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Public Disclosure Authorized - 'upa Public Disclosure Authorized ,~ a' ~ - i= t$6> W~ b -1!Q 1~~~~~~~~4 1- Public Disclosure Authorized Public Disclosure Authorized W 0 R L D B A N K COMPARATIVE MACROECONOMIC STUDIES Thailand's Macroeconomic Miracle StableAdjustment andSustained Growth I For Suthida and Divina Thailand's Macroeconomic Miracle StableAdjustment andSustained Growth PETER G. WARR B HANUPO NG NI D HIPRAB HA THE WORLD BANK, WASHINGTON,D.C. OXFORDUNIVERSITY PRESS, KUALA LUMPUR C) 1996 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W., Washington, D.C. 20433 Distributed exclusively in Asia and non-exclusively in the rest of the world by Oxford University Press 4Jalan UJl/5. Seksyen U] Hicom Glenmarie Industnial Park 40000 Shah Alan Selangor Darul Ehsan Malaysia All rights reserved Manufactured in the United States of America First printing October 1996 The World Bank Comparative Macroeconomic Studies series emerges from a research project that reviewed the macroeconomic experiences of eighteen developing countries over a period roughly from 1965 to 1990. So that the studies might be published with relatively little delay, the books have been edited outside the World Bank's Office of the Publisher by the Macroeconomic Research Department. The findings, interpretations, and conclusions expressed in this publication are those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to the members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Dr., Danvers, Massachusetts 01923, U.S.A. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'[ena 75116 Paris, France. Cover desigu by Saot Ferro Peter G. Warr is the John Crawford Professor of Agricultural Economics at the Australian National University, Canberra, Australia. Bhanupong Nidhiprabha is Associate Professor in the Faculty of Economics at Thammasat University, Bangkok, and Research Fellow at the Thailand Development Research Institute, Bangkok, Thailand. World Bank ISBN 0-8213-2654-6 Oxford University Press ISBN 983-56-0000-7 Library of Congress Cataloging-in-Publication Data Warr, Peter G. Thailand's macroeconomic miracle: stable adjustment and sustained growth / Peter G. Warr, Bhanupong Nidhiprabha. p. cm. Includes bibliographical references. ISBN 0-8213-2654-6 1. Structural adjustment (Economic policy)-Thailand. 2. Thailand-Economic policy. 3. Thailand-Economic conditions. 1. Nidhiprabha, Bhanupong, 1954- . 11. Title. HC445.W363 1996 338.9593-dc2O 95-13672 CIP Contents Foreword vii Acknowledgments ix Thai Names x Acronyms xi Data Notes xii Chapter 1. Introduction I Part One. The Macroeconomic Policy Environment Chapter 2. The Political and Historical Setting: The Paradox of Policy Stability 7 Thailand's Turbulent Political History 8 Sources of Economic Conservatism /9 Conclusions 29 Chapter 3. The Economic Setting: Structure and Performance of the Thai Economy 30 Social Character 30 Market Structure 31 Economic Performance 42 Appendix: Thailand's Macroeconomic Data Base 60 Chapter 4. The Policy Setting: Role of the Public Sector 67 The Institutional Framework 68 The Development Plans 70 The Fiscal System 75 Sectoral and Market Interventions 77 Public Provision of Infrastructure 87 Public Enterprises 89 Regulation of External Public Sector Debt 93 1* vi Thailand's Macroeconomic Miracle: Stable Adjustment anti Sustained Growth Part Two. Macroeconomic Adjustment to External Shocks Chapter 5. The Shocks 99 Balance of Payments Shocks 99 Effects of the Shocks on National Income 106 Effects of the Shocks on Economic Growth 112 Conclusions 116 Chapter 6. Thailand's Macroeconomic Response 117 Analyzing the Adjustment Response 117 Thailand's Aggregate Response 121 Conclusions 135 Chapter 7. The Role of Fiscal Policy 138 Fiscal Adjustment: 1970-90 138 Discretionary or Automatic Fiscal Stabilizers? 143 Sources of Stabilization 154 Conclusions 165 Chapter 8. The Role of Monetary Policy 168 Autonomy of Monetary Policy 169 Control of the Monetary Base 184 Instruments of Monetary Policy 190 The Performance of Monetary Policy 197 Conclusions 203 Chapter 9. The Role of Exchange Rate Policy 205 The Record of Exchange Rate Policy 205 The Policy Environment of Devaluation 210 Effects of Devaluation: Wages, Balance of Payments, Inflation 212 Post-1984 Exchange Rate Setting 215 Exchange Rate Policy and Relative Prices 216 Conclusions 227 Chapter 10. Conclusions: Thailand's Miracle? 228 Pattern of Response to Shocks 228 Were Fiscal and Monetary Policy Stabilizing? 230 Why the Macroeconomic Conservatism? 232 How Well Has Thailand Adjusted? 235 Notes 237 Bibliography 240 Index 251 Foreword This volume is the product of an intensive World Bank study of recent macroeconomic policy that reviewed the recent experience of eighteen countries as they at- tempted to maintain economic stability in the face of international price, interest rate, and demand shocks or domestic crises in the form of investment booms and related budgetary problems. The project paid particular attention to the 1974-79 period (which included the first and second oil price shocks), the 1980-82 period of worldwide recession and external debt problems for many developing countries, and the 1983-90 period of adjustment to economic difficulties and the re- sumption of growth. The objective of the project was to glean instructive lessons by analyzing the stabilization and adjustment policies pursued by these countries and assessing the outcomes. The authors of each country study were asked to deal with a common set of questions concerning the nature of the shocks or crises: their origin and de- gree of seriousness; the fiscal, monetary, exchange rate, and trade policies adopted in hopes of preventing permanent harm to the economy; and the results of the policies. No single computable macroeconomic model w as used in the project, but the framework of the open-economy macroeconomic model was followed to ensure consistency in generalizing about policy results. This intensive study of many ep- isodes generated ideas and suggested relationships showing the cause and effect behind the policies, the nature of the shocks and cri\es, and the governmental response to them. The overall findings of the project are presented in a synthesis volume by 1. M. D. Little, Richard N. Cooper, W. Max Corden, and Sarath Rajapatirana. Boom, Crisis, and Adjustment: The Macroeconomic Experience of Developing Countries. Thailand provides a case study of relatively successful adjustment. Despite significant external economic shocks and some internal political instability, Thai- land was less adversely affected by the turbulence of the 1970s and early 1980s than virtually any other oil-importing developing country. The successful adjustment took the form of consistently high rates of economic growth, low inflation, and only moderate growth of external debt. The present study provides details of how this was accomplished. The role of economic policy is a central theme. The results of the study show the importance of cautious macroeconomic policies, combined with reliance on market mechanisms as the principal means of re- source allocation. While the Thai achievement of sustained economic growth vii viii Thailand 's Macroeconomic Miracle: Stable Adjustment and Sustained Growth combined with macroeconomic stability is impressive, the policies which pro- duced this outcome appear to be capable of being emulated by other developing countries, should they choose to do so. Publication of this study was made possible by a generous grant from SIDA, the Swedish International Development Authority. Sarath Rajapatirana Director, "Macroeconomic Policies, Crisis, and Grovvth in the Long Run" Research Project. Economic Adviser, Operations Policy Group Acknowledgments The authors wish to acknowledge the contributions of the many individuals who have assisted in this study. Work on this manuscript began in 1986, when Peter Warr was a visiting professor in the Faculty of Economics at Thammasat Univer- sity, Bangkok. At that time, Bandid Nijathaworn, then of Thammasat University, was a member of our team. In 1987 Bandid Nijathawom left Thammasat to join the International Monetary Fund and subsequently the Bank of Thailand. We gratefully acknowledge his important contribution to the initial stages of our research, without implicating him in the many changes of direction and emphasis that occurred thereafter. The World Bank project leaders-Richard Cooper, Max Corden, Ian Little, and Sarath Rajapatirana-were helpful and constructive at all stages of the research. Detailed comments

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