Thailand - Current economic position and prospects (Vol. 1 of 2) : Main report

RESTRICTED EAP1 Vol. 1 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF THAILAND (in two volumes) VOLUME -I THE MAIN REPORT February 12, 1969 East Asia and Pacific Department  CURRENCY EQUIVALENTS Currency Unit - baht U.S. $1.00 = h 20. 80 lA1 U.S. $0. 048 1, 1 million = U.S. $48, 077  This report was prepared by a mission comprising Messrs. Manfred G. Blobel (Chief of Mission), Bernard Decaux, George H. Homsi, Tariq Husain, Harold Manning, Ali N. Memon, Motonaga Ohto, and Peter Streng.  TABLE OF CONTENTS Page No. BASIC DATA................................................... SU.1iARY AND CONCLUSIONS ............................. . i-vii I. POLITICAL AND SOCIAL BACKGROUND ........................ 1 II. RECENT PERFORIANCE OF THE ECONOMY ...................... 8 A. Introduction ....................................... 8 B. The Dynamics of Economic Growth .................... 11 The Pressure of Demand ........................... 11 The Response of Production ....................... 16 Growth, Investment and Employment ................ 23 C. Regional Income Growth .......................... 25 D. The Overall Balance of Resources ................... 29 Saving and Investment ............................ 29 External Finance .............. 31 lNoney Supply and Prices .......................... 34 III. THE TASK AI3FAD ......................................... 36 A. The Outlook for Growth in 1968 and 1969 ............ 36 B. Obstacles to Long-Term Growth ...................... 37 The Problem of Population Growth ................. 38 Problems in Education ............................ 40 Problems in Regional Development ................. 41 Problems in Agriculture .......................... 42 Problems in Manufacturing ........................ h 8 IV. PROOPECTS FOR OVERALL GRO1TH ANi THE FINAICIAL OUTLOOK 51 A. Prospects for Overall Growth ....................... 51 B. 'The Pattern of Domestic Expenditures ............... 52 C. The Prospective External Financial Position ........ 55 STATISTI CAL APPENDIX VOLUME II  BkASIC DATA Area 200,000 sq. miles Population Total (mid-1968 estimate) 35.3 million Rate of growth 3.3% P.a. Population density (per sq. mile) 177 Gross Dbmestic Product Total (1967) $107e5 billion Rate of growth, constant prices (1963-1967) 9.6% p.a. Ber capita (1967) US $140 equivalent Industrial Origin of Gross Domestic Product (1967) agriculture 31% lNianufacturing, mining, construction 21% All other 48% Expenditure Pattern (Percentage Distribution) 1963-1967 1967 Consumption 76.3 73.4 Private 66. 63.2 Public 8.9 10,2 Fixed Investment 23.9 25.3 Private 1T. 19.0 Public 5.9 6.3 Change in Stocks 1.5 3.5 Current lDeficit -1.7 -2.2 Expenditure on GDP 100.0 100.0 Average Savings Rate 23.7% 26.1% 1IWarginal Savings Rate 39.2% 32.9,. Resource Gap as % of Investment 6.9% 7O3% Average Annual Change 1963-1967 1967 Internal Financial Situation (in %) billion) Total IIoney Supply 10.0 17.9 Time and Savings Deposits 25.5 14.3 Bank Credit to Public Sector (gross) 15.3 10.4 (net) -8.9 -1.5 Bank Credit to Private Sector (gross) 16.8 17.1 (net) -22.0 0.7 Consumer Price Index (1962 = 100) 2.3 112  BASIC DkTA (cont.) Average Annual Change 1962/63-1966/67 FY 1966/67 (in 7Q ( billion) Public Sector Operations Current Revenue 13.h 16.6 Current Expenditure 13.6 12.9 Surplus 12.8 3.7 Capital Expenditure 13.5 6.8 Total External Assistance to Public Sector (net) decline 1.3 Average Annual Change 1963-1967 1967 Balance of Payments (in (TJ $ million) MIerchandise Exports 8.0 668 Yerchandise Imports c.i.f. (net of military imports) 13.9 1,049 Trade Deficit 32.0 -301 Net Invisibles (incl. private transfers & receipts from U.S. military expenditure) very large increase 287 Net Current Account Balance no definite trend _94 1962 1967 TUS $ million) Nlet Foreign Exchange Reserves 495 901 (10 months' (9- /2 months' payments) payments) Dec 31, 1962 June 30, 19t'- Public External Debt (US yp million) (including undisbursed) 250 316 Annual average .xternal Financial Assistance 1963-1967 1967 to Public Sector (gross) (US $ million) Grants (non-military) 39.6 51.2 Loans from Official Institutions 30.9 34.4 Suppliers' Credits, incl. short-term loans 10.1 5.2 Total o-;90 >iajor Sources IBRD 16,3 23.5 United States (AID and Ex-Im Bank) 30.4 42.1 Germany 5.9 7.2  uAe.Y AND CONCLUSI. NS 1. The Thai economy hae established an impressive record of growth. Over the past decade, 1958-1967, gross domestic product (at constant prices) has on average grown by 7.6% annually. Moreover, the pace of growth accelerated significantly between.the first and second halves of the decade - from 5.6% in 1958-1962 to 9.6% in 1963-1967. The final year, 1967, showed a rate of growth of 12.1%, reflecting a bumper crop of paddy and the addition- a.l stimuli to which the economy was exposed as a result of the rapid build-up in U.S. military expenditures, particularly on construction. ii. Lack of information does not allow one to trace in detail the inter- action between the various forces that propelled Thailand's economy forward in recent years. However, there can be no question that rapid increases in demand kept the productive resources of the economy under considerable pressure throughout the period. Demand derived from three groups of expendi- tures - exports, private investment and public expenditures - increased at a.n average annual rate of 11.5% over the ten-year period, but its pace of expansion accelerated from 6.5% a year in 1958-1962 to 16.5% in 1963-2967. This acceleration entailed a significant increase in the rate of import grow.th - from 7.9% in the first half of the decade to 14.2% in the second, reflecting the rapid expansion in investment and the emergence of a sizeable manufacturing sector. However, above all it generated a substantia. increase in domestic production, as evident in the high rates of growth of gross domestic product. iii. Throughout the period 1958-1967, the Thai economy maintained a. remarkably strong resource position, thanks to rapid growth of domestic savings and export earnings. Savings increased on average by 13.3% a year over the decade, but accelerated their pace of annual growth from 5.9% in 1958-1962 to 21.3% in 1963-1967, as public savings continued to mount and the marginal rate of private savings reached the impressive rate of 39%. At the same time, the annual rate of growth of export earnings climbed from h.5% in 1958-1962 to 1h.4% in 1963-1967, for an average of 9.3% for the decade, reflecting the strong expansion of agricultural output for exports and, towards the end of the decade, the large dollar expenditures in Thailand of the U.S. military. Because of this combination of rapidly growing savings and exchange earnings, the Thai economy was able to finance an increase of almost 150% in total investment between the two five-year periods, 1958-1962 and 1963-1967, mainly from its own resources. While investment went up by 864 billion, the resource gap widened by only ;2 billion, in total representing less than 7% of investment outlays. Moreover, exchange earnings were able without difficulty to provide for the rapidly increasing imports that were required to sustain economic expansion. In fact, through- out the period, inflows of capital from abroad exceeded net imports, enabling Thailand to build up its exchange reserves from US$321 million to US$901 million over the decade. Despite declining inflows in recent years from official sources to the public sector, reflecting greater reliance by the Government on Thailand's own resources, reserves continued to climb largely as a result of strongly increasing private borrowing abroad.  - ii - iv. The out'ook for economrc growth in 1968 and 1969 is dominated by cyclical influences, centered arolnd the poor paddy crop of 1967/68 and adjustment to the subsiding impact of U.S. military expenditures as an additional stimulus to growth. Together, these two factors suggest a sharp drop in the rate of growth of gross domestic product to around 4-5% in 1968, followed by a. recovery to about 7.5% in 1969, provided apparent weaknesses in the construction and service sectors - the two sectors most affected by the decline in U.S. military outlays - do not deepen and spread into the rest of the economy. Present indications are that the economy will be able in the near future to continue growing at the pace expected for 1969, or perhaps even somewhat more rapidly. However, faster growth more nearly in line with that achieved in the past five years and, beycnd the years immediately ahead, even maintenance of this pace, appears to be contingent upon Thailand's ability to tackle effectively several structural weaknesses that could develop into serious obstacles to growth in future. These relate to the need to place greater emphasis on social development, particularly education, and on mitigating disparities in the level and rates of growth of incomes between regions and between the Bangkok metropolitan area and the rest of the country. They also concern the direction of future development of agriculture and manufacturing. Finally, they apply to the tendency towards increasing net imports that derives primarily from the apparent loss of dynamism in merchandise exports - compensated in recent years by the large increase in earnings from the U.S. military - but which may be aggravated in future by fast rising fiscal deficits. v. Studies of Thailand's manpower situation and prospects have shown that the ecducation system has seriously lagged behind developments in the country's rapidly expanding economy and is not able to meet present demands, much less those likely to arise in future. These shortcomings are the combined result of low overall coverage of formal education arid of the relatively underdeveloped state of education from secondary schools upwards. Government has recognized the need for substantial improvement;s, and over the past few years various studies have been undertaken to examine the current situation and how best to expand and adapt the education system so as to catch up with the backlog and prepare for the future. Recognizing that the exdsting system, with its large leakages up the educational ladder, wa.s very wasteful, that the most urgent requirements were for middle- and upper-level manpower, and that any attempt to expand primary education sub- stantially would be futile until more and better trained teachers could be provided, these studies accord highest priority to improvement-s at the higher leve'ls of education. Translation of these recommendations into a program of action has been long delayed, the main difficulty naving been indecision on the part of the educational authorities which have suffered from lack of strong overall direction, inter-departmental rivalries, and inconclusive debates among proponents of various educational philosophies. IThile there are now some signs of movement in a few particular areas, an overall program has not yet emerged.. There is the danger that further dela;- will not only result in the educational system falling further behind the needs of the country, but also increase the risk of misallocating resourcc.:..  - iii - Moreover, the shortcomings of educational development bring into focus particularly clearly the fact that Thailand has yet to face up to the cost of past rapid increases in population at 3.3% a year. In view of the large task of upgrading education and the need generally to place more emphasis on, and devote more resources to, social development, and in the light of Thailand's demographic prospects which suggest a likely further a.cceleration. in the rate of population growth to 3.6% a. year, it seems that adoption of a national poolicy on population and establishment of an active program of family planning can be deferred further only at considerable cost to the qua2ity of life in Thailand in future. vi. Widening disparities in the levels and rates of growth of incomes between urban areas, especially the Bangkok metropolitan area., and the rest of the country and between regions was, inter alia, the price that Thailand paid for concentrating over the last decade on opportunities promising the highiest and quickest returns in terms of economic growth. There is now gro.ing concern over the social and political consequences of these dis- parities, particularly in the Northeast where insurgent activity has reporteci- ly increased greatly. As an expression of the political decision to under- take corrective action, regional planning is now being strongly emphasized. A development program is under preparation for the Northeast, with assistance from U.S. AID. The Government has applied to UJDP for planning assistance for the North and is looking for similar assistance for the South. It is difficult now to foresee how much operational content these plans will have. Hopefully, they will help focus attention on, and suggest solutions for, some of the structural problems in agricu].ture and manufacturing that not only seem' to be at the root of regional. income disparities but also becloud the long- term growth prospects of the economy as a. whole. Hopefully, too, they will begin to yield proposals for action well before their completion, particular.s.r for the Northea-st where the present diverse effort of various departments ceesio suited neither to bringing its difficult development problems closer to a. solution nor to providing a palliative against the current threat of declining incomes resulting from a. very poor paddy crop, a sharp fall in income from kenaf, and the prospect of decreasing U.S. military expenditures. vii. In the past, Government thinking about the needs of agricultural development has been strongly conditioned by Thailand's long tradition of rice monoculture whose large requirements for water served to focus almost exclusive attention on water as the critical input and on surface water control as the field in which the public sector could make its major contri- bution. In practice, this meant a heavy concentration of Government prograpri on the wide belt to either side of the Chao Phya river, stretching from Bangkok well into the North, where ecological conditions are most suitable for paddy and ample river flows and topography fa.vor irrigation. The result, of this concentration of effort Ja.s a. marked upturn in paddy yields. The corollary was, of course, a. relative neglect of other areas but this was in part offset by the strong stimulus of external demand that led to the rapid development under rainfed conditions of maize, cassava and kenaf for export.  - iv - However, the situation now seems to be changing. Except for maize, the market prospects for non-traditional export crops have weakened considerably, and as a result growth of export earnings is likely to slacken considerably. At the same time, the Government ha.s committed itself to reducing regional income disparities. For purposes of both promoting faster growth of agricultural incomes and exports and of achieving a more even regional distribution of incomes, what seems to be called for is not an extension of the concept of irrigated agriculture and consequently paddy cultivation to unsuitable areas, particularly the Northeast, but rather official recognition of the potential for agricultural development under rainfed conditions. In short, it would require a substantial change in approach, away from irrigation towards the agricultural aspects of development and to-wards a. reorientation of agricultural experimentation, centered around the identification of promising crops, particularly for export and the farm unit as the ultimate beneficiary of research. At the same time, more attention will have to be given to agricultural products whose expansion has badly lagged behind. One example is livestock for which the Northeast seems well suited, but where present marketing practices, including the pricing policy of the livestock monopoly in Bangkok, constitute strong deterrents to development. Another example is the ailing rubber industry in the South where recent progress in the development of high-yielding planting material has failed to stimulate much-needied replanting among the dominant smallholders in the face of low returns a2s a result of poor processing and a highly restrictive forest conservation policy. viii. At the same time, continuing development of irrigated agriculture in the Chao Phya ba.sin will no doubt remain an important element in the Government's agricultural program. A stage now appears to have been reached where in the interest of ensuring optimal use of water resources, both in the long run and in the more immediate future, the present approach to their development neecis to be adjusted. For the long run, there is the danger that continuation of the present practice of uncoordinated planning by the two main agencies involved in the development of water resources will lead to gross wastage. Therefore, comprehensive assessment of available water resources and development of guidelines for their allocation among competing uses - irrigation, power, navigation and, where appropriate, domestic water supply and salinity control - in the best economic interest of the country as a whole is a matter of urgency. As for the more immediate future, a change in emphasis seems required, away from continuing expansion of the irrigated area towards programs designed to improve productive returns on land presently under the command of irrigation systems. Existing irrigation facilities will need to be upgraded to provide effective control of water at the field level, with the ultimate objective of providing water for cultiva- tion of a second crop during the dry season. Ideally, much of this dry- season cultivation should be in crops other than paddy, but as in the case of rainfed agriculture an intensive research effort, agronomic and economic in orientation, to identify promising crops will be necessary before this objective can be translated into reality. In the meantime, and to prepare for this ultimate sta.ge of development, it would seem desirable for the  agricultural and the irrigation authorities in close coopera.tion to concentrate their effort on improving conditions for the main-season paddy crop. Studies now underway or under discussion in the Government should contribute a great dea.l to giving direction to further develop- ment in the Chao Phya basin, but their effectiveness will ultimately depend heavily on the ability of the newly formed Chao Phya Development Committee to achieve purposeful cooperation among the numerous agencies involved. ix. The most important task of industrial development policy in Thailand will be to effect a shift in emphasis away from simply inducing establishment of an ever increasing number of industrial plants towards a more selective approach designed to strengthen the structure of Thai industry. Discussions are currently underway in the Government about making promotion privileges a more flexible tool of industrialization policy. While the lack of data about the structure of industry in general and about the contribution to industrial growth of promotion privileges in particular makes it difficult to be very specific, improvements in the following directions would seem particularly desirable. First, much of Thai industry produces products for final use and obtains its material inputs mainly abroad so that there is a, gap in the intermediate range of industries and forward and backward linkages are very thin. This could be the result of changes in the tariff structure and reductions in import duties granted a.s promotion privileges which tend to favor foreign over local suppliers. Secondly, industrial growth has so far been associated with large and rapidly rising imports of materials which, unless modified, will make future expansion highly dependent on the ability of the agri- cultural sector to continue increasing exports substantially. Thirdly, industrial investrnent has been heavily concentra.ted in the Bangkok metro- politan area, in part reflecting the strong locational advantages of Bangkok but probably also resulting from the particular direction that industrial development has so far taken. These weaknesses could probably be mitigated to some extent by using promotion privileges more discriminately as a tool for promoting specific structural changes which seem desirable fr .n the point of view of the economy as a whole. x. Rapid increases in gross domestic product enabled the economy in recent years to meet the rising demand for goods and services resulting from fast expanding domestic expenditures without significant strains internally, in the level of prices, or externally, in the net balance of goods and services. As far as can now be foreseen, the continuation of rapid growth of gross domestic product and fast increasing exchange earningE, from which the overall resource position of Thailand derived its remarkab'e~ strength in the recent past, will not continue into the future. Output is likely to grow more slowly, but the growth of exchange earnings will probably fall much more sharply, reflecting an uncertain outlook for merchandise exports and the expectation of declining earnings from the U.S. military. As a result of this disparate movement, there is the prospect of a widening external gap even if the expansion of domestic  - vi - expenditures adjusts roughly to the slower growth of output. The weak spot here is the public sector where savings have declined because the Government has so far failed to obtain additional revenue to finance the expenditures associated with recent sharp increases in Government activity, especially in defense and security. Considering the wide range of tasks requiring Government action in the near future, including a, major increase in Government salaries, continuing indecision on revenue measures entails the danger of either further accelerating the tendency towards increasing deficits, wqith adverse effects on financial stability, or of forcing the Government to defer action on important fronts. xi. Present projections of the balance of payments indicate that 1968 marks a turning point and that, even with substantially s:Lower growth of imports, Thailand faces a period of rising net imports, which may reach US$275 million in 1971, as compared with US$110 million in 1967. For the period 1968-1971, i.e. through the remainder of the Second Plan period, the aggregate deficit on current account is estimated at US$800 million. This would be more than three times as large as the deficit incurred during the preceding four years but, being equivalent to only 12% of projected invest- ment during the period, it would still be quite small in relation to Thailandts own contribution to development of its economy. Moreover, Thailand should be able to begin narrowing the gap in the early 1970's when adjustment to declining U.S. military expenditures has been completed and when some of the structural changes in production referred to above have begun to take effect. xii. In the meantime, however, Thailand will have to seek external financing much more actively than in recent years. Thailand is in the fortunate position wrhere private capital inflows can be expected to make a major contribution to-wards closing the financing gap. As a rough estimate, US$350 million may be allowed for this source. Possibly even larger amounts may be available, but the advantages of such additional funds would have to be balanced against their effect on the structure of Thailand'S total external debt, the average maturity of which has already shortened consider- ably in recent years as a result of heavy private borrowing abroad and increa.sed reliance by the Government on export credits. Thus, about US$450 million net or, allowing for US$100 million in repayments falling due on existing public external debt, US$550 million gross will have to be obtained on public account. Grants, primarily from the U.S., may provide US$190 million and disbursements from existing foreign loans will come to US$140 million, including US$46 million from export credits, leaving US$220 million stil1 to be obtained. Exchange reserves, amounting to US$900 million at the end of 1967, afford a comfortable margin of safety against unfavorable short-term movements in the balance of payments and unquestionably could be drawn upon to help finance the residual. deficit. However, any major reduction would seem imprudent as a high level of reserves could, in the face of an uncertain outlook for exports, play a role in maintaining Thailand's attraction for private foreign investors and, more generally, its performance as a, rapidly growing private-enterprise economy with a virtually free exchange system.  - vii - xiii. Thus, while reserves may make some contribution, the important point is that after several years, in which Thailand has mainly relied on its own resources, there is now the need to start building up the pipeline of foreign financing commitments, which has decreased to a low level in relation to the disbursements likely to be required in future. A review of projects, for which the Government is seeking foreign financing, suggests that financing in the order of UE$400-h50 million could be committed through 1971. Contraction of additional external. public debt of such size would raise no question about Thailand's creditworthiness, as existing debt, at US$230 million, is small and service at its peak equivalent to only 3.8% of estimated exchange earnings. In particular, Thailand could safely contract additional export credits, but considering the size of new commitments in prospect and the probability of private borrowing abroad continuing at a sizeable rate, virtually exclusive reliance on such credits as in 1967 and 1968 would no longer seem prudent. Thus Thailand will have to resume borrowing from official sources on long terms.  CURRENT ECONOMIC POSITION AND PROSPECTS OF THAILAND I. POLITICAL Al!D SOCIAL BACKGROUND 1. Thailand can look back over the past decade with a great deal of pride about the vigorous growth of its economy. Gross domestic product (at constan-t prices) has gro.wun to more than twice its size since 1957, increasing, on average, Ty 7.6% annually. FurthE.corc, the pace of growth accelerated from 5.67o a year in the first half ofS the period to 9.6% in the second. Few developing countries are able to match this record. No doubt, Thailand owes pa.rt of this success to the fact that external c:ircumstances tended to be favorable, particularly with respect to exports. There is also no question that Thailand's strategic location in Southeast Asia in combina- tion with its foreign policies yielded incidental benefits to the economy. Principall-y, these took the form of sizeable amounts of foreign assistance and other transfers from abroad. 2. However, these external influences certainly do not explain by themse'ves why Thailand was able to establish such an impressive record of economic growth. The answer has to be sought within the country - the politica.l and social environment and the policies which enabled the country's productive energies to become operative with such obvious success. The role of econoric and financial policies will be considered in the following chapters. Here, the principal subjects are those aspects of the Thai po.litical and social environment that appear essential for understanding economic developments over the past decade. This analysis is intended to identify strengths and weaknesses that are likely to have a bearing on Thailand's ability to cope effectively with the problems of economic develop- ment that lie ahead. 3. Politically, the past decade has been stable. At its beginning, in i958, the Thai military took power and established the Revolutionary Government. IJThen Field lMarshal Sarit Thanarat, who had headed the Govern- ment since its inception, died in 1963, the transition of power was accom- plished smoothly. Field Marshal Thanom Kittikachorn and General Prapart Charusathien, who had been key members of Marshal Sarit's regime, took over the posts of Prime 11dinister and Deputy Prime Miinister, respectively. As a result, essentially the same military group that had taken over the reins in 1Q08 was still in office in 1968. 4. Mloreover, the Government of Field Marshal Thanom followed its predecessor's policy of giving strong emphasis to economic growth. It continued the practice of having non-military men head most agencies dealing with economic matters and granting them considerable influence in setting economic and financial policies. On the whole, these men have handled the country's economic affairs with considerable success.  5. In dealing with the economic affairs of the country, this group operated in a generally favorable environment. The military, realizing that prosperity was good politics, was generally res-po%lsive to their proposals. They had at their disposal a, civil service of high caliber, reflecting the prestige traditionally attached to Government service in Thailand which continued to be sufficiently strong to attract capable people despite loW salaries and a widening disparity iath private employ- ment. 6. Nlost important of all, Thai society possesses a number of qualities which proved to be of considerable advantage in tackling the task of building a stronger economy. Thai society is highly individu- alistic, so that far less than elsewrhere in the region is individual initiative thwarted by close family ties and obedience to venerated tradi- tions. There has, for instance, been a long tradition in Thailand of s,ontaneous migration - seasonal in search of employment during the slack agricultural season, and permanent in the quest for more fertile land to cultivate. In fact, Government-sponsored settlement schemes have been insignificant in comparison with voluntary migration in expanding the cultivated area during the past decade. 7. Thls strong individualistic tra.it is apparent in Government, too, where very considerable power rests with departments within minis- tries and agencies at a corresponding level and wide scope is given to the individual in charge in shaping the activities of his agency. Thus ably and energetically run departments and agencies have forged ahead, largely independently of actions taken elsewhere or adding activities when necessary complementary action under the responsibility of other entities was not forthcoming. In fact, departments and agencies within Government have largely been run on the pattern of independent companies - those that were well managed have been abl]e to expand their activities, wthile those under wieak management fell badly behind. Inevitably, lack of coordination between entities and of effective organization within them resulted, t;heir effects often aggravated by the traditional Thai reluctance to act decisively where conflicts exist. Not surprisingly, the National Economic Development Board - the agency in the Government charged with the task of economic planning - found it very difficult to operate effectively in such an environment. However, despite its obvious short- comings, this approach served Thailand well, and much of what has been accomplished in building up the country's infra.structure has been the result of individual action. 8. Also very important among the qualities conducive to economic growth wfas the openness of Thai society. This enabled Thailand to assimilate the Chinese among its population in a way unmatched by any of its neighbors, and with far-reaching consequences. On the broadest plane, certain traits in Thai society - at least in the Government and business elite - e.g. acquisitiveness and a certain drive - may be traced  to the influences of assimilation and intermarriage. Assimilation also gave the Thai economy access to a very sizeable group of capable traders and entrepreneurs who have been in no small part responsible for the efficient marketing operations in the country, drawing the individual small farmer into the market place and offering him the incentives to expand and diver- sify his crops, and for expanding the country's markets abroad. They have also frequently been Thailand's industrial pioneers. 9. The attitude of openness also applies to foreign ideas, enabling Thailand to adopt and assimilate those considered desirable. The effects of this openness are apparent in a number of developments. One example is the rapid emergence over the last decade of a managerial group. Indus- trialization in Thailand received most of its original impetus from foreign companies, and foreign investment continues to play an important role in this field. However, Thais have been able, after relatively short periods, to replace the original expatriate personnel. The result has been a rapidly growing managerial group in the country that should prove capable of ensuring continuing fast development of industry. Another example lies in the very extensive use, particularly in the public sector, of foreign consultants and contractors. This has enabled the economy to handle, by and large quite effectively, a rapid rise in investment spending to an amount equivalent to one quarter of gross domestic product - a feat that could not have been accomplished so quickly if Thailand had preferred to rely solely on the expertise available internally. 10. Finally, mention must be made of the role that women play in Thai society. Their role in economic affairs has traditionally been considerable - they have been largely responsible for marketing farm produce and for handling the family's monetary affairs. However, active participation of women in the econonmc life of the country is by no means confined to the countryside or to the lower-income strata. Highly trained women, many with degrees from foreign universities, from the middle and upper classes are found in large numbers in the professions and among managers and administrators in Government and the private sector, helping to fill the needs of a rapidly growing and changing economy. 11. Today, there are indications that in some important respects the environment in which the economy has been operating over the past decade, is changing. Mlany of these changes are the very consequences of the success that Thailand has had in expanding the economy. Most important among them is the fact that so far individual action and effort have played a far greater role than organized group action. Yet signs abound throughout the economy that it is the latter that is becoming increasingly essential if the problems of the future are to be tackled effectively. To give a few examples: in agriculture, efficient operation of the more complicated irrigation systems required in future for making use of improved varieties of rice and for double cropping will be impossible wi-thout some form of farmers' associations to coordinate cultivation and water use. At present,  effective organizations of this kind do not exist and past efforts by Government to implant them have not met with success, in past no doubt because the Government's efforts themselves were highly diffuse. Moreover, there is in general a dearth of voluntary social associations in Thailand, and therefore a lack of institutional foundations on which to build. Similarly, in manufacturing the need of the future will be for plants larger than can be financed by drawing solely on the resources of a closely knit group, often based on kinship, which has been the principal economic unit in the past. So far, there is widespread aversion among the diverse elements of the Thai business community and an important segment among foreign investors against the formation of public companies. 12. There are also strong indications that the nature of the tasks confronting Government is changing in the same direction, away from a situation, where individual action sufficed, to one where coordinated group action becomes indispensable. As the economy has grown, it has become more complex and so have the problems of economic management. Yet, Government policies and actions affecting the economy as a whole continue to be evolved largely within the narrow confines of a particular agency and its specific responsibilities. At the same time, the policy-making body of the National Economic Development Board - the one body in Government potentially suited to taking an overall view of the economy - remains almost exclusively concerned with individual projects, reflecting the reluctance of individual agencies to forego to any substantial extent the freedom of action they have so far enjoyed. This change in the environment also applies to specific public sector programs, where the need for more effective coordination - e.g. between the various modes of transport, between agriculture and irriga- tion, in the use of water resources between irrigation, power and other uses - and for strengthening Government activities in fields that have badly lagged behind in the competitive struggle for resources - e.g. education - is becoming increasingly pressing. Thus, in future, the pace of development will depend in rapidly growing measure on the extent to which Thailand evolves effective patterns of organization in an environment in which individual economic activities are becoming increasingly interdependent. This will also involve finding a way of neutralizing the potentially ex- ploitative effect of existing power structures, in the absence of which it is difficult to see how the necessary organizational structures - e.g. marketing boards for specific promising agricultural crops - can be created without stifling the very development they were meant to foster. 13. The dominating quest for economic growth over the past decade has also led to the relative neglect of development tasks that were not immediate- ly productive, but which, unless strengthened considerably in future, will adversely affect Thailand's opportunities for development in the longer-run future. This applies to social services in general, but is particularly disturbing in the field of education where very little headway has so far been made towards providing training in the extent and quality necessary to ensure an adequate supply of skilled manpower for the continuing development of the economy. This neglect also applies to the development of growth centers outside the Bangkok metropolitan area. Bangkok, being the seat of the central government and the country's principal sea port, will always  have attractions for new commercial and industrial ventures and, therefore, for people which no other city or town in Tbailand will be able to match. Ho-wever, the disparity between the metropolitan area and other urban centers has no doubt increased rapidly over the past decade in terms of average incomes, social amenities, educational facilities, etc. As a result, it has become increasingly difficult to post Government officials and executives in the private sector outside the metropolitan area for any length of time. Unless something is done - through decentralization of Government and a concerted effort to provide in selected centers throughout the country social amenities and educationa'l facilities more nearly in line with those available in Bangkok - the task of developing the country, as against a privileged segment of it, will become increasingly difficult. There is concern, too, over the future strength of Thailand's civil service. Over the last decade, the economic status of civil servants in the middle and upper levels has deteriorated sharply in comparison wjith their counterparts in private employment, and disappointment is acute over the failure of reform measures, which after long preparation finally became effective last year, to bring about any basic improvement. As a result, many of the younger civil servants, including those in important positions, will continue to be dependent financially on their families or be forced to hold multiple jobs to the detriment of their principal responsibilities in Government. There are also indications that the non-monetary rewards of Government service are losing their attraction, particularly to younger civil servants and those with technical skills in strong demand. As a result, it is becoming increasingly difficult for Government to attract and to hold civil servants of high caliber. This is a development which Government can ill afford if it is to be able to cope with the tasks ahead. 1h. There are signs of changes in the political scene, too, which will probably affect the environment in which the economy is operating. Perhaps most importantly, there is the prospect of return to elective Government after elections now scheduled to take place in February 1969. After many years of prohibition of political parties and censorship it is difficult to gauge the strength of opposition in the country to the present Government. Pressure for a return to elective Government has always been strong among Thailand's intellectuals and politically-minded urban groups. They proved their strength in recent municipal elections in Bangkok in which they decisively beat the slate of supporters of the present Government, but whether this performance could be repeated on a national scale, where rural voters would be the predominant element, is uncertain. In any event, the potential importance of the elections for the economy lies not so much in the possibility that Government may be less stable in future - which is unlikely considering the safeguards in the Constitution for a strong executive - or that the basic direction of Government policy will change, but rather in the possibility that an elected Government may find it difficult to give as much weight to strictly economic considerations as was given in the past. In fact, a movement in this direction has been underway for the past year or two, most notably in the field of revenue policies where in anticipation of the elections Government has been unwilling to act on proposals for additional taxation to reverse the deterioration in the Government's financial position.  - 6 - 15. These considerations apart, the major weak spot on Thailand's political scene is insurgent activity in the country's border areas. Most of it centers on the Northeast where roughly one tlhird of Thailand's population lives. It has long been an area of uncertain loyalty, at times even open hostility, to the central government in Bangkok which derives in part from the ethnic distinction of the region from central Thailand and its similarity to Laos and from the existence of non-Thai ethnic communities, especially Vietnamese and Cambodians, as well as from its physical isolation from the rest of the country as a result of surrounding mountain barriers. It is probably also related to the fact that the Northeast is the poorest among Thailand's regions which has long been neglected, and at times been exploited, by the central authorities. 16. To counteract insuraency, the Government has substantially increased police and military action in the areas affected. Such activity has, over the last two years, begun to make substantial claims on Government resources. At the same time, acting on the assumption that economic deprivation has made the people in these areas susceptible to insurgency, the Government has launched a sizeable program aimed at raising incomes and bringing more and better public amenities to the population in the form of roads, water supply, schools, public health facilities, etc. More will be said later about the substance of these programs. The important point in this context is that concern over the securilty situation has recently begun, and will continue to bring strong non-economic considerations to bear on Government spending policies. Given the magnitude of the task, the amounts involved could be very large. In addition, the internal security situation, together with Thailand's direct involvement in the war in Viet-Nam and the rapid build-up of the U.S. military presence in the country, has tended recently to strengthen the position of the military in the Government as against its civilian members, as reflected in the adoption of a program for the development of Thailand's armed forces which will absorb sizeable resources over the next several years. Thus, economic growth may receive somewhat less priority among national objectives than it has commanded during the past decade. 17. Finally, among the factors that may influence the environment in which the economy will operate in future, mention must be made of the effects of the near completion of the U.S. military construction program in Thailand and a possible beginning American disengagement from Viet-Nam. Over the last three years, the Thai economy was strongly stimulated by the direct and indirect effects of the American military build-up in the region - in the form of construction expenditures and outlays by troops stationed in Thailand and on leave from Viet-Nam, and by bolstering foreign exchange earnings durirg a period when merchandise exports were languishing. The sharp decline in prospect for construction expenditures from 1969 onwards is now causing concern in the construction industry, particularly as the secondary effect of the American build-up in a construction boom of hotels, apartments and office buildings in Bangkok has already come to an end. It may also create  - 7- some difficulties in the Northeast wvhere most construction workers were recruited. Reduced American activity in the region could cause additional difficulties - again in the Northeast where American bases have become a sizeable source of employment and where several towns have undergone rapid development that could not be sustained by the loca.l economy, but also in the hotel and service industries in Bangkok. In short, over the next few years the Thai economy will most likely have to do without the additional stimuli generated by the American military build-up in the region over the last three years. There is no reason why the economy should not be able to do so without severe depressing effects, provided the Government is prepared to help cushion the impact should such action be required. It is encoura.ging to note that the Government now recognizes that the need for action may arise and has begun to prepare contingency measures. 18. Looking ahead, then, there are a number of reasons to expect that the political and social environment in which the economy will be operating in future may not be quite as trouble free and congenial as that which it enjoyed over the past decade. However, the problem areas that have been mentioned above, must be kept in perspective. As the record shows, Thailand brings considerable assets to the task of adjusting to changing circumstances and of correcting for some of the neglects of the past.  II. RECENT PERFORMANCE OF THE ECONOMY A. Introduction i9. Production of goods and services in the Thai economy is predominant- ly the result of private economic activity. The contribution of the public sector to gross domestic product comes, roughly estimated, only to 7%, half of it consisting of public administration and defense and the remainder very largely of value added by utilities and transport and communication services. In commodity-producing activities the public sector plays an insignificant role. There are several government-owned industrial corporations, most of them set up in the 1950's in an attempt to accelerate the disappointingly slow development of industry. It soon became apparent, however, that direct Government involvement in industry tended to hinder rather than help industrial development because it created serious uncertainties for private investors. .Moreover, the Government recognized that most of the corporations faced seemingly insurmountable obstacles to efficient operation. Accordingly, a decision was taken in the early 1960's neither to set up additional corpora- tions nor to expand existing ones, except where clearly justified by their performance. The productive contribution by government-owned industrial corporations, therefore, never became an important factor in the industrial sector. It accounts for about 6-7% of value added by manufacturing, roughly equivalent to 1% of gross domestic product. 20. Private economic activity is largely organized around small individual units. The agricultural sector is dominated by owner-operated farms, covering around .5 ha., while large commercial farms and estates control only a very small part of the land under cultivation. There is no genera.l problem of tenure, largely because there are still large tracts of unoccupied arable land, all owned by the Government, and access to such land has traditionally been easy. There is also a notable absence of organization among farmers, and effectively working cooperatives are virtually non-existent. Manufacturing, too, is dominated by small establishments. Plants employing less than 130 persons contribute roughly 60% of value added in the sector, provide nearly 90% of all employment in manufacturing and constitute 99.9% of all manufacturing establishments. Labor unions do not exist. With such a structure in the commodity-producing sectors, the existence of a well- functioning marketing and distribution system becomes indispensable to economic efficiency. Judging by the results, Thailand has such a system, largely centered around the Sino-Thai and Chinese elements of the business community, whose contribution to the economic growth achieved over the past decade has been considerable. Furthermore, the large investments made by Government in the transport network, particularly in creating a basic system of national highways, greatly helped in improving and extending the marketing and distribution system. 21. The organizational structure of the Thai economy would suggest that competition prevails. This is no doubt true over large parts of the economy. There has been a long-standing argument, among Thais and foreigners, over the question whether farmers are exploited by middlemen acting in  monopsonistic fashion. Available data do not permit this argument to be settled conclusively. No doubt there are considerable imperfections, particularly in the less accessible parts of the country and in the case of new crops which are available only in small quantities. Furthermore, farmers indebted to merchants are sometimes not able to take advantage of competition among buyers. However, what reasonably reliable evidence exists, particularly on the rice trade, suggests that as a rule margins of net profit to the trader are not exorbitant. Moreover, particularly with respect to non-traditional export crops such as maize and cassava., it appears that traders are usually willing to incur considerable risk by guaranteeing the farmer a fixed price for his crop at planting time. For the manufacturing sector, too, available data - admittedly from a limited sample of larger-scale units - indicate that average profits, at 2O-25% on fixed assets, are not excessive, considering returns obtainable on investments elsewhere. However, throughout the Thai economy there are important enclaves well protected from competition and, as far as can be judged, exploiting their position. Frequently, they represent specific examples of the inter- penetration of the power structures in Government and the private sector referred to above (see paragraphs 5, 12). In such cases the interests of members of the government establishment are protected through the Government granting a monopoly position, as in the case of the livestock market in Bangkok, or excessively high tariff protection against imports, or tolerance of arrangements designed to control a particular market. These practices are harmful to economic growth, particularly as they tend to prevent expansion of output in particularly promising fields by blocking the entry of ne1icomers - in some cases the mere possibility of such a group moving into a certain field wi]l be sufficient to scare away potential investors not so al3ied. 22. These semi-public encroachments apart, it is worth noting that private economic activity is carried out in an environment marked by the absence of direct controls by Government. Exchange transactions are virtually free, including private borrowing abroad. There are no direct controls on trade, both internal and external, with the exception of rice for the export of iwhich the Gavernment sets an annual ceiling in order to ensure an adequate domestic supply. Licensing of industrial investments, although sometimes time-consuming, serves no substantive function other than to ensure compliance with health and safety regulations, except where privileges are sought under the Industrial Investment Promotion Act. There are no significant restrictions on private foreign investment, apart from limitations on the number and length of stay of expatriate personnel which seem unduly restrictive. Finally, the credit system functions under general rules laid down by the Bank of Thailand; neither general nor selective controls have been imposed on private credit in the recent past. 23. Accordingly, Government influence over the pace and course of economic development is exercised principally through the amount and pattern of public revenue and expenditure - recently around 18% of gross domestic product - and through economic and financial policies setting the framewiork  - 10 - of private decision-making. The limitations imposed by the economic system are also reflected in the nature and function of development planning in Thailand. Formal planning, as carried out by the National Economic Develop- ment Board (NEDB) under the Office of the Prime Minister and as embodied in the two plans prepared to date - including the present Second National Economic and Social Development Plan, 1966-1971 / - has remained essentially confined to programming public development expenditures. The private sector enters only into the macro-economic framework and then merely as a residual. It is difficult to see how the Plan could have gone further into planning private economic activityr. Nonetheless, it would have been desirable for proposals for public spending to be examined more thoroughly in the context of the economy as a whole. As it turned out, the macro-economic framework serves essentially as a financing plan, showing how public expenditures of the size proposed could be accommodated, but was not used to analyze how the objectives of the Plan could best be achieved. As a result, both general policy proposals for the management of the economy and specific recommendations for indivicual sectors are largely absent from the Plan. Moreover, even in drawing up the program of public development expenditures, NEDB was often unable to transgress the boundaries of departmental expenditure planning - an inability that also extends to annual budgets over which the Budget Bureau has the authoritative power, whereas NEDB has only an advisory function. 24. In brief, formal planning by NEDB reflects in many respects the nature of the Thai economy at this stage as well as the peculiarities of governmental organization which make concerted action involving different ministries and even different departments within one ministry so difficult to achieve. However, this is not to suggest that NEDB has acquiesced in this approach whose weaknesses it clearly recognizes. In fact, NEDB has recently sponsored important studies involving the areas of responsibility of several departments and agencies - e.g. in transport coordination, regional planning and agricultural development of the Chao Phya area. Furthermore, IEDB has begun to draw up annual plans in which increasing emphasis is being given to problems related to the management of the economy and to specific issues of policy in respect of sectoral development. These are moves in the right direction, even if they have been slow in gaining active support elsewhere in Government, where, after many years during which the economy grew rapidly almost without effort and resources were ample, there is a general disinclinat-ion to believe that it may become more difficult in future to keep the economy growing rapidly. 25. Economic and financial policies and their effects on the economy will be the principal subject of the sections that follow. However, there is one policy measure which intervenes in the structure of prices in Thailand so strongly and with such wide ramifications throughout the economy that it needs to be mentioned here. This is the taxation of rice for export. In the period 1963-1967, nearly one third of the f.o.b. value of rice has gone into taxes. Many considerations lie behind this measure, but the 1/ For a detailed review see: Current Economic Position and Prospects of Thailand, dated June 14, 1967 (AS-130a).  principa.l one is to keep the domestic price of the staple diet well below the world market price. It has been roughly estimated that but for this tax and its secondary effects on the domestic price of other locally produced foods which are not traded internationally, the average family in the Bangkok metropolitan area would have to spend 23% more to maintain its present real consumption, and nearly one third more if its annua.l income wa.s below the median of U$575. .nt the same time, farm incomes were about 25% lower than they would have been in the absence of such taxa.tion. This massive intervention had two main consequences: First, it made the development of other agricultural products for export relatively much more attractive, since they were not subject to similar taxa.tion, and thus strongly favored diversifi- cation. Second, it kept money wages in non-agricultural employment much lower than they would have been otherwise, giving the producers of inter- nationally traded non-agricultural goods a considerable advantage over their foreign competitors with respect to labor cost. Manufacturing was the principal beneficiary of this advantage, being promoted since the early 1960's also by various other measures, including ta.riff protection. B. The Dynamics of Economic Growth 26. 1967 was another year of rapid growvth of output for Thailand. According to preliminary es-timates, gross domestic product at constant prices increased by 12.1%.]/ This expansion was due to a combination of fa.ctors. Most importantly, a bumper crop of paddy was produced in 1966/67 so that value added by agriculture, after two years of sluggish growth, rose by 8.3%. Manufacturing and construction, though not reaching the very high rates of growth of the recent past, expanded by 11.3 and 15.1%, respectively. Following such growth in the commodity producing sectors and reflecting aaso the increase by 20% in merchandise imports, trade and transportation grew at a quicker pace, the trade sector reaching a record rate of 21.2%. 27. Expansion of output in 1967 brought the average rate of growth of gross domestic product (at constant prices) for the five-year period 1963-1967 to 9.6%. This is nearly twice the rate of 5.6% achieved during the preceding five years. The resultant growth over the past decade comes to 7.6% annually, a performance matched by few developing countries. The Pressure of Demand 28. Unfortunately, lack of information does notpermit tracing in detail the interaction between the various forces that propelled Thailand's economy forward in recent years. However, there can be no question that / Figures rela.ting to the national accounts differ from official Thai statistics for reasons explained in the footnotes to Table 13 in the Statistical Appendix.  - 12 - rapid increases in demand during the last five years kept the productive resources of the economy under considerable pressure. In the table below, three aroups of expenditures - exports, private investment and public expenditures - have been isolated.!/ Demand from these sources increased at an average annual rate of 11.5% over the ten-year period 1958-1967, but its pace of expansion accelerated substantially between the two halves of the period, from 6.5% a year to 16.5%. Average Annual Rates of Growth (Percent, compounded - current prices) 1958- 1962 1963- 1967 1958- 1967 Exports (Goods and Services) 6.2 14.3 10.1 Private Investment 4.9 21.3 12.8 - Fixed Capital Formation (10.8) (18.5) (14.6) Public Sector Expenditures 9.3 13.6 11.4 - Investment (15.9) (17.1) (16.5) Total 6.5 16.5 11.5 Imports (Goods and Services) 7.9 14.2 10.9 GDP - Current Prices 6.9 11.2 9.1 - 1962 Prices 5.6 9.6 7.6 29. This acceleration in expenditures entailed a significant increa.se in the rate of import growth - from 7.9% a year in 1958-1962 to 14.2% in 1963-1967. At first glance, this might suggest that as the expansion of primary expenditures accelerated, it exceeded the capacity of the economy to respond wJith increased production and spilled over into imports. Such effect very likely occurred in 1966 and 1967. However, for the whole period closer analysis indicates that the explanation for the acceleration in import growth is rather more complex. For one thing, the ratio between the increases in total imports and in primary expenditures declined between the two five-year periods, from nearly one half to one third. For another, the import content of fixed capital. formation - the largest single element among primary ex- penditures - rose from 21% in the first period to 35% in the second, and the increase in imports of capital goods accounted for 47% of the total rise in imports in 1963-1967, but for only 30% in 1958-1962. Finally, higher imports other than capital goods represented only 17% of the increase in primary expenditures in 1963-1967, roughly half the proportion that had prevailed in the earlier period. / In 1.966 and 1967, considerable additional pressures were generated by expenditures associated with the U.S. military build-up; such outlays in Thailand rose from insignificant amounts in 1965 to a level roughly equivalent to 4% of GDP in 1967.  - 13 - 30. Nonetheless, the fact remains thst Lccelerate6 evxoan-ion of expenditures was associated not only w.ith a strong upsurge in the rate of economic growth but also a, much higher rate of increase in imports. Growth and Structure of Imports Average Annual Rates Structure of Growth (%) (% of Total) 1958-1962 1963-1967 1957 1962 1967 Consumer Goods 2- 8.0 41-0 34.5 26.5 Non-durable 3.0 5.2 32.8 27.4 18.5 Durable 0.2 16.7 8.2 7.1 8.0 Intermediate Products and Raw Materials 10.7 20.5 13.2 14.4 19.0 Chiefly for Consumer Goods 15.1 18.9 6.h 8.7 10.8 Chiefly for Capital Goods 5.6 22.5 6.8 5.7 8.2 Capital Goods 15.2 18.2 23.9 28.2 34.0 Other Immorts 9.9 11.. 22.3 22.9 20.5 Vehicles, Parts 12.9 18.0 7.7 8.8 10.5 Fuels, Lubricants 8.9 5.3 10.9 10.6 7.2 To'tal 8.2 13.9 100.0 10(.0 100.0 In part, this occurred because gross fixed capital formation which, in the virtual absence of domestic production of capital goods has a much higher import content than other expenditures, went up much more rapidly in 1963-1967 than in 1958-1962..J Another important factor wa.s the shift towards manufacturing - where the average rate of growth nearly trebled - because investment in this sector - and in associated activities such as power generation and transmission - has a much higher import content than investment elsewhere, and because the growth of manufacturing required large increases in imports of materials. Again accelerated expansion in manufacturing was an important element in the more rapid economic growth achieved in 1]63-1967, a.s very roughly indicated by the calculation that, counting only the direct effect, gross domestic product would have grown by over one percentage point less, had the sector continued to expand at the pace prevailing in 1958-1962. All these observations amount to saying )a/ There are strong indications that the buil]d-up in the country's capital stock was a vital element in the acceleration of economic growth.  that, provided the pattern of growth in 1963-1967 was reasonably close to being optimal, the acceleration in its pace during the period was possible only because sufficient exchange resources were available to sustain it. What would have happened to growth had this condition not been met is, of course, an idle question as far as the past is concerned, but obviously of considerabl]e importance for the future. 31. As yet, no satisfactory structura]. growth model exists for the Thai economy. It is, therefore, not possible at this stage to rank the various kinds of expenditures in order of their importance to economic growth. Holrever, there are strong reasons for suspecting that exports played a crucial role. First, demand for export was a very important fac-tor in stimulating production in the agricultural sector, making it an active participant in the process of growth. Unfortunately, the contribution of increased agricultural production, including related activities, to the accel]era.tion of growth in gross domestic product in 1963-1967 is only inadequately reflected in the national accounts, but roughly estimated it comes to nearly one-third. Export demand is also the principal determinant of mining output. Construction activity soared as in anticipation of demand from the U.S. military for office space, living quarters and hotel accommoda- tion building permits for such buildings in the metropolitan area alone jumped from 41.4 billion in 1965 to 83.3 and 3.6 billion in 1966 and 1967. Second, studies on private savings :in Thailand strongly suggest that profits from trade in export commodities have been among the principal sources of the remarkable increa.se in private savings which in turn stimulated the rapid expansion of investment. Third, exports provided the exchange necessary to finance the sharp rise in imports without which the growth of non-agricultural output would have been severel'y stifled. 32. Nevertheless, domestically generated expenditures - private investment and public expenditures - probably also were an important element in the acceleration of economic growth. Together, they increased their share in total domestic expenditures from 22% in 1957 to 25% in 1962 and then jumped to 33% in 11.967, in the process accelerating their pace of expansion from 10.5% a year in the first half of the decade to 18% in the second. They were thus of sufficient size to suggest that they were important to economic growth not only in facilitating the productive response of the economy to increasing demand, but were by themselves a substantial factor in keeping demand growing. 33. Private fixed capital formation grew by 10.8% a year during 1958-]962, then surged up to 18.5% in the latter five-year period. Its sbare of GDP increased from 11% in 1957 to 19% in 1967. Existing data do not allow to analyze in detail either the sources or the direction of this strong upsurge. However, a few broad statements about the direction of investment can be made with a. reasonable degree of confidence. First, the derivation of the investment estimates in the Thai national accounts rules out increased investment activity in agriculture as a. major factor. Secondly, the upsurge of building activity in 1966 and 1967 was a significant element towards the end of the period, as already mentioned. Thirdly, the one sector that through- out the period 1963-1967 grew consistently at a much higher rate than in the  - 15 - preceding five years is manufacturing, and if some rough estimates of the associated investment are made it appears that this sector alone may account for as much as two thirds to three fourths of the acceleration in private fixed capital formation between the two halves of the past decade. 34. Public investment, starting from a low base, grew even faster than private fixed capital formation during the first five-year period (1958-1962), but dropped slightly behind during the second. Throughout the years 1958-1967 an average growth rate of 16.5% was achieved, bringing the share of investment in total public expenditures up from one-fourth to almost two-fifth and the ratio of total investment (total fixed capital formation) to GDP up from 19 (14)% to 28 (25)%. Public investment mainly provided for irrigation fa.cilities, roads and electric power. 35. The rate of expansion of current public expenditures nearly doubled between the two five-year periods 1958-1962 and 1963-1967, reaching 11.7% in the latter. During the first period, administration expenditures (including defense) remained practically unchanged, whereas outlays for social and economic services rose rapidly, pushing their share up from 11 to 36% of public consumption expenditures. Among these, education expenditures soared up frorn 3 to 23% of the total. Conversely, during 1963-1967, administration outlays grew faster than the rest, bringing their share up again to 68%, while expenditures on socia.l and economic services declined relatively. The slower growth of this group of expenditures was entirely due to the reduced expansion of the education sector while the expansion in administration outlays reflects in part the salary adjustment of 1.966-67, in part security- related outlavs not included under defense. Percentage Distribution and Average Annual Growth of Public ConsumDtion Percent Compound Interest 1957 1962 1J967 1958-1962 1296_3-_19 1958- 1967 Total Public Consumption Expenditures 100 100 100 6.7 11.7 9.2 - Administration 89 64 68 - .1 13.0 6.3 (Defense) (22) (24) (22) (9.2) (9.5) (9.4) - Social and Economic Services 11 36 32 34.9 9.1 21.3 (Education) (3) (23) (18) (62.5) (5.8) (31-1) 36. Private consumption growth remained consistently below that of GDP during the ten-year period 1958-1967, leaving considerable scope for additional savings. Between 1958-1962 and 1963-1967, average annual growth increased from 6.3% to 7.9%, due to exceptionally high annual rates in 1966 (10.1%) and 1967 (12.4%) , resulting in an average rate of 7.1% for the entire period. Consequently, the share of private consumption in total  - 16 - domestic expenditures fell from almost three fourths in 1957 to less than two thirds in 1967. Data on the composition of private consumption are neither sufficiently detailed nor reliable to permit a meaningful analysis of changes in structure. The Response of Production 37. As stated above, Thailand's gross domestic product at constant prices grew by 7.6,- annually in the decade 1958-1967. However, average rates of grow.th differed markedly between the two halves of the period, rising from 5.6% in 1958-1962 to 9.6% in 1963-1967. Of the total growth in gross domestic product achieved over the decade, roughly 80% Twas derived directly from the non-agricultural sectors of the economy wihich grew by 8.9% a year over the period as a. whole. These sectors were also largely responsible for the acceleration of growth between the two five-year periods. Expanclding by 11.6% annually in 1963-1967, as compared to 6.3% in 1958-1962, they provided directly about 900 of the additional product achieved through the higher rate of growth. Together, the non-agricultural sectors of the Thai economy increased their share in gross domestic product from 62% in 1957, to 64% in 1962 and 70% in 1967. This development was led by manu- facturing, construction and mining which, together, increased their share from 17% to 22% over the decade. Their rate of growth jumped from 6.4 to 15.0% a, year between the two five-year periods, owing largely to the fast expansion of manufacturing and to a lesser extent to construction. Although trade nearly trebled its rate of growth between the two periods, its con- tribu.tion to gross domestic product went up by only two percentage points, reaching 21% in 1967. All the other sectors, taken together, increased their share only marginally over tbe period, to 28% in 1967. However, the large numbers invoilved in some of the traditional activities included in this group tend to obscure the rapid emergence of new sectors in recent years. Value added by utilities, for instance, expanded by about 22% a. year over the decade - electric power generation alone increased by 30p annually over the last three years. The fast expansion of the banking system was reflected in a rate of groToth around 16j% a year over the decade. Finally, tourism has recently developed into a major industry in the Bangkok metropolitan area where hotel rooms nearly quadrupled since the end of 1964 to reach 7,600 by June 1968. According to the balance of payments, tourist receipts have risen by 22% a year since 1962, and if earnings by the industry from U.S. military personnel are added, the rate of growth rises to over 30% a year.  -7 Recent Growth of Output by Sector (Percent - constant pr:ices) 1963 194 1965 1966 1967 1963-1967_1 1. Agriculture 10.3 5.5 2.6 1.1 8.3 5.5 la. - Crops (11.2) (5.6) ( .9) ( .2) (104.) (5.5) 2. Manufacturing 19.2 13.3 17.4 9.2 11.3 14.0 3. Construction 25-4 8.8 16.4 26.8 15.1 18.3 4. Mfiining and Quarrying 7.7 5.4 20.9 18.8 6.4 11.7 Total 2-4 19.7 11.5 17.4 14.5 12.0 15.0 5. Trade 12.0 16.6 7.5 5.7 21.2 12.4 6. All other Sectors 5.6 8.5 10.1 9.7 10.2 8.8 Gross Domestic Product 10.8 9.4 8.4 7.1 12.1 9.6 2/ Compound interest. 38. wo-hile the share of agricultural output in total gross domestic product declined over the period, it has to be noted tha.t since 1957 agricultural production has gone up, on the average, by 4.9% a year, and its rate of expansion accelerated, from 4.4% in 1958-1962 to 5.5% in 1963-1967. This is a pace matched by few developing countries and was sufficient not only to provide for an increasing consumption of food by Thailand's fast growing population, but also to produce a rising surplus for export. If a correction is made for the effect on exports in 1967 of the low ceiling set by Government on rice exports and of the drought that affected crops other than rice, the growth of agricultural exports (at constant 1962 prices) accelerated from an annual average of 6.2% in 1958-1962 to 7.7% in 1963-1967, and for the period as a whole came to 6.9% a year. Finally, of the increase :in the output of crops over the decade, more than one fourth was derived from crops which were produced only in negligible quantities at the beginning of the period, particularly maize, cassava and kenaf. Thus, there has been considerable movement in the agricultural sector, bo-th towards higher levels of total production and towards a more diversified range of products. 39. Moreover, it is encouraging to note that this movement also extended to paddy which, accounting for roughly half of value added by crops, continued to dominate the agricultural sector. Cultivation of paddy has long been the most tradition-bound agricultural activity, farmers being generally reluctant to experiment with a crop on which their subsistence depended. For a long time, therefore, production grew very slowly and virtually only as a result of an expansion of area. cultivated. In fact, this situation continued into the first half of the last decade when, partly because cultivation had already been pushed into lands only marginally  suitable, part:Ly because of poor weather conditions, average annual production showed no advance over the level achieved during the preceding five years. This is in sharp contrast with developments during 1963-1967 when average output jumped by 42%O - an increase that is only insignificantly reduced to 35% if the extraordinarily high crop of 1966/67, favored by unusually good weather, is omitted. At least as significant as the increase in output, howTever, is the fact that 60% of this increase was clerived -7rcm higher yielJ s, while only 40,'. was attributable to expansion in acreage. Much of this change came about as a. result of developments in the Centra.l region which accounted for 40P,' of the increase in paddy acreage and 55% of the additional output. The beginning of this period, of course, coincided i