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THE ROLE OF IMPORT SUBSTITUTION AND EXPORT ORIENTATION STRATEGIES ON THAILAND’S ECONOMIC GROWTH A Dissertation Submitted to the Faculty of Argosy University in Partial Fulfillment of th

THE ROLE OF IMPORT SUBSTITUTION AND EXPORT ORIENTATION STRATEGIES

ON THAILAND’S ECONOMIC GROWTH

A Dissertation

Submitted to the Faculty of Argosy University

in Partial Fulfillment of

the Requirements for the Degree of

Doctor of Business Administration

Jesse Stevens December 2002

UMI Number: 3127039

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in partial fulfillment of the requirements for the degree of Doctor of Business Administration

by Jesse Stevens

Argosy University Sarasota, Florida December 2002

Abstract of Dissertation Presented to the Graduate School of Argosy University

in Partial Fulfillment of the Requirements for the

Degree of Doctor of Business Administrati

THE ROLE OF IMPORT SUBSTITUTION AND EXPORT ORIENTATION STRATEGIES

ON THAILAND’S ECONOMIC GROWTH

By Jesse Stevens

2002 Chairperson: Dr Gordan Pesakovic

Committee: Dr Shanker Menon

Dr Pete Simmons Department: International Business

The economic development of less developed countries (LDCs) has been the

subject of debate since the 1950s The debate focuses on the role of import-substituting

industrialization (SD and export-led industrialization (ELD policies in LDCs’ economic development Initially, countries in Latin America, Africa, Asia, and India adopted ISI as

a strategy of development But reorientation away from full dependence on ISI to

implementing policies to promote export diversification has emerged The development

literature includes cases and models that examine Third World economic development in

these two stages

Other studies present a general quantitative analysis on cross-sectional data By

using a case study for one country, this study expected to show that development

strategies influenced economic variables in Thailand during three periods (1965-74,

1975-85, and 1986-96) The study sought to quantify the development strategies’ effects

on primary commodities, capital formation, economic growth, and the inflow of foreign direct investment during the three periods Data collected were population values reported

as the economic indices of Thailand A descriptive approach was used to answer the

importance (manufacturing became more important to the export structure, especially in

the second half of 1980s), enhancing capital formation, foreign investment, and

increasing overall gross domestic product per capita

This study has demonstrated the relevance of export growth through free trade that enhances productivity through increased specialization and improves resource allocation

It is crucial to the continuation of Thailand’s economic progress and success that policy makers maintain outward-orientation policies and further develop these policies

Copyright 2002

ACKNOWLEDGEMENTS

iks to my Lord, Jesus Christ, for his encouragement and guidance in

completing this task Thanks to my mother for her prayers and endless love

iks to my wife, Gweneth Lloyd’ Stevens for her support, love and patience in this endeavor

Thanks to my children, Olivia and Carumey, for their sacrifices

Thanks to my commitiee chair, Dr Gordana Pesakovic, and committee members,

Dr Shanker Menon and Dr Pete Simmons, for their guidance

vi

Period One: Economic Growth in Thailand 5 ÔỎ S913 22s cv re re seesessex Import Substituton and Exports in Thailand V291 5993 051 1s xe nsxcre 4 Period Two: Economic Development with an International Perspective 6 Economic Development after the Oil Crisi ¬ ¬ il

Thatland Expanding Merchandise ExpOFfS M 12

Thailand Industrial Growth -escee- s99 95s s9 se HH9 5 3 35 1s nu sec 13 Major Threats to Thailand Economy dưưing the 19§ÔS -.ei 16

Period Three: Thailand Economic Development s3xssc<se 4211351515 9351 85.87 s vn 19 Statement of the Problem " , S30 00.5 nướng ve m se.ss2/1

Problem Background: Industrialization Strategies HH1 33559525 S1 2x 9965 Em có 21

Purpose Of SÍUỞY c vnc HH HH ng Hh g g c s30 t0 nho 28

Research Questions HH ¬ "— sesscessaceesenace 28

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Limitations/Delimitations .:csseccsssessevoese sascaecovsoens "¬ sonaceseesvossnsasass 29

Mercentism Period: 1500-1750 M s.xseesse S90 6 5685 5550 £gee 35

Classical Theory of Trade ¬_ 36 Neoclassical Model ¬—- " H158 105e6sses " 37 Structuralists H990 83 985 k9 0 chang TH H195 9516 s9 5see cacessescencenceaseesensenss 38

Significance of the East Asian Development MiodeÌ .ocssssccesesse 42

Product Characteristics Embodied in NIC Exports sesonseacense 43

Review of Emprical Studies Mm HH9 136 1S g2 net 3 933cc 43

CHAPTER THREE: METHODOLOGY — ÔỎ ¬.- 51

Research Design .,ôÔỎ 51 Method of À1taÌySIS con neree " Ô "— - 51 Sample cscccsseccscssceccssssssscesscceseseccssesesecssscesesocecauaseseenecssessenssesseossseceaceeesecees 51

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Research Question 1 ¬ ,ÔỎ 33 Research Question 2 — ôÔỎ ¬— 34 Research Question 3 nh 54 Research QuesfiQn Á co con nen 2e M oD

CHAPTER FOUR: FINDINGS .c:cccsccsssceseesccseeeeneess " s.seesses $6

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Comparisons with Typical Patterns at Similar Income

Levels @ercent can 3 Sources of Industrial Growth (4) .:ccscsscccesssessecssncseenssancasesssersonsaccaseoseaatenees 5 Growth of Income, Population and Terms OÍ TA cong nen 7

Sectoral Growth and Structufe of PTOUCUON HH ngu, 10 Structure of Merchandise ZXDOTÍS co ng nh he 14

Balance OÍ P4VTHTIÍS G2 HT 0 KH TT HH ngư 17 Economic Trends in Selected Eas( Asian Countries (1981-1983) 18

commodities and the development strategies of import substitution and

€XpOFf Orien{allOTi? «-««see " ÔÔỎ 59

What was the relationship of capital formation and the development strategies

of import substitution and €XDOTÍ OTICTI(EEÍOTH ng na se 61 What was the relationship of economic growth and the development strategies

of import substitution and ©€XDOFE OFICfIEAÍOTi con n ng se 63

What was the relationship of foreign direct investment and the development strategies of import substitution and export OrientafiOf -««cxeeseeseescss 65

CHAPTER ONE THE PROBLEM There has been continuous discussion in the literature about the relative merits of

development strategies involving either import substituting industrialization (ISD or export-led industrialization (ELD) The controversy is whether international trade is

Thailand’s dependent variable, economic growth The analysis will be based on data

covering three periods (1965-74, 1975-84, and 1985-96) of Thailand economic history

Period One: Economic Growth in Thailand

1965-1974 Thailand had an impressive economic record during the postwar period Among countries at similar income levels, it experienced one of the highest growth rates of per

capita incomes, 4.5% a year between 1965-74 According to Shilling (1979) estimates showed economic growth was accompanied by reductions in interregional and urban-rural

income differences and in the proportion of the poor in the total population Agriculture

as well as manufacturing industries participated in the expansion, with growth rates of

value added of 5.2% and 3.3%, respectively, between 1960-73, when the average annual rate of gross domestic product (GDP) was 8.0% In agriculture, the availability of

uncultivated land created opportunities for rapid growth Agriculture, in turn, provided inputs for manufacturing industries as well as demand for manufactured products

Domestic demand, together with import substitution, contributed te the growth of

Shilling (1979) also reported that several factors contributed to the rapid growth

of the Thai economy during the postwar period Thailand had savings and investment rates higher than developing countries of comparable size and incomes per head In the years 1960-73, average shares of domestic savings and investment in GDP were 21% and 23% respectively; the corresponding figures for the comparative countries averaged 18%

and 20% (Table 1) The second contributing factor was that domestic and foreign

investment benefited from political stability and a generally favorable investment climate

in Thailand after the Second World War An additional asset was the fact that Thailand had a free enterprise system, with limited government intervention in economic life

A third factor was that Thailand had a more open trade system than most countries

at similar levels of economic development, with relatively low tariffs and few quantitative

import restrictions The openness of the Thai economy is reflected in the high share of

foreign trade in GDP In the 1960-73 period, export and import shares averaged 18% and

21%, respectively, as against 12% and 14% for the comparative countries

Finally, economic growth benefited from the rapid expansion of exports,

averaging 7.2% a year in volume terms between 1960-73 However, the volume of

imports grew even more rapidly, in particular after the mid-1960s, with annual increases averaging 10.2% for the period taken as a whole Notwithstanding improvements in the terms of

Source: Bank of Thailand, Statistical Bulletin, various issues and H.B Chenery and

Moise Syrquin, Patterns of Development 1950-70, Oxford University Press,

1975, p 204

Note: The typical pattern for a large developing country as been derived by the use

of cross-country regressions from Chenery and Syrquin, op.cit It refers to a

representative country with per capita incomes of $420 in 1978 prices; in the

period 1960-73, per capita incomes averaged $300 in Thailand, again

expressed in terms of 1978 prices; average per capita income was $450 in

1974-78 The difference between domestic investment and savings does not equal that between imports and exports due to rounding.

trade, Thailand’s balance of trade deteriorated as a result, with the trade deficit amounting

to 5.0% of GDP in 1973 This deficit was in large part offset by a surplus in the service account (in particular, US military expenditures related to the Vietnam War) and by

private transfers (Shilling, 1979)

Import Substitution and Exports in Thailand

According to Shilling (1979) import substitution in nonddurable consumer goods and their inputs (domestic production of clothing, shoes, textiles, and leather)

significantly contributed to industrial growth in Thailand following the end of the Second

World War

However, by the early 1970s, the replacement of the importation of these commodities by domestic production practically came to an end With the completion of its first easy

stage (a stage of import substitution that represents the utilization of labor-intensive

production methods), import substitution ceased to contribute to industrial growth (Table

2) This occurred despite increases in industrial protection Furthermore, Thailand’s rapid development during the 1970s was similar to that of a group of developing countries (Malaysia, Colombia, Ivory Coast, Morocco, and Tunisia) that successfully shifted away from specialization in primary goods in terms of production, exports, and employment In Thailand, as in these countries, rapid growth took place in incomes and employment,

based on labor intensive industries such as clothing, textiles, footwear, electronic

components, and other light consumer goods Industrial development in Thailand was

also characterized by its close linkage with rapid agricultural growth, its reliance on small

firms, its relatively low labor costs, and successful adaptation of foreign technology to

local requirements and factor endowments The policy environment during the previous

Source: Estimates made for mission by Narongchai Akrasan

Note: A positive contribution of import substitution indicates decreases in the share

of imports in domestic consumption; a positive contribution of export

expansion indicates increases in the share of exports in domestic production

The contribution of domestic demand is the residual.

two decades generally supported private sector initiative and did not discourage labor intensive, export oriented and small-scale production

However, Shilling reported that during the second half of the 1970s Thailand

moved from being a country with relatively low distortions im its industrial incentive

structure to one with a fairly high degree of distortion This was due to roughly a doubling

of the effective rate of protection on major manufactured goods and a rapid increase in

the use of investment incentives favoring large scale, capital-intensive industrial projects The sector’s growth was nevertheless increasingly dependent on export demand, which in

part probably reflects the large extent to which the country’s import substitution phase for

final consumer products has been concluded A less distorting treatment of the industrial sector might have led to even more rapid expansion of exports as the sector could have

benefited more from the country’s comparative advantage (Shilling, 1979)

Period Two: Economic Development with an International Perspective

1975-85 Thailand experienced a remarkably rapid and sustained rate of economic growth

with an average growth rate of per capita income of 4.7% between 1960 and 1980

Among selected major countries in the region (Indonesia, Philippines, Korea, and

Maiaysia) Thailand’s growth performance was surpassed only by Korea and it was well above that of all middie income oil importing developing countries (Table 3)

This good record resulted from a rapid real GDP growth, although it slowed to 7.2% in the 1970s as compared with the very high growth of 8.4% in the 1960s During

the 1970s GDP growth in Thailand fell short of Korea’s growth and oil exporters,

Indonesia and Malaysia, but remained above that of the middle-income oil importing

countries as a group Progress was made on the population front with population growth declining from 3.0% in the 1960s to 2.5% in the 1970s Despite this progress, however, Thai population growth remains rapid by international standards and its decline has recently shown signs of abating

In addition to the continuing population pressures, the terms of trade decline

tended to reduce the real income gains in Thailand The drop in terms of trade, although

not uniform across the period, paralleled that in the comparative countries, with the

exception of the oil exporters As a result of these broad countervailing factors, Thailand achieved a per capita income level of $670 in 1980 This figure still puts it only in the bottom third for all middle-income developing countries, at a level about equal to the

Philippines, but less than half the per capita income of Korea and Malaysia, and of the

average for all middle income oil importing countries

According to a World Development Report (1982) it was during this same period that Thailand witnessed a rapid transformation in its structure of production, with the

share of agriculture in total value added declining from 40% in 1960 to 25% in 1980 This transformation was particularly rapid in the 1960s, but it left Thailand still heavily

dependent on agriculture when compared to the average middle-income oil importing

countries CMIOIC), although not unusually so when compared to its neighbors, Indonesia, the Philippines, and Malaysia (Table 4)

The growth was rapid in Thailand, in excess of that in the average MIOIC and in the Philippines, but substantially below that of Korea Thailand’s large service sector also

experienced rapid growth, commensurate with that of the other two sectors In sum,

Thailand’s economic growth was based on rapid expansion in all three major sectors of the

economy, particularly industry, albeit at a reduced rate during the 1970s when compared

with the 1960s, largely in line with the less than favorable international environment

Associated with Thailand’s rapid economic growth was a fast expansion in trade, particularly during the 1970s As a result, the Thai economy has become much more open and subject to external economic influences The share of imports in GDP, which had

fluctuated between 19% and 22% during the 1960s, rose to 30% by 1980, while exports increased from an average of about 18% of GDP during the 1960s to 25% in 1980 At the

same time the composition of trade changed, with a significantly increased share of oil in total imports and a reduced role of Thailand’s traditional principal export commodity,

rice, in total exports On both accounts, it has become more difficult to insulate domestic

prices and incomes from fluctuations due to changes in external prices and demand

(World Development Report, 1982)

Economic Development after the Oil Crisis

Balassa (1979) stated that high economic growth rates came in the period

following the oil crisis He pointed out that the gross domestic product rose at an average annual rate of 7.5% between 1973 and 1978, with increases of 4.2% and 12.0% in

agriculture and manufacturing, respectively The acceleration in the growth of exports

contributed to this result The volume of exports rose 14.0% a year, with approximately

equal increases shown for primary and manufactured exports Expansion was especially rapid in the exports of tapioca, sugar, and canned pineapple among processed primary products and in the exports of textiles and clothing, electronics, and jewelry among manufactured goods The volume of imports rose at a much lower rate, averaging 4.3% a year between 1973 and 1978 But, as a result of the quadrupling of oil prices, Thailand

il

experienced a one-third decline in its terms of trade, so that the value of exports and imports grew at about the same rate (19% a year) during this period

With export and import values rising more rapidly than the current value of GDP,

the ratio of the trade deficit to the gross domestic product increased from 5.0% in 1973 to

6.4% in 1978 Furthermore, Balassa (1979) indicated that the balance of payments were adversely affected by declines in earnings from services and transfers, due largely to the

disappearance of foreign exchange earnings related to the Vietnam War and the decrease

of private transfers Thus, while the surplus in the service account and in transfer

payments offset nearly nine-tenths of the trade deficit in 1973, this ratio fell to less than one-fifth in 1978

Moreover, rapid economic expansion contributed to the acceleration of the growth

of imports in 1977 and in 1978, when the current account deficit came to exceed 5% of GDP Preliminary data showed a further deterioration in 1979, with the deficit amounting

to about 8% of GDP, in a large part due to increases in oil prices Consequently, the

approximate doubling of oil prices between 1978 and 1980 increased Thailand’s oil bill

Baht) 20 billion above its 1978 level, representing a terms-of-trade loss of about 3% of GDP and raising the ratio of the current deficit to GDP t0 9-10% in 1980 (Balassa, 1979) Thailand Expanding Merchandise Exports

A World Report (1982) showed merchandise exports substantially outperformed

both GDP and import growth in real terms during the 1970s This was the first time

merchandise exports had reversed the pattern of the 1960s The report indicated that

export of goods recorded 11.3% average volume increase was 1.6 times higher than GDP

growth and 1.7 times higher than merchandise imports growth

12

This reversal was a result of Thailand’s prompt response to continuously strong world demand for its traditional exports and effective penetration of new markets with manufactured exports Thailand’s impressive export growth performance was reflected in the fact that merchandise exports almost doubled as a share of GDP during the previous decade, owing two-fifths of the change to traditional exports (agriculture and the other primary commodities) and three-fifths to the expansion of manufactured exports The

structure of merchandise exports underwent considerable changes in the 1970s Thailand evolved from an almost exclusively primary goods exporter (86% in 1970) into a much

more diversified exporter While agricultural goods still played the major role (60% in

1981), manufactured exports emerged as an important contributor, with 30% of exports in

1981 (Table 5, World Development Report, 1982)

Thailand Industrial Growth

Thailand’s industrial structure reflected the continuing importance of agriculture

in the Thai economy Processing food and agricultural commodities accounted for 36% of

manufacturing value added in 1979 compared with only 20% in Korea and 22% in

Malaysia (Table 6) However, textiles and clothing were also very important

manufacturing activities, contributing 23% to total manufacturing value added, a share that was exceeded only by Egypt and Greece among the MIOIC Value added in

machinery was also relatively high when compared to other countries between the lower

third of the middle-income group Chemicals were of relatively minor importance

Vehicle assembly, construction materials, consumer durables, and integrated circuits were

emerging branches of domestic manufacturing activity (World Development Report,

1982)

13

Major Threats to Thailand’s Economy during the 1980s

in the early 1980s several major threats emerged to endanger the momentum of Thai economic growth The sharp oil price increases of 1979-80, coming after those in

1973-74, pushed the county’s import bill up dramatically and necessitated a major

investment program in alternative sources of energy The discovery of natural gas in the Guif of Thailand proved a major windfall in this respect At the same time the presence of

Vietnamese forces on Thailand’s borders led to a substantial upturn in defense spending

These problems, alongside ongoing development programs, were not easy to deal with,

particularly since the expansion of cultivated areas, which generated agricultural growth

up to 1975, had been curtailed by deteriorating environmental conditions In addition, the bulk of Thai industry, long sheltered behind high tariff barriers, had made only a partial transition to export-oriented manufacturing The trade and current-account deficits on the balance of payments thus tended to widen in the early 1980s and foreign debt increased rapidly (Table 7)

However, in this Thailand was not alone Worldwide, the adjustment process was difficult GVorld Development Report, 1982) and by comparison with selected other countries in the region, Thailand’s performance had to be considered quite successful For

1981, 1982, and 1983 respectively, Thailand’s GDP average growth was exceeded only

by that of Korea, while its current account and budget deficits as a percent of GDP were moderate in comparison to most of its neighbors In contrast to the aftermath of the first

oil shock, Thailand moved rapidiy after 1979 in adjusting its economy to the changed international environment by implementing its broad program of structural reform (Table 8)

16

° Foreign exchange plus gold valued at end of year London prices

“Medium and long term debt

* Public and publicly guaranteed

Sources: National Accounts, NESDB: short-term projections, BOT; mission estimates

i7

Table 8

Economic Trends in Selected East Asian Countries (198 1-1983)°

GDP growth rate Current account Central government

in constant prices (%) deficit as% of GDP deficit as % of GDP °

* Actuals for 1981; estimated for 1982; projected for 1983

> Fiscal years for Thailand

Source: World Bank staff estimates

18

Period Three: Thailand’s Economic Development

1986-96

A Far East Report (1994) argued that Thailand’s development record over the

previous three decades was impressive Real per capita income growth was positive every

year and averaged almost 4% over the period The transformation during this time of an

economy heavily dependent on natural resources and agriculture to one of a major

exporter of manufactured products provided a diversified base of economic activity and

employment Moreover, inflation and external debt was kept within manageable limits Thailand provided an excellent example of the dividends to be obtained through outward orientation, receptivity to foreign investment, and a market-friendly philosophy backed by conservative macroeconomics management and cautious external borrowing policies Significant progress was also made in a variety of other areas including food security, primary school enrollment, adult literacy, infant mortality, maternal health, and life

expectancy Absolute poverty was reduced from over 57% in the late 1960s to about 20%

The Far East Report (1994) reported that the structure of the Thai economy

underwent considerable change over the decade At the end of the 1970s agriculture employed more than two-thirds of the labor force and produced more than a quarter of

GDP, while the share of manufacturing in GDP was 20% By 1981 manufacturing had

overtaken agriculture in value-added terms, and in 1993 it contributed 28% of GDP while agricultural value added had declined to about 12% Thailand’s manufacturing sector is now the largest within ASEAN The economy is also strongly export oriented In recent years, exports of manufactures grew particularly fast with exports of goods and nonfactor

services increasing from 24% of GDP in 1980 to almost 40% in 1993; the share of

19

manufactures in total merchandise exports rose from 35% to 65% in the same period Textile products surpassed rice, the leading export commodity of Thailand for many years, in 1985, and textile exports are now almost four times the value of rice exports (Far East Report, 1994)

The performance of the Thai economy has been particularly impressive since the

mid-1980s Between 1987 and 1990 real GDP growth was among the highest in the

world, averaging almost 12% And despite the recession in the industrial economies and

domestic political uncertainties, Thailand’s economy still expanded at about 8% a year over 1991-93 It had a GNP per capita of $1,810 in 1992 CUNIDO, 1992)

The remarkable growth performance was built on favorable external factors; political stability and prudent macroeconomics in conjunction with a vibrant and

responsive private sector The growth of manufactured exports and inflows of foreign direct investment in the second half of the 1980s were facilitated by the depreciation of the dollar—to which the baht was tied—rising cost pressures in other East Asian

economies, lower oil prices, and relatively strong growth in the OECD economies

Domestic policies, including conservative fiscal management, aggressive export

promotion, and market-friendly sector intervention helped Thailand take advantage of these external developments Of particular importance were the successful stabilization

and adjustment measures of the early 1980s, which placed the economy on a stable and

rapid growth path This in turn led to a large increase in direct foreign investment, from

$274 million to $1.4 billion (annual averages) between 1981-91

While growth since 1991 was slower than the double-digit rates achieved in the

late 1980s, this pace was more sustainable Due to tightened financial policies, domestic

20

demand was expanding less rapidly than during the boom years This economic

deceleration also shrunk the current account deficit, which rose to 8.7% of GDP in 1990

GDP growth in 1993 was about 7.8% Despite the slowing of domestic demand growth relative to the late 1980s, it was strong enough to more than offset sluggish export growth

in the first half of 1993 The pickup in export growth in the second half of the year meant

that the current account deficit fell to 5.3% of GDP Inflation was moderate at around 4% but rose to 5% in mid-1994 (The Economist Intelligence Unit, United Kingdom, 1994)

Statement of the Problem The economic development of LDCs have been the subject of an extensive debate

and controversy among academics, economists, business and political leaders,

international agencies, and various schools of thought since the early 1950s Hout (1996) reported:

The controversy with respect to development strategies has remained an

important element in the debate on Third World countries Although the

debate is less openly ideological in contrast with the 1970s, for

instance—the extent to which developing countries should open up their

economies and allow market forces to influence the outcome of economic

processes is still a relevant question (p 1)

The debate focused on the role of import-substituting industrialization (SD and export-led industrialization (ELD policies in LDCs’ economic development As

developing countries implement programs of economic adjustment following

projectionist or trade liberalization has a decisive impact on both the character and

direction of economic policies

21

Initially, countries in Latin America, Africa, Asia, and India adopted [Sl as a

strategy of development But a major reorientation away from full dependence on ISI to

implementing neo-liberal policies to promote export diversification has emerged The

development literature includes numerous cases and models that examine Third World

economic development in two stages: ISI and ELI Hout (1996) stressed the important of

adopting the right strategy:

The development strategy that is adopted by the government of a developing country is an important element in shaping the political-economic order Although the choice for either import substitution or export orientation is by no means an absolute one, because governments can place more emphasis on one or the other

in different sectors of the economy, the consequences of the adoption of a

development strategy are very important for individual economic actors (p

2)Problem Background: Industrialization Strategies

Hewison (1983) provides a historical account of Thailand industrialization

strategies starting with General Sarit Thanarat’s “revolution” in 1958 Initially the new administration’s industrialization plans were not that different from its predecessor It was not until the ernergence of balance of payments and trade problems that the state sought

reduction in manufactured imports by imposing bans that led to import shortages To

overcome this problem the state moved to an impori-substitution industrialization (SD strategy, especially as it had been advocated by the influential Work Bank report (IBRD, 1959), the Bank of Thailand (1960), a United Nations mission (van Rijnberk, 1961) and the Commission for Asia and the Far East (ECAFE, 1964)

22

The new government recognized that a successful ISI strategy demanded that domestic manufacturing be protected by various import bans and tariffs In 1960 the Thai

state began to erect such barriers, despite some opposition from “free traders.’ However,

the state did not simply decide, of its own accord, to adopt an ISI strategy According to

contemporary reports, domestic industrial capitalists exerted strong pressure for

protection When announcing increased tariffs in late 1960, the minister for finance stated

that the decision had been taken following strong representations from iocal industrialists

For example, Baanjurd Cholvicharn, a prominent banker, president of the Thai Chamber

of Commerce, and a close friend to General Sarit, was outspoken in his criticism of the lack of control placed on merchants He believed the merchants were creating a ‘terrible’ trade imbalance and urged import controls

According to Hewison, the logic of import substitution remained predominant throughout the 1960s, strongly supported by the Board of Investment, the National

Economic (and Social) Development Board (NESDB), the Ministry of Indusiry, the Bank

of Thailand and local manufacturers Their position was reflected in the first (1961-66)

and second (1967-71) development plans, where the majority of capital invested with

government promotional privileges in the 1960s went into ISI areas (ngram, 1971)

In terms of ISI effectiveness, Hewison pointed out that the strategy had some

successes in textiles, but a number of emergent siructural problems existed, such as built-

in disincentives to exports In addition, the political economy had significant

developments with important structural changes occurring in manufacturing The sector’s contribution to GDP rose from 12.5 to 17.5%, with its annual growth rate averaging 11% over the period The high rates of protection encouraged domestic investment and the

23

development of domestic manufacturing advanced the whole process of capital

accumulation, especially for the banking and industrial capitalists For instance, the

Sophonpanich family, notably banking capitalists, took full advantage of ISI policies to

expand into industry, thereby enhancing their corporate power Paunk (1980) noted during this peried of full swing ISI policies, that cooperation between industrialists and

bankers provided a strong economic and political base to override the interests of

consumers and traders who favored more liberal trade policies Nevertheless, by the end

of the 1960s the expansion of manufacturing in consumer goods had grown the relatively small domestic market sectors (textiles and motor vehicles), thus raising doubts about the ISI strategy of inward-oriented policies

The dominance of ISI as Thailand’s political-economic emphasis was also

accelerated by international developments Thailand’s excess capacity became a major problem and growth in the manufacturing sector dropped to 7.5% a year in the 1969-72 period Consequently, there were corresponding drops in manufacturing investments

This led to agitation among groups of local capitalists in 1969, with the president of the

Thai Industries Association urging both increased protection for domestic industries and more incentives for exporters (Bangkok World, 15 October 1969:17)

Simultaneously, growing trade deficits forced the government to examine export- oriented industrialization (EOD strategies This strategy was to be based on Thailand’s

comparative advantage in producing commodities for a world market Then the nation

could bring in valuable foreign exchange and achieve a trade balance by doing what comes naturally An adoption of EIO strategies was also logical because internationally

24

higher inflation in the West and exchange rate fluctuations made Thai manufactures potentially attractive on the world market

These changing circumstances began to be recognized, and in 1971 the Board of

Investment announced incentives for exports Hewison (1983) stated,

These benefits were enhanced in 1972 when the Investment Promotion Act

was revisited and export targeting introduced The icing on the ELI cake

was the formal recognition of the strategy in the third plan (1972-76), even

though it was also conceded that ISI was not to be completely jettisoned

(p 55)

As a result, the value of manufactured exports began to expand at an unprecedented rate, rising from USS$40 million in 1970 to US$270 million three years later The fourth plan

(1977-1981) adopted ELI as the dominant strategy, while indicating that ISI should be

continued in some areas of the economic However, export industries were to receive special state promotional privileges According to Hewison (1983):

The emphasis on export was close to the World Bank desire for labor-

intensive, export-oriented industries As ISI had seemed in the 1960s, so a

number of political leaders saw ELI as the magic formula for development

in the 1970s, as the state attempted to reduce trade and balance of

payments deficits by expanding exports (p 56)

The shift to EOI, as the dominant strategy, gained more momentum when large

and highly concentrated corporate groups began to demand a move toward outward- looking development strategies Having outgrown the Thai market, these capitalists were

seeking to expand their accumulation on an international scale Consequently, the priority

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given to EOI may be seen as an indication of the increased influence of big capital within

the Thai political economy (Hewison, 1983)

on whether international trade is beneficial (or harmful) to economic development In

other words, is there a positive relationship between economies policies (SI or ELD and economic growth in less developed countries (LDCs)? Tyler (1981) pointed out that

following the work instigated by the formulation of the Prebisch-Singer thesis in the late

1940s, an abundant literature critical of the gains to be reaped from international trade by LDCs developed The implication of this body of literature was to reject the free trading economic philosophy nominally espoused in many developed countries as prejudicial to the economic interests and economic development of the LDCs

Conversely, Tyler and others disagree with this thesis and conclusion, arguing instead that there is increasing evidence that export oriented policies provide examples

necessitating a re-examination of the role of international trade in the development of poor countries For instance, once backward countries such as Taiwan, South Korea, Singapore, and Hong Kong are now well-documented successful, newly industrialized

countries (NICs) These countries’ success with export oriented development strategies are heralded as examples of the benefits derived from trade and specialization along comparative advantage lines

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Yaghmaian (1990) claimed that the impressive economic growth of the NICs is a

showcase of “laissez-faire” and “free trade.” He pointed out that ELI growth has been

celebrated as an alternative to ISI by the Third World Lee (1981) says, “the theory of comparative advantage has been reincarnated in the policy of ELI as the universal

‘strategy’ of development for developing countries in the neoclassical literature.”

Similarly, it is argued by some (Balassa, 1981; Krueger, 1986) that the developing

countries could sustain high growth rates by relying on market forces and managing to get factor prices right, adopting “right policies,” and “realistic” exchange rates

The policy shift from import substitution to export promotion has also gained strong empirical support from a body of literature in which exports are introduced into the

production function as an explanatory variable (Balassa, 1978; Feder, 1983; Ram, 1987) According to Sheehey (1992), in these cross-country studies real GDP growth is regressed

on the rate of growth of real exports, labor force growth, and a measure of the rate of

growth of the capital stock

Although many LDCs favorably view ELI policies, ISI was the dominant

economic policy adopted by most LDCs from the 1950s through the 1970s Schmitz

(1990) argued that import-substitution achievements from 1950s onwards were more a result of deliberate economic policies His analysis indicated that the primary import

substitution policy implemented in the 1950s and 1960s was the restriction of imports of

manufactured goods in the form of tariffs, quotas, and multiple exchange rates Their use

was not always aimed at industrialization, but was often a response to balance of

payments difficulties According to Schmitz, the data show that considerable advances were made in the degree of industrialization; the share of manufacturing im GDP

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increased and the share of imports in total domestic supply was lowered significantly

Nevertheless, despite impressive ISI policy results, Schmitz’s conclusion was one of

disenchantment The authors of most country and sector studies tended to conclude that in many cases ISI policies where unsuccessful in raising per capita standard of living and

producing sustainable economic growth ( Diaz-Alejandro, 1975; Donger, 1976;

Hirchman, 1968; Little, Scitowsky, & Scott, 1970; Nixon 1982; Sutckiffe, 1971)

Purpose of Study Most studies show there is a lack of comprehensive theory to explain the shift from ISI to ELI, particular for LDCs The purpose of this research is to assess the

influence of the two main development strategies referred to as import substitution and export-led growth on Thailand’s economic performance Other studies have presented a general quantitative analysis on cross-sectional data The current study focused on the

experience of a single, developing country This study examined Thailand data during three periods (1965-74, 1975-84, and 1985-1996) to investigate the links between

development strategies and economic growth

Research Questions

Over the past decades the influence of import substitution strategies has declined

while the importance of export-oriented development strategies has increased As a result

of this occurrence this study tested the following research questions

Research question 1: What was the relationship between the development

strategies of import substitution and export orientation on primary commodities in

Thailand for the periods 1965-74, 1975-85, and 1986-1996?

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