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Thailand’s Trade Lessons

Why do Thailand’s poor have to pay the price for the country’s protectionism?

March 31, 2002

Why do Thailand's poor have to pay the price for the country's protectionism?

For decades, Thailand’s leaders have been more concerned with building up prestigious heavy industry than with creating proper jobs for young people. By means of minimum wages, tax breaks for heavy industry, protectionist trade policies and other interventions, Bangkok has lured certain industries to invest in Thailand — and scared others away.

The result: Thailand’s industrial structure is off-kilter — skewed both geographically and economically. Geographically, Thailand’s industry is clustered around Bangkok and Rayong. The rest of the country has practically nothing. Greater Bangkok in 1990 accounted for 76 percent of the country’s total industrial output and 55 percent of Thailand’s gross domestic product.

This is why it has been remarked that Bangkok, for all intents and purposes, is Thailand. Administratively, there’s no doubt about it. I experienced the bureaucratic reality first hand when I tried to get a passport for my newborn daughter, Carolina.

Having both Swedish and Thai citizenship, she needed two. The Swedish passport was a piece of cake. We had merely to visit the Swedish consulate in Phuket in the south of Thailand, where we were living at the time and submit our application.

Then there was the Thai passport. To apply for that one, we had to journey more than 500 miles to the capital.

Apparently, it doesn’t occur to the Thai bureaucracy that somebody living outside Bangkok might like a passport. Extreme administrative centralization of this kind is not the exception, but the rule. Far too many permits and licenses are issued in Bangkok — and nowhere else.

By all standard yardsticks of economic inequality, Thailand is the country in East and South East Asia with the biggest economic gaps. It is also the country where inequality has grown the fastest in recent decades. But the growing injustices of the Thai economy have little to do with any global market forces.

During the 1990s, Thailand’s customs tariffs were among the highest in the world: The average in 1993 was more than 45 percent, sky-high compared with the 5 to 15 percent that are termed normal. Such high tariffs make it harder for cheaper goods to get into the country.

It wasn’t always this way. As the 1960s opened, Thailand boasted the lowest import tariffs in Asia. But then, the tariff walls were quickly flung up to levels far greater than those of the other of the region’s tiger countries.

When tariffs increase, so do primarily domestic costs of production. In the absence of foreign competition, protected companies can raise their prices more than they would have otherwise. They can also afford to pay their workers more than their production would be worth on the open market.

Sounds good? Well, unfortunately the story does not end there. As labor costs are artificially raised in certain parts of the economy (the protected parts), they must become correspondingly depressed in other parts (the non-protected ones). And this is precisely what happened.

It certainly became harder to make a living in Thailand’s agricultural sector. Setting up export quotas for leading agricultural products like rubber, tapioca and rice didn’t help matters either. High export tariffs on rice hit hard at the incomes of those living in the countryside. That’s economic injustice — the injustice of an anti-globalization policy.

Back in 1980, rice was Thailand’s single largest export product. It has since been replaced by garments, computer parts, jewelry, plastics, prawns, rubber, integrated circuits and industrial products.

There is a Brazil-like logic to Thailand’s protectionism. It takes from the poor — and gives to the rich. It has been the Thai farmers — 60 percent of the labor force in 1994 — who have had to subsidize the protectionist industrial policy benefiting the Bangkok region.

This absurd development strategy is reflected in the income tables for the different Thai provinces. The list is topped by Bangkok and vicinity, with an average income of 186,167 baht ($7,118) as of 1994.

This is more than triple the national average of 61,335 baht per capita. At the bottom of the barrel is Sisaket, a province in northeastern Thailand, where the average income that year was 14,960 baht (about $572). It took 12 people in Sisaket to produce as much wealth as one person in Bangkok.

Depressing farmers’ incomes by political means was — and is — of course not a sound recipe for economic success. The worst effect has been that poor Thai families cannot afford to properly educate their children. The problem is not, as one might suspect, that they are forced to send the children to work instead of school to help provide for the family. They have enough to survive, at any rate.

The real problem, according to an analysis by the World Bank, is that rural families have not been earning enough money to pay for their children’s schooling expenses — school uniforms, books and all the rest of it. The schools were there, as were the teachers. But families cannot afford to send their youngsters to school for much more than the four (now six) years that are compulsory.

Does this description of the Thai economy clash with the conventional image of Thailand as a low-wage country with a rapidly expanding export industry?

Not necessarily. During the late 1980s and early 1990s, the reserve for labor created by Bangkok’s economic policy did “help” Thailand build up an export-oriented, labor-intensive industrial sector as well.

Low wages — combined with political and macroeconomic stability, a decent infrastructure and tax exemptions — made Thailand an attractive production base for export companies.

But the export sector was largely cordoned off from the rest of the economy. That is what I realized when I visited Sweden. In the shops there, I saw lots of goods — clothes, interior furnishing articles and electronic products — that had been manufactured in Thailand.

But, amazingly enough, I’d never seen them in Thailand itself. In Bangkok they were unobtainable. Why? Because the export industry confined itself to exports only. Export companies had been localized in special enclaves, known as export zones, where they were exempted from certain taxes and import tariffs on the condition that all their output be exported.

Perversely, they are actually banned from selling to Thai consumers — unless, of course, they are willing and able to pay high import tariffs. Often, this means cumbersome calculations and so much red tape that they’d rather not bother.

Sometimes, though, products shipped out by the export companies are then shipped back in. You’ll find goods on Bangkok store shelves that were made in Thailand — but are imported from Singapore.

The conclusion to overcome rigged way of running an economy is clear. If the goal is to improve the lot of the impoverished Thai farmer, the government needs to get out of the way. Quotas must be abolished, tariffs must be slashed — and the economy as a whole must be deregulated.

If that does not happen, it is Thailand’s poor who will suffer that most. The country’s elites meanwhile, will do rather fine. They have the financial means and the political connections to cope, if not benefit handsomely from the deliberately twisted form of organizing their country’s economy.

Thailand is thus caught not so much in the globalization trap as in the isolation trap. Globalization and markets — deregulation, freer trade, the disseminated of new technology — can save disadvantaged groups from strong, predatory elites. Globalization can turn yesterday’s victims into tomorrow’s winners.

Of course, globalization will not solve all the problems of all developing countries. The gentle breeze of liberalism at the eleventh hour cannot be expected to slough away all the structural, cultural and social misfortune wrought by 50 years or more of destructive economic policies.

March 31 , 2002

Adapted from “The Race to the Top” by Tomas Larsson.