Industrial protection and income distribution in Thailand

Abstract

During the past three decades, economic growth in Thailand has been marked by the growing dominance of the manufacturing sector. The share of manufacturing in GDP and in total exports has increased markedly. At the same time, there has been a sluggish increase in the share of manufacturing employment in the total labour force. Consequently, the gap between output per worker in agriculture and the manufacturing sector has widened. Concurrently, the distribution of income in Thailand has become more unequal. The role of industrial protection in industrial development is wellknown. Many studies have estimated the degree of industrial protection in Thailand during the past three decades. Many have also attempted to establish the impact of a move from an import substitution regime towards an export promotion regime. However, no previous studies have examined the impact of trade liberalisation on income distribution, which is very important in policy decisions. Based on a computable general equilibrium (CGE) model, this thesis attempts to answer the question: ’What would be the income distribution impact of a move from the 1987 system of industrial protection towards free trade?’ The answer to this question contributes to empirical knowledge in the area of protection and income distribution in Thailand. This thesis also offers methodologies to estimate the size distribution of income, and to incorporate income distribution into a general equilibrium framework. The methodologies enhance the analysis of poverty incidence, as well as income inequality. The methodologies are applied to analyse the income distribution impact of a move from the 1987 system of industrial protection towards free trade, at the national, community, and regional levels. As part of the database construction, the thesis also constructs a Social Accounting Matrix (SAM) for Thailand, and estimates a system of consumer demand. SAM provides some important information for the CGE model, such as production technology and a factor ownership matrix. The estimation of consumer demand consists of demand for ten commodities by ten types of households, enriched by price information. This is the most detailed estimation of consumer demand everdone for the Thai economy. Results from simulations using the CGE model confirm the argument in support of free trade. They show that while the move towards free trade would lead to a more equal distribution of income, it would also lead to a government budget deficit. The government might choose to borrow or raise more revenue, through an across the board increase in indirect tax rates or direct tax rates, to finance its budget deficit. The decision of the government has important consequences for income distribution.