Thailand: Agriculture In Economic Recovery

1998

Peter G Warr

Following the economic crisis of mid-1997 policy interest in the importance of Thailand's agricultural sector increased greatly. From having been seen previously as a stagnant or declining sector without long term growth prospects, agriculture has come to be seen as a source of urgently needed foreign exchange without the necessity of large capital inputs and especially for absorption of the large numbers of urban sector employees made redundant by business closures in the cities. It is now widely expected that the agricultural sector will play a disproportionate role in the economic adjustment to the crisis.

On a long term basis, agriculture is a declining sector within the Thai economy. Its share of GDP declined from over 30 per cent in the early 1970s to just over 10 per cent in the mid 1990s. But the economic crisis has drawn attention to an under-appreciated function played by the agricultural sector of large developing economies - its role as a stabiliser. While agriculture did not grow as rapidly as the rest of the economy during periods of rapid growth, it did not contract as severely during the crisis, either. The National Economic and Social Development Board projects that in 1998 Thailand's aggregate real GDP will decline by 7 per cent. Within this aggregate projection, the contributions to GDP of manufacturing, construction and services will all decline, by 7.5, 22.0 and 7.1 per cent respectively. Agriculture alone will grow, its contribution to GDP increasing at 2.5 per cent. A similar situation applies in Indonesia. The crisis did not produce a contraction in agriculture comparable with the rest of the economy.

The long term decline of agriculture reflects demand side factors that reduce the share of agriculture in total demand and supply side factors, especially capital accumulation, that draw resources out of labour-intensive agricultural industries and into more capital and skill-intensive industries in manufacturing and services. In addition to these underlying economic forces, Thai economic policy has contributed to the long term decline of agriculture. The level of government expenditure devoted to agriculture is not low, by Southeast Asian standards, and are second only to Indonesia, but the principal sources of economic progress have been seen as lying outside the agricultural sector. Public investment in agricultural research and extension have been modest and, as a result, yield improvements in Thai agriculture have been the lowest in Southeast Asia. Thailand's trade policies have encouraged the development of capital-intensive manufacturing, thus discriminating against agriculture in the competition for domestic resources.

Private capital investment in agriculture has also been small, especially in crop production. Increases in the value of output have resulted primarily from moving the composition of output away from rice, with output growth under 1 per cent over the decade prior to 1997, to higher value commodities, partly fruits and vegetables, but primarily livestock and fishery.

In the short run, it is possible for agriculture to increase its output and levels of employment in response to the crisis, but any such contribution is likely to be limited and temporary. As it is transmitted to domestic prices of agricultural commodities, the depreciation of the baht will increase the profitability of agricultural production. But it may not provide the large stimulus to an expansion of agricultural production that has been expected. Available evidence suggests that the price responsiveness of Thai agricultural production is very low, especially for rice.

Over the medium to long term, agriculture may be expected to continue its long term decline as a share of overall economic activity and for its total work force to continue to decline absolutely. This process is both inevitable and desirable. It generates long term economic benefits for the Thai population and policy should not be mis-directed into a futile attempt to stop it. Continued productivity gains in agriculture will nevertheless be an important source of overall economic growth in Thailand. Improved efficiency in the use of land, water, labour and improvements in the supply of public and semi-public goods such as new technological information will be central to these productivity gains.

The long term economic future for rural areas in Thailand must depend increasingly on non-farm activities. The factors which have caused non-farm economic activity in Thailand to be so heavily concentrated in one mega-city, Bangkok, must therefore be a central focus of policy reform.

WATCHPOINT: Will agricultural exports respond significantly to the depreciation of the baht?

 

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