d'c 7 S (A1,rc ) WORLD BANK I ILE COPY COMPARATIVESTUDIES I The Political Economy of Agricultural Pricing Policy Public Disclosure Authorized Trade, Exchange Rate, and Agricultural Pricing Policies in Thailand Ammar Siamwalla Suthad Setboonsarmg Public Disclosure Authorized Public Disclosure Authorized j4w _~~ 4- , .w Ve p 'L~hJP# Public Disclosure Authorized The Political Economy of Agricultural Pricing Policy Trade, Exchange Rate, and Agricultural Pricing Policies in Thailand Ammar Siamwalla Suthad Setboonsarng WORLD BANK COMPARATIVE STUDIES The World Bank Washington, D C Copyright © 1989 The International Bank for Reconstruction and Development/THEWORLD BANK 1818 H Street, N W Washmgton, D C 20433 All rights reserved Manufactured in the United States of America First prmting September 1989 World Bank Comparative Studies are undertaken to increase the Bank's capacity to offer sound and relevant pohcy recommendations to its member countries Each series of studies, of which The Political Economy of Agricultural Pncing Policy is one, comprises several empirical, multicountry reviews of key economic policies and their effects on the development of the countries in which they were implemented A synthesis report on each series will compare the findings of the studies of individual countres to identify common patterns in the relation between pohlcy and outcome-thus to mcrease understandmg of development and economic policy The series The Political Economy of Agricultural Pricing Policy,under the dLrectionof Anne 0 Krueger, Maurice Schiff, and Alberto Vald6s, was undertaken to examme the reasons underlymg pncmg policy, to quantify the systematic and extensive intervention of developing countnes in the pncmg of agricultural commodities durmig 1960-85, and to understand the effects of such intervention over time Each of the eighteen country studies uses a common methodology to measure the effect of sectoral and economywide pnce mtervention on agricultural incentives and food prices, as well as their effects on output, consumption, trade, intersectoral transfers, government budgets, and income distnbution The poltical and economic forces behind pnce intervention are analyzed, as are the efforts at reform of pricing policy and their consequences The findings, interpretations, and conclusions in this series are entirely those of the authors and should not be attnbuted in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent The material in this publication is copynghted Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copynght 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 photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated The complete backlist of World Bank publications i shown in the annual Index of Publications, which contams an alphabetical title list and indexes subjects, authors, and countnes and regions, it is of value principally to libraries and institutiona irchasers The latest edition is available free of charge from Publications Sales Unit, Department he World Bank, 1818 H Street, N W, Washmgton, D C 20433, U S A, or from Publicatioi te World Bank, 66, avenue d'Iena, 75116 Paris, France Ammar Siamwalla is program director for, and St Setboonsarng a research fellow in, the Agriculture and Rural Development Program of th iland Development Research Institute I ibrary of Congress Cataloging-in-Publication D;~ Amma Sayamwala Trade, exchange rate, and agricultural pricing policies in ~i1ailand / Ammar S'amiwalla, Suthad Setboonsarng , witn the -1+qrce cii Ctmhia PPrmr-,ionwi+anasuk, Chareonchal Lergsiriwat, P'rosong Werakarn,anapongs p cm -- (The Political economy of agricultural pricing II cy 3 includes bibl ographica1 references i',I,N 0-8213-1316-9 1 Axgricultural prices--Government policy--Thaliand I Suthad ,tiujmiusarng II Title III Series World Bank comparative liill, Political economy of agricultural or-icing pollcy 1ii b5 Z775A44 1989 I ii--dc20 89-38871 CIP iii Abstract Thailand, which had a population of about 45 million in 1980, is still largely an agricultural country. In 1984, it is estimated, agricultural work was still the main source of earnings for more than 70 percent of the population. It was expansion of agricultural land, along with investment in infrastructure, that allowed Thailand's gross domestic product (GDP) to grow an average annual 7.2 percent between 1960 and 1973. GDP growth slipped to an average annual 6.2 percent for the 1974-85 period. For much of the 25-year period covered by this report, government intervention in the prices of rice, maize, and natural rubber was extensive. In the cases of rice and natural rubber, both of them traditional Thai exports, intervention took the form of explicit export taxes. Intervention in the price of maize, on the other hand, took the form of restrictive quotas on maize exports to countries other than Japan and Taiwan, the principal buyers. Unlike the other three commodities discussed here, sugar was a product that was imported by Thailand until 1960. For many years prior to that, government policy was to encourage growers of sugar cane and thus achieve self-sufficiency. This general policy of aiding growers continued even after Thailand became an exporter of sugar. One conclusion of this study is that the Thai sugar industry would have shrunk to about a quarter of its size during the study period if the government had refrained from intervention. Intervention in the prices of rice and natural rubber had the effect of penalizing farm producers by reducing their output prices. There was, as a consequence, a shift of resources towards Thailand's small industrial sector. In 1981, the Thai government lifted its quota restrictions on maize exports, effectively freeing trade in maize. Between then and 1985, the government also liberalized its trade by eliminating its intervention in the rice, sugar, and natural rubber markets. Unfortunately for export growers, however, the gradual elimination of government intervention was overshadowed by sharp declines in the world prices of Thailand's major agricultural exports. IV Table of Contents Page List of Tables vi List of Figures ix List of AbLreviations xi Chapter 1: Overview of the Thai Economy 1 Geographic Characteristics and Resources 1 Economic Performance and Distribution of Income 9 The Agricultural Sector 17 The Postwar Political System: A Thumbnail Sketch 20 Chapter 2: History, Instrumentalities, and Objectives of Government Intervention: Rice 29 The Rice Export Tax Regime 29 The Consumption Subsidy Program: The Rice Reserve Requirement 31 The Price Support Program (1975-83) 37 Quantitative Estimates of the Direct Price Effects of Various Government Measures 42 The Legal and Administrative Framework 48 The Bureaucratic Politics of Rice Policy 53 Conclusion 61 Chapter 3: History, Instrumentalities, and Objectives of Government Intervention: Sugar, Maize, and Rubber 69 Sugar 69 Conclusion 90 The Low-Key Politics of Maize 95 Rubber 99 Other Commodities and Inputs 104 Chapter 4: Industrial and Macroeconomic Policies Affecting Agriculture 1ll Factors Affecting the Agricultural Sector as a Whole 111 The Effect of Industrial and Macroeconomic Policies on Exchange Rates 123 Agricultural Coods Prices Relative to Nonagricultural Goods Prices 132 v Chapter 5: Effects of Price Intervention on Output, Consumption & Trade 141 The Output Effect of Price Intervention on Rice, Maize, and Rubber 141 The Effect of Intervention on Sugar Output 145 The Consumption Effect of Price Intervention 160 The Effect of Price InterventLionon Foreign Exchange Earnings 160 Chapter 6: Effects on Resource Flows between the Agricultural Sector and the Government and between the Agricultural Sector and the Rest of the Economy 166 Transfers Between the Agricultural Sector and the Government 166 Transfer Between the Agricultural Sector and the Rest of the Economy 178 Chapter 7: Income Distribution Effects of Agricultural Pricing Policies 186 Economic Conditions and Government Intervention in 1980 186 Categorization of Households 188 Sources of Income 188 Pattern of Household Expenditure 193 Changes in Household Real Incomes: Estimation Method 195 Changes in Household Real Incomes: Results 198 Chapter 8: Conclusion 204 Bibliography 209 Appendix 1 216 Statistical Appendixes 220 VI LIST OF TABLES Page Table 1.1 Land Utilization in Thailand 5 Table 1.2 Agricultural Labor Force and Arable Land 6 Table 1.3 Total Labor Force and the Share of 7 Employment by Major Sectors Table 1.4 Growth Rates of Real Gross Domestic Product 10 and Its Components Table 1.5 Shares of Major Sectors in GDP 12 Table 1.6 Relative Income Per Capita 15 Table 1.7 Gini Coefficients by Region and Area, 1962/63, 1968/69, 1975/76 and 1981 16 Table 1.8 Agricultural Imports into Thailand, 1985 18 Table 1.9 Distribution of Land Holdings by Size of 19 Holding Table 1.10 Percentage Shares of Four Selected Crops in 28 Value Added of Agricultural Crops Table 2.1 Cheap Rice Distributed through Public 34 Warehouse Organization Table 2.2 Funds Allocated for Price Support Programs 39 1974/75-1982/83 Table 2.3 Export Tax Equivalents of Various Intervention Measures on Rice 44 Table 2.4 Thailand's Market