MICROSIMULACIÓN

Looking at the components of GDP, from Figure 3.1 it can be seen that private consumption was the largest component, at more than 50% of GDP. After 1996 the ratio of private investment to GDP significantly decreased due to the financial crisis, but after 1999 this ratio started to recover again. The ratio of government spending to GDP was increased during the crisis period in order to stimulate the economy. Lastly, net export (X-M) became positive after the crisis due to an increase in exports.

Figure 3.1: Ratios of GDP components (%)

Source: NESDB, 2010, Gross Domestic Product.

-20 0 20 40 60 80 100 120 Ratio of X-M to GDP Ratio of I to GDP Ratio of G to GDP Ratio of C to GDP

Table 3.6: Percentage change of output components, 1988 prices Year % change of C % change of I % change of EX % change of IM % change of G % change of GDP 1988 – – – – 6.2 13.2 1989 10.0 20.1 25.1 27.2 12.6 12.1 1990 11.4 22.4 15.0 29.7 17.3 11.1 1991 5.1 9.2 23.5 15.6 17.4 8.5 1992 8.0 2.5 13.7 6.0 23.4 8.0 1993 7.7 9.5 13.4 12.3 17.2 8.3 1994 7.1 8.2 22.5 18.1 17.6 8.9 1995 7.2 9.8 24.8 31.9 10.5 8.8 1996 5.4 2.6 –1.9 0.6 16.6 5.5 1997 –1.3 –43.7 3.8 –13.4 18.4 –0.4 1998 –13 –51.5 –13.8 –34.0 –6.0 –10.2 1999 4.1 –3.4 7.4 16.9 –1.6 4.4 2000 4.9 14.3 19.5 31.5 3.5 4.8 2001 3.9 4.7 –7.1 2.9 3.0 2.2 2002 5.1 11.8 4.7 4.5 3.2 5.3 2003 6.1 15.0 18.1 17.3 –3.5 7.1 2004 5.8 14.0 21.5 25.7 17.8 6.3 2005 4.3 9.4 15.1 25.8 7.0 4.6 2006 3.0 3.9 16.9 7.9 13.9 5.1 2007 1.7 0.0 18.2 9.0 12.8 4.9 2008 2.6 3.1 15.8 26.8 3.7 2.5 2009 –1.1 –14.6 –13.9 –25.2 17.4 –2.2

Source: BOT, 2010, Stat Macroeconomic Indicators.

From Table 3.6 it can be seen that before the crisis (1989 to 1996), GDP growth was high with employment growing in most sectors (e.g. construction and tourism). Private consumption continually expanded by an average of 7.8% per year, especially in 1990, when private consumption grew more than 11% due to the government raising salaries for government officials and raising the level of minimum wages. However, during the crisis private consumption fell by 1.3% in 1997 and then by 13% in 1998 (Table 3.6). This was because unemployment increased to 4.3% in 1998 from about 1% in 1996 (see Table 3.7). Moreover, households suffered from uncertainty about employment, which resulted in a reduction in household spending. Nevertheless, private consumption increased again in 1999 by 4.1%.

The main factors in the recovery were decreases in valued-added tax, low interest rates (see Table 3.7) and government measures to stimulate the spending of people in the countryside (e.g. the Miyazawa budget for boosting employment). After 1999 private consumption expanded more than 4% per year every year until 2005. In 2006 and 2007 the growth rate of private consumption decreased because of an increase in oil prices and people having no confidence in the political situation. In 2008 the growth rate of private consumption rose again after the government increased the level of minimum wages that year. In 2009 the

growth rate of consumption turned negative again, at –1.1% (see Table 3.6), due to a decrease in GDP resulting from world economic problems.

The trend in private investment corresponds to output and private consumption. Private investment grew strongly from 1989 to 1995 by an average of just over 10% per year. Growth in private investment mostly came from small and medium business and the real estate sector. Factors encouraging private investment were low levels of wages, high levels of loanable funds from overseas, the government’s measures to stimulate and diversify private investment to other areas, and the measures for promoting investment in small and medium enterprises. According to Siriprachai (2007), in 1989 and 1990 the growth rate of private investment was very high (over 20%) because of foreign direct investment, especially from Japan. However, the Band of Thailand increased the interest rate ceiling for loans in the second half of 1990, and private investment fell in 1991.

A high growth rate of private investment from 1989 to 1995 caused an excess in private investment (e.g. in real estate). This resulted in the slowdown in the growth rate of private investment in 1996 (just 2.6% per year). Later, when the financial crisis occurred, the growth rate in private investment turned to negative (–43.7% in 1997). Because of previous over- investment, banks’ caution over lending and high interest rates, the growth rate in private investment continued to be negative in 1998 and 1999. However, as can be seen from Table 3.6, private investment started to recover again in 2000 due to investment in real estate. The growth rate in private investment from 2000 to 2008 was higher than 3% every year, except in 2007, when the growth rate was low due to the political situation. In 2009, due to a decrease in GDP, the growth rate fell to –14.6%.

Figure 3.2: Trade balance and current account (billions of baht at current prices)

Source: BOT, 2010, Stat Economic Indicators.

Turning now to the trade balance, in the 1950s the most important export good was rice, along with others goods from the agriculture sector, such as rubber, tin and teak. However, according to Siriprachai (2007), since the 1980s the manufacturing sector has increased its role in export dramatically. From 1985 to 1990 important manufacturing export goods were textiles, garments, canned foods, canned fish, gems, jewellery and circuits. From the mid- 1980s imports were increasing faster than exports.

From 1987 to 1997 Thailand suffered from a trade deficit (see Figure 3.2) because the growth of the economy was high. As a result, the level of imports increased strongly (see Table 3.6) because of the demand for capital in order to support higher investment. The government also reduced import taxes. Although the rate of expansion in exports was also positive, the level of exports was still less than that from import. This is why the trade balance was in deficit during this period, which resulted in a deficit in the current account.

However, after the crisis, imports fell by 35% (1998) due to a reduction in the baht and lower domestic demand. In contrast, exports mostly increased after 1998 due to changes in the

-20 -15 -10 -5 0 5 10 15 20 25 Trade Balance Current Account

exchange rate. The trade balance, in deficit up to 1997, turned to surplus from 1998, resulting in a current account surplus between 1998 and 2007 (except for 2005, due to oil and material imports). In 2008, although the trade balance was still in surplus, there was a deficit in the current account because of a deficit in the services balance, due to a decrease in tourists from overseas. The trade surplus continued in 2009, when imports decreased more than exports (– 25.2% and –13.9%, respectively).