Monday, 12 August 2024 – In this webinar, Emeritus Professor Peter Warr explored the rapid structural changes in Thailand’s economy over recent decades.
REGIONAL ECONOMIC STUDIES PROGRAMME WEBINAR
Southeast Asia has seen rapid diversification overtime. This could present itself in the contraction of the agriculture as a share of aggregate economic output and the corresponding expansion of the combined shares of industry and services. An insight into the forces behind these structural changes would be useful in recognizing the potential disruptions they could deliver to factor markets and the improvements it could bring to economies and societies. As such, understanding the role that governments could exercise their influence through policy would be valuable.
To provide a well-rounded answer to such a query, the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute, organised a webinar featuring Professor Peter Warr, John Crawford Professor of Agricultural Economics, Emeritus, at the Australian National University.
Professor Warr began the webinar with an empirical snapshot of the long-term economic process many East Asian economies such as Thailand, Japan and Indonesia have experienced – as income in these countries grew, the agricultural sector contracted. This indicated a movement of resources out of the agricultural sector into the industry and services sectors. One reflection of such a process is urbanisation where the location of economic activity has shifted away from agriculture to that of commodities and services. Presenting data on total value added to GDP and employment from three sectors – agriculture, industry and services – Professor Warr summarised the process of industrialisation as the simultaneous decline of agriculture and rise of industry together with the movement of workers out of agriculture primarily into services rather than industry.
Delving more into the drivers behind structural change, Professor Warr outlined five possible hypotheses: 1) a supply-side phenomenon where industries that are capital intensive must expand should capital stock grows relative to the stock of labour and vice versa, 2) different rates of total factor productivity between sectors, 3) varying international prices of agricultural goods relative to industrial goods, 4) changes in trade policy and, 5) a phenomenon described by Engel’s Law where the share of expenditure on food declines as incomes rise. In such a scenario, if composition of output expanded uniformly across the agriculture and non-agricultural sectors, prices would move against agriculture. Differentiating the first two hypotheses as supply-side explanations and the last three hypotheses as that of relative change in prices, the implications of these hypotheses were illustrated using the production possibility frontier.
Professor Warr then briefly touched upon the economic model used in his study which attempts to estimate how changes in exogenous variables corresponding to the five hypotheses could affect endogenous variables in the form of structural change. The model recognises both intermediate inputs and the fact that domestically produced commodities are imperfect substitutes for imported commodities under the Armington assumption. Building upon data on total factor productivity, international relative prices and rates of protection on three different sectors from various data sources, results showed that the agriculture sector contracted by 2.8% while the industry sector expanded by 5.8%. The services sector demonstrated similar levels of contraction. Evoking the previous five hypotheses, greater total factor productivity growth in industry rather than agriculture or services appeared to explain virtually all the changes as compared to the other four hypothesis. Trade tariffs imposed in the 1990s also appeared to explain little. As such, results from the study posits that structural change in Thailand was essentially attributed to changes in technology rather than that of relative prices.
Professor Warr concluded his presentation by highlighting a paradox in Thailand and similar economies where policy moves in favour of agriculture as the prominence of agriculture within the economy and employment in agriculture declines. This is evident in economies such as Japan, Korea and Western Europe where industry is taxed, and agriculture is heavily subsidised. Therefore, trade policy as a response to structural change would not be effective in resisting the powerful force that structural change presents.
The 90-minute webinar was attended by an audience composed of research scholars, students, policymakers and the public. Professor Warr also answered their questions on an array of topics including possible causes for differing productivity rates in the different sectors, the role of foreign direct investments in global value chains, the impact of monopolies and oligopolies on economic growth, productivity measurement in services sector and the incorporation of the informal sector and a more in-depth study of individual sectors in future studies.