has tripled from US$780 to US$2,460. Bhutan’s increasing enrolment and education numbers are also reflective in the shift from a reliance on the primary sector, to greater shares of manufacturing and services in the economy. Nevertheless, there are some drawbacks. Bhutan’s economy has not developed fast enough to absorb new graduates, resulting in 42% of unemployed in the 15-24 demographic being holders of bachelor degrees and above. This also has other social implications: the location of higher education institutions has encouraged rural-urban migration, and the lack of relevant jobs for fresh graduates are both inefficient uses of their training and education, and has costs in terms of wages foregone while studying. While education policies have helped transform Bhutan’s economy and the lives of its citizens, issues such as high unemployment among graduates and the burden of increased rural-urban migration need to be addressed. Bhutan needs to
4 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 better complement its education policies with the needs of its economy through greater cooperation between the private sector and policymakers. Thammasat Review of Economic and Social Policy (TRESP) is a biannual double-blind peer reviewed international journal published in June and December. The Faculty of Economics, Thammasat University and the Editorial Team of TRESP seek to provide an effective platform for reflecting practical and policy-oriented perspectives that links the academic and policymaking community. Having devoted to our ‘knowledge-for-all’ philosophy so as to drive our society forward, the Faculty decided that TRESP published in an open access model. For further information and updates on this journal, or to submit an article, please visit our website at www.tresp.econ.tu.ac.th.
Euamporn Phijaisanit Editor-in-Chief
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Bounded Rationality and Malaysian Housing Policy*
Consilz Tan Senior Lecturer KDU University College Selangar, Malaysia [email protected]
Leland Entrekin Emeritus Professor Murdoch University Perth, Australia
David Butler Professor of Economics Murdoch University Perth, Australia
* This article originated from a presentation titled “Investment Decision in Real Estate: Rational and Boundedly Rational Behaviours” given by the authors during the International Conference on Business, Big-Data and Decision Sciences 2017 held at the Chulalongkorn Business School, Chulalongkorn University, Bangkok, on 4th August 2017. The authours would like to thank the conference participants that contributed their insightful thoughts and useful comments on this paper. 6 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
ABSTRACT The investment decision in real estate markets is becoming more challenging, due to rising property prices and the limited purchasing power of home buyers. There are numerous studies and statistics focused on property prices, mortgage eligibility, and lifestyle concepts. However, there is limited research on understanding the individual investors’ decision-making behaviour. This study aims to explore the investment decision in real estate markets by understanding both rational and boundedly rational behaviour of individual investors. We find that individual investors are affected by cognitive biases such as anchoring, endowment effect, loss aversion, and herding. Nonetheless, they are motivated by rational goals such as capital gain, long term investment, rental yield, and wealth accumulation. Our findings can assist Malaysian housing policy to achieve sustainability in the housing industry.
Keyword: Behavioural economics, Decision making, Real estate investment
JEL Classification: D1, D6, D7, D9, H4, R3
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1. Introduction People face a plethora of choices and it is very challenging for cognitively constrained human agents to make unbiased decisions. Home ownership has transformed from a simple household shelter into a more sophisticated investment opportunity. The two general motives in the housing market, consumption and investment (Brueckner, 1997), have complicated the effort to better understand decision making behaviour. Many of their objectives are to accumulate wealth or receive rental yields, especially with its characteristic of lower risk compared to the other types of investment. Behavioural economics is utilized in this study to understand the investment decision of real estate investors. Gallimore, Hansz and Gray (2000) suggested that decision making processes are not fully rational. Boundedly rational behaviour is better in predicting human behaviour if compared to traditional economic theory (Camerer & Fehr, 2006). This study is designed to achieve the objective of understanding the investment decision in the real estate market. We employed a research survey to collect data from individual real estate investors who had sold at least one property in their lifetime. It is crucial to investigate the behavioural factors that affect the investment decision in order to enhance the process of making informed decisions. In the meantime, our questionnaire included rational objectives such as long-term capital gain and rental yield for wealth accumulation. This inclusion is aimed at examining the motivations that urged investors to participate in the real estate market. However, due to the condition of recruiting individual investors who had sold at least one property in their lifetime, a sample of 99 individual investors in Malaysia were collected in the research survey. Hence, the results of the study are not meant to generalize, but rather provide us with diverse views on understanding
8 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 bounded rational behaviours that influence the individual investors in real estate investment decision.
1.1. Background of the study In the recent report released by National Property Information Centre (2017a), the Malaysian house price index rose dramatically by 5.5% in 4Q2016 compared to 4Q2015. The increase in housing prices encouraged individual investors to participate in the real estate market. In a recent survey conducted by City & Country of The Edge Malaysia (Khoo, 2017), 60% of working adults aged between 22 and 32 plan to buy a property either now or in the near future. 43% of them said that their affordable range is between RM300,000 and RM500,0001. By looking at the statistics provided by NAPIC (2017b), the number of unsold completed residential units with the price range from RM300,000 to RM500,000 increased over the years. There was about a 33% increase in the number of unsold completed units (RM300,000 to RM500,000) from 2014 to 2015 and 66% from 2015 to 2016. Regarding the overhang value for the residential units in this price range, it is a huge increase from RM674 million in 3Q2015 to RM1,143 million in 3Q2016. The statistics are not matching the sentiment of property purchasing indicated by the survey. So, what went wrong and what we have missed? More importantly, what are the forces behind their decision making in purchasing a property? The fear of loss, expectation for capital gains, enjoyment of having own house, regret of making wrong decision, joy in success of investment, and other behavioural factors might be guiding their decisions.
1 As of 26 February 2018, RM1 is approximately US$ 0.26 according to the Central Bank of Malaysia. 9 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
1.2. Significance of the study The objective of economic research is to predict economic outcomes and understand market interaction (Malmendier & Tate, 2005). We aim to enhance our understanding of the individual real estate investors. Our key assumption is that people do not act rationally all of the time, that is, they do not always maximize their utility or profit even when they wish to. To highlight this fact, this study focuses on individual investors who have sold at least one property. In the past, there were studies conducted that emphasized institutional investors and valuers. However, the investigation of individual investors is rather more challenging. For instance, the degree of loss aversion of institutional investors is hardly measured because they are acting as intermediaries and will not manifest the affective component of loss aversion (Paraschiv & L’Haridon, 2008) due to their role as professional agents. As individual investors are not ‘professional’ but have the same objective of earning profits from their investment, it is crucial to discover the existence of bounded rational behaviours as the influence of these behaviours on the outcome of investment is still unknown. Furthermore, we also aim to investigate the importance of rational goals. Individual investors are more than qualified to be part of the study as they have experience in the whole investment process, from purchasing of property to the sale of property.
2. Literature Review There are many studies that focus on institutional investors but investigation of the decision-making behaviours of individual investors has not drawn much attention from researchers. Real estate investment involves several decision- making processes that are essential when determining the 10 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 success of an investment. This section focuses on the real estate investment decision and bounded rational behaviours.
2.1. Investment decision People always face more than one choice and need to select from different options. This process can be very challenging when people fail to weigh the value of costs and benefits. Nonetheless, the more information available the better, especially for individual investors in making investment decisions. Investing in real estate markets has lower risks compared to investing in security markets. Case and Shiller (1988) suggested that houses are always viewed as a safer investment, as long as the investors hold the property long enough. An individual investor is required to comprehend the whole market in order to succeed in real estate investment. It is very important for the individual real estate investor to understand the institutional environment, such as by comprehending taxation and property law, housing policies, and the macroeconomic and financial situation. Unlike institutional investors, individual investors are not technically aware of the existence of cognitive biases when making the decision to buy, hold, or sell property. According to Paraschiv and L’Haridon (2008), institutional investors may not manifest the affective component of loss aversion in the situation of selling an object. Institutional investors are sophisticated while individual investors, as a group, are un- sophisticated (Grinblatt & Keloharju, cited in MacCowan & Orr, 2008). Institutional investors are similar to investment managers and pension fund and REITs managers (Lim, McGreal & Webb, 2006). Generally, institutional investors are not emotionally invested in any one property. Shiller (2001) provided a different insight into the behaviour of institutional investors and suggested that institutional investors may have
11 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 the need for justifiable authority to confirm their best judgements, which are often generated intuitively. In this case, there is a contrary notion of regret avoidance and independence. Individual investors have the freedom to make investment decisions without worrying about a need for authority, but they still attempt to avoid the regret sentiment in case the decision does not deliver satisfactory results. In view of the differences between institutional and individual investors, it evokes reflection on whether real estate investments involve spontaneous decision making. Real estate investment may not appear to require impulsive decision making, but it often does. However, a rational investor should always obtain sufficient information before taking action. Anecdotal evidence suggests that the decision to buy and sell a house is a joint decision, where the individual uses agent knowledge and acquires other relevant information to narrow down choices in terms of price and location. For institutional investors, there are in-house research teams that help them to perform forecasting before making a strategic decision. Furthermore, Brian Elton and Associates (cited in Seelig, Burke & Morris, 2006) described the investors’ actual behaviour as unpredictable because it may change according to institutional circumstances. For example, the decision- making process of individual investors may be affected by the speech and methods that are used by real estate agents and financial officers. Participants in Bargh’s experiment pushed away all unpleasant words, instead focusing on those that were pleasant (Bargh, 1997). Hence, the impact of automatic behaviour and the push-pull reaction seems to be part of the decision-making process. More importantly, the outcomes of a decision should not be overemphasised, instead effort should be spent on evaluating the process of deciding (Einhorn & Hogarth, 1981).
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2.2. Bounded rational behaviours Individual investors adjust the value of a property from an initial anchor value. In the case of property valuers, Diaz (1998) concluded that they use a reference point as anchor in the negotiation process. They tend to make a decision based on the previous situation in which he/she succeeded in the negotiation process. Valuation of a property is mainly affected by the most recently-valued property (Scott & Lizieri, 2011). Waweru, Mwangi and Parkinson (2014) concluded that anchoring is one of the major factors that influence property investment decision making by using the feedback from 155 real estate agents in Nairobi. According to Grover and Singh (2015), anchoring does affect the decision of real estate investors where investors set the value of the property based on the recent selling/buying prices. Availability of information is crucial when people do not wish to experience regret when making a decision. People are likely to avoid responsibility when feeling regret after a bad decision has been made (De Bondt & Thaler, 1995). Regret avoidance describes a situation where people avoid decisions as they are reluctant to make the wrong decision (Tetlock, 1992; see also Bell, 1982; Samuelson & Zeckhauser, 1988). Shefrin and Statman (1985) also discussed how aversion to regret contributes to investors’ behaviour when averse to realising losses (see also Case & Shiller, 1988). People are averse to making wrong decisions when they perceived themselves as competent. Some investors prefer to hire an agent to help them make a decision in order to negate stress. Taking this into consideration, only experienced agents are able to make the decision and are responsible for the blame or credit from investors. The endowment effect can be useful for predicting an individual’s behaviour when possessing an object. Past
13 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 ownership is an influencing factor in the valuation of an object. Hence, there is a positive relationship between the endowment effect and duration of ownership. Strahilevitz and Loewenstein (1998) proposed that the more time a subject possesses an object, the more value he or she will place on a similar object within a shorter time of possession (see also Paraschiv & L’Haridon, 2008). Hence, the study showed that ownership increases the value of an object significantly. Duration of current ownership did significantly increase the value of an object, as well as its perceived attractiveness, to the owner. Such behaviour is attributed to the endowment effect and loss aversion due to emotional attachment (Ariely, Huber & Wertenbroch, 2005). Kahneman (2003) proposed that a good that is given up by the owner will be placed with higher value. This behaviour can also be categorized as loss aversion where a person weighs their losses heavier than gains (Kahneman & Tversky, 1979). Liberman et al. (1999) argued that when people have experienced losses more frequently than gains, they will have a greater tendency to maintain their current possession over new options. They also highlighted the importance of the source of ownership and the performance of the object. A key point to highlight here is that people value an object more when there is a positive event. In other words, if a property carries a positive experience for an investor, such as good feng shui (particularly in the Asian market) or special design and renovation, that has received positive feedback, or was inherited from someone he/she loved and cared for, the investor tends to overvalue the property, affecting the decision-making process as well as the desired selling/buying price. On the other hand, herding behaviour is suggested as one of the factors influencing the investment decision. Herding behaviour represents the behaviour of investors when
14 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 following the movement of the majority in investment activities. In the financial market, an agent may trade against his initial assessment and instead follow a trend or movement reflective of a previous trade (Avery & Zemsky, 1996). Shiller (2001) proposed that herding behaviour can be due to conformity pressure in the circumstances where people want to secure their status in the group. People tend to neglect their personal information and instead are easily influenced by others in every activity which includes investment and financial transactions (Hirshleifer & Teoh, 2001).
3. Methodology We collected our data using a self-administered questionnaire distributed to real estate investors who had sold at least one property in their lifetime. Snowball sampling was used to increase the chance of getting responses from the right people who have experience in buying/selling property. The questions were designed to understand the rational motivators that attract investors to participate in real estate investment. These motivations include capital gain, change in stage of family life cycle, long-term investment (5-10 years), lower risk compared to stocks, portfolio rebalancing, rental yield, source of income, speculative income (less than 3 years), supplementary income, taxes, and wealth accumulation. This study developed a measurement scale for bounded rational behaviours based on several cognitive biases as shown in Table 1 below. We used a seven-point Likert Scale to assess variables (from point 1 for Strongly Disagree to point 7 for Strongly Agree). Statistical Package for Social Science (SPSS) version 22.0 was employed to analyse the data and also to conduct hypotheses testing.
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Table 1. Development of measure scales Bounded Literature Number of rational items behaviours Anchoring Samuelson and Zeckhauser 4 items (1988), Thaler and Sunstein (2009). Endowment Carmon and Ariely (2000), 5 items effect Kahneman (2003), Kahneman and Tversky (1984), Thaler (1980). Loss aversion Carmon and Ariely (2000), 5 items Genesove and Mayer (2001), Kahneman and Tversky (1979), Samuelson and Zeckhauser (1988). Herding Avery and Zemsky (1996), 6 items Banerjee (1992), De Bondt and Thaler (1995), Thaler and Sunstein (2009).
4. Analysis and Results Rational motivators which encourage individual investors to participate in real estate investment are illustrated in Table 2. The importance of each motivator was analysed using a t- test to assess statistical significance. The table shows some of the relevant descriptive statistics. All of the responses provided by individual investors for each factor were significantly statistically different from point 4 of the Likert scale (i.e., neutral), excepting taxes.
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Table 2. The independent samples t-test on financial goals Financial motivators Mean Test p- scores statistics, t values
Capital gain 5.92 15.468 0.000 Change in stage of family 4.92 5.991 0.000 life cycle Long term investment 5.34 10.106 0.000 (5 – 10 years) Lower risk compared to 5.40 10.023 0.000 stocks Portfolio rebalancing 4.92 6.650 0.000 Rental yield 5.63 13.115 0.000 Source of income 5.53 11.779 0.000 Speculative investment (less 4.54 3.568 0.001 than 3 years) Supplementary income 5.55 12.090 0.000 Taxes 4.24 1.407 0.163 Wealth accumulation 5.98 17.477 0.000
In terms of bounded rational motivators, about 65% of the respondents agreed that they use a previous investment value to decide how much to invest in a current investment. In addition, about 75% of respondents agreed that they set the price of current properties based on the market value. A majority of these investors use first asking prices as a starting point to adjust pricing, even if it is markedly different from the current market price. Investigation of the endowment effect and loss aversion showed that 66% of the individual investors set a higher price than market value when selling their property. This shows that investors weigh losses heavier than gains
17 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 when making a decision. Furthermore, the survey also shows that nearly 55% of the respondents agreed that they would keep an undervalued property longer than they should in order to obtain another chance to sell for a higher value. They (74% of the respondents) would hold on to the property if they believed they could get a better price, even if a favourable offer price was made. We also found evidence of herding behaviour. For example, about 80% of the respondents judged the success of a property investment by looking at the attractiveness of the property to others. A majority of these investors were more likely to invest in a property that had a lot of investors interested in it.
5. Discussion and Implications This study aimed to understand the investment decision of individual investors in the real estate market. The results indicate that the cognitive biases such as anchoring, endowment effect and loss aversion, and herding exist in the decision-making process. The study also shows that goals such as long-term capital gain and rental yield for wealth accumulation are important factors in driving the real estate investment decision. In conclusion, we find evidence for the influence of boundedly rational behaviours in decision making. The outcomes of the study will be able to provide insights for researchers, policy makers and real estate investors. The research helps to shed light on the planning of Malaysian housing policy, especially on the issue of providing affordable housing in urban areas. In addition, it helps to promote sustainable housing developments in meeting basic housing needs and wants. Policy makers should consider the elements of economics, social acceptance and feasibility of Malaysian housing policies in order to achieve sustainability in Malaysian housing markets. So far, there is still a gap
18 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 between demand and supply of affordable housing. This research enables policy makers to design a more effective housing policy in relation to the behaviour of individuals based on diverse ethnic groups, income groups, family size, etc. Due to the economic transformation from an agriculture-based economy to an industrialized economy, there are increasing numbers in the urban population in most ASEAN countries. Most housing policies were designed to assist the urban poor and aimed to improve housing affordability. However, the individual choice has been neglected. An effective public policy should take individual choice into account and help to improve the choice architecture in housing markets. Nonetheless, future research can be carried out by recruiting more participants to get additional views on the bounded rational behaviours that guide real estate investment decisions. The investigation on behaviour of homebuyers is important as their needs and preferences are the push factor on enhancing the current housing policies either in Malaysia or neighbouring countries.
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De Bondt, W. F. M. & Thaler, R. H. (1995). Financial Decision-Making in Markets and Firms: A Behavioural Perspective. In: R. Jarrow and et as. (ed.) Handbook in Operations Research and Management Science. Elsevier Science B.V. Diaz III, J., (1998). The First Decade of Behavioral Research in the Discipline of Property. Journal of Property Investment & Finance, 17. Einhorn, H. J. & Hogarth, R. M. (1981). Behavioural Decision Theory: Processes of Judgment and Choice. Annual Review Psychology, 32, 53-88. Gallimore, P., Hansz, J.A. & Gray, A., (2000). Decision making in small property companies. Journal of Property Investment & Finance, 18, 602-612. Genesove, D. & Mayer, C., (2001). Loss Aversion and Seller Behavior: Evidence from the Housing Market. Quarterly Journal of Economics, 116, 1233-1260. Grover, P. & Singh, L.K. (2015). Study on Behavioural Factors Influencing Investment Decision in Real Estate: A Case Study of Udham Singh Nagar (Uttrakhand). International Journal of Engineering Technology, Management and Applied Sciences, 3(7), 150-158. Hirshleifer, D. & Teoh, S.H., (2001). Herd Behaviour and Cascading in Capital Markets: A Review and Synthesis. European Financial Management, 19, 25-66. Kahneman, D., (2003). Maps of Bounded Rationality: Psychology for Behavioral Economics. The American Economic Review, 95, 1449-1475. Kahneman, D. & Tversky, A., (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47, 263-292. 21 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Kahneman, D. & Tversky, A. (1984). Choices, Values and Frames. American Psychologist, 39, 341-350. Khoo, E. (2017). Purchasing a property in your twenties. The Edge Malaysia, 13-19 Feb. Liberman, N., Idson, L.C., Camacho, C.J. & Higgins, E.T., (1999). Promotion and Prevention Choices between Stability and Change. Journal of Personality and Social Psychology, 77, 1135-1145. Lim, L. C., McGreal, S. & Webb, J. R. (2006). Perception of Real Estate Investment Opportunities in Central/South America and Africa. Journal of Real Estate Portfolio Management, 12, 261-276. MacCowan, R. J. & Orr, A. M. (2008). A behavioural study of the decision processes underpinning disposals by property fund managers. Journal of Property Investment & Finance, 26, 342-361. Malmendier, U. & Tate, G., (2005). Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited. European Financial Management, 11, 649-659. National Property Information Centre (2017a). The Malaysian House Price Index. Available from: napic.jpph.gov.my/portal [Accessed 1 April 2017] National Property Information Centre (2017b). Residential, Shops and Industrial Properties Market Status Report/Tables. Available from: napic.jpph.gov.my/portal [Accessed 1 April 2017] Paraschiv, C. & L'Haridon, O., (2008). Loss Aversion: Origin, Components and Marketing Implications. Recherche et Applications en Marketing (English Edition), 23, 67-82.
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Samuelson, W. & Zeckhauser, R., (1988). Status Quo Bias in Decision Making. Journal of Risk and Uncertainty, 1, 7- 59. Scott, P.J. and Lizieri, C., (2011). Consumer House Price Judgments: New Evidence of Anchoring and Arbitrary Coherence. Available: http://ssrn.com/abstract=1765974 [Accessed 5 June 2013]. Seelig, T., Burke, T. & Morris, A. (2006). Motivations of investors in the private rental market. AHURI Positioning Paper No. 87. Queensland, Swinburn/Monash and UNSW/UWS AHURI Research Centres. Shefrin, H. & Statman, M., (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. The Journal of Finance, 40, 777-790. Shiller, R.J., (2001). Bubbles, Human Judgment and Expert Opinion. New Haven, Connecticut: Cowles Foundation for Research in Economics Yale University. Strahilevitz, M.A. & Loewenstein, G., (1998). The Effect of Ownership History on the Valuation of Objects. Journal of Consumer Research, 25, 276-289. Thaler, R. (1980). Toward A Positive Theory of Consumer Choice. Journal of Economic Behaviour, 1, 39-60. Thaler, R.H. & Sunstein, C.R., (2009). Nudge: Improving Decisions About Health, Wealth, and Happiness, United States of America, Penguin Books. Tversky, A. & Kahneman, D., (1991). .Loss Aversion in Riskless Choice: A Reference-Dependent Model. The Quarterly Journal of Economics, 106, 1039-1061.
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Tetlock, P.E., (1992). The Impact of Accountability on Judgment and Choice: Contingency Model. Advances in Experimental Social Psychology, 25, 331-376. Waweru, N.M., Mwangi, G.G. & Parkinson, J.M. (2014). Behavioural factors influencing investment decision in Kenyan market. Afro-Asian Journal of Finance and Accounting, 4(1), 26-49.
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25 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Changing Thailand's Future with Tax Reform
Thorn Pitidol Lecturer Faculty of Economics Thammasat University Bangkok, Thailand [email protected]
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ABSTRACT At present, Thailand is facing an urgent need for tax reform that can alleviate its long-term fiscal deficit, a condition that is threatening to destabilize the country's economy. The approach that should be taken to solve this problem is to raise tax revenue while simultaneously reducing economic inequality. Policy measures to be taken under this approach include the enlargement of the tax base by registering more people to pay income taxes, the reduction of unnecessary tax benefits, and the expansion of wealth-based taxes. In addition, the government should reform its expenses. In the case that the government chooses to raise tax revenue by a means that does not promote the reduction of inequality, such as raising the VAT rates, the government should make sure that its expenses prioritize improving the welfare of the poor and the disadvantaged. More importantly, for all the changes associated with tax reform to be achieved successfully, fiscal transparency is needed. Fiscal transparency helps inform people how their taxes are being spent, allowing changes associated with tax reform to be understood and accepted. Finally, tax reform also requires a reform of politics and governance. Democratic participation is needed at all levels of government to allow people the opportunity to monitor and help make decisions related to taxation. Decentralization of governance should also be pursued together with fiscal decentralization, in order to equip local governments with more resources and a better ability to respond to the diverse needs of different localities.
Keyword: Thailand, Tax Reform, Fiscal Sustainability, Inequality
JEL Classification: H20, H23, H25
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1. Changing Thailand's Future with Tax Reform A proposal for tax reform often provokes public concerns, for it may relate to a rise in tax payments. Tax reform, however, can also provide opportunities for the improvement of millions of lives. Rather than just hoping for the smallest amount of tax to be paid, it is more important to recognize the opportunities that are opened by improvements in the tax system. A better tax system can lead to development in several aspects. As a crucial source of government resources, adequate tax revenue sustains the government's operation and enables more government investments. A better tax system contributes to a reduction of economic inequality, gives incentives to stimulate economic growth, and creates disincentives to reduce undesirable economic activities, such as those which generate pollution. It also supports decentralization of governance, allowing the government to be more responsive to local needs. It is worth recognizing that tax reform is not just about the government gaining a greater share of resources, but for the process of tax reform to be successful, it also needs to achieve changes in the objectives and roles of the government, in order to have a government that is more effective in improving the quality of people’s lives. The main objective of this paper is to outline a vision of tax reform for Thailand, explain why reform is needed, in what areas, and how to carry it out. This paper identifies four areas where reform can be focused; 1) promoting sustainable economic growth; 2) reducing inequality; 3) promoting decentralization; 4) solving environmental problems. The paper will be divided into 4 sections, with each section pointing to reform that can fulfill each of these objectives. The paper ends with the summary of the reform content into "ten principles for tax reform in Thailand."
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This paper is part of the "Policy Community on Taxation", a collaboration between Friedrich-Ebert-Stiftung (FES) Thailand, Thailand Development Research Institute (TDRI), and the Faculty of Economics, Thammasat University. The project ran a series of meetings from late-2015 to 2016 to promote dialogues on tax reform for Thailand. The participants of the meetings came from different sectors, including the government, NGOs, academia, and the private sector. The outcomes of these dialogues are summarized into the content of this paper.
2. Tax Reform to Promote Sustainable Economic Growth While a change in the tax system is often seen cautiously, for it can create a negative impact on economic growth, a failure to improve the tax system can also be equally detrimental to growth, particularly in the long run. Thailand's tax system can be improved to promote sustainable economic growth in two ways: 1) by promoting fiscal sustainability; and 2) by providing the right incentives for investment.
2.1. Promoting fiscal sustainability The sustainability of a country's fiscal system relates directly to its economic conditions. Recent proposals by the Thai government to raise tax revenue actually reflects the worsening fiscal situation of the country. Thailand's government budget has been in deficit for most part of the past two decades. Since 1997, barring just one year in 2005, Thailand has had fiscal deficit every year (see Figure 1). Such long-term fiscal deficit reflects the inability of the Thai government to raise adequate revenue, and subsequently leads to two other problems.
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Figure 1. Thai Government Budget Balance 1997-2015 (Unit: Millions of Baht)
Source: Siriprapanukul (2016)
Firstly, the government currently lack resources for public investment. Over the past two decades, there has been a drastic fall in the proportion of government budget available for public investment. The budget for public investment fell from 24-26 percent of the total budget during 1998-2007, to just 18- 19 percent during 2008-2016. Such a drastic reduction has subsequently led to lost opportunities in crucial areas of development, such as the failure to upgrade infrastructure. Such a lost opportunity can have a crucial impact on Thailand's competitiveness over the long run. Secondly, public debt is now rising. From 2001-2015, Thailand's budget deficit constantly increased, with the annual deficit sitting at more than 3 trillion Baht annually. While Thailand's current public debt level stands at 43 percent of GDP, a level that is still not high when compared globally, this level of debt is likely to continue to rise in the future. A major cause of the rising trend of public debt in Thailand is the country's rapid move toward an aging society. In the upcoming
30 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 decades, the increase in the old-age population will create pressure for the government's welfare expenditure to increase, while the decline in working age population is likely to reduce the capacity of the government to raise revenue. A study by Chucherd et al. (2016) suggests that without tax reform that can raise tax revenue or reduce government expenses, Thailand's public debt is projected to rise above the level of 60 percent of GDP by 2027. The rise in public debt can be harmful to long-term economic growth, due to its potential in instigating an economic recession or even an economic crisis. A sustained rise in public debt can lead to a fall in the government's credit rating, causing a subsequent increase in the cost of borrowing for the private sector, and a stagnation of the overall economic growth. To deal with the concerns over the long-term budget deficit, the government faces a crucial need to find ways to raise tax revenue. There remains an important question as to whether collecting more tax will harm the efficiency of the Thai economy. A study by the World Bank points out that there is in fact ample room in the Thai economy for a rise in taxes (Kwaja & Iyer, 2014). This study suggests that Thailand's tax revenue, currently standing at 16-17 percent of GDP (see Figure 2), can be raised to 25 percent of GDP without harming the overall efficiency in the economy. Thailand’s reduced tax intake was impacted by a number of conditions. The rates of Value Added Tax (VAT), personal income tax, and corporate income tax in Thailand are still relatively low when compared globally, especially when compared to developed countries (see Figures 3 - 5). Furthermore, Thailand's very large informal economy means a large section of its population are yet to be registered as part of the base for the country's income taxes.
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Figure 2. Tax Revenue as a Percentage of GDP by Country (2014)
Source: World Bank (2014)
Figure 3. Personal Income Tax Rates of Bottom and Top Tax Brackets by Country (2015)
Source: World Bank (2015)
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Figure 4. Value Added Tax Rates by Country (2015)
Source: Siriprapanukul (2016)
Figure 5. Corporate Income Tax Rate by Country (2015)
Source: World Bank (2015)
Two approaches should be considered to raise the tax revenue in Thailand. Firstly, the government should put efforts into enlarging the tax base. Due to the large informal economy, there are approximately 28 million people who are currently unregistered in the income tax system. This is a very large number when compared with those who are registered, which is only currently around 10 million (Siriprapanukul, 2016). The inclusion of more people into the tax base, via the use of new technology and better government monitoring, will not 33 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 only alleviate the government's budget deficit, but will also bring more justice for people who already pay taxes. Secondly, the government can raise the tax rates. At present, the VAT rate seems most likely to receive a raise. This is because the VAT rate is less complicated to raise, and will result in an immediate and large rise in the government revenue. Furthermore, Thailand's VAT rate is already in the process of adjustment, with a rise from 7 to 9 percent currently postponed until 2018. However, it is important to recognize that using VAT to raise revenue will not be helpful to alleviate Thailand's inequality problem. VAT is a tax with regressive structure, with the poor having to pay VAT more than the rich as a percentage of their income. Hence, in the case the VAT rate is raised, the government needs to make sure that more benefits will be returned to the people, especially in the form of welfare spending to the poor. At a broader level, any attempt by the government to increase tax revenue has to occur together with an attempt to improve the quality of spending. The government needs to make sure that its spending is made efficiently on things that are worthwhile for the people. This can only occur with the promotion of transparency, allowing the people to see how their taxes are being spent to generate benefits for them.
2.2. Providing the right incentives for investment The Thai government has provided tax benefits to promote foreign investment in the country. In recent years, this measure has been increasingly adopted to counter the decline in foreign investment. Thailand's foreign direct investment has slowed down when compared to other countries in the region. Giving tax benefits to encourage foreign and private investment, however, comes at a significant cost. In 2016, the tax benefits granted by Thailand’s Board of Investment (BOI)
34 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 led to a loss in corporate tax revenue of around 150,000 million Baht (see Figure 6). This is a large proportion when compared to the total amount of corporate income tax, which in 2015 was 560,000 million Baht.
Figure 6. Estimated Corporate Income Taxes (CIT) lost from BOI's tax benefits (Unit: Millions of Baht)
Source: Siriprapanukul (2016)
More importantly, giving such a tax benefit may not even help achieve the desired objective. A study by Muthitacharoen (2016) found that the Effective Average Tax Rate (EATR) that foreign investors are actually facing in Thailand is already lower than its neighboring countries that are competing to attract foreign investment. Hence, the tax incentives that Thailand is providing are already attractive, requiring no need for further reduction to promote foreign investment (see Figure 7).
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Figure 7. Effective Average Tax Rate of Thailand and its neighboring competitors in 2016
Source: Muthitacharoen (2016)
To provide the right tax incentives for investment, it is important for the government to review the cost and benefits of existing measures. There needs to be an evaluation on whether the loss in tax revenue is made up for adequately by the achievement of the measures' objectives. It is worth noting that there are a host of other factors that also have a crucial role in attracting foreign investment. One of the factors is the difficulty in doing business resulting from the complexity of regulations. Muthitacharoen (2016) found that the difficulty of complying with the tax regulations in Thailand is higher than its competitors. Firms operating in Thailand face complicated procedures related to tax payments. Such complex regulations can be reduced to help promote investment in Thailand without causing any loss in tax revenue. Another fact which is influential in attracting foreign investment, especially in the long run, is the quality of infrastructure. Rather than losing tax revenue from giving tax benefits, more tax revenue is needed to allow the government to invest in upgrading infrastructure. 36 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
3. Tax Reform to Reduce Inequality A tax system can also have a crucial function in redistributing income and reducing economic inequality. For Thailand, a country that has long suffered from economic inequality, this function can be highly relevant. Not only is economic inequality in Thailand a problem in itself, it is also associated with many problems that the country is facing, especially the political conflict that has destabilized the country in the past decade. Examining the nature of Thailand’s economic inequality raises a further need for redistribution of wealth and income. Phongpaichit and Baker (2016) explain that a crucial feature of Thailand’s economic inequality is the concentration of income and wealth in the hands of the “top 1 percent” of the population. They cited a study by Pootrakool (2013) to highlight the fact that in the past 30 years, the top 1 percentile of income in Thailand has seen their income grow 2.8 times more than the average rate. The Global Wealth Report, published by Credit Suisse in 2016, suggests that the top 1 percent wealthiest in Thailand holds as much as 58 percent of the country’s wealth. The report ranks Thailand as the country with third highest wealth inequality in the world (Credit Suisse, 2016). With the inequality problem characterized as the “top 1 percent problem”, Thailand’s inequality problem is not just relevant to the poor, but is important for most of the population. Such a characteristic implies that most of Thailand’s population have failed to gain an adequate share of the benefits from economic growth in their country. Thus, to most of Thailand’s population, having a tax system that promotes redistribution from the wealthiest to the rest will be beneficial. At present, Thailand’s tax system has a limited capacity to redistribute. Overall, Thailand’s tax system has a low level
37 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 of progressiveness when compared to other countries, especially those which are developed. Taxes that have the strongest presence in the Thai system are consumption-based taxes, such as the VAT and excise taxes. In 2014, these taxes comprised 57 percent of total tax revenue (see Figure 8). As the consumption-based taxes have a regressive nature, its strong presence limits the overall progressiveness of the Thai tax system.
Figure 8. Sources of Tax Revenue by Categories of Taxes (2014) (Unit: percentage of FY2014 tax revenue)
Source: Ananapibut (2016)
Thailand’s income-based taxes, comprising of personal income tax and corporate income tax, comprise of 42 percent of total tax revenue. While these taxes have a progressive structure, their progressiveness is compromised by two factors. The first factor is the availability of tax benefits that are biased toward the rich. These benefits include, for example, allowing investment in Long-Term Funds (LTF) and Retirement Mutual Funds (RMF) to be used in reducing personal income tax payments. The availability of these benefits compromise the
38 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 progressiveness of Thailand's personal income tax system (see for example, Table 1, on the progressiveness of personal income tax after LTF), while those who utilize such benefits are often the rich. The second factor is the complexity of rules and regulations related to income taxes. There are 2,060 laws associated with income taxes in Thailand. This creates complexity and loopholes that the rich and wealthy can maneuver to their advantage, while others cannot. Another feature of Thailand’s tax system that demonstrates its lack of progressivity is a very limited presence of wealth-based taxes. Wealth taxes, such as taxes on inheritance or land, have a strong potential to redistribute, especially in the context of high wealth inequality. At present, these taxes provide only about 1 percent of tax revenue. How can Thailand's tax system be reformed to reduce inequality? The need to solve the inequality problem must be recognized simultaneously with the need to expand tax revenue. The government must prioritize the reform options that can fulfill both the objectives of enlarging revenue and improving redistribution. There are three options that can fulfill this criteria. Firstly, the roles of taxes with a progressive structure, especially wealth-based taxes, should be expanded. While the Thai government has recently made attempts to issue some of these taxes, such as the inheritance tax, their actual impact is still limited. This is because these recent attempts still contain exemptions and loopholes that allow the taxes to be avoided, especially by the rich. Thus, there is a need for the implementation of these taxes to be reviewed in order for the current problem to be fixed. In addition, the government should study other forms of wealth taxes, looking at the possibility of new taxes, such as a tax on capital gains from the stock market.
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Effective Effective Tax Tax Rate LTF with Deduction [5]/[1] 0.0% 1.2% 3.2% 5.5% 7.6% 13.7% 19.9%
Maximum Accumulated Accumulated Tax in Bracket The after Deduction LTF [5] - 4,575 18,650 46,100 82,300 286,625 815,000
[4]
-
Taxable Taxable Income Income after LTF Deduction [2] - 241,500 411,500 624,000 836,500 1,686,500 3,500,000
Maximum Maximum Deductible Deductible LTF [1] 15% x But Exceeding Not Baht 500K [4] - 58,500 88,500 126,500 163,500 313,500 500,000
Effective Effective Tax Tax Rate without LTF [3]/[1] 0.0% 1.9% 4.7% 7.7% 10.6% 17.5% 23.6%
Maximum Accumulated Accumulated Tax in Bracket The [3] - 7,500 27,500 65,000 115,000 365,000 965,000
term Fund and Progressiveness of the of termand Personal Tax Progressiveness Income Fund
-
Long
.
Taxable Taxable Income [2] 150,000 300,000 500,000 750,000 1,000,000 2,000,000 4,000,000
able1
T
Assessable Assessable Income [1] 240,000 390,000 590,000 840,000 1,090,000 2,090,000 4,090,000
Source: Tax (2016) Community Policy Source:
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Secondly, there is a need to improve the current nature of income-based taxes to raise their progressiveness. An obvious measure here is to review and reduce the tax benefits that are not necessary, and also give advantages to the rich. Thirdly, the government must put serious efforts into promoting the transparency of its fiscal system. ‘People participation’ should be promoted to monitor government action and contribute to decision-making. More transparency can only come when information related to tax and government expenses are readily available for people to access. Such transparency will enable people to know how their taxes are being used, and whether the taxes are getting spent efficiently to generate benefits back to the people. It is important not to forget that the tax system is directly influenced by politics. In a political system that limits opportunities for most people to participate, while allowing only a small number of people to accumulate political power, the rich can easily resist any attempt that may threaten to take away their wealth. Such a system is likely to allow the rich to defy the tax reform that would promote substantive redistribution. Hence, a political reform that enhances democracy is a precondition for the success of a tax reform that could reduce inequality.
4. Tax Reform to Promote Decentralization Improving the tax system is connected the improvement of governance through decentralization. Decentralization helps bring a number of benefits. It can make public services more responsive to local needs. Devolving power and roles to local governments helps bring them closer the people, and allows more information about local demands to be incorporated in policy making. Moreover, decentralization enables people at the local level to gain the sense of ownership over their local governments. As a key element of a broader 41 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 process of decentralization, fiscal decentralization is indispensable in bringing about these benefits. Although the process of decentralization process has been embarked upon in Thailand since 1990, its progress has stagnated, especially during the past 10 years. The main impediment of such a progress is the complexity and the inability to change Thailand’s bureaucratic system. Moreover, the country’s fiscal structure also represents another problem. 85 percent of the revenue of local governments (Local Administrative Organizations) in Thailand still comes from the central government, in the form of allocations and subsidies. The revenue that local governments collect by themselves comprises of less than 10 percent of their total budget (Laovakul, 2016). The limited ability to collect their own revenue imposes a number of limitations on the roles of local governments. It limits their autonomy and capacity to improve their public services. Without being responsible and accountable directly to the taxes provided by locals, local government officials may also lose their motivation to provide better services. Lastly, having local governments receiving a large proportion of their revenue from the central government open ways for intervention into local politics by politicians and political parties at the national level. A major way to promote decentralization through tax reform is to equip local governments with the ability to collect their own revenue. Local governments should be supported to collect some types of taxes from people in their locality. These taxes can include, for example; taxes on land and buildings in the locality, and fees that reflect the usage of services and facilities provided by the local government. To allow local governments to collect their own revenue, regulations should also be revised to promote greater autonomy of local governments. Local governments should be
42 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 given the ability to design some forms of local taxes. Yet, with local governments gaining more power, local participation should be enhanced to ensure transparency and accountability in the operation of local governments. More importantly, other aspects of decentralization need to be achieved together with fiscal decentralization. For a broader process of decentralization in Thailand to be successful, there needs to be reform of the bureaucratic system. More tasks and responsibilities have to be devolved to local governments, especially those related to the provision of local services. Local governments should be given some ability to design their own services, in order for them to be more responsive to different needs in different localities. Finally, specifically for Thailand, there is a need for a clearer division of roles and responsibilities among the country's three levels of governance; the central government, regional government, and local government. Thailand's bureaucratic system has suffered due to the overlapping of roles and the confusion in responsibilities among its three levels of governance. Without solving this problem first, it will be difficult for the process of decentralization to progress. The problem can be solved by differentiating the roles clearly among the three levels, for example, having the central government making plans and strategies, the regional government performing tasks of coordinators, and the local government as the main provider of services.
5. Tax Reform to Solve the Environment Problem In contrast to other objectives, using taxes as a measure to deal with environmental problems has not received much attention in Thailand. This perhaps reflects the overall lack of awareness in Thai society on environmental issues. Thailand still faces an urgent need to curb its environment problems; the
43 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 current level of air pollution in Bangkok, for example, is among the worst in the world (Achavanuntakul, 2016). Tax measures have actually been utilized in various countries to deal with environmental problems. These measures are aimed at raising the cost of activities that create negative impacts on the environment, by internalizing the cost to those who create it. The rise in cost is aimed to help reduce the amount of activities that create a negative impact on the environment. Alternatively, tax measures can also be used to encourage the change in behavior of producers or consumers, bringing them toward economic activities that are more environmental friendly. Reflecting the country's lack of awareness on environmental challenges, Thailand has made very limited progress in developing tax measures to help solve environmental problems. In the past 5 years, there have actually been attempts to pass new laws to provide a framework for the measures, for example the draft law on Fiscal Measures for Environmental Protection Act. However, this attempt failed due to lack of support, constraints from legal technicalities, and difficulty in designing the actual implementation of the law. Such an experience reflects the challenges that are likely be faced by similar attempts in the future. Putting aside the aforementioned challenges, there are at least two ways for the Thai government to adopt tax measures to solve environmental problems. Firstly, taxes can be collected from carbon emissions. This so called “carbon tax” has been adopted in a number of developed countries such as Finland, Sweden, the United Kingdom, and Canada. The carbon tax has had an instrumental role in reducing the use of fossil fuel in these countries, and in supporting the development of alternative sources of energy. There are different options for a carbon tax to be collected in Thailand
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(see Figure 9). Like a number of developed countries, this tax can be collected based on the consumption of fuel. Other options include collecting this tax from the use of electricity, or collecting it directly from carbon emissions.
Figure 9. Options for Carbon Tax Collection in Thailand
Source: Tax Policy Community (2016)
Secondly, taxes or fees can be collected from the use of goods that generate pollution, such as plastic bags or foam containers. Doing so will raise the cost of using these goods, subsequently discouraging their use. Still, there are concerns that this type of tax could cause the price of products to rise for consumers, and in particular cause the poor to suffer more than other groups. To ease such a concern, the government can choose to subsidize environmentally-friendly products, making them more affordable to the poor.
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To gain more support for the introduction of these taxes, the revenue coming from them can be “earmarked” for specific types of expenses. By doing so, tax payers can see more clearly what they get in return from their increase in tax payment. There is also a need to make sure that the earmarking process is open for democratic participation, and can constantly reflect people's demands. Despite the concerns among producers that environmental tax measures will raise their cost of production, there are in fact ample benefits to be noted. Having these measures can help improve Thailand’s reputation on the global market. This can be a vehicle for Thailand to gain more of a competitive edge over its competitors, particularly in developed countries that contain a large number of consumers who are environmentally conscious.
6. Summary: Ten Principles of Tax Reform for Thailand Thailand is facing a number of challenges. Its economic growth has slowed down, while its society is aging fast. The Thai government has had a long-term fiscal deficit, a risk to sustainable economic growth that is likely to continue in the coming decades. At the same time, the country's high level of economic inequality persists. Its governance remains deeply centralized, and Thai society lacks awareness over its growing environmental problems. All these problems need to be taken into account in an attempt to reform Thailand's tax system. Thailand's "Policy Community on Taxation" has deliberated on the necessary elements of a tax reform for Thailand. The outcome of the discussion can be summarized into the "ten principles" as follows:
1. Generating tax revenue at the same time as reducing inequality. The overall framework of tax reform for
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Thailand is to prioritize measures that can simultaneously raise revenue for the government, while at the same time redistribute income from the rich to the poor. 2. Expanding the tax base while reducing unnecessary tax privileges. At present, enlarging government revenue is necessary to ensure fiscal sustainability. An approach that should be prioritized is to enlarge the tax base by bringing more people to register their personal income tax and corporate income tax. In addition, the government should reduce the complexity of rules and regulations related to income tax, and limit unnecessary tax benefits, such as tax benefits from investments in LTF and RMF. These tax benefits have not only led to a loss of tax revenue, but disproportionately advantage the rich. 3. Expanding tax revenue from wealth-based taxes. The government should expand the capacity to collect more taxes from wealth, such as inheritance taxes and land taxes. Although the revenues generated from these measures may not be significant, their existence has crucial implications for the reduction of inequality. However, the implementation of these measures needs to be made carefully to avoid generating unintended impacts on the poor and the middle class. 4. Reviewing current tax benefits. Tax benefits provided to promote investments, such as those given by Thailand's Board of Investment (BOI), should be regularly evaluated. There needs to be a consistent review of the benefits, to monitor whether the given benefits are fulfilling their objectives. The government should also look more toward other options in promoting investments, such as promoting the ease of doing 47 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
business and reducing the cost of compliance to procedures in tax payments. 5. Restructuring government expenditure. In the case that the government chooses to generate revenue through measures that are not directly helping to reduce inequality, it should make sure that the need to address the economic inequality is answered through government expenditure. The government must ensure that its expenditure is structured in a way that helps promote welfare to the poor and the disadvantaged. 6. Developing new forms of taxes. The government should look into the possibilities of issuing new forms of taxes, such as the earmarked tax. By explicitly specifying the uses of the revenue, the earmarked tax can provide a transparent link between tax revenue and government expenses. Another form of tax that the government should consider is a capital gains tax applied to the gains from the stock market. As a form of wealth tax, such an option can promote equality at the same time as generating revenue. However, the impact of these taxes needs to be studied carefully before their actual implementation. 7. Promoting fiscal decentralization. Rules and regulations should be improved to give local governments more autonomy and capacity to manage their own fiscal budget. Instead of receiving subsidies and allocation from the central government, local governments should have the ability to collect their own revenue, collect local taxes such as land and building taxes, and collect fees for local public services. Local governments should also be given some freedom to design their services, in order to respond to the demand of people in their own locality. 48 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
8. Adopting tax measures to solve environmental problems. The government should consider introducing new forms of environmental taxes, such as a carbon tax. Doing so will help promote Thailand's reputation in the global market. It can enhance the competitiveness of Thailand's exports, especially to countries with strict environmental standards. In addition, the government may consider collecting taxes and fees to raise the cost and reduce the use of products such as plastics bags and foam containers. To reduce the negative impacts from such a measure on consumers, revenue generated can be used to subsidize more environmentally friendly products. 9. Promoting fiscal transparency. Information on taxes and government expenses should be made open to the public. Doing so not only makes sure that the public knows how their taxes are being spent, but it also helps people acknowledge the benefits they receive from their taxes and accept changes resulting from the tax reform process. Fiscal transparency also encourages the government to improve the quality of their spending. 10. Restructuring political structure. It must be recognized that any change in the tax system is connected to the wider political structure, with the change inevitably affected by negotiations between interest groups that are politically and economically powerful. Thus, a necessary condition that will enable tax reform to be more beneficial to ordinary people is the promotion of ‘people participation’ in the reform process, and in monitoring and determining the direction of government policies. Finally, for a reform to be successful, the scope of tax reform should be extended to cover the broader reform of institutions associated
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with administering tax policies, tax collection, and the allocation of tax revenue.
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References Achavanuntakul, S. (2016). Tax Reform to Promote Sustainability and Competitiveness: Some Observations. A presentation for meeting on Tax Reform to Promote Sustainability and Competitiveness, Thailand Policy Community on Tax Reform, 18 June 2016, Eastin Grand Hotel, Bangkok. Ananapibut, P. (2016). Reforming Tax to Redistribute Income and Promote Inequality in Thailand. A presentation for meeting on Tax Reform to Promote Redistribution and Reduction of Inequality, Thailand Policy Community on Tax Reform, 27 Febuary 2016, Banyan Tree Hotel, Bangkok. Chucherd, T., Angklomkliew, S. & Apaitan, T. (2016). The Perspectives of Debt Dynamic and Fiscal Limit on Fiscal Sustainability in Thailand, (in Thai). Thammasat Economic Journal, 34(1), 57-105. Credit Suisse. (2017). Global Wealth Databook. Credit Suisse Research Institute. Kwaja, M.S. & Iyer, I. (2014). Revenue Potential, Tax Space, and Tax Gap. Policy Research Working Paper No.6868. The World Bank. Laovakul, D. (2016). Reform Tax Through Decentralization. A presentation for meeting on Tax Reform and Decentralization, Thailand Policy Community on Tax Reform, 1 May 2016, Banyan Tree Hotel, Bangkok. Muthitacharoen, A. (2016). Assessing Tax Incentives for Investment: A Case Study of Thailand. Southeast Asian Journal of Economics, 4(2), 105-128.
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Phongpaichit, P. & Baker, C. (2016). Introduction: Inequality and Oligarchy. In Phongpaichit, P. & Baker, C. (Eds). Unequal Thailand: Aspects of Income, Wealth, and Power. NUS Press: Singapore. Pootrakool, K. (2013). The Quality of Growth from the Perspective of Income Distribution: Problems and Solutions. Paper presented at the Bank of Thailand Annual Seminar 2013. Siriprapanukul, P. (2016). Tax Structure of Thailand. A presentation for meeting on Tax Reform to Enlarge Revenue, Thailand Policy Community on Tax Reform, 16 July 2016, Eastin Grand Hotel, Bangkok.
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Appendix
Thailand’s Policy Community on Taxation
“Thailand’s Policy Community on Taxation” arose from a collaboration between Friedrich-Ebert-Stiftung (FES) Thailand, Thailand Development Research Institute (TDRI), and the Faculty of Economics, Thammasat University. The aim of the project was to create a group of policy advocates that share the vision in building an accountable tax system that promotes equality and sustainable growth in Thailand. The project also sought to expand the network toward allies who share the same vision in disseminating the ideas and the proposal for Thailand’s tax reform. Thailand’s Policy Community on Taxation connected actors from different social sectors, including the academia, public sector, private sector, and civil society. The project brought them together to exchange their insights and knowledge, especially on the problems relate to the tax system of Thailand, and the approach for the improvement of such a system. Thailand’s Policy Community on Taxation held 6 meetings from November 2015 to September 2016. Each of the meetings discussed a major aspect of Thailand's tax system, covering aspects that range from redistribution, decentralization, promotion of sustainability, improvement of competitiveness, and enlargement of tax revenue. The discussion of these aspects was synthesized in the final meeting that aimed at drafting a policy proposal. Each of the policy community meeting started with the invited experts outlining the points for discussion, followed by open exchange of ideas by the participants.
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The 6 meetings that were organized as part of Thailand’s Policy Community on Taxation were:
1. Building Thailand Policy Community on Taxation, 28 November 2015, Centara Grand at Central Ladprao, Bangkok 2. Tax Reform to Promote Redistribution and Reduction of Inequality, 27 February 2016, Banyan Tree Hotel Bangkok 3. Tax Reform and Decentralization, 1 May 2016, Banyan Tree Hotel Bangkok 4. Tax Reform to Promote Sustainability and Competitiveness, 18 June 2016, Eastin Grand Hotel, Bangkok 5. Tax Reform to Enlarge Revenue, 16 July 2016, Eastin Grand Hotel, Bangkok 6. Proposal for Thailand's Tax Reform, 16-18 September 2016, Sampran Riverside Hotel, Nakorn-Pathom
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55 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Role of Education Policies in Bhutan and its Impact on the Economy
Deki Wangmo Economics Teacher Motithang Higher Secondary School Department of School Education Ministry of Education Thimphu, Bhutan [email protected]
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ABSTRACT Education has had a tremendous impact on economic development both in general and in helping to transform the lives of individuals. There is no doubt that education is a core element of any sector development. However, education is also criticized for creating unemployment and increasing rural-urban migration which created more pressure on employment. Therefore, to have a successful economic transformation, education policies and curriculum should be adopted to match the changing needs of society. This paper portrays the role of education policies in Bhutan and its impact on the economy in stylized facts.
Keyword: Education policies, Education in Bhutan, Human capital development, Economic development
JEL Classification: O15, I20, J00
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1. Introduction There has been a general understanding that improving human capital is an important factor for regional and national development which is reflected in the literature on economic development. An example is Solow (1956) which illustrated how technology can affect economic growth by introducing technology as an exogenous variable not affected by the marginal rate of substitution between capital and labor. Another model proposed by Romer (1990) built on this by endogenizing technology and linked it to human capital, knowledge accumulation and economic growth. Linked to this is the work on regional development; Jacobs (1969) found that as the scale and diversity of cities increases, the increasing network links between economic actors result in more and newer ideas and innovations. On top of this, Andersson (1985) explored the historical role of creativity in regional economic development, examining the importance of culture, communications, creativity and knowledge. Lucas (1988) put forward that the theory of human capital focuses on the way an individual divides their time over various activities affects their productivity. Benhabib and Spiegel (1994) summarizes this viewpoint, concluding that the accumulation of human capital has long been considered an important factor for economic development. According to Healy and Côté (2001), human capital is potentially of key importance in determining potential positive outcomes, including higher income, life satisfaction, and social cohesion. Further, Benhabib and Spiegel (1994) stated that human capital can affect economic growth through two mechanisms: influencing the rate of local technological innovation, and the capacity of adopting technology from abroad. Florida, Mellander and Stolarick (2008) expanded on this by putting forward two possible issues, the distinction
58 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 between educational versus occupational measures of human capital, and the factors that affect its distribution. Benhabib and Spiegel (1994) suggested two alternative routes through which human capital can play a role in economic growth: attracting physical capital, and as a determinant of the magnitude of Solow residual; this was supported to some degree by the empirical evidence. One of the important questions in the debate on the human capital revolution in the economic literature is that, if education is considered as accumulating capital, then the rate of return needs to be understood and it must provide a clear comparative advantage. Psacharopoulos (1985) found that with regards to levels of schooling, private returns exceed social returns because education is often publicly subsidized. Furthermore, the gap between public and private returns are the greatest in the poorest countries, and in higher levels of education. Conversely, Cypher and Dietz (2008) identified one of the key barriers that thwart economic growth and development being an ineffective educational system, for example low levels of general literacy and an inefficient allocation of resources between primary, secondary, and higher education. Today, many developing countries consider an investment in education as one of the important investments for the economic development. According to Bray (2002), for all developing countries, education is seen as a major investment towards achieving economic and social goals, however he argues that governments routinely underinvests. Bhutan is a land-locked developing country bordered by China in the North and India in the South, covering an area of 38,394 square kilometers. It opened to the outside world in the early 1960s and modern development followed shortly after. Today, Bhutan has a unique development philosophy: the Gross National Happiness (GNH), a development guiding principle that provides more importance to well-being of its
59 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 people over materialistic growth. Hydro power is the backbone of the Bhutanese economy followed by tourism and agriculture. The modern educational system started at the same time as it opened to the modern development in 1960s. Since then, frameworks for the education systems were developed so to achieve education millennium development goals today. In 2003, the country’s first university, the Royal University of Bhutan, opened by joining together eight higher education institutes and two teacher training education institutions (Jamtsho & Bullen, 2007). The objectives of this paper are to: (i) identify the effects of education and economic growth, (ii) review the education policies and (iii) provide policy recommendations.
2. Overview of Education Policy Power (2000) suggested “In the Twenty-first century, nations will become both more competitive and yet more interdependent, and their future ever more dependent on the knowledge, skills and resourcefulness of its people, creating new opportunities and difficulties for education” (p. 152). Education is prerequisite for the central element of the progress and the development of a nation. As such, education is no longer the privilege of the few but a basic right of all our young people. Since the commencement of formal education 1960’s Bhutan has seen remarkable achievements within a few decades. The need for modern education was felt because of the recognition of the importance of human capital development for Bhutan’s socio-economic development. Although modern education is very young in Bhutan, it has undergone major transformations in recent years. The significant progress made in education is a clear indication that the country has prioritized development of human resources in
60 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 the country. Figure 1 indicates the growth in number of schools and institutes since the first Five Year Plan (FYP).
Figure 1. Growth in number of Schools and Institute
900
800 792 815 747 700 670 600 535 500
400 408
300 268 200
100 98 119
0 11 1961 1971 1981 1992 2002 2008 2012 2013 2014 2015
Source: Policy and Planning Division, Bhutan (2015)
Phan and Coxhead (2013) suggested that, particularly in developing economies, there is a strong correlation between education and economic development. This paper will focus on the education policies in Bhutan and discuss the implications for economic development. The Department of Education, Bhutan (2002) stated that “it is important to examine the policies in any given education system, the ways in which they interact and impact upon system performance and other underlying factors that may inhibit or strengthen established policies” (p. 1). As such, the need to review and analyze the policies in education in Bhutan is essential. The way education policies are implemented will determine its 61 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 ability to transform the education and learning outcomes in Bhutan. One of the most prominent features of successful educational reforms in other countries is clear guidance provided by a well-informed goal or vision and is proper implementation through careful planning, management, monitoring, and evaluation (Wangchuk, 2015).
2.1 Education structure in general As indicated in Table 1, 11-year free basic public education is provided in Bhutan from Pre Primary (PP) classes to Grade X. This is comprised of seven years of primary education, starting at the age of six, and four years of middle Secondary Education (VII-X). There is a national board examination (BCSE) upon completion Grade X. After Grade X, students can choose to either continue their general education for two years in Grades XI and XII in Higher Secondary schools, enter technical training institutes, or join the labor market. This is often based on a students’ performance in national board examinations. A qualifying percentage is set by the Board of Examination to determine whether a student can continue studying in government schools or look for their own private higher secondary school. Some economically disadvantaged students, who cannot afford to continue in the private schools, exit to enter vocational training institutes. The course offered at vocational institute ranges from six months to two years. After completing Grade XII students can either join the colleges under the Royal University of Bhutan or private colleges
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22
21
Year
th
20
4
–
st
19 1 Tertiary Education Undergraduate Courses
Educational SystemEducational
18 XII
17 Continuing Labor Market XI Higher Education Higher Secondary School Education Vocational
16 X
15 IX
14 VIII
13 VII
formal centres formal
-
12 VI Education Secondary School Secondary Middle Non
11 V
10 IV
9 III
Table 1: System TableEducation General 1:
8 II
7 I
6 PP Education Primary SchoolLower Secondary
5
4
school school
-
(ECCD) 3 centres Pre Early childhood care and development Primary School
Annual Education (2015) Statistics Annual
: :
Age Level Source 63 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 abroad. The selection for students in the government colleges is based on the merit ranking of their performance. 2.2 Primary Education Target 2.A of the United Nations Millennium Development Goal is to achieve Universal Primary Education by 2015, that is, to ensure that children everywhere, boys and girls alike, will be able to complete a full course of primary schooling1. Primary education is proposed as a factor which can contribute to sustainable economic development in the country. Therefore, there should be strong foundation built by primary education. The progress of other sectors depends on the quality of primary education in the country (Annual Education Statistics, 2015).
Table 2. Enrollment ratio since 2008 (in percent) Year Gross Primary Net Primary Enrolment Enrolment Male Female Total 2015 112 92.4 98.1 95.2 2014 113 96 94 95 2013 116 95 96 96 2012 118 95 96 96 2011 120 94 96 95 2010 118 93 95 94 2009 116 91 93 92 2008 112 87 89 88 Source: Annual Education Statistics (2015)
1 http://www.un.org/millenniumgoals/education.shtml Accessed 22 March 2018. 64 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018
Table 2 shows a dramatic increase in enrollment in the primary education between 2008 to 2015 of about 7 %, despite many challenges especially in this area.
2.3 Curriculum Table 3. Number of students in Tertiary Education by field of study and gender, 2014 Field of study Male Female Total Architecture and Design 7 8 15 Commerce and 683 658 1,341 Accountancy Education 1,498 1,259 2,757 Engineering and 1,250 510 1,760 Technology Forestry and Agriculture 389 149 538 Languge/Literature 943 948 1,891 Management Studies 519 510 929 Medical Technology 71 59 130 Medicine 40 24 64 Nursing 122 145 267 Public Health 16 9 25 Law 38 68 106 Science/ Mathematics 342 167 509 Social Sciences 340 417 757 Total 6,258 4,831 11,089 Source: Annual Education Statastics (2015)
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For any country the curriculum would be designed in such a way that it suits the needs of the country’s labour market. In Bhutan, the curriculum is designed in such a way that it can provide students with ideas, knowledge, skills and values in realizing GNH and also to make them ready for the job market. Table 3 shows the curriculum taught to students from PP to Grade XII. For the tertiary level education, the Royal University is responsible for implementing the curriculum. The tertiary education system in Bhutan offers only undergraduate and diploma programs with courses ranging from two to four years. Besides government scholarships, there are various scholarships provided by the donor countries like India, Japan, and Thailand. Students who do not qualify by failing to achieve the required marks, study in the private colleges in the country or abroad. As per the Annual Education Statistics 2015, the gross enrolment ratio (GER) for tertiary education in Bhutan is estimated at 26.4% with a gender parity index (GPI) figure of 0.79.
2.4 Legal frameworks The Constitution kingdom of Bhutan 2008, Article 9 states that:
The state shall endeavor to provide education for the purpose of improving and increasing knowledge, values and skills of the entire population with education being directed towards the full development of the human personality. Article 16, further clarifies that the state shall provide free education to all children of school going age to tenth standard and ensure that technical and professional education is made generally available
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and that higher education is equally accessible to all on basis of merit (p.31).
Children in Bhutan have traditionally relied on their parents and relatives for protection but with changes brought about by modernization, there is a need to enact legislation and policies on issues concerning children (Education for all: Mid- decade assessment in Bhutan). In this regard, The Convention on Rights of Children (CRC) was signed in June 1990 and ratified in August 1990 by the Royal government of Bhutan. This was to signal that Bhutan would endeavor to ensure survival, protection, development and participation of all children. With this legislation in place Bhutan’s enrolment stands at 106.61%.
Figure 2. Gross Primary enrollment (in percent)
122
120 120
118 118 118
116 116 116
114 113 112 112 112
110
108 2008 2009 2010 2011 2012 2013 2014 2015
Source: Annual Education Statistics (2015)
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2.5 Financial commitment Given the fact that education helps to open doors, provide opportunities and gives liberty to people and most importantly it also helps nations to foster peace and reduce poverty through economic growth. Therefore, the commitment made to education in many countries is of the highest importance and this can be seen through the share of budget allocated. Likewise, in Bhutan, the share of budget allocation in education is one of the highest. Public education expenditure stood at 7.3 percent of GDP and 16.7 percent of total government spending (Ministry of Finance, Bhutan, 2015). As per the record of Annual Education Statistics (2014), in the financial year 2013-14, a total amount of Nu 5,701.3 million (revised budget) was allocated for the education sector. Of this budget allocation, Nu 5,370.3 million was spent by the education sector in the financial year 2013-2014.
Figure 3. Sector Allocation for FY 2015-16
1 Health 4 8 Education 6 Economic and Public services 11 18 RNR
2 Trade and Industry
12 Roads
Urban Develoment, Housing and Public amenities 36 Communaction and Transport
Energy
Source: National Budget for the Financial Year 2015 -16
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2.6 Decentralization According to the report Education Policy Research Series, Discussion Document No. 5, 2014, it is expected that decentralization would reduce the financial burden on the central government, while at the same time improve the relevance, efficiency and effectiveness of education provided. Decentralization and transferring of decision making is amongst the most intriguing recent school reforms (Hanushek, et al., 2011). Policy planning and administration is done at the ministry level. Responsibilities such as supply of teaching learning materials, teacher deployment and policy implementation are borne by the districts and the report is to be submitted to the ministry. With the launch of Autonomous schools in 19 state schools as a pilot test in 2015, the schools were given more power in decision making. According to Operational Guidelines for Central Schools, 2014, “The key areas of autonomy are staffing, budget, curriculum and assessment practices, schedule and governance. While each autonomous school can choose to exercise the flexibilities, they are also obliged to meet a number of mandated responsibilities”. With schools functioning as an Autonomous entity, it is expected that they would improve the quality of their education as well as increase their efficiency.
3. Positive impact of education on economy Bhutan clearly sees education as a main driving force for the country’s economy. The report of Unemployed Youth Perception Survey, 2014 stated that Bhutan’s economy is one of the fastest growing in the world and is ranked fourth by the IMF in terms of the speed of growth. The average growth rate has been at 8% since 2000, GDP per capita has more than tripled from US$780 in 2000, to US$2,460 in 2013. Social 69 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 progress, especially in health, education and poverty has met almost all of the Millennium Development Goals. Amongst them, education was very progressive with increasing net enrolment in primary schools from 84% to 91.5% by 2007. This manifestation of high achievement in education is a potential reason why Bhutan was able to make such a huge progress in economic development in a short period of time. As mentioned by Psacharopoulos, (1994) “people educated in states with high quality schools exhibit higher returns to additional years of schooling”. The main purpose of higher education is to prepare students for the job market (Harvey, 2000), and education helps to find better job opportunity and contribute to the economic development of a country. As pointed out by Sanyal (1987): “Whatever the political ideology of a government, the employment of graduates from institutions of higher education is considered an essential element of national development”. Thus, the government budgeted a substantial amount to the Education sector in Bhutan as mentioned previously. Education has been and is the means and to create employment and bring economic development to a country. A large part of modern economic growth (70%) is contributed by an increase in the knowledge embodied in technological advancement which is human capital. Therefore, it is not surprising to see that governments place so much importance on education and on skills development for human capital. Higher economic growth in Bhutan is accompanied by an increase in the productivity of the factors of production driven by an increase in the education attainment. Since 1981, the Bhutanese economy has experienced structural changes that are usually considered to be a major feature of modern economic growth which took place with the start of modern education. The current formal education system was introduced in the first Five Year Plan in 1961 and has since
70 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 been expanded to develop the necessary human resources required for socio-economic development of the country, as well as improving overall welfare (Annual Education Statistics, 2015). An indication of economic progress can be seen in the shift of occupational structure from the primary sector to the secondary and tertiary sectors and the share of GDP contribution from each sector. In 1981, the primary sector contributed to 56% to the GDP, while it has declined to 16% in 2013. Corresponding to the decline in share of primary sector, share of secondary and tertiary sector increased by 42%. (National Statistics Bureau, 2013). These structural changes are one of the measures of the fact that the growth process has an education influence on the economy. Figure 4 shows the view of share of different sectors in 2013.
Figure 4: Percentage share of GDP by major sectors (1980 and 2013) 60 56
50 42 42 40 32 30
20 16 12 10
0 Primary Secondary Tertiary
GDP contribution in 1981 GDP contribution in 2013
Source: National Statistics Bureau, 1981 and 2013
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4. Drawbacks of education on employment Although education is seen as one of the most important factors for economic development, it may also be partly responsible for creating an unemployment problem as graduates may have suffered from an irrelevant curriculum and lack of job opportunity in the market. According to Sanyal (1987), the expansion of higher education may have created as many problems as it has solved, such as: (i) the lack of relevance in the content and structure of the system of higher education with respect to national needs, (ii) lack of confidence in the institutions of higher education by production sectors in the economy due to lack of interaction between the two areas; (iii) rural migration caused by the location of these institutions in urban areas; (iv) the students' increased expectations, which could not be met; and (v) most importantly, a mismatch in number and quality between graduates produced by the system and opportunities in the labour market. Most of the people viewed education as a guarantor of employment, so the problem sprouted in the form of unemployment and underemployment among most university graduates in Bhutan. According to the Unemployed Youth Perception Survey Report of Bhutan (2014), youth unemployment amongst those aged 15-24 was 9.6 percent, which is marginally higher than the national unemployment average. The report states that amongst the unemployed, 1.2% had Masters Degrees or higher, while 48.5% had undergraduate degrees. A little over 36% had completed secondary education, while those with Grade X qualifications consist of 12.1%. Youth with only Grade IX and below education represented 1.2% as shown in Figure 5.
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Figure 5. Percentage share of unemployed by Educational Attainment
Others No Primary 1% Education 4% 6% Lower Secondary Bachelor 4% degree and Middle above Secondary 42% 15%
Higher Secondary 28% Source: Labor force survey (2015)
From the figure, we can question the relevancy of tertiary curriculum in Bhutan to the job market as the youth with undergraduate degrees form the highest unemployed group. Traditionally when there was no modern education, the definition of unemployment was not known to Bhutan. With the onset of modern education, the ideas of education in all the minds of the people are merely to provide employment opportunities. With every youth passing out from the universities, they start to look for the white collar jobs and occupations in the agriculture sector was neglected, which was also responsible for a rural-urban migration. The youth who passed out from the universities are reluctant to go back to villages and work. In most of the cases in every country, it was found out that education did not prepare them adequately for work and hence they remain unemployed. Therefore, policymakers should pay special attention to increase the rigor, 73 Thammasat Review of Economic and Social Policy Volume 4, Number 1, January – June 2018 relevance, and engagement of the school curriculum. Although the link between education and employment is now recognized, the inherent interrelationship was forgotten and academics had been separated from employment markets. With the demand for graduates exceeding supply, attention was focused on fields in which graduates were in short supply with little thought was given to unemployment (Sanyal, 1987). When education fails to address the relevancy of job market, it can cause a stagnation in economic growth, potentially for a long time. If such high youth unemployment continues in a long term, the education and skills of Bhutan’s youth would not be put to productive use and would limit the development possibilities for the country.
5. Policy recommendations i) Policies should be reassessed on a regular basis to match the needs of the economy. ii) Coordination is required across the public and private sector to make the best of higher education institutions. iii) The education system should be tailored to become more relevant in changing social needs in the world of work. iv) Policies to boost youth employment have to fit the country’s development needs across the different areas of growth, and address the industrialization and servicification of the economy. v) Education policy should address skills deficiencies in the labour market by ensuring that skills training in the education system match the needs in the future.
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6. Conclusion Education has tremendous impact on the economic development in general and particularly education in itself has helped to transform the life of individuals. There is no doubt that education is the core element of any sector development. However, education is also criticized for creating unemployment and increasing rural-urban migration which created more pressure on employment problems. Therefore, to have a successful economic transformation, education policies and curriculum should be adopted to the changing needs of the society.
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References Andersson, A. (1985). Creativity and regional development, Papers in Regional Science, 56(1), 5-20. Bray, M. (2002). The costs and financing of education: Trends and policy implications. Manila: Asian Development Bank. Benhabib, J., & Spiegel, M. M. (1994). The role of human capital in economic development evidence from aggregate cross-country data. Journal of Monetary economics, 34(2), 143-173. Cypher, J. M., & Dietz, J. L. (2008). The process of economic development. Routledge Department of Education, Bhutan (2002). Education Sector Strategy: Realizing Vision 2020 Policy and Strategy Florida, R., Mellander, C., & Stolarick, K. (2008). Inside the black box of regional development—human capital, the creative class and tolerance. Journal of economic geography, 8(5), 615-649. Healy, T., & Côté, S. (2001). The Well-Being of Nations: The Role of Human and Social Capital. Education and Skills. Organization for Economic Cooperation and Development, 2 rue Andre Pascal, F-75775 Paris Cedex 16, France. Hanushek, E. A., & Woessmann, L. (2011). How much do educational outcomes matter in OECD countries? Economic Policy, 26(67), 427-491. Harvey, L. (2000). New realities: The relationship between higher education and employment. Tertiary Education & Management, 6(1), 3-17.
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Jamtsho, S., & Bullen, M. (2007). Distance education in Bhutan: Improving access and quality through ICT use. Distance education, 28(2), 149-161. Jacobs, J. (1969). Strategies for helping cities. The American Economic Review, 652-656. Lucas, R. E. (1988). On the mechanics of economic development. Journal of monetary economics, 22(1), 3- 42. Ministry of Finance, Bhutan (2015). National budget financial year. Ministry of Labor and Human Resource, Bhutan (2014). Unemployed Youth Perception Survey report. National Statistics Bureau, Bhutan (2015). Bhutan at a glance. Phan, D. and Coxhead, I. (2013). Princelings and Paupers? State Employment and the Distribution of Human Capital Investments Among Vietnamese Households. Available at SSRN: http://dx.doi.org/10.2139/ssrn.2265481 Policy and Planning Division, Bhutan (2015). Annual education statistics. Power, C. N. (2000). Graduate Department of Education, University of Queensland. School governance: Research on educational and management issues, 1(3), 152. Psacharopoulos, G. (1985). Returns to education: a further international update and implications. Journal of human resources, 583-604. Psacharopoulos, G. (1994). Returns to investment in education: A global update. World development, 22(9), 1325-1343.
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Romer, P. M. (1990). Human capital and growth: theory and evidence. In Carnegie-Rochester Conference Series on Public Policy (Vol. 32, pp. 251-286). North-Holland. Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 65-94. Sanyal, B. C. (1987). Higher Education and Employment: An International Comparative Analysis. The Falmer Press, Taylor & Francis Inc., 242 Cherry St., Philadelphia, PA 19106-1906. Wangchuk, N. (2015). Principals’ Perspectives on Autonomous Schools in Bhutan (Doctoral dissertation).
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