Declining Efficiency of Investment

Satisfactory Essays
Declining Efficiency of Investment

It may be useful to put the discussion of performance constraints of the Thai economy briefly in perspective. Over the past 2 decades, the Thai economy has been one of the best performing economies in the world, characterized by sustained high growth rates, averaging 10.3% 1985-90, and 8% in the years prior to the crisis (1990-96). This growth was accompanied by a dramatic decline in the incidence of absolute poverty, from 57% in 1962 to 14% in 1992, with per capita income increasing from $700 per annum in the late 1960s, to $2,700 in 1996. At the same time, rapid growth was accompanied by environmental degradation, resource depletion, and an increasingly unequal distribution of income and wealth.

However, on balance a remarkable record of development. During this period of rapid growth and economic transformation, Thailand became increasingly integrated into the world economy through trade and investment flows, and production linkages. As the economy expanded rapidly and became more complex in structure, it posed more and new types of strains and challenges to economic management or “governance” systems at both the macro (i.e. public policy) and micro (enterprise) levels. As the relative role of the private sector increased in the economy, the importance of enterprise management and performance correspondingly increased. Looking more deeply at Thailand’s performance, manufactured exports grew by about 23% per year between 1980 and 1995, almost doubling during 1992-1995. However, in 1996 export growth fell practically to 0 per cent, with labor-intensive exports usually identified as the main culprit. Certain factors are generally cited as responsible for this abrupt and dramatic decline:

· External factors cited included the emergence of new competitors, with the coming on stream of new production facilities in lower income/lower wage countries such as China, Indochina, Philippines, further complicated by the30% devaluation of the Chinese yen in 1994;

· Domestic factors cited generally relate to rising wage rates and overvalued exchange rates. Domestic wage rates during 1991-95 rose about 11%, on average or about 5% increase in real wages per year, cited as the key factor in the slowdown in growth of labor intensive exports. The real effective exchange rate of the baht is estimated to have appreciated by about 15% during 1995-97, primarily because of the linkage to the US$, which appreciated against the yen.

While the above factors suggest that Thailand was losing its edge in low cost, labor intensive exports, these are at best partial explanations for the overall decline in export performance.
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