Thailand - Current economic position and prospects (Vol. 3 of 3) : The industrial sector

RESTRICTED Ny1l1H11N8 Report No. EAP-15a 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 The report may not be published nor may it be quoted as representing their views.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 three volumes) VOLUME III THE INDUSTRIAL SECTOR August 20, 1970 East Asia and Pacific Department  CURRENCY EQUIVALENTS Currency Unit - Baht U.S. $ loO = $ 2080 a 1.00 UoSo $ 0.048 $ loOO million - U.3S $ 48077  This report was prepared by missions that visited Thailand in Jlanuary/February and in June 1970. The missions comprised of Messrs. Wouter Timas (Chief of Mission), Peter Streng (Chief Economist), Christian G.A. Merat, Mrs. Helen Hughes, Miss Lucy Hi. Keough, and Messrs. Thomas Geer and Eljas K. Sukselainen.   CONTENTS Page No. SUMMARY AND CONCLUSIONS i I. INTRODUCTION 1 II. INDUSTRIAL POLICY 7 III. I'HE PRINCIPAL MANUFACTURING INDUSTRY SECTORS 21 IV. TllE ECONOMIC STRUCTURE, PRODUCTIVITY AND EFFICIENCY OF MANUFACTURING 44 V. CONCLUSIONS AND RECOM1ENDATIONS 55 APPENDIX: STATISTICAL NOTE 61 STATISTICAL TABLES 65   SUMMARY AND CONCLUSIONS i. The 1960s saw rapid development in manufacturing in Thailand, with an average growth rate of 12.7 percent per annum. Value added in manufacturing grew from 12 percent of the gross domestic product in 1960 to 15 percent in 1968, and increased from $12 per head in 1953 to $23 per head in 1968. A modern industrial sector was added to existing, largely primary processing manufacturing industries, and the level of technology, management and labor skill was substantially raised. In many respects manufacturing can be regarded as having been the leading sector in the Thai economy in the 1960s. ii. An inward oriented industrial strategy relied most heavily on tariff protected import substituion, but other policies also affected the pace of industrialization. An industrial promotion system assisted in attracting local and foreign investment of some $310 million, mainly in manufacturing. Foreign investment accounted for a third of this promoted investment. Japanese firms, with 11 percent of all promoted investment were the most important foreign investors, followed by United States firms which contributed 5 percent of total promoted investment. Stable monetary policy was an important factor in industrial development, al- though severe credit limitations affected manufacturers' ability to borrow locally. There were, however, also some important constraints on industrial development. High production taxes raised costs, increasing the need for tariffs, and archaic administrative practices, particularly in the control of imports and exports out of the port of Bangkok, also contributed to high costs. The principal constraint, however, was the small market and an emphasis on the protection of goods for a relatively high income enclave in Bangkok which resulted in the neglect of the mass markets that existed. iii. In the industrial structure which emerged at the end of the 1960s the primary processing industries were still the most important in terms both of value added in production and employment. New consumer goods industries ranged from food processing and textiles to electrical goods and motor vehicle assembly, and there was considerable development in intermiediate goods, particularly building and construction materials. The capital goods sector saw little growth. In spite of its considerable development, however, Thai industry is still characterized by low efficiency and productivity arising principally from small scale production, fre- quently compounded by low capacity utilization. Some of the smaller local- ly owned firms face problems of inadequate capitalization, management and technical knowledge. Throughout the manufacturing sector structural diffi- culties were becoming evident by the end of the 1960s. The easy import substitution opportunities were exhausted, and further import substitution could only be obtained at increasing costs protected by steeply rising tariffs of 60 percent and more. There had been little overall import re- placement in the 1960s since the new industries not only had initial capital equipment requirements but in many cases continuing imported input needs, and scale of production was too small for extensive backward integration into raw materials or components. There were practically no exports of indus- trial goods, and capital repatriation commitments due to foreign invest- ment were growing.  - ii - iv. A reorientation of policy towards a more competitive industrial structure emphasizing greater efficiency in prinary producing industries, promoting mass consumption and export oriented manufacturing industries, and taking advantage of Thailand's comparative advantage in low labor costs, would seem to be desirable if manufacturing is to avoid balance of payments difficulties and lead to self-sustaining long term growth. The following policy changes would be necessary for such a re-orientation of strategy: avoidance of further tariff increases, a rationalization of the tariff structure, long term plans for orderly tariff reduction, and more up-to-date practices in the administration of customs; the avoidance of direct import controls and the imposition of luxury taxes to restrict domestic consumption where necessary; a revision of business taxes in keeping with the tariff structure; an upward revision of income taxes to avoid the transfer of revenue from Thailand to developed countries and the use of tax reform to encourage corporate firm ownership; the continuation of encouraging foreign investment particularly for export oriented indus- tries; the strengthening of the Board of Investment to facilitate the pro- motion of more competitive, productive and efficient manufacturing industries by both local and foreign investors. v. Within such a strategy and policy framework there appear to be several areas where large scale investment may be necessary to enable fur- ther substantial steps in industrialization to be made. The first of these is in industry related infrastructure investment, notably in the develop- ment of a deep water port for heavy and export industries, and in indus- trial estates of various types. A-combined approach to the problems of rice storage, transport, milling and by-product utilization could substan- tially improve productivity in this important primary processing industry. The shortage of timber means that a supply of alternative economic raw materials, particularly for pulp and paper, should be sought, and the possibility of developing kenaf or eucalypts for this purpose in the northeast should therefore be explored. The current expansion in Thai iron and steel production makes an early decision about the optimal devel- opment path for this industry desirable.  THAILAND - THE MANUFACTURING INDUSTRY SECTOR 1/ I. Introduction 1. In recent years manufacturing has been the most rapidly growing sector of the Thai economy, and Thailand now has the nucleus of a modern industrial sector. This is, however, largely the result of investment in the last ten years. Before 1960 industrial development in Thailand was negligible. 2. Until the middle of the nineteenth century, when the Thai economy consisted predominantly of subsistence farmers, village households produced most of the goods used in every day life. Cotton was spun and woven into cloth, there was some preservation of food, and farmers built their own dwellings and made most of their agricultural implements and domestic uten- sils from the materials around them. There was some specialization in tile and pottery manufacture, in iron making, in silk weaving, in sugar produc- tion, and in the making of fish sauces, and these products were traded within the Kingdom and abroad. In the middle of the nineteenth century when the economy began to be monetized as rice became the principal export, European countries imposed rigorous free trade on Thailand. Most household produced goods, including sugar, were gradually replaced by imported manufactures. Trade came first to the Central Plain where access to the countryside by water was relatively easy, and then, as the railways reached out at the end of the nineteenth century, to the North and Northeast. 3. Rice and saw milling were the only new industries to develop in the nineteenth century, at first to serve the export trade, and then to satisfy local needs as well. The shelter of natural freight protection led to some further industrial development. In 1919 there were seven factories in Bangkok: a cement plant, three aerated water plants, a soap factory, a cigarette factory and a leather factory. The only one of these to be founded with local capital was one of the aerated water plants. The 1920s saw a partial revival in local sugar processing but little other industrial growth. 2/ 4. Thailand recovered its sovereignty over foreign trade in 1926, and began to introduce customs tariffs and excise taxes for revenue pur- poses from 1932. It now became profitable to produce tobacco, alcoholic beverages and matches locally. Commercial growth was concentrated in 1/ This Report does not include handicraft industries except in relation to the development of the manufacturing sector proper. 2/ C. Isarangkun, ManufacturinR Industries in Thailand, unpublished Ph.D. thesiss in progress, Australian National University, Canberra, July 1969; R. J. Muscat, Development Strategy in Thailand, New York, 1966; T. H. Silcock, ed., Thailand, Social and Economic Studies in Development. Can- berra, 1967; International Bank for Reconstruction and Development, A Public Development Program for Thailand, Baltimore, 1959.  -2- Bangkok, and this led to food processing and other consumer good industries, and to the growth of metal workshops, so that by 1941 Bangkok had 373 manu- facturing establishments. Most were privately owned by local entrepreneurs, mainly of Chinese origin, but there was also government investment in in- dustry. The Army Survey Department had built a small paper factory in 1917, but most of the development of state manufacturing came in the 1930s with the establishment of two cotton spinning and weaving mills, a silk factory, another paper mill, an abbatoir, and a sugar mill. 5. The outbreak of war stimulated both industrial development and government participation in industry and led to the creation of the Minis- try of Industry in 1942 to take over the government enterprises and control industry generally. The immediate post-war years saw increasing customs tariff levels, further expansion of public investment, and some private investment, but little industrial progress was made. In 1954 growing aware- ness of the importance of manufacturing industries and of the role of private investment, particularly foreign investment, were reflected in the passing of the Promotion of Industrial Investment Act which sought to stimulate private investment in industry by guaranteeing freedom from nationaliza- tion, and giving selected "promoted" firms exemptions from import taxes on raw material and capital equipment, and income tax exemptions. Foreign investors were guaranteed the repatriation of capital and profit. Direct government participation in manufacturing was to recede into the background. A major effort towards industrial promotion did not, however, occur until 1959, when, following the recommendations of the IBRD economic mission to Thailand, 1/ the government established the Board of Investment to implement the 1954 Act. 6. The establishment of the Board of Investment came just as pri- vate manufacturing investment quickened appreciably in response to the increasing pace of development of the Thai economy. The 1950s saw steady growth in the agricultural sector, and the effects of infrastructure invest- ment were being felt. Exports were becoming more diversified and there was an increasing inflow of foreign loans and grants. In the mid-1960s these developments were supplemented by the presence of U.S. armed forces, and the impact of Rest and Recreation troops on the growing tourist industry. According to the Board of Investment data, the rate of new investment in manufacturing grew rapidly in the 1960s, reaching a total of 6,216 million baht ($310 million) by the end of 1969 (Table I.1). From 1959 to 1969 some two thirds of investment in promoted firms, the bulk of it in industry, 2/ came from local entrepreneurs, and one third from foreign investors. Japan, 1/ International Bank for Reconstruction and Development, op.cit., pp.97-100. 2/ Hotels, service industries, and, recently, mineral exploration are also eligible for promotion certificates. In the past two years invest- ment in these non-manufacturing sectors accounted for 5.5 percent of proposed investment by promoted industries. See footnote /a in Table 1.1.  -3- the United States and the Republic of China were the principal foreign in- vestors, and the bulk of foreign investment was in the form of joint ven- tures with Thai entrepreneurs. The Board of Investment data appear to be the most reliable series of total investment in industry, but because of constant revisions it cannot be broken up-into annual investment series. A National Economic Development Board survey of actual investment by pro- moted firms shows greater total investment than the figures. for registered capital for the period 1959 to June 1969 (Table I.2). This includes in- vestment out of accumulated profits and is therefore probably a better indication of total investment, but annual investment figures appear to fluctuate more than actual investment. Fluctuations were, it is true, partly due to large projects such as the Thai Oil Refinery Co. Ltd., partly the result of changes in the investment climate, and partly the result of the administrative bunching of approvals, but to some extent they also reflect the inaccuracy of the data. 1964 was thus possibly the peak invest- ment year, and investment probably began to fall from 1965 as easy import replacement opportunities declined. The Board of Investment noted a marked falling off in 1969 following unfavorable business expectations resulting from declining U.S. military activity in Thailand and the withdrawal of U.S. troops from Southeast Asia and expects it to remain low throughout 1970. However, it appears that some of the slack due to the withdrawal of U.S. troops-is being taken up by a rapid expansion of domestic housing. The num- ber of dwelling houses completed in the Bangkok-Thonburi area has grown steadily in the 1960s, and it jumped from 16,809 in 1967 to 21,478 in 1968. In 1969 it was said to be higher still, and the rate of growth has apparently been maintained. 1/ 7. As investments aade with the new incentives took time to come into production, the 1963 Census of Manufacturing gives some indication of the structure of manufacturing industry in Thailand before the new investment incentives became effective. The Census coverage is unfortu- nately not always reliable as there was considerable undervaluation of many industries in which small scale production was important, and over- valuation in rubber and rubber products. 2/. For firms with 10 or more workers consumer goods industries accounted for 65 percent of value added in manufacturing, and capital goods accounted for 8 percent of value added in manufacturing (Table 1.3). Tobacco was the most important single sub- 1/ Applied Scientific Research Corporation of Thailand data. The number of dwellings completed increased from 1,201 in 1962 to 12,395 in 1964 in Bangkok proper. In 1966 when the area surveyed was increased to include the outskirts of Bangkok-Thonburi, it was 15,871. 2/ Nationa]L Statistical Office, Report of the 1964 Industrial Census, Volume One, Bangkok, 1967, pp. 2-7. See Statistical Note for an appraisal of the Census figures.  group, the high value added reflecting the very large profits of the government-owned tobacco monopoly. In terms of employment, output, and the value of fixed assets, food industries, consisting largely of rice milling and sugar factories, formed the most important sub-group. Non- metallic mineral industries, cement, brick, tile and glass manufacturing, were the most important sub-group in terms of value added in intermediate products, but wood industries, mainly saw milling, were more important in terms of employment. Rubber processing, predominantly in the southwest rubber growing region, 1/ and chemicals, consisting largely of pharmaceu- ticals and bleaching compounds, were the only other important intermediate products. In 1963, there was almost no basic metal manufacture (Tables 1.3 and I.5). 2/ Capital goods industries were largely repair workshops for other industries and motor vehicle repairers. 8. The increase in investment in the 1960s led to a rapid growth of industrial output, and this is indicated by increases in the volume of output of selected industries (Table 1.4) and in value added in industry (Table 1.5). The total average annual growth rate between 1960 and 1968 was 12.7 percent per year but there were considerable differences within this overall rate. Durable consumer goods industries grew fastest at 23.8 percent per year. Most of these were of course negligible in the early 1960s, and the growth figure reflects the small base from which they started. However, furniture and fixtures which were in existence in 1960 also grew rapidly at 18.8 percent per annum stimulated by the boom in hotel building from the mid-1960s. The 17.4 percent average annual growth rate of intermediate goods was chiefly due to the introduction of petroleum refining in the mid-1960s, and to a high rate of growth in non-metallic minerals, reflecting a continuous expansion of output of building and construction materials. Consumer goods, starting from a comparatively high base showed a lower, but still relatively high, annual average growth rate of 10.0 percent. Within this group textiles grew at 16.4 percent per annum, and beverages at 12.9 percent per annum. While the former reflected a significant increase in import substitution the latter was largely due to increasing consumption. Thus, although the primary processing indus- tries - rice, sugar and saw milling and rubber processing - were still the most important industries in terms of value of output and value added at the end of the 1960s, they no longer completely dominated manufacturing. 9. The contribution of manufacturing to gross domestic product has risen in the 1960s and Thailand is now one of the most highly industrial- ized countries in Southeast Asia. The following table showing value added in Thailand and other Southeast Asian countries indicates that only in 1/ Ministry of Agriculture, Agricultural Statistics of Thailand, Bangkok, 1966, p. 99. 2/ See Statistical Note for explanation of differences between 1963 Cen- sus figures.  - 5 - the Philippines did manufacturing contribute more to the gross domestic product than in Thailand. 1/ Singapore also had a somewhat larger modern industry sector than Thailand, but its contribution to total gross domestic product was smaller. Value added in manufacturing in Southeast Asia as a share of gross domestic product /a 1953, 1960 and 1968 /b 1953 1960 1968 (p e r c e n t) Indonesia - 8.1 /c - Malaysia (West) - 8.6 11.6 Philippines 11.4 16.2 17.3 /c Singapore - 7.9 12.4 Thailand 11.5 11.7 14.7 /a At factor cost, except Thailand which is at market prices /b In 1966 prices /c Net domestic product Source: B. Balassa and H. Hughes, Statistical Indicators of Levels of Industrial Development, Economics Department Working Paper No. 45, May 19, 1969. Revised and updated November, 1969. These figures must, of course, be interpreted with considerable caution because of the inadequacies of national income statistics, but their sug- gestion of relative levels of industrialization seems reasonable. The estimate of the share of manufacturing in the national product supports the contention that manufacturing did not develop in Thailand until the 19609, and this is also borne out by the growth in value added in manu- facturing per head of population which remained constant at about $12 per head from 1953 to 1960, but rose to $23 in 1968. 2/ Manufacturing has, of course, made a lesser contribution to the economy in employment than in value added. The 1963 manufacturing census showed some 221,000 workers employed in manufacturing establishments, so that, allowing for the lack 1/ If the Philippines' net domestic product is converted to a gross domestic product, the difference is quite small. 2/ Balassa and Hughes, loc. cit.  of coverage of small enterprises, total employment in manufacturing was probably about 250,000. 1/ This was about 1 percent of the workforce. 2/ More recent figures of employment are not available. On the basis of estimates of employment growth in developing countries with an industrial pattern comparable to Thailand's, it seems unlikely that the workforce in manufacturing in 1968 was higher than 400,000 workers. 3/ This would mean that currently manufacturing accounts for about 2.3 percent of the work- force. 10. The last decade has thus seen a definite swing towards industrial development in Thailand. The growth of manufacturing has had little effect on total employment, but it has made a substantial impact on the gross domestic product. Manufacturing has been growing faster than other sectors of the economy, and in some senses it has therefore clearly been a leading sector. Industrial growth has partly been the outcome of the general ex- pansion of the economy, but it has also been markedly influenced by govern- ment policies directed towards an industrialization strategy. It is, how- ever, by no means clear whether existing policies can maintain or accel- erate industrial development. These policies will now be examined in the next section of this report. The main characteristics of the principal industries will then be briefly reviewed in the third chapter, and the fourth chapter will analyse the economic structure of Thai manufacturing. Chapter five will draw together the conclusions deduced from this analysis and make recommendations for future strategy orientation and policy measures. 1/ See Statistical Note for census coverage. In the 1961 population census, 481,000 people reported themselves as "occupied in manufac- turing", but this included domestic and handicraft workers, and therefore does not give an indication of employment in manufacturing proper. 2/ Work force estimates of were based on the 1961 occupation census figure of 13,772,104 updated by an estimated population growth of 3.2 percent per annum. 3/ A Survey conducted by the Ministry of Labor, covering 6,836 manufac- turing establishments, recorded a total employment of 256,666 workers in 1969; the establishments covered, however, only formed a small proportion of total manufacturing establishments registered with the Ministry of Industry which numbered 45,071 in 1968. (See Table IV.1 below).  7- II. Industrial Policy 11. Since their introduction in 1961, Economic Development Plans 1/ have been the principal vehicles for economic policy statements, but they have had little affect on industry because the Government's view has been that while it should assume the main responsibility for creating a favor- able climate for investment, the actual planning and execution of industrial projects should be left to the private sector. Thus past plans only in- cluded allocations of funds for the development of infrastructure and for vocational and technical education. The new plan, which is to go into effect in October 1971, but which has not yet been drafted, is expected to provide industry with some research and technical assistance, and to place added emphasis on maintaining fiscal and monetary stability as an incentive to increasing private investment. The weight of actual industry promotion measures has been and remains elsewhere: with fiscal and monetary policy and with legislation providing specific incentives to investors in manufacturing. Investment Incentives 12. Industrial development in Thailand received a new impetus in 1954 with the Promotion of Industrial Investment Act which aimed at stimu- lating investment in "important" industries by granting them specific in- centives. F:Lrms receiving a promotion certificate were guaranteed against nationalization and competition from state enterprises, and foreign firms were, in addition, permitted to own land for industrial purposes and granted the right to repatriate capital and profits. Promoted firms could also re- ceive a number of tax concessions during the first five years of production, including exemption from, or reduction of, tariff duties and business taxes 2/ on imported machinery, equipment and raw materials. For new projects, although not for expansions, promoted firms also received a five- year holiday from inicome tax. 3/ Firms were classified into three groups according to their "importance" to the national economy; this was generally based on their consumption of domestic inputs, backward and forward link- ages (actual or potential) with the rest of the industrial sector, and the provision of employment. Table II.1 shows industry groupings in the var- ious categories Industries in Category A received full exemption from import duties, and those in categories B and C received up to 50 percent and 30 percent reduction in import duties respectively. 1/' The first Six Year Economic Development Plan was introduced in 1961 and was completed in 1966. The current Five Year Plan began in 1967 and will end in 1971. 2/ See below para. 24. 3/ A firm could also receive exemptions or reductions on export duties but thesle are negligible.  - 8 - 13. In spite of such substantial incentives, local and foreign in- vestors were slow to invest in manufacturing enterprises in Thailand until the establishment of the Board of Investment in 1959 to implement the Promotion of Industrial Investment Act. Minor amendments to the Act in 1960, 1962 and 1965 have had little effect on the impact of legislation, but changes in the board of Investment's administration procedures and determination of criteria have influenced the course of investment quite markedly. Initially the Board's procedure in granting promotion certifi- cates was extremely slow and cumbersome. With an inadequate and inex- perienced staff, it had to classify industries into groupings, and examine each application to gauge its "importance to the economy". By the mid-1960s, as the number of applications for promotion grew with the fairly rapid rate of economic development, and in the shelter of rising protective tariffs on consumer and intermediate goods, the Board of Investment speeded up the processing of applications. 14. The most important feature of the promotion system was not, how- ever, the explicit tax exemption, 1/ but rather its implicit aspects, and in particular its link with the tariff system. Firms granted promotion were confident that they would obtain a sufficiently high level of tariff protection for their finished products combined with exemptions for their raw materials to enable them to operate profitably. Behind the incentives lay a policy of conserving the domestic market for local producers. How- ever, Government policy also aimed at preventing monopoly situations, and competition among domestic producers was therefore to be ensured by encour- aging the entry of several firms into an industry. Such competition was not, however, to be allowed to run out of bounds, and so once a few firms were granted promotion certificates, entry restrictions were imposed. 2/ In practice the failure to obtain a promotion certificate generally prevent- ed a firm from entering an industry as the Board of Investment could ask the Ministry of Industry not to issue a license to a firm which had been denied promotion privileges. 1/ Income tax concessions, particularly were regarded as being of little value by investors. This is partly due to the characteristics of the Thai corporate income tax system, (paras. 28 and 29 below), but also to a general attitude, particularly among foreign investors, that if an investment is profitable they do not mind paying taxes, if it is not, there are no taxes to pay. Such views are in marked contrast to the opinion of a recent investment study by the OECD Business and Industry Advisory Committee which claimed that income tax incentives are an important device in attracting foreign investment and could therefore substantially contribute to future industrialization. OECD Business and Industry Advisory Committee, Thailand, An Investment Study, 1968, p. 11. 2/ In 1969 only about 100 of some 250 applications for promotion were approved; most of the refusals were to prevent the creation of excess capacity and to limit competition.  - 9 - 15. The Board of Investment follows a policy of maximum prices at the wholesale level to contain the effects of this oligopoly situation. The commodities affected are sheet glass, textiles, tyres, Kraft paper and fishing nets for all of which tariffs are high (Table II.2). In so far as this policy is put into practice it tends to reflect the cost structure, and profits, of the marginal firm. 16. During the last two years it has become evident that the imple- mentation of the Incentives Act along these lines was leading to struc- tural difficulties in the economy. In particular a large raw material import bill was being created by the new promoted industries. In 1969 the Board of Investment therefore began to standardize promotion privileges for all firms by granting fewer A-and B category certificates and by drop- ping raw material tariff exemptions from the promotion legislation. To- gether with improvements in the Board's leadership and staffing, this has led to the speeding up of promotion procedures and a concomitant reduction in the time lag between application and approval. The proportion of ap- provals to applications has, moreover, also shown a steady increase during the 1960s, reflecting the Board's adoption of a less discriminatory approach to granting incentives, although the incentives themselves have become more limited. 17. While the Board of Investment has been moving toward a more standardized approach in granting promotion certificates, the Ministry of Industry has become selective in its licensing policy. 1/ For many years, licensing was not an important policy tool as criteria for licenses were generally limited to somewhat vague health and safety standards. However, with the establishment of the Division of Economic Planning, industrial policy statements are now being issued for various industries, stating the conditions which a firm must fulfill before receiving a license. This is affecting small industries particularly because the Ministry is seeking to protect handicraft producers. For example the production of plastic matting has been forbidden to protect handicraft producers of straw matting. 18. Foreign investment in Thailand's manufacturing sector over the past ten years has been considerable. Until recently, the favorable provi- sions of the promotion legislation were reflected in ready acceptance of foreign investment by private entrepreneurs as well as by the Government, 2/ and the success of this policy is evident in the 2,069 million baht ($100.9 million) foreign investment in registered capital of promoted industries, representing 33 percent of total industries, between 1959 and 1969 (Table 1.1). Recently the Chairman of the Board of Investment expressed a fear that 1/ The Factory Act 2512 (1968) requires all factories using machinery of 2 horsepower or more or employing seven or more workers to obtain a license which must be renewed every three years by the Ministry of Industry. 2/ OECD Business and Industry Advisory Committee, op. cit. p. 19.  - 10 - Japanese investment, the largest single source of foreign funds, was too high. Japanese investment is however only 11 percent of total investment in promoted industries, and political factors as well as economic judgment appear to have played some role in the Chairman's view. Tariffs, -/ Import Taxes and Import Controls 39. Although Thailand regained fiscal autonomy in 1926, the tariff level, set at 3 percent in 1856, was not substantially raised until 1932 when customs duties became a major source of public revenue. The first protective tariffs were levied in 1935, and rising tariffs since then have been both a source of revenue and a means of protecting domestic industry. 20. Tariffs range from 5 to 80 percent, with great variations within the same product group as well as among various groups. Table I1.2 shows nominal tariff levels for 1966-67, the most recent year for which complete data were available, and Table I1.4 shows principal changes since 1966. These variations reflect the tendency toward a tariff which is "tailor-made" for the needs of the new industries being established by superimposing ad hoc changes requested by new producers on existing revenue cum protec- tionist tariffs. Table 11.4 shows a number of increases designed to pro- tect new producers; reductions in raw material input duties were made at the same time to increase the actual level of protection for final products. In general most consumer goods and intermediate products produced locally are protected by high tariffs of the order of 40 to 60 percent, whereas capital equipment, raw materials and components not produced locally have lower tariffs ranging from 5 to 10 percent to 15 percent. The ad valorem tariff is supplemented by specific rates on some products. These are applied instead of ad valorem rates whenever their incidence is higher than the ad valorem rate. This type of tariff is used in lieu of dumping duties, for while anti-dumping legislation was passed in 1967, it has been found to be too cumbersome in practice and has never been successfully implemented. Intermediate products which are the inputs for domestically produced finished goods, are thus often highly protected, substantially lowering the effective protection on the final product, despite the high tariff which the final product carries. Such duties are sometimes a consequence of revenue demands on the tariff, which in 1968 contributed 27 percent to government revenue, 2/ and they are therefore difficult to reduce. On July 1, 1970, the rates of import duties on foodstuffs, consumer non-durables and durables were signif- icantly raised and a number of specific rates were changed to ad valorem rates. Most of the consumer goods produced locally which are of a luxury 1/ Tariffs are discussed only in nominal terms throughout this report. There is no reliable study of effective protection in Thailand, but the structure of production suggests that effective protection is consider- ably higher than nominal for many products, so that nominal tariffs give an extremely conservative view of protection. 2/ See Table 5.1, Volume II.  - 11 - nature, such as canned goods, garments, electrical applicances and passenger cars have duties of 60 to 80 percent. Beer, wine and liquor have 100 percent duties. Tariffs on raw materials and components for the manufacture of these items were also increased in some cases, such as components for motor vehicle assembly. Therefore, pending further analysis, it is not certain whether, in combination, these tariff increases have raised the level of effective protection in all cases. The main aims of the July 1970 tariff changes were to raise additional revenue and to restrict demand for imported consumer goods and passenger cars. 21. Table II.2 also shows weighted averages of tariff collections as a percentage of c.i.f. prices for selected industry groups for 1966-67. These figures reflect the reduction of tariffs on inputs for promoted in- dustries (including hotels), 1/ and the incidence of tariffs can now be ex- pected to increase since new firms coming into production do not have raw material tariff exemption privileges. Table II.3 shows the frequency dis- tribution of tariff collections by tariff rates and percentage distribution of collections by products; 2/ it indicates that tariffs collected at rates of up to 25 percent accounted for 26.5 percent of total collections, tariffs at rates between 30 percent to 60 percent accounted for 54.9 percent, and tariffs of more than 60 percent accounted for 18.2 percent of collections. Tariff collections on consumer goods accounted for 37.8 percent of total collections, intermediate goods 26.7 percent, and capital goods 33.4 percent; these ratios reflect both the relative level of tariffs and the importance of tariff exemptions in intermediate and capital goods. 3/ 22. The height and irrationality of the tariff structure made the receipt of promotion privileges which granted tariff reductions on capital equipment and raw materials an important part of the profitability calculus of investing firms. The recent elimination of raw material duty exemptions, the phasing out of A and B certificates, and the increasing number of firms coming into production and requesting higher protective tariffs are now underlining the importance of the tariff; and the structure of the tariff, as well as its high absolute level, is leading to increasing difficulties and to d