The notion of a labour surplus model of Arthur Lewis and Hirschman’s unbalanced
growth strategy might also have influenced Thai elites. In the early 1950s, the Thai rural sector was painted as being very remote and full of under employed and misguided labour. The evidence of population growth and a plentiful labour supply seemed to support this myth. The population of Thailand in 1960 was 26.3 million, increasing to 36.1 million in 1970, 46.7 million in 1980 and 56.1 million in 1990.12 In view of the annual population growth rate of 3.0 per cent during 1947-1960 period, it made sense to follow the dualistic model of Lewis13.(Lewis, 1954) and the unbalanced growth model of Hirschman (Hirschman, 1958). Importsubstitution strategy matched the prevailing circumstances in the Thai rural economy. If the country had established modern industrial plants, it would have become richer andprogressive like the developed countries. Moreover, not only would scarce foreign exchange have been saved, but increased employment might also have been achieved. Import substitution could have helped the poor to find jobs in a modern industrial sector instead of being unemployed and underemployed in poor rural areas and finally poverty would have been reduced.
During the import-substitution period, the Thai government was strongly biased
against the agricultural sector, while it tyrannical protected and created a number of
incentives for promoted industrial firms (mostly big foreign firms in Bangkok). Export tax was in turn imposed on agricultural products, rice,14rubber, logs and wood. Manufacturing sectors were not subject to taxes and highly protected by quantitative restrictions. It is probable that a heavy tax on the Thai agricultural sector might have forced it to engage only in resource-based activities using static comparative advantage.15 In addition, tariffs and other trade policies of ISS, implemented by BOI’s granting and providing tax concessions on imported machinery, equipment, raw materials and other imported intermediate inputs to the promoted or preferred industries were the case. There can be no doubt that the high degree of distortions and bias during the ISS period, contrary to expectations, did not lead to efficient allocation of resources in those promoted firms (see Bhagwati, 1988).
According to Tambunlertchai (1987), Thai policy makers began to be aware of the adverse effects of import-substitution strategy relying heavily on imported inputs, for instance, in capital goods. This suggests that resources were transferred to the promoted firms through the provision of relatively cheap machinery and intermediates, mostly capital and inputs from other companies from abroad to local assemblies. It makes sense for the foreign promoted firms to tend to use more capital inputs, but less labour inputs as a whole in the production line. Furthermore, it should be realized that the ISS regime has not only arisen in the context of exchange rate overvaluation, but has also been conducted within the framework of quantitative allocation systems by state bureaucrats.16 This is prone to result in rent-seeking activities, Directly Unproductive Activities DUPs and corruption in the sense that resources might be diverted from productive to unproductive activities (see Bhagwati, 1988; Krueger, 1974; Siriprachai, 1993). Moreover, the high degree and chaotic pattern of ISS inexorably encouraged the dissipation of entrepreneurial energies and real resources. As a consequence, import-substitution strategy seemed neither to reach governmental objectives, nor match the state of factor markets, namely cheap labour supply in Thailand from the 1950s to the 1980s. The unbalanced growth industrialization strategy of land-abundance until the 1970s and labour abundance until the late 1980s, paradoxically, had been emphasizing the development of industries involving the use of scarce ‘capital’. This raises the question; why was the case and how did it come about?17 Moreover, import-substitution strategy even failed to create forward and backward linkages in industrial sectors. Capital intensive industrialization is meant to use more machinery but whether it will raise labour productivity or not is inconclusive. However, Siamwalla and Setboonsarng (1989) comment on the role of BOI in promoting industrial firms as follows:
The importance of BOI lies not so much in the granting of promotional privileges…in
the form of tax holidays, exemptions from taxes on imports of machinery and raw materials and the like…but in its role as a forum where private business can legitimately submit requests to the government for these privileges. The government in a sense, become involved in the private sector decisions, having been involved, it also has become responsible for the survival of the enterprises. BOI’s importance for the analyst lies therefore, not so much in the privileges that it grants, but as an indicator of the trust of government policies. As the guiding philosophy of BOI in the 1960s was import substitution, protection of industry became the norm…Industries were promoted, most agro industries in Thailand (like rice milling and rubber processing which are small and medium scale) cannot gain access to BOI promotional
privileges. Such policies show a clear, albeit implicit, bias against agriculture (Siamwalla and Setboonsarng, 1989).
However, Thai technocrats (mostly in the National Economic and Social Development Board NESDB), introducing export promotion strategy to stimulate manufactured exports in the early 1970s as part of the Third National Economic and Social development Plan (1972-1976), specified the promotion of manufactured exports as the main industrial strategy.18 The central question that emerges is why did Thai policy-makers change industrial strategy in the opposite direction at the beginning on the 1970s, a time was known as a downturn of the world economy? Once again, how is it to be explained? One of the plausible reasons is that Thai policy-makers highly appreciated the ‘miracle’ experience of the East Asian NIEs in achieving high economic growth through the adoption of outwardlooking industrialization-Eos (see Tambunlertchai, 1987). This assessment might be right when we look at some official documents written by high ranking policy makers in NESDB. Others indicate that the World Bank and the IMF seemed to have indorsed Thailand’s export promotion strategy. However, it is likely that both factors partly caused it to turn-round in its path towards developmental strategy. Both international financial institutions routinely put forward the idea of abandoning ISS to developing countries including Thailand.19 The World Bank suggested that Thailand should adopt ISS in the late 1950s, but in the early 1970s, in sharp contrast, supported EOS instead. Thus, Thailand was urged to pursue export promotion strategy.
The fact that the export promotion period (1972-1976) did not succeed was evident.
Import substitution policy did not merely prevail, but was also advocated through tariff policy and other quantitative restrictions which were under the control of the Ministry of Finance. The 1974 revision was, of course, import liberalizing policy, but was followed by increased protection in the 1978 revision. However, under the 1977 revision of the Industrial Promotion Act, BOI was still empowered to provide a large number of privileges to preferred firms; (i) exemptions, or reductions up to 50 per cent of import duties and business taxes on imported machinery, as well as business taxes on domestically produced machinery, (ii) reductions up to 90 per cent of import duties and business taxes on both imported materials and domestic materials, (iii) exemptions from corporate income taxes for 3-8 years, with the carry-forward of losses for up to five years after the period of exemptions, (iv) exclusion from taxable income of fees for goodwill, copyright and other rights for a period of five years after income is derived from the promoted activity; and (v) exclusion from taxable income of
dividends derived from the promoted activity during the period of tax holiday. Furthermore, this amendment gave BOI power to levy a special import surcharge to help out the promoted firms. The example above is just a small part of the incentive system provided to encourageforeign companies to invest in Thailand. The penalty to foreign firms violating the rules was seldom applied. This is contrary to the East Asian experience.
In fact, in 1972, the investment promotion law was replaced by the National
Executive Council Announcement No.227 which was, in substance, intended to give rise to
greater incentives for export industries. Exemption from export duties and business taxes for export products of promoted firms was included. In addition, imported material inputs and imported products to be re-exported were exempted from import duties and business taxes when the income was derived from export activities. Promoted firms were permitted a 2 per cent deduction on the increases of income over the previous year for income tax purposes. It should also be noted that BOI had considerable discretionary authority to determine the list of activities or/and firms eligible for promotion privileges. The 1972 investment law and the 1977 revision of the Industrial Promotion Act empowered BOI to grant and provide privileges to promoted firms.20 In the early 1970s, Thai technocrats started to realize that serious problems confronting them were (i) inefficiency of some import-competing industries as a result of high wall protection from tariffs and heavy reliance on imported capital goodsand intermediate products, (ii) limited employment absorptive capacity and (iii) heavy concentration of manufacturing activities in Bangkok and the surrounding provinces.21 In addition, the Third national Plan specified poverty proble.