Term Paper on Survey of Economic Development

Thailand is an Asian developing country and has been performing quite well in terms of her economic growth rates. Thailand has averaged a growth rate between 1970 and 1990 of 6.7 percent per annum. One must admit that official macroeconomic data before 1970 has not yet been updated but in the economic literature, it is widely agreed that Thai economy also enjoyed considerable expansion as early as since 1950s. Among high and steady growth, instabilities did occur, however. Like other countries, Thailand has undergone several economic shocks, most of them were exogenous to the economy but some emerged from different internal factors.
 

Well, it is not an easy question to evaluate comparatively the economic policies recommended by the proponents of economic theories or so called experts with what was actually implemented by Thailand. First of all the dearth of data on the second part of actual implementation is not officially updated. And secondly, there are many exogenous variables, which led to changes in the regular path to economic development. There are positive sides as well as negative sides to the implementation. Although Thai economy with its high growth rates have been the center of attention to most economists and government officials but still there remains others blaming for its emphasis on overall growth while leaving the distribution of benefits and equality of income.
 

Click Here To View Top 3 Term Paper Sites

Conventional Economic Development Theories
Here the emphasis will be strictly within the period mentioned above i.e. 1930 to 1960. There were many great economists who originated and quite often successfully utilized their economic development theories. Among these are Rostow, Schumpeter and Ricardo. Malthusian theory on population and economic development still holds its validity. Here one must keep in mind that an economic theory on development needs implemental policies, which would lead the economy to the growth path.

Theories on economic and/or social development have taken a magnified attention after WWII. There are such theories namely economic growth/modernization theory, dependency theory, endogenous development theory and BHN/ human development theory worth mentioning in the period between 1930 and 1960. Now when we talk about the economic policies and specifically for this chapter the trade and exchange rate policies, which lead to the economic development, one must keep in mind the overall scenario of development in the world economy. Policies of economic and/or social development are based on the following major theories: globalization-liberalization/market economy, state-guided development, New International Economic Order, Sustainable development and Social development.

The Import Substitution Theory of Economic Development
• Focuses on creating jobs by promoting import-substituting business.
• By stemming income leakages, import-substitution causes the existing levels of injections from exports to have a larger multiplier effect on the local economy.
• Import substitution can be just as effective a policy instrument in promoting jobs and creating additional income.

Export Led Theory
The focus of the economic policy debate in most of Europe’s transition economies has shifted from stabilization and recovery to growth and convergence during the last few years. In this regard some of the growth experiences of East Asia provide good examples and lessons for Europe’s transition economies. The relevant lessons from Asia focus on the importance of sound macroeconomic policies and an outward oriented trade regime, and highlight the need for public support for the development of trade infrastructure, including institutions for export financing, insurance, market research, and technology transfer. The Asian experiences also suggest that there is reason to be cautious regarding the objective to fix nominal exchange rates during periods of high growth.

Exchange Rate Regime
After World War II big powers discussed the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies. They gathered together and during the 1930s, many of the world’s major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.

The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.

THAILAND’S ECONOMIC DEVELOPMENT PATH
It is not that Thailand did not follow the growth path as per the above noted trade theories for development. Thailand’s trade policies during the period 1955-1970 were a mix of support to natural resource based exports and protection of import substituting industries. It followed a medium path between the two theories of import substitution and export led growth. Government also provided various incentives such as tariff protection the most important incentive to domestic producers. Also there were tax exemptions and other privileges administered by the government. Nominal tariffs on consumer goods were in the range 25-30 percent and tariffs for machinery and intermediate inputs were generally between 15 and 20 percent, which was lower than in most other developing countries (World Bank 1993:140).

Thailand started off on a mild form of import substitution from the beginning of the 1970s, when tariffs on consumer goods were raised to a range of 30-55 percent in an attempt to encourage domestic industrialization. Tariffs are tools of trade policies, which are very useful for the proponents of protectionist theories. During the period the tariffs on machinery and intermediates remained at a lower level, as there was a need to accumulate capital. The low tariffs impacted a significant increase in the effective protection of domestic consumer goods industries. Important sectors worth mentioning are textiles, pharmaceuticals, and automobile assembly. The high trade barriers were often coupled with domestic content requirements.

However, it is often pointed out that Thai policies were not designed to “pick winners” in specific industries. Instead, the Board of Investment preferences were extended over time to a wider and wider range of industries, and many of the incentives, including a duty drawback scheme, were also made available to exporters from the early 1970s. To some extent, this was probably a conscious and pragmatic policy, given the limited ability and capacity of the Board of Investment to identify potential winners, but it is also likely that exclusive preferences have been difficult to implement because of the features of the political system, with many influential interest groups.

Government also gave duty drawback schemes, which favored upstream producers. By allowing intermediates and raw materials to come in almost without protection, the policies may have hampered the development of a more flexible and deeper industrial base. Thai manufacturing production grew at an apparently healthy rate of approximately 10 percent per year during the 1970s (Linnemann 1987: 299).

The microeconomic incentives were largely the same as elsewhere in the region: tax exemptions, duty drawbacks, export processing zones, infrastructure investments, subsidized credit, marketing assistance, and so forth. Initially, many of these measures were designed to neutralize the various distortions caused by protectionism, but by the early 1990s, a more broadly based import liberalization had started, providing added stimulus to export production. The effects of the increasing outward orientation were spectacular. Foreign investment inflows increased dramatically. Merchandise exports jumped from USD 7 billion in 1985 to over USD 56 billion a decade later. In 1995, three-quarters of Thailand’s exports were manufactures. Concurrently, the per capita income rose from USD 800 in 1985 to over USD 3,000 in 1995.

Thailand allowed its real exchange rate to appreciate by pegging the Baht to the US dollar. It had detrimental effects on export competitiveness in labor-intensive industries. Insufficient public investment in education made the problem more severe, since the shortage of skilled labor precluded any attempt to move into higher value added sectors. These problems contributed to stagnating exports and a large current account deficit, exceeding 8 percent of GDP in 1995 and 1996.


Endnotes

Smith, Adam. (1776) An Inquiry into the Wealth of Nations Marvel Comics Inc., East Akron, Ohio
http://faculty.web.waseda.ac.jp/jnishi/GSAPS2000-fall-ed.htm
Wade, R., Governing the Market, Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press http://www.newint.org/issue183/facts.htm
Ari Kokko Working Paper No. 142 (February 2002) Export-Led Growth In East Asia: Lessons For Europe’s Transition Economies European Institute of Japanese Studies Stockholm School of Economics