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Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, May 1996.
1993 1994 1995
Income, Production and Employment
Real GDP (1985 prices) 2/ 97,581 106,829 117,464
Real GDP Growth (percent) 3/ 8.3 8.7 8.6
GDP at Current Prices 2/ 124,957 143,177 165,008
GDP by Sector:
Agriculture 12,743 14,674 15,362
Energy and Water 2,995 3,337 N/A
Manufacturing 35,282 40,356 45,722
Construction 8,786 10,656 12,019
Rents 3,209 3,531 N/A
Financial Services 9,151 11,372 N/A
Other Service 52,791 54,181 N/A
Government/Health/Education 4,648 5,067 N/A
Net Exports of Goods & Services -6,535 -8,291 N/A
Real Per Capita GDP (US$) 2,154 2,439 2,759
Labor Force (000s) 33,619 34,878 34,231
Unemployment Rate (percent) 3.7 3.4 3.1
Money and Prices (annual percentage growth)
Money Supply (M2) 6/ 18.4 12.9 19.1
Base Interest Rate 4/ 10.5 11.75 13.62
Personal Savings Rate 4.4 3.7 N/A
Retail Inflation 7/ 3.4 5.1 5.4
Wholesale Inflation -0.4 3.9 N/A
Consumer Price Index 113.7 119.5 N/A
Exchange Rates (B/US$ average
Official 7/ 25.32 25.15 24.84
Parallel -- not applicable --
Balance of Payments and Trade
Total exports, (FOB) 5/ 37,159 45,233 54,750
Exports to U.S. 5/ 7,987 9,507 9,803
Total Imports, (CIF) 5/ 46,242 54,444 65,620
Imports from U.S. 5/ 5,373 6,444 6,739
AID from U.S. (FY-DA obligation) 47.5 34.6 31.2
AID from other Countries (FY) N/A N/A N/A
External Public Debt (LT) 8/ 14,171 15,534 17,478
Debt service payments (paid) 8/ 5,180 6,429 1,894
Gold & Foreign Exchange
Reserves 6/ 23,980 30,279 35,900
Trade Balance 5/ 9,083 9,211 10,870
Balance with U.S. 5/ 2,614 3,063 3,064
Sources: Bank of Thailand, Thai Ministry of Commerce, Thai
National Economic and Social Development Board, U. S.
Department of Commerce and Embassy estimates.
1/ 1995 figures are all estimates.
2/ GDP at factor cost.
3/ Percentage changes in baht terms.
4/ Figures are actual and average interest rate.
5/ Merchandise trade.
6/ As of Sept. 1995.
7/ Jan.-Sept. 1995.
8/ As of June 1995.
1. General Policy Framework
Thailand's economic development policies are based on a competitive, export-oriented, free market philosophy. Over the last decade, Thailand's economy has undergone a substantial transition from one based primarily on agriculture to a more open and broadly based one with a large manufacturing sector. Although the majority of the Thai labor force (54.6 percent in 1995) is still employed in agricultural production, this sector now accounts for only 11 percent of GDP. Manufacturing, wholesale and retail trade and service industries are the most rapidly growing sectors and now account for almost two-thirds of Thailand's GDP.
The Banharn government which came into office following democratic elections in July 1995 has continued to pursue the major economic policies of previous governments. As did its predecessor, the current government has stressed addressing imbalances created through rapid industrialization by emphasizing rural development and reducing disparities in the distribution of income.
Thailand's gross domestic product grew at an average annual rate of over eight percent during the last decade, and averaged over ten percent between 1988 and 1994. Following a modest slow down to 7.9 percent in 1992, GDP growth picked up in 1993 to 8.3 percent, and rose further to 8.7 percent in 1994. Growth in 1995 is currently estimated at 8.6 percent. Barring unexpected domestic or external shocks, Thailand should maintain solid economic growth in the seven to eight percent range for the foreseeable future.
Thai exports grew at 21.7 percent in 1994 to exceed $45 billion. This was a landmark for Thailand as exports exceeded one trillion baht for the first time. Import growth was also strong at 17.7 percent, rising to $54.4 billion. Both imports and exports have continued their strong growth in 1995, with exports projected to increase by 21.6 percent and imports by 21.2 percent. Thailand's merchandise trade deficit grew to $9.2 billion in 1994 and is expected to top $10.7 billion in 1995.
The country's current account deficit rose in 1994 to $8.5 billion, equivalent to 5.9 percent of GDP. The current account deficit has continued to widen and is projected to top $10 billion in 1995, equivalent to 6.1 percent of GDP. The persistence of the deficit, as well as its rapid growth, has aroused some concern among Thai policymakers. While many officials argue that a substantial portion of Thailand's trade deficit is accounted for by imports of capital goods, others note that imports of consumer goods have also been increasing rapidly.
Net capital movement into Thailand was $14.1 billion in 1994, mostly as a result of strong private capital inflows, predominantly bank financing ($13.2 billion). Net foreign direct investment fell from $2 billion in 1992 to $1.7 billion in 1993 and $595 million in 1994, largely as the result of a slowdown of investment in this category from Japan; a great deal of investment from Japan now enters Thailand via the large bank inflows noted above. Foreign direct investment has increased slightly in 1995. During the first eight months of the year, the latest period for which statistics are currently available, foreign direct investment reached $588.7 million.
Overall, the country recorded a balance of payments surplus in 1994 of $4.2 billion. Total debt outstanding was $54.1 billion, $15.8 of which was public debt. The total debt service ratio stood at 10.6 percent. Official reserves stood at $35.9 billion in October 1995, equivalent to about seven months of imports.
Rapid growth has had its drawbacks: infrastructure bottlenecks remain a problem and environmental degradation has worsened considerably in recent years. If unresolved, Thailand's infrastructure bottlenecks and shortages of skilled personnel will limit the pace of future growth. Metropolitan Bangkok's public works (communications facilities, roads and mass transit) are already overtaxed and will come under increasing pressure. At the same time, much of the growth has been concentrated in the greater Bangkok area, which accounts for more than half of Thailand's total GDP. Little progress has been made in addressing the problems of wide disparities of income between Bangkok and the rest of the country.
A drought in the northern provinces during 1993 reduced agricultural output dependent on irrigation and reduced water supplies to the Bangkok metropolitan area in 1994. Abundant rainfall in 1994 and 1995, however, has refilled reservoirs to capacity. Severe flooding in the north of Thailand during August 1994 and in both the north and central plains region in 1995 destroyed some crops. These growing conditions, strong export demand and changes in Thai policies which reduced production have led to increased prices for agricultural goods in 1995.
The average amount of schooling for the Thai workforce is less than six years, the lowest in ASEAN. The level of education of the workforce will have to be raised to maintain Thailand's development pace and competitiveness with neighboring countries which have lower wage rates. The Thai government is fully aware of this problem and is in the process of expanding mandatory years of schooling from six to nine. Wage gains continue to outpace substantially the growth of the consumer price index.
For the past eight years Thailand has experienced a substantial government budget surplus as revenues were fueled by growth and government investment expenditures for major infrastructure projects lagged. For 1994 the government's overall cash surplus reached $2.6 billion, 1.8 percent of GDP.
2. Exchange Rate Policy
Since November 1984 the Thai baht has been pegged to a basket of currencies of principal trading partners. The composition of the basket is a closely guarded secret, but the U.S. dollar appears to represent about three-quarters of the basket. The Exchange Equalization Fund, chaired by a Deputy Governor of the Bank of Thailand, determines the exchange value of the baht each working day. There is no parallel market in Thailand. Global currency realignments since 1985, and especially the recent appreciation of the Japanese yen and the Thai baht against the U.S. dollar, have tended to make U.S. exports to Thailand more price competitive.
In May 1990 the Thai government announced a series of measures to liberalize significantly the exchange control regime. It accepted the obligations of the International Monetary Fund's Article VIII covering reduction of restrictions on international transactions. Commercial banks were given permission to process all foreign exchange transactions and substantial increases were allowed in ceilings on money transfers not requiring Bank of Thailand preapproval and on spending by Thai tourists and businessmen abroad. In April 1991 and May 1992 additional rounds of foreign exchange liberalization substantially simplified foreign exchange reporting requirements and allowed banks to offer foreign currency accounts to individuals and businesses. The central bank also raised limits on Thai capital transfers abroad and allowed free repatriation (net of taxes) of investment funds, dividends, profits and loan repayments. It allowed exports to be paid for in baht without prior permission and companies to transfer foreign exchange between subsidiaries without having to change those funds into baht.
3. Structural Policies
The appointment of the first Anand administration in March 1991 set the stage for a flurry of legislative and regulatory reforms. The Anand government reduced market distortions, made tax policies more transparent and, in general, liberalized the domestic market. Although the nation's trade and current account deficits are large in relation to total GDP, the overall balance of payments remains in surplus because of tourism earnings and large inflows of foreign capital. This payments surplus and a substantial budgetary surplus have allowed the Thai government to reduce customs duties and liberalize its import regime. A wider reform of the import regime, reducing the number of tariff rates and eliminating most tariffs above 30 percent, is being pursued. Thailand began implementing the ASEAN Free Trade Area's (AFTA) tariff reductions in January 1993. Although it began slowly, AFTA has picked up speed as the six member nations (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) have started seeing results. At the September 1994 meeting of the ASEAN Economic Ministers in Chiang Mai, the AFTA members agreed to reduce the 15 year implementation schedule to 10 years, gradually to eliminate the exclusion list of protected items and generally to expand AFTA from a tariff reduction scheme into a real free trade area. Thailand has been one of the leading proponents of this effort, and an ASEAN summit scheduled to take place in Bangkok in December 1995 may advance the implementation schedule of AFTA. Thailand's trade relations have traditionally been oriented toward distant markets, particularly North America, Europe, and Japan, but the government sees the ASEAN Free Trade Area increasing intra-ASEAN trade as well.
Beginning in 1992 the Thai government implemented a major reform of its taxation system. In 1992 the government increased personal income tax deductions, lowered the top marginal tax rate to 37 percent and unified the corporate income tax rate at 30 percent. The government is considering a further reduction to 25 percent to attract more investment. On January 1, 1992 Thailand implemented a value-added tax (VAT) system, replacing a multi-tiered business tax with a single rate of seven percent on value added. U.S. transportation and shipping companies in Thailand are at a competitive disadvantage vis-a-vis firms from third countries which "zero rate" Thai companies under their own VAT systems. Since the United States does not have a VAT system, U.S. firms are "exempt" from the Thai system and unable to claim rebates for taxes paid on inputs. Firms which are "zero rated" are able to offset VAT paid on inputs in paying their own taxes.
Thai financial authorities have taken additional steps to open up the commercial banking system. Foreign exchange controls have been liberalized and the government has lifted the ceiling on deposit rates. It is gradually reducing the amount of government bonds that commercial banks are required to hold to satisfy reserve and other requirements. In May 1992 the central bank authorized banks and finance and security companies to engage in additional activities and banks are now able to underwrite securities. In March 1992 the Finance Ministry licensed seven new mutual fund companies, ending a 17 year monopoly. Foreign banks are allowed to participate in the Bangkok International Banking Facility (BIBF), created to develop an offshore banking industry in Thailand. Again, as part of its commitment in the GATS negotiations, Thailand will allow from five to seven BIBFs to become full branches in 1996.
4. Debt Management Policies
Domestic credit is expanding, helping fuel some of the growth in consumption in the economy. Domestic credit expanded 18 percent in 1992, 19.6 percent in 1993, 28.9 percent in 1994 and 27.1 percent through September 1995. The prime rate has ranged from 10.5 to 14 percent since 1991 and currently stands at 13.75 per cent. In the same period, rates for one-year fixed deposits have ranged from 7.0 to 11.0 percent, where they stood as of September 1995. With the disparity between relatively high domestic rates and declining international lending rates, Thai private sector external borrowing has grown rapidly since 1993 and, as noted above, net capital inflows have increased greatly.
5. Significant Barriers to U.S. Exports
In order to comply with its Uruguay Round commitments, the Thai government introduced substantial reductions in its duty rates effective January 1, 1995. With few exceptions (automobiles, alcoholic beverages, certain unprocessed agricultural products) import duties currently range from zero to 30 percent ad valorem. There are presently six classifications of import duties: (1) zero duties on selected equipment (e.g. medical) for public use, (2) zero to five percent on raw materials; (3) 10 percent for intermediate products; (4) 20 percent for finished products; (5) 30 percent for special production items; and, (6) items offered special protection (e.g. 68.5 percent for luxury sedans). In addition, the Thai government continues to levy other specific taxes of an equivalent or higher rate.
Arbitrary customs valuation procedures sometimes constitute a serious import barrier. The Thai Customs Department keeps records of the highest declared prices of products imported into Thailand from invoices of previous shipments. Those prices can then be used as "check prices" for assessing tariffs on subsequent shipments of similar products from the same country. Customs may disregard actual invoiced values in favor of the check price for assessment purposes, a practice which may particularly affect agricultural products with seasonally fluctuating prices. For products shipped from other than the country of origin, the Customs Department reserves the option of using the check price of either the country of origin or the country of shipment, whichever is higher. These rules are applied to imports from all nations.
The Thai Food and Drug Administration issues licenses for food and pharmaceutical imports. This licensing process can pose an important barrier because of its cost, duration and demand for proprietary information. Licenses for importers of food products cost 15,000 baht (about $600). These licenses must be renewed every three years. Licenses for importers of pharmaceuticals cost 10,000 baht (about $400) and must be renewed every year. Sample products imported in bulk require laboratory analysis at a cost of 1,000 to 3,000 baht (about $40 to $120) per item. Food products imported in sealed containers (consumer-ready packaged) require laboratory analysis at a cost of 5,000 baht (about $200) per item. Thirty-nine food products must be registered as "specific" controlled food items" at an additional cost of 5,000 baht ($200) per item. Registration of pharmaceutical imports costs 2000 baht (about $80) per item, with the cost of inspection of each item an additional 1,000 baht (about $40). Although the Thai Food and Drug Administration has made efforts to streamline the registration process, it usually requires three months or more to complete. All controlled items must be accompanied by a detailed list of ingredients and a description of the manufacturing process. Some U.S. suppliers have declined to export to Thailand rather than provide the proprietary information requested.
The Thai Ministry of Commerce requires import licenses on certain raw materials, petroleum, industrial, textile and agricultural products. These licenses can be used to protect uncompetitive local industry, encourage greater domestic production, maintain price stability in the domestic market and for phytosanitary reasons. Import licensing is also used to protect intellectual property rights and to comply with international obligations. Import licensing is required for 43 categories of items. In the food products area, licensing requirements remain for powdered skim milk and fresh milk, potatoes, soy beans and soy bean oil, refined sugar, coffee and others. Corn for animal feed is among those 10 categories which do not need import licenses but must comply with concerned agencies' requirements for surcharges, fees or certificates of origin.
Largely by restricting foreign bank entry, branching and acquisition of Thai banks, Thai authorities limit all foreign banks to about six percent of total commercial banking assets at present. Although an existing foreign bank license was bought in 1994, no new foreign bank licenses have been issued since 1978. However, Thai authorities regularly approve representative offices of well established foreign banks. In aggregate, foreigners are limited to a maximum 25 percent shareholding in each Thai bank. Thai authorities have approved a limited number of foreign branches to operate in the offshore market. No person or group of related persons, whether Thai or foreign, may hold more than five percent of the shares of each Thai bank. Larger holdings established before these regulations took effect cannot be increased, but do not have to be reduced.
Foreign banks do not receive national treatment in Thailand. Foreign banks are prohibited from opening branches and are not permitted to operate off-site automated teller machines (ATMs). In 1994, regulations were changed to permit foreign banks to participate in the local ATM network. However, they have been unable to negotiate agreements to participate in the ATM network with domestic banks.
Thai law and regulations limit foreign equity in new local insurance firms to 25 percent or less. This denies new U.S. property/casualty and life insurers access to the local market on terms equal to local insurers. A long established U.S. firm, however, controls a major share of the Thai life insurance market.
Under Thai law, aliens are forbidden to engage in the brokerage business. A 1979 law limits all foreign ownership of Thai finance and credit foncier companies to 25 percent; however, a maximum of 40 percent participation in firms already licensed when the law was enacted is permitted.
6. Export Subsidies
The Government of Thailand ratified the Uruguay Round agreements in December 1994. Thailand maintains several programs, notified to the GATT in July 1995, which benefit manufactured products or processed agricultural products and may constitute export subsidies. These programs include subsidized credit on some government-to-government sales of Thai rice, preferential financing for exporters in the form of packing credits; tax certificates for rebates of packing credits and tax certificates for rebates of taxes and import duties on inputs for products made for export. Thailand established an export-import bank in September 1993 which took over some of these functions, particularly the packing credit program.
7. Protection of Intellectual Property
Improved protection for U.S. copyright, patent and trademark holders has been one of our most prominent bilateral trade issues over the past several years. Thailand has made significant progress in intellectual property protection over this period. Following the passage of a revised copyright law in November 1994, which generally brings the Thai copyright regime into conformity with international standards of the draft Uruguay Round agreement (TRIPs) and the Berne Convention (Paris Act) the U.S. downgraded Thailand from "priority watch list" to "watch list" status. In addition, the Thai government has agreed to provide protection through administrative means for certain pharmaceutical products not entitled to full patent protection under Thai law. In recognition of this progress, in July 1995, the U.S. also restored a number of GSP benefits which had been denied to Thailand under the provisions of Special 301. A number of additional bills designed to bring Thailand into full compliance with TRIPS requirements, including new patent legislation and improvements to the copyright act, are currently being drafted.
Efforts on the part of the Thai government to enforce existing copyright laws have also improved since 1991. Enforcement activities against intellectual property infringement were centralized to reduce copyright piracy, with raids by police expanding to cover computer software. U.S. industry associations have been instrumental in securing more energetic enforcement. Nonetheless, copyright piracy of audio and video tapes and computer software remains widespread. The government has publicly stated its commitment to continuing and vigorous enforcement. The Ministry of Commerce set up a special Intellectual Property Department in 1992 which is active in coordinating both the legal structure and enforcement efforts against all forms of violation of intellectual property.
Concerns remain that Thailand's legal procedures do not provide adequate deterrence against copyright infringement. The government has established a special division in the courts to concentrate on intellectual property matters and a bill to establish entirely separate intellectual property courts, with judges trained in intellectual property matters, is currently pending in Parliament. Thai officials expect that these measures will speed up consideration of copyright and other IPR cases and improve the efficiency of the legal system in dealing with them.
8. Worker Rights
a. The Right of Association: The Labor Relations Act of 1975, Thailand's basic labor law, guarantees to workers in the private sector most internationally recognized worker rights, including freedom of association. Workers have the right to form and join unions of their own choosing, to decide on their constitutions and rules and to formulate their policies without outside interference. Once a union is established, the law protects members from discrimination because of union activities. In addition, unions have the right to maintain relations with international labor organizations. In April 1991 the government passed the State Enterprise Labor Relations Act (SELRA) which denied state enterprise workers many of the labor association rights they had enjoyed under the 1975 law. The government has promised to amend the SELRA and restore these rights. The new legislation has been approved by the Cabinet, passed parliamentary scrutiny, and is set for final passage in the March 1996 legislative session.
b. The Right to Organize and Bargain Collectively: The 1975 Act grants Thai workers the right to organize unions and employee associations without outside interference and to bargain collectively over wages, benefits and working conditions. There are nearly 900 private sector unions registered in Thailand. Until the SELRA is amended, state enterprise workers, like civil servants, may not form unions, but are allowed membership in employee associations. The law currently denies the right to strike to civil servants, state enterprise workers and workers in "essential" services such as education, transportation and health care. Actual collective bargaining is rare, though informal employee/employer bargaining does occur in some firms. Industry-wide collective bargaining is almost unknown.
c. Prohibition of Forced or Compulsory Labor: The Thai Constitution prohibits forced or compulsory labor except in the case of national emergency, war or martial law. Thailand, however, has been subject of ILO action under Convention 29 (Forced Labor) for several years because of the persistence of child prostitution. Recently, the government has stepped up enforcement of laws against child prostitution and is cooperating in ILO programs to deal with the problem.
d. Minimum Age for Employment of Children: The minimum employment age in Thailand is 13. Thailand restricts the employment of children between 13 and 15 to "light work" in nonhazardous jobs and requires Department of Labor permission before they can begin work. Employment of children at night is prohibited. The government has announced its intent to increase compulsory education from six to nine years in the next few years; this will make possible further raising of the minimum employment age to 15. In the last three years, the government has also more than doubled the size of the labor inspector corps concerned with child labor law to enhance enforcement of those laws. Nevertheless, enforcement is not rigorous and some illegal employment of children continues, mostly in the informal sector.
e. Acceptable Conditions of Work: Working conditions vary widely in Thailand. Medium and large factories, including those of most multinational firms, generally meet international health and safety standards, although a May 1993 fire in a factory producing toys for export in which nearly 200 workers were killed demonstrates significant gaps in enforcement. The government has sought to address those gaps by increasing the number of safety inspectors and by increasing the penalties for violations. Eight-hour days are the norm and wages and benefits in export industries usually exceed the legal minimum. However, in Thailand's large informal sector, wage, health and safety standards are often ignored. Most industries have a legally mandated 48-hour maximum work week. The major exception is commercial establishments, where the maximum is 54 hours. Transportation workers are restricted to no more than 48 hours per week.
f. Rights in Sectors with U.S. Investment: U.S. capital investment is substantial in several sectors of the Thai economy, including petroleum (exploration, production, refining, and marketing), electronic components assembly and consumer products. Workers in these sectors, especially those working for U.S. and other western and Japanese firms, usually enjoy labor conditions superior to those of the average Thai worker: the degree of unionization is greater, wages and benefits are higher, and health and safety standards are better. Child labor is rare or nonexistent among large multinational firms. However, compliance with worker rights standards is weak among some subcontractors which supply larger, more reputable firms.
(Millions of U.S. dollars)
Category Amount
Petroleum 1185
Total Manufacturing 1341
Food & Kindred Products 50
Chemicals and Allied Products 290
Metals, Primary & Fabricated (1)
Machinery, except Electrical (1)
Electric & Electronic Equipment 358
Transportation Equipment (2)
Other Manufacturing 105
Wholesale Trade 344
Banking 365
Finance/Insurance/Real Estate 63
Services 70
Other Industries 394
TOTAL ALL INDUSTRIES 3762
(1) Suppressed to avoid disclosing data of individual
companies.
(2) Indicates a value between $-500,000 and $500,000.
Source: U.S. Department of Commerce, Bureau of Economic
Analysis
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