Trade liberalisation and manufacturing performance in Thailand 1990-2000

Abstract

Thailand initiated trade liberalisation in the early 1970s by reducing import restrictions. These liberalisations were not consistently implemented because the government used tariffs to correct trade deficit and impose fiscal constraint. However, the breakthrough in liberalisation came in the early 1990s, as the government was under pressure from both external factors, such as participation in WTO, AFTA and APEC, and internal factors, such as demands to promote competitiveness and efficiency of the manufacturing sector. The tariff rates of many products were reduced significantly, and both nominal and effective rates of protection began to decline for the first time. The major objective of this thesis is to study the impacts of trade liberalisation in the 1990s on manufacturing performance in Thailand. The main hypothesis is that trade liberalisation has had positive impacts on the Thai manufacturing sector. To test this hypothesis, sub-hypotheses were formed and appropriate methodologies adopted to enable research at both industry and firm levels. For the industry level study, a number of performance variables were identified, namely, total factor productivity growth, labour productivity growth, change in price-cost margins and export growth. Two periods were selected, 1990 to 1994 and 1990 to 1999. Use of the short period, 1990 to 1994, allowed capture of the immediate impacts of trade liberalisation, while use of the longer period, 1990 to 1999, allowed capture of long-term impacts. The performance variables were regressed with trade policy variables and other control variables, such as structural characteristics and technological characteristics that influence performance. The Ordinary Least Squares was used. The result of the study shows that reduction in protection rates increased productivity growth and reduced price-cost margins. Output and export growth were also found to be important determinants of productivity growth. Impacts of trade liberalisation on manufacturing performance at the firm level were studied for three reasons: (1) to complement the industry level analysis; (2) to show performance after the Asian Financial Crisis of 1997-8; and (3) to study the impact of liberalisation at a disaggregated level. Two manufacturing performance indicators were identified at the firm level, technical efficiency and price-cost margins. Technical efficiency was estimated by using stochastic frontier production function. One-year data of about 3005 firms in ten different industries is used in this estimation. Technical efficiency was then regressed with trade and other control variables. The results show that firms in the majority of industries have performed fairly well as the levels of technical efficiency were around 70 and 80 per cent. The results further reveal that the share of foreign investment, exported output and imported input positively influenced firms� technical efficiencies. The price-cost margins variable at the firm level was regressed with the import penetration ratio, market share, capital labour ratio and concentration ratio. Standard Least Squares and pooled data from 1998, 1999 and 2000 were used. The result reveals that capital intensity and the import penetration ratio were the most important determinants of price-cost margins. Overall, support for the hypothesis that trade liberalisation in the early 1990s has had positive impacts on the manufacturing sector in Thailand has been obtained.

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