Comparative advantage, protection and growth of the textiles industry in Thailand

Abstract

Thailand has enjoyed phenomenal economic growth in the past three decades accompanied by rapid industrialization. Manufacturing sectors, especially textiles and computer electronics, have replaced the agricultural sectors as the major contributors to economic growth and exports. In the 1980s textiles replaced rice as the major export industry. The Government has played an active role in industrialization and trade through promotion of private investment, and tariff and non-tariff protection. This study examines the comparative advantage of the tradable sectors and the level of protection accorded to them. The particular focus of the study is the textiles industries. The domestic resource cost (DRC) of an industry provides a good indication of its comparative advantage, while the effective protective rate (EPR) provides a good measure of the actual protection an industry receives. The DRC is defined as the cost of the domestic resources required per unit of foreign exchange earned, whereas EPR is the net value added under distortion per unit value added under free-trade. The study is based on Thailand's 58 sector input-output table which covers 43 tradable sectors, 15 non-tradable sectors and two primary factors, capital and labour. The tradable sectors comprise 10 agricultural, 3 mining and 20 manufacturing sectors. Two of the manufacturing sectors, namely Spinning and Weaving and Wearing Apparel, belong to textiles production. Additional data on domestic prices and nominal tariffs were obtained from government and non-government sources. The EPRs and DRCs of the 43 sectors are determined for the years 1975 and 1985, making use of the respective input-output tables, to ascertain the changes in the nature of protection and comparative advantage respectively. The results reveal that in 1975 only three sectors (Sugarcane, Other Crops, and Motor Vehicles and Repair), had a DRC value greater than one, implying comparative disadvantage. Of the 40 sectors only 20 received protection. The rest, including the agricultural and textiles sectors, received a negative effective protection. This implies that the agricultural and textiles sectors were taxed to subsidise other manufacturing indirectly in the seventies when the governmment pursued an import-substituting industrialization strategy. In 1985, 11 sectors including four agricultural sectors had DRCs greater than one implying a lack of comparative advantage. The textiles industries had DRCs greater in size than in 1975, though still less than one. Many industries, including textiles, received positive protection, i.e. positive EPRs. Fishery and Motor Vehicles and Repairs had negative value added under free-trade, implying that they needed heavy effective protection to sustain production. Government policies aimed at export expansion in the eighties. The government tariff policies were examined and it was found that the general tariff levels had been lowered by 1985. The role of the Government in promoting investment and growth in textiles was studied. The investment and export promotion incentives for private investors provided through the Board of Investment since the sixties, the low interest loans of the Industrial Finance Corporation of Thailand, and various business tax exemptions provided by the Ministries of Finance and Industry, appear to have contributed substantially to the expansion of the textiles industries. Further, the effective protection and expansion of the domestic and international markets for Thai textile products have been conducive to the growth of production and exports. The Multi-Fibre Agreement (MFA) with developed countries which restricts imports of textiles from Thailand does not seem to have affected this growth. This is partly because of successful government efforts in penetrating non-MFA markets and partly because of upgrading the quality of products.