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This chapter gives a general idea of Thailand’s economic development and the country’s structural transformation before dealing with the specific issue of Thai agriculture in the next chapter. The main discussion of this chapter is on the problems resulting from economic development and structural transformation of Thailand. Before we reach into the main discussion in Section 2.3, an overview of the meanings of structural transformation and the empirical results on patterns of structural change are given in Section 2.1. After that the features of the structural transformation of Thailand are presented in Section 2.2 with the support of an input-output analysis on the decomposition of the factors of growth in the Thai economy.
2.1 Background—Theoretical Arguments and Empirical Research Regarding Structural Transformation
Structural transformation is closely related to development economics dealing with developing countries. Syrquin (1988: 208) stated that “an obvious reason for studying structural change is that it is at the center of modern economic growth. It is, therefore, an essential ingredient for describing the process and for the construction of any comprehensive theory of development. More important is the hypothesis that growth and structural change are strongly interrelated. Most writers recognize their interdependence, and some emphasize the necessity of structural changes for growth.” Section 2.1 is divided into two parts. Section 2.1.1 discusses
briefly the theoretical arguments of structural transformation. Section 2.1.2 shows the results of empirical research on structural transformation.
2.1.1 Theoretical Arguments Regarding Structural Transformation
Economists have two basic approaches to analysis of structure, micro approach and macro approach. The first is concerned with the functioning of economies, their markets, institutions, mechanisms for allocating resources, income generation and its distribution, etc., anchored in economic theory (Syrquin 1988: 205). The second sees economic development as an interrelated set of long-run processes of structural transformation that accompany growth.
The central features of this approach are economy-wide phenomena such as industrialization, urbanization, and agricultural transformation, regarded as elements of what Kuznets identified as
“modern economic growth” (Syrquin 1988: 205). This chapter focuses mostly on such long-run processes with a concern for the income distribution issue.
Syrquin (1988) gathers and summarizes the concepts of structural change used in economics into the five main aspects listed below. The interrelated processes of structural change that accompany economic development are jointly referred to as structural transformation.
1. Increase in the rate of physical and human capital accumulation (Rostow, Lewis) 2. Shift in sectoral composition of economic activity (industrialization)
a. Production (demand and trade) and factor use (Kuznets, Chenery) b. The allocation of employment (Fisher, Clark)
3. Change in location of economic activity (urbanization)
4. Change in other concomitant aspects of industrialization (demographic transition, income distribution)
5. Change in institutions (Kuznets, Adelman, Morris)
The accumulation of physical and human capital and shifts in the composition of demand, trade, production, and employment are described (following Chenery (1986)) as the economic core of the transformation, while the related socio-economic processes are identified as peripheral (Syrquin 1988: 206). These two components (accumulation and sectoral composition) will be our main focus in this and the next chapters.
The accumulation of physical capital was referred to as physical capital in commodity production and infrastructure in the 1950s. Capital appeared as the critical factor in the Harrod-Domar model. Rostow (1960) emphasized the sharp increase in the rate of investment during the take-off stage. A doubling in the investment rate was also seen as indispensable by Arthur Lewis (1954), and the shift of resources to the modern sector increased the profit share in income and thus raised the saving rate. Two important early developments can be seen as attempts to specify the role of capital. For the closed economy, Mahalanobis (1953) argued that with non-shiftable capital, the key planning problem is the allocation of investment between sectors producing consumption and production goods, or how many machines to use in making machines. For the open economy, Chenery and Bruno (1962), and Chenery and Strout (1966) introduced foreign exchange requirements as an additional constraint on growth besides the limitation imposed by savings. The main message of these studies and of the latter emphasis on human resources is that a sustained increase in rates of accumulation, while not sufficient, is a necessary requirement for long-run growth and transformation (Syrquin 1988: 212).
The sectoral shifts in the composition of economic activities were also stressed in 1950s.
In Lewis’s model, sectoral differences appear as traditional versus modern sectors, and in Nurkse (1953) and Rosenstein-Rodan (1943, 1961) as a requirement for balanced growth. These approaches shared some views of the functioning of less developed economies: labor surplus in
agriculture, low mobility of factors, price-inelastic demands, export pessimism, and a general distrust of market. On the empirical side, studies of long-run transformation are best represented by Kuznets’ synthesis of modern economic growth in a series of seminar papers.1 Kuznets established the stylized facts of structural transformation, but was reluctant to offer a theory of development. He saw his analysis as an essential building block towards such a theory. His essays on modern economic growth are a compendium of ideas on growth, transformation, distribution, ideology, institutions, and their interrelations. General Equilibrium modelers can find in these essays a rich source for ideas, a guide to specification, and to the long-run relations against which to calibrate their models. The amount of information assembled by Kuznets was enormous, but he did not use formal statistical techniques in its analysis. This task was later taken up by Chenery (1960). His 1960 “Patterns of Industrial Growth” fit well in this approach as an attempt to determine the “normal” transformation in the structure of production as income grows. Both Kuznets and Chenery emphasized much on the importance of the comparative study to find common features and patterns among nations (Syrquin 1988: 213-214). Their ideas will be elaborated in the next section on empirical research.
Fisher (1935, 1939) and Clark (1940) dealt with sectoral shift in the composition of the labor force. They were probably the first to deal with the process of reallocation during the epoch of modern economic growth, and to use the form of sectoral division: primary-secondary-tertiary (Syrquin 1988: 213-214). The main message of these studies is that change in relative importance of sectors is defined as a structural change. The reallocation of resources to sectors of higher productivity contributes to growth if it leads to a fuller or better utilization of resources.
1 “Quantitative Aspects of the Economic Growth of Nations” (1956-67). More compact statements are the 1966
2.1.2 Empirical Research on Structural Transformation2
Economists performed analyses on the comparative experience of nations varying in size, location, and historical heritage to establish common features and patterns and to identify divergences from such pattern. They expect to find some uniform patterns of structural transformation.
Kuznets addressed the importance of this comparative study of structure and growth that
“the rationale is conditioned on the existence of common, transnational factors, and a mechanism of interaction among nations that will produce some systematic order in the way modern economic growth can be expected to spread around the world” (Kuznets 1959: 170, Syrquin 1988, 216). These transnational factors discussed by Kuznets3 are “those potentially common to the world,” which are (1) the industrial system;4 (2) a community of human wants and aspirations;5 (3) organization of the world into nation-states. The way the transnational factors affect the pattern of growth is conditioned by national factors such as size, location, natural resources, and historical heritage. The consideration of the national elements thus leads directly to an emphasis on the distinctive structure and on the differences in growth pattern.
Finally, there are international factors relating to the various channels of interdependence among the different nations. The crucial point stressed by Kuznets6 is that “if there were no substantial transnational factors, there would be no common features of significance in the economic growth of nations and comparative study would be hardly warranted.”
2 This section draws heavily from Syrquin (1988).
3 Kuznets (1959: 166), cited from Syrquin (1988: 216-217).
4 That is, the system of production based on the application on the technological potential afforded by modern science. Some of the requirements of the system are some minimum level of literacy, a non-familial, impersonal type of organization, and a high degree of urbanization.
5 This is illustrated by the relatively weak resistance to the spread of modern technology in reduction in death rates, by the generality of Engel’s law, and by the widespread desire for higher standard of economic performance and levels of living.
The same idea appears in different form in Chenery (1960: 626). Universal factors, of which he lists five: (1) common technological knowledge; (2) similar human wants; (3) access to the same markets for imports and exports; (4) the accumulation of capital as the level of income increases; (5) the increase of skills, broadly defined, as income increases, lead us to expect uniform patterns of development, while particular factors and policy are behind divergences from a common path. In the analysis of development, the sources of diversity are no less important than those leading to uniformity (Syrquin 1988: 217).
The presence of transnational (or universal) factors is the basis for expecting uniformities in the growth process. But national (or particular) factors recognized from the output make clear the inevitability of differences at some level. The comparative approach thus suggests uniformities at a broad (macro) level of analysis or aggregation, but allows for variations at a lower (micro) level (Syrquin 1988: 217).
2.1.2.1 The concept
Analyses on structural transformation usually focus on the concept of a transition from an agricultural to an industrial economy, which allows for differences in many dimensions, such as industrial composition, timing or sequencing of changes during the process, and sources of financing of capital accumulation (Syrquin 1988: 217). There is, however, more than one way to make this transition. Some even go beyond the question of whether or not countries need to industrialize, but focus on the problem of when and in what manner it will take place, which is also a focus of this dissertation. Instead of searching for a unique pattern, attention was turned to the determination of average patterns over time, and to an exploration of the relation between time-series and cross-section patterns (Syrquin 1988: 222).
2.1.2.2 The Methodology of Comparative Analyses
The methodology of comparative analyses in Sections 2.1.2.3 and 2.1.2.4 is a statistical approach which focuses on the search for uniform features of development (“stylized facts”) and the main sources of growth and change. It sources of information are long historical series from developed countries, shorter time series from developing countries, and cross-country comparisons. This approach is subject to some limitations on policy implications and causality.
The cross-section analysis does not take into account technological innovations, changes in consumer tastes, the dynamic effects, and changes in the international environment (Syrquin 1988: 221-222). It is also unrealistic to expect identical time-series relations across countries. At best we can expect a high degree of uniformity in the nature of the relations reflecting the operation of common universal factors and discrepancies that can be interpreted (Syrquin 1988:
222). In contrasting cross-section and time-series results, it is customary to interpret the former as reflecting long-term adjustment, and the latter as short-term or partial adjustments to changes in exogenous variables. The cross-section approach was originally intended as a response to the limited data in developing countries. Comparisons of economic structure across countries are now regarded as useful in their own right (Syrquin 1988: 222-223).
2.1.2.3 Patterns of Growth and Accumulation A. Growth Pattern
The process of economic growth can be formally described as the result of the expansion in productive resources and the increase in the efficiency of their use. During the transition (or in the epoch of modern economic growth) the growth of inputs—labor and capital—also accelerates, but by far the most important element accounting for output growth in developed
countries, has been the growth of total factor productivity (TFP). However, it would be wrong to deduce from this result that capital accumulation is not an important factor for development.
The reasons are that, first, studies of productivity growth in developing countries have shown that factor inputs account for a much higher proportion of growth than in advanced countries. This is due in part to the observation that the share of value added imputed to labor is higher in rich countries than in poor (one of Taylor’s (1986) stylized facts). Other reasons are the role of capital accumulation as a carrier of technological change, and its status as a necessary factor for intersectoral resource shifts. In addition to embodiment effects, a high rate of investment may be required to sustain aggregate demand and prevent idle capacity from arising.
These observations point to a limitation of sources-of-growth analysis. The sources considered are usually assumed to act independently from each other, usually ignoring links and interactions among them. The missing link in this case, is the relation between measured productivity growth and capital accumulation.
Evidence from micro studies (Pack 1988) suggests another reason for the low measured growth of factor productivity in various developing countries: the resources deployed are used inefficiently relative to both international best practice and the best domestic firms.
The very large contribution of productivity growth to output expansion in developed countries is a relatively recent phenomenon. In most of the countries for which long-term records are available, factor productivity growth accelerated over time to a larger extent than output growth, thereby raising its relative contribution.
At the sectoral level most evidence indicates faster TFP growth in the industrial-modern sector than in agriculture. However, the high rate of productivity growth has been pervasive, encompassing all major production sectors, As Kuznets (1966: 491) pointed out in relation to the experience in developed countries, even if the rise in output per unit of input in agriculture was
lower than that in industry, it was still so large compared with premodern levels that one can speak of an agricultural as well as of an industrial revolution. Recent studies have also identified strong ‘country’ and ‘period’ effects. Rates of labor and total factor productivity growth tend to be uniformly higher across sectors in countries with good average performance as well as within countries in periods of rapid growth of aggregate productivity. This finding suggests that the overall economic environment, which includes general macroeconomic and trade policies, is an important factor in explaining differences in productivity growth (Syrquin 1988: 224-225).
B. Accumulation
Accumulation refers to the use of resources to increase the productive capacity of an economy. Indicators of accumulation include rates of saving; investment in physical capital, in research and development, and in the development of human resources (health, education); and investment in other public services which augment productivity. This section focuses on aggregate saving and investment patterns.
Saving and investment have critical role in income growth. During the epoch of modern economic growth, and over the transition range, there is a significant rise in the share of saving and investment in GDP.
Kuznets (1961, 1966) analyzed long-term trends in capital formation proportions in ten countries. In most countries he found a significant secular rise in capital formation proportions.7 Crafts (1984) pooled time-series and cross-section date for 17 countries in nineteenth century Europe and found a significant income effect for the investment ratio.
Cross-country studies for the post-World War II period reveal significant income effects for saving and investment, both among countries and over time within countries. Syrquin and
Chenery (1986) report estimates of development patterns for samples of over 100 countries during 1950-83. The expected total change over the transition derived from the pooled regression, is about 8 percentage points of GDP for the investment share and about 11 percentage points for the saving proportion. This difference between the changes in saving and investment reflects the tendency for the inflow of foreign capital (measured by the current account deficit) to decline over the transition. A similar secular decline took place in advanced countries (Kuznets 1961).
The average income and effects on investment and saving in the time series are positive and significantly larger than the implied effects across countries. That is, whatever the initial shares were, they tended to go up since 1950 (Syrquin 1988: 227).
The increase in overall accumulation rates at a faster pace than population or employment, results in changes in factor proportions and in comparative advantage with implications for the sectoral allocation of economic activity (Syrquin 1988: 228).
2.1.2.4 Changes in Sector Proportions
Changes in the sectoral composition of production are the most prominent feature of structural transformation. Associated with income growth are shifts in demand, trade, and factor use. These interact with the pattern of productivity growth, the availability of natural resources, and government policies, to determine the pace and nature of industrialization.
A. Final Demand
Among the most uniform changes in demand affecting industrialization, are the decline in the share of food in consumption and the rise in the share of resources allocated to investment (Engel’s Law). At low income levels, food consumption accounts for as much as 40 percent of
GDP and total private consumption for about 75 percent. Over the whole transition both shares decline; food consumption by more than 20 percentage points (of GDP) and total consumption by somewhat less. The rise in the shares of non-food consumption and investment imply a shift in demand away from agricultural goods and to industrial commodities and nontradables (Syrquin 1988: 231).
B. Intermediate Demand
The largest element in gross output of one sector is used as intermediate products, which in the aggregate accounts for over 40 percent of total gross output in most countries. During the process of development, the total use of intermediates relative to total gross output tends to rise, while varying its composition. The relative use of primary products as intermediates declines, while the uses of intermediates from heavy industry and services go up. Most of the overall rise in intermediate use is not due to changes in the composition of output but rather to increases in the density of the input-output matrices. These trends reflect the evolution to a more complex system with a higher degree of fabrication, and the shift from handicrafts to factory production.
The latter can also be observed in the change in the distribution of firms by size. The increase in the use of intermediate services is indicative of the dependence of industrial growth on a parallel expansion of modern services. This relation provides an additional explanation to those based on income elasticities, government expansion, and productivity growth, for the rising shares of services in employment and output.
The preceding results referred to the use of a sector’s output as an intermediate input (a row measure). Looking at total intermediate purchases by a sector (a column measure) a systematic trend has been observed in agriculture. The share of intermediate inputs in the total value of output increases significantly with the level of income. Technical change in the sector
and a rising relative price of labor, induce a more mechanized structure of production and a more intensive use of inputs from outside the sector—fuels, fertilizers and capital goods. During the course of the transformation the value-added ratio in agriculture (the counterpart of the ratio of intermediates purchased to gross output) typically goes down from close to 80 percent to less than 55 percent of the value of output (Chenery and Syrquin 1986, Syrquin 1988: 231-232).
and a rising relative price of labor, induce a more mechanized structure of production and a more intensive use of inputs from outside the sector—fuels, fertilizers and capital goods. During the course of the transformation the value-added ratio in agriculture (the counterpart of the ratio of intermediates purchased to gross output) typically goes down from close to 80 percent to less than 55 percent of the value of output (Chenery and Syrquin 1986, Syrquin 1988: 231-232).