PART II
The decline and recovery of Thai agriculture: causes, responses, prospects and challenges

Nipon Poapongsakorn
Faculty of Economics, Thammasat University

With the assistance of

Chaiyasit Anuchitworawong
Sake Mathrsuraruk
Thailand Development Research Institute

Abbreviations and acronyms

Executive summary

This study explains how Thai agriculture has tackled the problems of cost-price squeeze and satisfactorily adjusted its production structure toward new comparative advantage. It begins with an exploration of the causes of decline and revival of Thai agriculture and the consequent changes in the production structure during 1980 to 2003. Then, it analyses how Thai farmers, the private sector and government policies have responded to such changes, particularly the problem of cost-price squeeze. After speculating upon the future prospects of Thai agriculture, the paper discusses some of the lessons and the challenges facing Thai farmers.

Between 1985 and 1996, the problems facing Thai agriculture were so serious that most planners and economists believed that it was a sunset industry with a bleak future. Yet its recovery in the early 2000s may have proved this belief to be wrong. This paper explains both the causes of agricultural malaise and revival in the context of the “Dutch disease” framework, and how farmers and business companies related to agriculture responded to the problem.

Even during the period of rapid decline, Thai agriculture made adjustments towards a new comparative advantage. The adjustments took place not only in the farm output and agricultural input markets, but also in non-farm activities. In the output market, Thai agriculture shifted toward higher-value products and less labour-intensive and probably less water-intensive crops. Farmers also responded to the effects of Dutch disease by producing more non-traded and import-competing products during the bubble period and by switching back to traded goods after the 1997 to 1998 crisis. In the input markets there has been a trend toward increasing real wages caused by labour shortage and the huge movement of workers from agriculture into the non-agricultural sector. As a result, farmers have increased their investment in mechanization. They have also stepped up investment in water pumps and pond digging in response to the water scarcity problem. But perhaps the most important response is the technological improvement which became the second largest source of agricultural growth after capital accumulation throughout the 1981 to 2003 period. This performance was made possible by increasing specialization at the farm level, by increasing farm size (particularly in livestock and perennial trees which require long-term investment), by changing input intensities, by diversifying agricultural export products and most importantly by technological improvements, which include genetic improvement, mechanization and resource management. These adjustments were first pioneered by commercial farmers, contract farming companies, agribusiness firms and exporters who were willing to take risks and to readily respond to price signals. In addition, most farm households have diversified their sources of income into non-farm activities with a lower degree of income variation. The most important sources are employment income and remittances from family members working in the cities.

For many farmers with poor land resources, particularly poor farmers in the Northeast, agricultural restructuring towards higher-value crops was not an option. Thus, they decided to reduce their labour effort on the farm and seek alternative non-farm jobs. This explains why economic growth and higher prices of agricultural products have substantially reduced poverty.

Perhaps the most important set of policies that has allowed domestic relative prices to reflect international relative prices has been sound macroeconomic policies. There were also, however, periods of bad macroeconomic policies that penalized the agriculture sector, for example, the early 1980s, the early 1990s and during the first six months of the 1997 to 1998 crisis. The shift in agricultural trade policy from one that penalized farmers to a more neutral one in 1986 caused farmers and the private sector to bear the full consequences - both positive and negative - of changes in the price level. The 1994 trade policy reform, the market access commitment in the Uruguay Round Agreement and the current bilateral free trade agreement (FTA) negotiations have also partially reduced both bias against agriculture and protection - albeit small - of Thai agriculture.

Yet in recent years, there has been an increasing use of highly distorted policies that provide a rising level of support to the farmers, e.g. price support programmes, a debt deferment programme and various subsidized credit programmes for people at the grassroots level. The assessment of these programmes finds that their performance, excepting the debt deferment programme, is very disappointing. All the price-support programmes have been plagued by widespread corruption as shown by reports of both the police department and the senate committees. Although these sectoral policies have been quite costly and distorted the resource allocation, their overall impact on the agriculture sector remains limited. But if these sectoral policies continue to expand, they may impose higher fiscal cost on the tax payers and seriously affect the competitiveness of Thai agriculture in the near future.

Thai agriculture faces four main challenges. First, to remain competitive in the world market, it has to reorient its production from traditional commodities towards high-value and safe products. There are at least four necessary policy measures to facilitate and speed up the restructuring process. Public research in the areas of genetic improvement and postharvest technology will provide more profitable alternatives for farmers. The government needs to step up its efforts in biotechnological research. Stimulating the production of safe and high-value food will also require an appropriate system of public good provision, such as laboratory tests for chemical residue, public regulation of food safety and quality standards and a more effective institution for sustainable use of natural resources. If the farmers are to invest in the production of safe products, their incentives will have to be increased through the development of modern food and agricultural markets which involve the centralization of procurement and frictionless logistical interface with the farmers. To participate in the new marketing and procurement system, farmers will have to organize themselves so that they can both exploit economies of scale through joint investment in local public goods (such as the extension services and the establishment of a tractability system) and capture economic rent through creating safe food brand names.

Given a declining agricultural workforce and increasing water scarcity, the second challenge is to facilitate agricultural restructuring towards land-intensive but less water-intensive cropping patterns. Slowness in the process of land consolidation is attributable to legal constraints and government land policy. There are two opposing policy alternatives; i.e. efficiency-oriented, and safety-net oriented. The latter policy aims to maintain the current pattern of small farm size as part of a social protection policy. But if an efficiency-oriented land policy is chosen, the government will have to streamline existing tenancy regulations which are biased against the landowners. The rights to transfer land obtained under the land reform programmes will also have to be reviewed and revamped. Water policy also needs to be redirected from ineffective supply augmentation to demand management. The challenges lie in how newly created market-based institutions for water resource management, at both river-basin and community levels, can be established and implemented. Issues for these institutions include, inter alia, redefining and assigning property rights, pricing, creating a participatory approach to water management systems in the areas of water allocation and maintenance of the distribution system. Improvement in government planning and management of the overall water delivery system is also urgently needed.

The third challenge is to promote professionalism in farming and to provide some social protection for ageing farmers as they leave the occupation. One of the entry barriers facing new professional farmers is the high sunk cost of investment in new farming techniques and establishment of business relations in modern food and agricultural markets. Public research and dissemination of knowledge of new varieties, new production techniques and business opportunities will not only reduce entry barriers but also the search costs of existing farmers.

As an increasing number of young people departs the countryside, leaving an ageing population of farmers, the future care of older farmers becomes a major social concern. There is a need for the community and the government to establish old-age care institutions to complement the eroding system of family security.

The fourth challenge is to enable farmers to fully exploit opportunities arising from the more liberal trading environment and to allow those who are less competitive to adjust their production systems before the new bilateral FTAs and the Doha Round agreement are concluded and implemented. In addition to the need for more public investment in agricultural research and provision of public goods and services, there are still many constraints that will prevent farmers from capturing the benefits of free trade, e.g. water shortage, problems of land rights - only 60 percent of agricultural land has title deeds - natural resource degradation and highly distorted price-support policies. Another immediate issue is the urgent need to design and implement structural adjustment programmes for farmers who currently grow import-competing and temperate zone products. Once the new bilateral FTAs are concluded and the tariff walls are torn down, some of these farmers will have to switch to other crops, while others may have to leave the agriculture sector. Besides alternative packages in an agricultural restructuring system, the government will also need to institute a new integrated rural development policy.

There are at least four important lessons from the experience of market-oriented Thai agriculture. First and foremost, the country's comparative advantage can play its role if the macroeconomic policies are sound and the trade policy is neutral, i.e. the protection regime does not work against agriculture. Sound macroeconomic policies also bring about economic stability, a necessary condition for economic growth. Second, instead of using highly distorted sectoral policies, the government should redirect its effort towards policy measures that aim at tackling market failure and providing public goods and services. The more appropriate forms of intervention are institutions and policy measures that complement, but do not replace, the market mechanism. Third, to tackle the problems of market failure, one has to ensure that the intervention is based upon institutions that mimic the informal institutions that already exist in society. Last but not least, Thailand has successfully reduced poverty incidence and has already surpassed the Millennium Development Goals, thanks to its pro-poor growth policy, i.e. growth benefits both the poor and the non-poor equally. Poverty reduction was made possible first by rapid agricultural growth during 1960 to 1980 and then by the massive boom of the non-agricultural sector, which provided job opportunities for the rural poor. Such job opportunities are very important for land-poor farmers who have to seek supplementary income from non-farm activities. Thus appropriate rural development will not only reduce rural poverty, but will also reduce the rural-urban income gap. In addition, the Doha Round agreements, to cut domestic support and export subsidies and to provide more market access, will increase world agricultural prices, which will, in turn, reduce poverty in the food-exporting developing countries.

1. Introduction

Over the last 45 years, the Thai economy has undergone substantial transformation. In the 1960s and the early 1970s, the agriculture sector, which was the largest sector in terms of GDP share, was the engine of rapid economic growth and provided the main source of foreign exchange earnings for the development of the non-agricultural sector. Although the non-agricultural sector has always grown faster than agriculture (Table 1), growth of manufacturing output began to accelerate during 1986 to 1990, when Japanese firms relocated labour-intensive exporting plants in Thailand. Agricultural growth slowed down and manufactured exports surpassed agricultural exports for the first time in 1985. While financial liberalization helped sustain the growth of the non-agricultural sector in the 1990s, agriculture was adversely affected. Its relatively slow growth and the fall in its share of GDP were partly attributed to the long-term decline in world agricultural prices, particularly the slumps in 1986 and 1992 to 1993. Agriculture's share of GDP dropped sharply from 25.4 percent in the 1970s to 15 percent during 1985 to 1990 and 11.4 percent during 1990 to 1996.

The rapid relative decline of agriculture has been one of the main concerns among policy-makers and economists since the late 1980s (Siamwalla 1996; Coxhead and Plangpraphan 1998). But in the early 2000s, Thai agriculture has faced another difficulty. In addition to the fall in world prices of agricultural products in 1998 to 2000, outbreaks of Avian Influenza (AI), which first appeared in late 2004, have killed 16 people and forced the government to cull more than 30 million chickens; this has severely reduced chicken meat exports. Thailand may never be able to regain its lost export market as there has been no sign that AI can be effectively controlled, let alone eliminated. Moreover, the bilateral FTA with China has begun to affect northern farmers who produce temperate fruits and vegetables. The Thai-Australia FTA is also feared to bankrupt the Thai dairy industry and cattle farms when imports of dairy products and beef are fully liberalized.

To many people, these are signs that agriculture is now a sunset industry. Whether the future of Thai agriculture is bleak or bright is our focus.

Thai agriculture does look resilient. After reaching its nadir at 7.6 percent in 1993, the agricultural share in GDP increased by almost 2 percentage points during 2001 to 2003, thanks to a commodity price boom. The recent surge of oil prices may be another boost for the agriculture sector, partly because the demand for alternative sources of bio-energy produced from agricultural products has also increased. How resilient Thai agriculture really is and how it copes with the problems and constraints are also the main focus of this paper.

This paper will assess the changes in comparative advantage of Thai agriculture. Four main questions will be addressed. First, what explains the decline of Thai agriculture during 1984 to 1995 and the recovery of agricultural growth after the 1997 to 1998 crisis? Second, how has the agriculture sector adjusted its production structure towards new comparative advantage? Third, what are the future prospects of the sector and the challenges it will have to face in more competitive world agricultural markets once important trade barriers are lifted? Finally, what are the lessons from Thailand's experience? The last question is important for those interested in comparative policy studies because the development of Thai agriculture has always been based on market orientation in the context of an open economy.

Part 2 describes the growth and performance of Thai agriculture since 1980. The causes of agricultural malaise during 1984 to 1995 and the revival of agricultural growth after the financial crisis in 1997 to 1998 will also be analysed. Part 3 analyses the consequences of growth on agricultural structure and poverty. The discussion will focus on the changes in cropping patterns towards new comparative advantage. The long-term trend of declining poverty will also be analysed. How Thai agriculture coped with the malaise and how successful the adjustment process has been are the issues discussed in Part 4. Part 5 describes and assesses the role of government policies in its tackling the agricultural malaise and facilitating the restructuring process. In Part 6 we speculate on the opportunities and constraints thrown up by the challenges facing Thai agriculture in the near future and provide some policy implications. The final part summarizes the lessons from Thai agricultural development.

2. Growth and performance of Thai agriculture

Since the 1980s, Thai agriculture has undergone boom and bust periods. In this section we discuss agricultural growth performance after 1980 and analyse the causes of decline and revival. We also argue that despite a reduction in its relative size, agriculture is still vital to the Thai economy.

2.1 Overview of the performance of Thai agriculture

Thailand enjoyed remarkable economic growth until the 1997 economic crisis. The GDP growth rate averaged 6.4 percent per year between 1960 and 2004. In the 1960s and early 1970s, agriculture was the engine of growth, with an annual growth rate of 5.7 percent (Table 1). This increase was mainly due to a massive expansion into previously forested areas. Rapid growth was made possible by public investment in infrastructure and primary education, which enabled the farmers to sell their products at higher farm-gate prices and boosted farm productivity (Siamwalla 1991). Last, but not least, are the conservative fiscal and monetary policies pursued since the early 1960, which generated economic stability over the next two decades (Siamwalla 1991). There were changes in input intensity, the adoption of new technology and a shift towards high-value products.

Table 1. Growth rates of Thai agriculture and other sectors

Notes: ¹ Geometric growth rates of real GDP at 1988 prices are calculated from the regression in semi-logarithmic form.

² Between 1960–1970 and 1999–2004 simple processing activities are included in the manufacturing sector.

Source: Calculated from NESDB, National income.

Thai agriculture continued to grow rapidly in the early 1970s, thanks to the world commodity boom in 1972 to 1974 which mitigated the adverse effect of rising oil prices. Since the prices of most agricultural products remained high, the pace of expansion in land area accelerated. The resulting cassava boom in the Central Plains soon led to water shortages relative to storage capacity.

By the 1980s agriculture had begun to lose its comparative advantage, owing to a cost-price squeeze problem, and growth slowed. In addition to exhaustion of the land frontier, there was a depression of agricultural prices throughout most of the decade, as a consequence of worldwide expansion of agricultural production capacity. The removal of rice export taxes was not enough to insulate farmers from the slump of rice prices, triggering not only massive rural-urban migration but also longer employment in more permanent factory jobs.

Thailand's industrial boom came as a surprise after a decade of economic and political instability in the 1970s and early 1980s (Table 1). Foreign direct investment picked up substantially during the second half of the 1980s, mainly because of the 1985 Plaza Accord agreement among the five advanced countries (G5) that brought about a sharp appreciation of the Japanese yen. As Japanese exports became more expensive, many Japanese manufacturing firms chose to move their labour-intensive plants to low-cost sites elsewhere in Asia. Thailand was the first choice of the Japanese investors because of the availability of cheap educated labour, economic stability and government tax incentives for foreign investors. Manufacturing value added grew at double-digit rates for seven consecutive years from 1987 to 1993.

The comparative advantage of Thai agriculture was further eroded by the asset-price bubble which was generated by financial liberalization in the early 1990s. A huge influx of short-term capital, due to the maintenance of a fixed exchange rate, generated rapid growth in the real estate sector. The manufacturing sector continued to boom mainly because of the expansion of the capital-intensive industries which received maximum tax benefits and protection. The government believed that Thailand could become a newly industrialized country only when it invested in basic industries such as steel, oil refinery, petrochemicals, cement, etc. As will be explained below, the “Dutch disease” effect drew resources away from agriculture. Consequently, its annual growth rate declined to 3.1 percent in 1990 to 1996.

Soon the problems of overinvestment were exposed and speculators began to attack the baht. After exhausting its foreign reserve in a series of defensive actions against the currency speculation, the Bank of Thailand decided to float the baht on 2 July 1997 and enter an IMF programme. The financial crisis, which then spread to other Asian economies, wreaked havoc on the Thai economy as GDP declined by 10.6 percent in 1998. Despite a 45 percent depreciation of the baht and the consequent 30 percent increase in agricultural exports between 1996 and 1998, agricultural GDP nonetheless declined by 0.9 percent in 1997 and 1.5 percent in 1998. This negative growth was due to a combination of three factors: a reduction in world agricultural prices in 1998; the El Niño-induced drought which adversely affected production of upland crops, especially sugar cane, cassava and maize; and the decline of some livestock subsectors and the marine fisheries. Had the first two events not occurred, the agriculture sector should have enjoyed some positive growth.

Since then agricultural growth has picked up, to 4.9 percent between 1998 and 2003, thanks to rapid growth of the world economy. China's rising demand for commodities has been the major factor for causing world agricultural prices to surge upwards, particularly the prices of some traditional Thai exports such as rubber and cassava. Growth was highest in the livestock sector, followed by the crop sector. Fisheries also recovered. But livestock value added fell substantially in 2004 due to the impact of AI on Thai exports of fresh poultry meat. Poapongsakorn (2004) estimates that AI may have reduced agricultural GDP by 2.6–3.0 percent in 2004.

The non-agricultural sector consistently grew at a higher rate than agriculture (Table 1), thanks to a concerted industrialization policy pursued since the First National Economic Plan in 1959. Yet the industrial sector remained small, in terms of both value added and employment, during 1960 to 1980. It was not until 1986 that the manufacturing sector became the main growth driver and the Thai economy was no longer dominated by agriculture.

After three decades of sectoral growth differentials (Table 1), the relative size of agriculture has shrunk drastically. The agricultural share of the GDP fell from 24 percent in the 1960s to 8.5 percent in 1990 to 1996, most remarkably in 1985 to 1996 because of economic boom. The agricultural revival since 1998 has lifted its GDP share to 9.4 percent.

Agricultural employment, on the other hand, declined more slowly. The number of employed persons (aged 15 years and over) in agriculture first began to fall in 1989, but its percentage share of total employment was not overtaken by the non-agricultural sector until the late 1990s (Figure 1b). Yet, compared to other developing countries at a similar level of economic development, Thailand's agricultural workforce has a very large share,¹ at percent in 2004.

Sources: NESDB, National income; NSO, Labour force survey.

Figure 1. Relative size of agriculture

Since the real value of manufactured exports grew much faster than agricultural exports, at 10.6 percent compared to 2.3 percent per annum between 1977 and 1985, the value of agricultural and food exports was overtaken by that of manufactured exports in 1985. Subsequently, the competitiveness of agricultural exports suffered a serious setback, growing at -4 percent per annum during 1985 to 1996. These were the years of industrial boom followed by the asset-price bubble. As a result, the agricultural share of merchandise exports fell continuously from more than 55 percent in the mid-1970s to about 17 percent in the mid-1990s (Figure 1a). Once the crisis was over, agricultural exports registered positive growth (4.6 percent per annum during 1998 to 2004), yet their share of merchandise exports has continued to decline.

The volume of major exports has increased and Thailand has remained one of the top exporters of agricultural products such as sugar, tropical fruit and vegetables, canned pineapple and canned tuna. Despite the fall in the real world prices of rice, rubber and cassava (Figure 2), their export volumes have increased, enabling Thailand to remain the world's largest exporter of these products. This demonstrates that Thailand has strong comparative advantage in agriculture, an issue to be discussed in Parts 3 and 4.

2.2 Sources of growth

The recent revival of agricultural growth and the increased GDP share are signs that Thai agriculture may have successfully acquired a new comparative advantage. As already mentioned, Thailand remains one of the largest global food exporters. Yet Thai people still enjoy a plentiful supply of foods at low prices. The consumer price index (CPI) for food items has increased at 1.29 percent per annum, compared to 3.99 percent per annum for the overall CPI during 1980 to 2004. It is therefore essential to investigate how such a performance has been made possible.

As mentioned above, in 1960–1980 the main contribution to agricultural growth was expansion of land and labour. Since the mid-1980s, the contribution of land has become less important because of the closing of land frontier (Siamwalla 1991). For the 1980 to 1995 period, Tinakorn and Sussangkarn (1998) show that the largest contributor to agricultural growth was capital accumulation, followed by technological progress. The authors estimate that the rate of technological progress, or growth in total factor productivity (TFP) was 0.9 percent between 1981 and 1995, accounting for 25 percent of agricultural growth. The performance of technological development in agriculture is remarkable compared to the non-agricultural sector. Despite the very high growth of the manufacturing sector at about 10.5 percent, compared to the agricultural growth rate of 3.7 percent, during 1981 to 1995, the TFP growth for the manufacturing sector was -0.7 percent.

This study updates the estimates of growth accounting to 2003 (see details in Appendix 1). We have also attempted to break down the growth accounting into three agricultural subsectors. This is the first attempt in the Thai literature on agricultural development. Due to serious data limitation, we could only collect a few important measures of capital stock and land. So the indices of capital and land in three subsectors, i.e. crops, livestock and fisheries, had to be constructed. They are not complete measures but the best available information that we could assemble.

Following the growth accounting method used in Tinakorn and Sussangkarn (1998) and adjusting for land and labour quality, we find that during 1981 to 2003, the largest contributor to agricultural growth was capital accumulation, followed by the growth of TFP. That capital accumulation has been the largest source of agricultural GDP growth should not be surprising. As will be discussed below, the surge in private investment in farm machinery in response to the exodus of young workers from agriculture began in the early 1990s and continued in the early 2000s.

TFP's contribution to the growth of agricultural GDP is about 29 percent when total employment is used as the labour input while its contribution is higher, at 44 percent, if total working hours are used (Table 2). The increased contribution of TFP is due to a sharp decrease in the number of working hours and employed workers from 1993 onwards. The crop sector shows a similar pattern of TFP growth to the whole agriculture sector, although the former has a higher rate of TFP growth and contribution to the GDP. Our estimate of agricultural TFP growth rate for 1981 to 2003 is also higher than the 1980 to 1995 estimates obtained by Tinakorn and Sussangkarn (1998). Arise in TFP in agriculture, particularly in the crop and livestock sectors may be partly due to an increase in the expenditures for research and extension (R&E) in the 1980s and early 1990s. The evidence shows that total annual budget expenditure on R&E as a percentage of agricultural GDP increased from about 1.82 percent in 1988 to 3.43 percent in 1997. Other plausible explanations for the higher TFP include genetic improvements, learning-by-doing of farmers and the introduction of new production technology by contract farming companies to be discussed in Part 4.

Table 2. Growth accounting for GDP growth

Note: TFP is computed as a residual or the growth in output that remains after removing the contributions from the growth in labour (measured by working hours), land and capital.

Source: See Appendix 1.

In the crop subsector, TFP growth is the largest source of value-added growth followed by capital accumulation. One interesting finding is a surge in TFP growth from 2.1 to 2.6 percent per annum in 1981 to 1996 to 5.5 percent per annum in 1998 to 2003. Although the later period is too short to draw firm conclusions, the higher TFP is an indicator of the strong comparative advantage of the crop sector.

Surprisingly, the largest source of livestock growth is labour, implying that livestock activities are labour-intensive. TFP, which was the second largest source of growth, peaked at 6.3 percent per annum in the crisis years of 1997 to 1998, and then declined to 0.5 percent per annum in 1998 to 2003 (Table 2).

For the fishery sector, caution is required when interpreting its TFP growth, owing to the limitation of available information. The average TFP growth in this sector is negative. TFP is also separately estimated for the freshwater fishery and marine fishery sectors because of their different nature. The average TFP growth for marine fishery activities has declined in recent years. Between 1981 and 1995, technical progress averaged 2.59 percent annually compared to an average annual rate of -5.6 percent between 1996 and 2000. Overexploitation leading to depletion of marine fishery resources could be the primary reason. This interpretation is consistent with the fact that capital accumulation constitutes the largest source of growth, followed by the expansion of working hours (Table 2). Negative TFP growth of the freshwater fishery should not be overemphasized given the fact that capital data are poor and there has been an increasing supply of inland aquaculture.

In sum, Thai agriculture still has a major role to play, thanks to the contribution of capital and TFP. The rise in agricultural TFP, particularly in the livestock subsector during 1985 to 1998 and the crop subsector in the postcrisis period reflects agriculture's ability to acquire new comparative advantage, an issue that will be further analysed in Parts 3 and 4.

2.3 Causes of the decline and recovery of agriculture: the Dutch disease²

Siamwalla (1996) discusses three hypotheses to explain the causes of agricultural decline. They include the exhaustion of abundant land, the natural decline of agriculture and Dutch disease. He argues that the evidence seems to support the Dutch disease hypothesis. His findings are supported by Coxhead and Plangpraphan (1998).

The Dutch disease was triggered by two factors: (1) increased foreign investment and financial liberalization which, in turn, fuelled the investment boom, and (2) a decline in the terms of trade. Massive capital inflows, first in the form of foreign direct investment in 1986 to 1991 and then in the form of short-term debt, reduced the relative profitability of agriculture through several channels. First, as foreign capital flowed into the traded manufacturing and the non-traded real estate sectors, the increased income of those who work in these sectors caused the prices of non-traded goods³ to increase. The prices of traded goods, including agricultural products, should remain the same because they are determined in the world market. However, in 1986 and the early 1990s, world agricultural prices did not stay constant but declined sharply (Figure 2). As the real prices of traded and import-competing agricultural products declined (Figure 3), reducing the sector's relative profitability, agricultural resources were transferred into the non-traded and the booming manufacturing sectors.⁴ Moreover, the higher prices of non-traded goods also led to an appreciation of the local currency which, in turn, had additional negative effects on agricultural exports. The real value of food exports fell from 2.3 percent per annum in 1977 to 1985 to -4 percent per annum in 1985 to 1996.

Sources: (1) World Bank, Price prospects for major primary commodities, 1990–2005.
(2) International Monetary Fund, International financial statistics yearbook.

Figure 2. World prices of sugar, maize, rice and rubber from 1950 to 2005
Jan–Sep (at 1990 prices)

The economic crisis that hit Thailand in 1997 put a brake on the agricultural decline. Flotation of the baht resulted in a sharp depreciation and improved the competitiveness of Thai agricultural exports. Domestically, baht prices of traded goods increased. The consequent capital flight forced Thailand to repay its foreign private debt by running a current account surplus. As there was a sharp contraction of the economy, prices of non-traded goods also fell drastically. As the prices of traded goods relative to non-traded goods increased, resources were withdrawn from the non-traded sector. Therefore, the reverse effects of Dutch disease took place. This explains why the real value of agricultural and food exports registered strong growth of 4.6 percent per annum in 1998 to 2004⁵.

a) Traded crops

b) Import-competing crops

c) Non-traded crops

Note: Real prices are based on the 1988 farm price index.

Source: OAE, Agricultural statistics of Thailand.

Figure 3. Farm prices of major commodities, 1985–2002
(baht/kg at 1988 prices)

Probably the most profound impact of the Dutch disease on the agriculture sector was through the labour and land markets, and cropping pattern. First, movement of the workforce out of agriculture accelerated during the boom years. In addition to a fall in the relative profitability of agriculture, the fall in world agricultural prices caused the real agricultural wage rate to increase. When the real wage rate is measured against the agricultural GDP deflator, rather than the CPI, it rose by almost 50 percent between 1980 and 1985 (Figure 4). So the demand for agricultural labour declined. As a result, the agricultural workforce declined by 3.6 million between 1989 and 1995, of which 81.6 percent was men and women aged 15 to 24. About half of them went to school, while about 0.84 million found jobs in the non-agricultural sector. Regardless of the reasons for their movement, Siamwalla (2004) finds that most of these young workers did not return to agriculture when they were older. The decline in agricultural employment was temporarily stopped by the 1997 to 1998 crisis, but has continued since the economic recovery. As most of Thailand's poor are in the agriculture sector, the long-term fall in agricultural employment will have some positive impact on poverty.

Source: NESDB, Bank of Thailand, and NSO, Labour force survey.

Figure 4. Real wage rates of private employees in the agriculture sector and all sectors
Round 3 (August)

The movement of young workers combined with rapid economic growth also caused the rural labour market to tighten and real wages (measured against the CPI in Figure 4) to increase sharply in the early 1990s. Farmers responded in two ways: by hiring illegal immigrants, estimated at more than 0.4 million (Siamwalla 1999), and, more importantly, by adopting less labour-intensive technologies, including the use of pesticide for weeding and other forms of mechanization (Figure 5). Since machinery and labour are substitutes (negative elasticity of demand for labour with respect to agricultural machinery), mechanization diminishes employment opportunities in agriculture in the short term (Coxhead and Plangpraphan 1998). As will be discussed later, this issue had important implications when the crisis broke out in 1997 to 1998. After the crisis, the quantity of agricultural machinery and equipment continued to increase (Figure 5) because real wage rates rose further in 2000 to 2003.

The impact of the economic boom on agricultural land is more complicated. Land per agricultural worker began to decline in the early 1980s, a few years before the industrial boom, owing to closure of the land frontier and the increase in the agricultural workforce (Figures 1 and 6). Siamwalla (1991) argues that this is an important reason for the decreasing comparative advantage of Thai agriculture in the early 1980s. In the boom, planted area started to decline as agricultural land was converted to non-agricultural uses (Figure 6). Introduction of a new series of land-use data in 1992 shows a continuing downward trend, but at a gradual pace. However, the boom had much more impact on the agricultural workforce. The large exodus of farm workers has reversed the declining trend of land per worker since 1990, except in 1997 to 1998 when the crisis forced many laid-off workers in the cities to return to the rural areas. After the economic recovery, land area per worker has jumped sharply due to the large reduction in the number of agricultural workers.

Source: Office of Agricultural Economics, Agricultural statistics of Thailand.

Figure 5. Number of agricultural machines, by type

Note: The new land-use data since 1992 have been based upon satellite maps.
Sources: NSO, Labour force survey; TDRI, Dynamics data base; Office of Agricultural Economics.

Figure 6. Planted area and area per worker

Coxhead and Plangpraphan (1998) developed an econometric model to evaluate the impacts of agricultural and non-agricultural growth on demand for agricultural labour and land. Their estimates confirm that exogenous changes in the non-agricultural sector had relatively large impacts on demand for labour and land, especially in the long term. A 10 percent increase in non-agricultural prices will reduce labour demand by 7.9 percent and land used will fall by 2 percent in the long term. Increases in non-agricultural investment also have a negative effect on demand for land and labour with the respective elasticities of-0.07 and -0.26.

Dutch disease also produced significant impacts on cropping patterns. As not all agricultural products are traded goods, one could expect that the financial bubble would generate higher growth of non-traded agricultural products than that of traded products. Table 3 classifies agricultural products into three groups - traded (or export) products, import-competing products and non-traded products⁶. It confirms that the latter grew faster than the traded crops during 1985–1996, but the growth of import-competing crops was also very high. The main reason is that these products are protected by a high tariff wall. For example, the tariffs for palm oil and coffee are 30 percent and 60 percent respectively.

Table 3. Growth in value added of major crops, livestock and fishery products

Notes: (1) Exportable crops include paddy rice, cassava, kapok, tobacco, sugarcane, maize, sorghum, mung bean, sesame, black pepper, pineapple, rubber and orchids.

(2) Import-competing crops are cotton, kenaf, jute, soybean, garlic, shallots, oil-palm, cocoa, coffee and tea.

(3) Non-traded crops consist of native tobacco, castor bean, groundnut, chilli, bird pepper, vegetables, fruit (except pineapple), coconut, flowers (other than orchids) and other crops.

(4) Traded livestock = import-competing livestock = dairy products and cattle.

(5) Non-traded livestock = buffalo, swine, ducks, chickens and duck eggs.

Source: Calculated from NESDB, National income.

The baht depreciation in 1997 to 1998 reversed the Dutch disease effect, particularly after 1998 when the crisis was over. The growth rate of real agricultural GDP averaged 4.9 percent per annum between 1998 and 2003, rising to an impressive 8.7 percent in 2003. But agricultural output declined by 2.8 percent in 2004, largely due to the impact of the AI outbreak on the poultry sector. Therefore, the average annual growth rate of agricultural GDP was only 3.5 percent for 1998 to 2004.

Both the non-traded and import-competing crops suffered negative growth in 1996 to 1998 as predicted by the reversal of the Dutch disease. The real value of traded exportable crops registered positive, but disappointingly low, growth (Table 3). The positive impact of the baht depreciation was almost offset by the El Niño effect⁷ and the fall in world agricultural prices. In the livestock sector, the swine and ruminant subsectors, which can be classified as non-traded, also had negative growth in 1996 to 1998, as did fisheries (Table 3). The traded poultry sector, particularly chicken, enjoyed a high growth rate, thanks also to bovine spongiform encephalopathy (BSE) in Europe.

While the performance of traded crops was disappointing during the economic recovery, value added of non-traded crops grew at the fastest rate in 1998 to 2004, followed by the import-competing crops. Plausible explanations include growth of the non-traded service sector as a result of budget deficits and expansionary monetary policies to stimulate growth. According to the Dutch disease hypothesis, expansionary macroeconomic policies will increase the prices of non-traded goods relative to traded goods. Secondly, world prices of major Thai agricultural products such as rice and rubber continued to fall until 2001 and 2002. For example, despite the increases in the export quantity of Thailand's top agricultural exports, rice, rubber and sugar, their export values fell by 30.17 billion baht in 1999, accounting for 94.7 percent of the total reduction of agricultural export value. After 2002, however, the rapid growth of China generated a large increase in its demand for raw materials. The prices of rubber and cassava skyrocketed. Yet Thai agriculture seems to be unlucky. In late 2003, there were virulent outbreaks of AI, forcing Thailand to reduce chicken exports from 24.8 billion baht in 2003 to 1.75 billion baht in 2004, a decline of 93 percent. Since then, there have been occasional outbreaks. As a result, broiler and hen production has been forced to downsize substantially and restructure (Poapongsakorn 2004). Finally, in addition to the El Niño drought, Thailand experienced two more droughts between 1999 and 2004. In 2002, the production of most crops declined by 0.5–9 percent, although real value added managed to increase due to higher agricultural prices. A severe drought⁸ in 2004 was also partially responsible for the decline in agricultural output.

One important issue that has drawn much academic attention is the impact of the economic crisis on farm households (Siamwalla and Sobchokchai 1998; Behrman et al. 2001; Bresciani et al. 2002). As argued below, the crisis had both positive and negative impacts on farm household income.

Between 1996 and 1998, the growth rate of farm household real income declined sharply compared to 1986 to 1990 (see Part 4, Table 11). But surprisingly, this growth rate remained positive, at 0.3 percent, despite the fact that the real GDP dropped by more than 10 percent in 1998. There are two reasons. First, the baht depreciation helped increase agricultural exports, which in turn explained why real agricultural GDP declined by only 1.5 percent in 1998. Second, part of the household real income reported in the 1998 socio-economic survey was in fact earned in the last few months of 1997. After 1998, however, farm households suffered two consecutive years of decline in their real income. Their real income only began to increase in 2001 and reached the 1998 level in 2002. The major source of the fall in total farm household income was the reduction of agricultural income. This means that the benefits from baht depreciation were more than offset by the slump in world agricultural prices after the crisis spread to other Asian countries and the El Niño-induced drought. Farm families also saw their wage income and transfer income fall between 1998 and 2000. As these two sources of income accounted for 40 to 45 percent of farm household income, the contraction of the non-agricultural economy had significant adverse effects on farm families for at least three years.

The data for landless farmers are more interesting. Unlike most farmers, their real income fell sharply, by 15.3 percent between 1996 and 1998 (Table 4). As part of the 1998 income was earned in the second half of 1997, this means that the crisis hit the landless workers first. Their two main sources of income, wage and farm income, declined sharply between 1996 and 1998, while all farm households, both landowners and tenants, still enjoyed increasing real incomes from both sources. One explanation is that landless workers also worked in construction. Before the crisis broke out in 1997, the real estate sector had already experienced chronic excess supply with resulting cancellation of construction plans. Siamwalla and Sobchokchai (1998) found that employment in the construction sector began to drop in 1996. Moreover, the farm income of landless families also dropped sharply in 1998. This may be due to a reduction in the demand for hired labour as production fell under the impact of drought.

Table 4. Real income of agricultural households by landholding status*

Note: * Real income is based on 1998 prices.
Source: Calculated from NSO, Socio-economic survey, various years.

Landless workers must have responded to the crisis by becoming more active in searching for jobs because their real wage income increased after 1998. It should also be noted that many farm households responded to the fall in their cash income by stepping up their efforts in activities that increased in-kind income such as hunting and fishing. In 1998 to 1999, in-kind income of all farm households increased by 50 to 150 baht per month (or 11–31.5 percent of real cash income in 1997).

On the input side, the baht depreciation increased the price of imported fertilizer, therefore reducing the quantity of fertilizer imports by 16.5 percent between 1996 and 1998. However, this reduction affected the yields of only a few crops, especially dry-season rice and maize. After 1998, fertilizer imports increased again, as did the yields of most crops.

The fall in farm household real income had a serious effect on ability to repay debts. Consequently, the Bank for Agriculture and Agricultural Cooperatives (BAAC) experienced a sharp increase in loan arrears as the repayment rate of its farmer customers fell from 89 percent in 1996 to 1997 to 64.2 percent in 1998 to 1999. Fortunately, most farmers did not face serious liquidity problems because they still had easy access to the short-term production loans from BAAC. Between 1996 to 1997 and 1998 to 1999, the disbursement of short-term loan and credit lines, which constitute the largest share of BAAC's credit, increased from 67.5 billion to 77.2 billion baht. Moreover, in 2001 the government introduced a three-year Debt Deferment Programme to help mitigate farmers' liquidity problems.

2.4 Natural decline of Thai agriculture or a long-term problem?

Many economists have argued that Thai agriculture is subject to increasing comparative disadvantage and may already be in the sunset stage (Siamwalla 1996), and that the non-agricultural boom in the 1990s has stimulated a pattern of agricultural responses which will be costly to reverse in a different economic climate from that of the 1990s (Coxhead and Plangpraphan 1998). Are the changes in Thai agriculture between the pre- and the postcrisis periods described above consistent with these views?

The evidence given above on agricultural growth during and after the crisis shows that the reverse effects of the Dutch disease, triggered by the currency depreciation and commodity boom, have revived agricultural growth and maintained the relative GDP share of agriculture. The comparative advantage in agriculture has been restored, at least for the medium term. The growth in real value of agricultural exports in the postcrisis period is higher than in 1995 to 1997. If fishery products are excluded, the postcrisis growth rate of agricultural exports is higher than in the bubble years of 1990 to 1997. How Thai agriculture has managed to maintain or increase its comparative advantage in some products will be analysed in Part 3. But this does not mean that we can be complacent. Currency depreciation can only temporarily boost export competitiveness until it is fully offset by the subsequent increases in the relative prices of non-tradables.

Coxhead and Plangpraphan (1998) argue that the rapid transfer of labour out of agriculture and the sharp increase in farm mechanization in the early 1990s may have increased the rigidities in the labour market. First, the investment in migration to the city is irreversible, “By deciding to leave the farm the rural migrants have exercised an option of not staying home and earning a low but certain wage, but invested in the rural-urban move with associated costs (but higher net expected wage gain). Having done so they are unlikely to give up their new situation readily, especially if they continue to believe that a recovery is imminent” (Coxhead and Plangpraphan 1998). Therefore, one would expect urban unemployment to remain high during and after the crisis. Moreover, the exponential growth of investment in labour-replacing farm equipment may make it difficult to create more farm jobs to absorb the returned migrants. So even with open unemployment in urban areas, there is little reverse migration. Does the evidence confirm such a hypothesis?

Table 5 shows that the unemployment rates shot up during the crisis and remained above the long-term average of 2–2.5 percent for several years. The rural unemployment rate rose to almost 5.9 percent in May 1998 and peaked at 6 percent in May 1999. The urban rate in May 1999 was also 2.5 times higher than that at the same time in 1996. It peaked in December 1998 and then tapered off slowly. This high urban unemployment is consistent with Coxhead's hypothesis. But one should remember that the fall in labour demand is the main cause of high unemployment. Further, Behrman et al. (2001) show that the Thai labour markets are not as flexible as those in some other low income countries.⁹

One piece of evidence is, however, contrary to Coxhead's argument. The direction of migration changed during the crisis. In the dry season (round 1 survey), the rate of one-year rural-urban migration dropped by almost 5 percent between 1997 and 1998; while urban-rural migration increased by almost 8 percent. The same pattern is observed for the wet season. Even more interesting is that the one- to five-year rural-urban migration continued to decline until February (round 1) 2000.

As a result of reverse migration, rural unemployment rates surged to 3–5.6 percent in 1998 and remained at a high level until the third quarter of 2001. Most of the unemployed persons were female and young workers who preferred looking for non-agricultural jobs at home than in the cities. Their parents' homes and farms provided a necessary safety net. Although many teenagers possess no agricultural skills, females can contribute to household chores, leaving the physically demanding farm jobs for adult males. Once urban unemployment had dropped to the normal rate by the third quarter of 2000, signalling an increasing demand for labour, these young workers decided to go back to the cities. Agricultural unemployment therefore began to decline in 2001. In effect, Coxhead and Plangpraphan's argument has to be qualified. Many laid-off workers decided to return home because there was no unemployment insurance. Their parents' farms not only provided a safety net, but also a base from which to look for a job, thanks to the ease of travel to the cities on Thailand's good rural road network. The increase in the rural unemployment rate probably helped lessen urban unemployment problems.

Table 5. Unemployment rates by area (percent)

Source: NSO, Labour force survey.

3. Structural change and changing comparative advantage of Thai agriculture

3.1 Structural change at the national level

The decline of agricultural growth caused by the Dutch disease had profound effects on the structure of production and agricultural exports. Such structural changes are the result of efforts made by farmers and agribusinesses in response to the changes in opportunities and constraints. In this section we discuss the production structure resulting, at both national and regional levels, and also address the declining trend of poverty incidence, while the responses of the farm sector will be described in Part 4.

To have a better understanding of the structural changes in Thai agriculture, two initial conditions should be mentioned. First, Thailand has undoubted comparative advantage in agriculture, particularly in staple crops such as rice, rubber, cassava, sugar cane, maize and kenaf. The crop subsector therefore always accounts for the largest share of agricultural value added. Comparative advantage has been shaped by Thailand's plentiful supply of natural resources, particularly of land, and its unique tropical geographic location that is rarely hit by major natural catastrophes. Second, since Thai agriculture has been globalized for more than 150 years, it has to be highly dynamic, quickly responding and adapting to the demands of the world economy (Siamwalla 1992).

Two patterns of structural change in Thai agriculture are easily discernible. First, the GDP shares of all agricultural subsectors, except fisheries have declined (Figure 7) because agriculture has grown at a slower rate than other sectors. Because of the deceleration in growth, the share of crops in agricultural value added dropped by almost 10 percentage points between the 1970s and early 1990s. Since the economic crisis, however, its share has increased, due to currency depreciation and improvement in agricultural prices relative to the unit value of manufactured products. Despite strong growth of value added between 1980 and 1996, the share of livestock in the agricultural GDP declined, and then increased slightly until the outbreaks of AI began in late 2003. Fisheries share of agricultural GDP increased throughout the last four decades, but has declined since 1998.

Source: NESDB, National income.

Figure 7. Share of five agricultural subsectors in agricultural value added, 1960–2004

It should also be noted that figures on the agricultural GDP underestimate the importance of Thai agriculture. Many agricultural products are processed into higher value food and animal feed products, their values being reported in the manufacturing sector. Many of these products are important exports, including modified starch, processed chicken meat, canned fruit and vegetables, sugar, frozen and canned seafood products, processed woods, etc.

Second, the dynamism of Thai agriculture can be observed via the structural changes within the crop subsector. Changes in cropping patterns that can be discerned in Figure 8a include the introduction of new crops along with the disappearance of others and the expansion of high-value crops.

Over 1960 to 2004, many new crops have been introduced and successfully adopted by Thai farmers, including maize, sugar cane, cassava, pineapple and palm oil. But where a newly introduced crop proved unprofitable or there was a more attractive crop, the farmers did not hesitate to drop it. For example, five of the important crops in the 1960s - garlic, onion, tobacco, kenaf and jute - disappeared from the list of top eight products after 1975. On the other hand, cassava became the second largest annual crop in 1975 to 1985 but has suffered a decline since the late 1990s as a consequence of Europe's Common Agricultural Policy reform which has had a negative impact on the demand for cassava pellets. In recent years, however, cassava production has increased in response to higher prices.

Source: NESDB, National income.

Figure 8. Percentage share of crop and livestock value added by product, 1970–2004

Among the traditional staples that are in the list of top eight products in the 2000s, two - rubber and sugar cane - have an increasing share in the crop value added (Figure 8). The latter has been highly protected but it is the regulated high retail price of sugar that is the main incentive for production. Since the late 1990s, sugar-cane production has shifted to the Northeast because of the labour shortage in the Central Plains. The rapid expansion of rubber production took place in the early 1990s when the spread of AIDS led to higher investment in rubber factories for the production of prophylactics. The government has also provided cash subsidies for new rubber plantations, especially in the Northeast.

Although the share of rice in the agricultural GDP has steadily declined (Figure 8), it is still the most important crop. Most of the increases in production have been attributed to expansion of the second rice crop in the early 1980s and the 1990s. The expansion can be explained by increased intensification, multiple cropping and specialization. In addition, some farmers have restructured their rice production towards higher quality rice such as organic and jasmine rice.

Maize remains one of the top eight crops, but with a declining share in value added. Its production has recently declined. After the implementation of the Uruguay Round Agreement on Agriculture, Thailand's actual import of maize has been much higher than its committed tariff quota. The actual in-quota tariff (5 percent) is also lower than the bound rate. As a result, most of the increased demand by domestic feed producers is met by cheaper maize imports. Thus, the area under maize has contracted to more suitable areas that can compete with imported maize. The same phenomenon has been observed for palm oil and soybean production areas.

These structural changes in the crop subsector have clearly shown the ability of Thai farmers to change their cropping pattern in response to opportunities and constraints. In addition, as the production of most major crops, except perennial trees and horticulture, requires little specific capital investment, Thai agriculture, which is dominated by smallholders, easily adapts to changes in incentives.

The share of non-traditional crops, including vegetables, flowers and fruit, has increased rapidly since the 1990s (Figure 8). By 2004, their combined value added was about the same as that of rubber. Domestic demand is the important factor in the expansion of these crops, whose income elasticity is higher than that for traditional crops. In recent years, exports of fruit and vegetables have also increased rapidly, further stimulating their production. Another factor affecting the production of fruit and vegetables is that they are highly perishable and the quality requirements are very strict, especially in foreign markets. To produce high quality and safe products, new technology must be acquired and adopted. Thai farmers have been quick to adopt technology from abroad and some have been pioneers in creating new varieties. As consumers in both foreign and Thai markets are willing to pay higher prices for quality products, Thai farmers have found means to supply the required products.

Although the livestock share of the agricultural GDP declined slightly during 1980–1998, its real value added has increased significantly. Moreover, there has been substantial restructuring within the sector. Within the poultry sector, large-scale chicken production, which first appeared in the 1970s, has almost replaced backyard production. The scaling-up of chicken and layer farms, to be discussed in Part 4, has continued in the 1990s. Such restructuring has been made possible not only by the adoption of new production technology, but, more importantly, by increased demand for poultry products in both domestic and foreign markets. The outbreak of BSE in the mid-1990s also resulted in a temporary increase in European Union demand for Thai chickens.

The same restructuring phenomena have occurred in the swine sector but at a slower pace owing to legal restrictions on slaughtering houses. As swine production is still plagued with the problem of foot-and-mouth disease, the main growth driver is domestic demand.

Another subsector that has experienced rapid growth and increased share in value added is the dairy sector. The high income elasticity of demand for dairy products explains why the share of the dairy sector jumped from 0.4 percent in 1980 to 8 percent in 2003. The growth of this industry has been made possible by continuing government promotional efforts and trade protection (Poapongsakorn et al. 2003). Average farm size has also increased over the last 15 years.

Among the four subsectors, fisheries enjoyed the fastest rate of growth, particularly from 1985 to 1996 (see Table 1), and has become the second largest agricultural subsector since 1990. The expansion has occurred in both the marine and freshwater fisheries: Their annual growth rates in 1980 to 2004 are almost the same, on account of hatchery technology and formulated feed introduced in the 1980s. However, in recent years, value added in marine fishery has experienced negative growth. Marine resources are open-access resources and marine capture fisheries have long been subject to harvesting beyond a sustainable yield. The number of fishing boats, estimated at 58 119 in 2003, far exceeds resource capacity, resulting in a dramatic decline of the yield per hour. Use of destructive fishing methods continues, even in conservation bays.

The Thai fishery structure is dominated by marine fishery. In 2004 total fisheries production was about 3.9 million tonnes, of which 2.65 million (68 percent) came from marine capture fishery and the remainder from coastal aquaculture, inland capture fishery and freshwater aquaculture. Yet in terms of value added, the marine capture fishery was much smaller than that of coastal aquaculture¹⁰. Tonne for tonne, therefore, coastal aquaculture is the most valuable subsector.

After being the world largest producer of cultured shrimp for many years, Thailand has lost its competitiveness recently. Between 1987 and 1995, shrimp production increased from 23 600 to 260 000 tonnes. Subsequently production and exports of shrimp declined, in the case of tiger prawns very severely. Fortunately, shrimp farmers have switched to white shrimps using imported stock. Although they are lower-value products, the yield and net income are higher.

The decline of shrimp production stemmed from three major problems. First, Thai farmers use wild seed stock for their culture. Overfishing has resulted in a serious shortage and poor quality of wild stock. Second, there were recurrent major disease outbreaks resulting from the industry's reliance on wild stocks that had not been bred for disease resistance. Finally, modern intensive practices, used by the smallholders who dominate the shrimp-farming industry, have had adverse environmental impacts. These problems arose from the difficulty of regulating smallholder activities in pond siting, effluent disposal and illegal encroachment on fragile mangrove forests.

3.2 Structural change in agriculture at the regional level

Structural changes at the national level mask differences at the regional level. This section examines the share of the agricultural GDP by region, regional productivity per worker and the extent of regional specialization in certain agricultural activities.

While the relative importance of agriculture has declined in every region, the rate of decline in the sector's share of gross regional product (GRP) differs from region to region. Between 1981 and 2004, the decline was fastest in the Central and the Eastern regions (Figure 9) which have increasing manufacturing activities. Agriculture's share of Eastern GRP began to fall sharply after the development of the Eastern Seaboard in the 1990s. The South (35 percent), North (20.6 percent), Western and Northeast regions (almost 19 percent each) have the largest shares of income from agriculture in GRP. But what is very surprising is that the South is the only region with an increasing share of national agricultural output.¹¹

Each region tends to specialize in certain agricultural activities, depending on its endowments. The North, Northeast and West are highly specialized in crops. The crop share of agricultural value added in the North increased from 74 percent in 1981 to almost 90 percent in 2004. One explanation is that it has the smallest farm household landholdings and may not be suitable for other agricultural activities except vegetables and high value fruit trees. Owing to a plentiful supply of surface water, many farmers can grow several crops in one year. In the Northeast agricultural activities are concentrated in crops (which account for 80.5 percent of agricultural value added) and livestock (16.8 percent). The lowland rain-fed areas are suitable for rice, while the upland areas are used to grow cassava, sugar cane and, until recently, rubber. Grassland areas carry cattle and dairy farms. The West is dominated by upland crops in the upland areas and rice in the irrigated areas. In the South, farmers have become more specialized in rubber, palm and fisheries (Table 6).

Source: NESDB, National income.

Figure 9. Share of GRP by sectors and regions

We can supplement the explanation of regional agricultural income with information on landholdings drawn from the Agricultural Censuses of 1978, 1993 and 2003. Over the 25-year period, the South and the Northeast have become more specialized in agriculture because the percentage of farm holdings that cultivate a single kind of crop has increased (Table 6). Farmers in the South have allocated more land to rubber: Holdings that grow only rubber increased from 24 percent in 1993 to 30.7 percent in 2003. The number of holdings growing only rice or rice and other crops declined sharply, indicating that the region is not suitable for paddy. In the Northeast, the percentage of farm holdings with a single crop increased from 62 percent in 1978 to 75 percent in 2003; almost all of them rice farm holdings.

The North is the only region in which the percentage of holdings growing multiple crops increased, from 34 to 36.8 percent during 1978 to 2003. Most of these farms grow rice and other crops. At the same time, the fruit farmers have become more specialized as the percentage of holdings with only one kind of permanent tree crop increased from 6.2 percent in 1993 to 7.4 percent in 2003 (see Table 6). In the Central Plains, the percentage of single crop holdings has remained virtually the same, but the share of holdings specializing in perennial crops, vegetables and flowers has increased, while that of paddy farms has declined.

Farmers in the Northeast have the lowest agricultural productivity per worker (14 776 baht in 2004), followed by the North (16 249 baht). Bangkok has extremely high worker productivity (721 404 baht), while the South has the second highest worker productivity (54 862 baht). Information on household income from the socio-economic survey (Table 7) shows that during 1986 to 2004, farm households in the Northeast earned an increasing share of their income from non-farm activities. The ratio of farm income to total household income decreased sharply from 66 percent in 1986 to 38 percent in 2004. Surprisingly, southern farm households still earn most of their income from agriculture, as the share of farm income fell marginally from 60–69 percent in 1986 to 1990 to 59–62 percent in 2002 to 2004. This means that farm households in the South engage in more diversified farm activities and have less need for non-farm employment¹². Farmers in the North have the second lowest farm/total household income ratio, implying that agricultural income provides an insufficient livelihood. On the other hand, wage income, most of which is from non-farm activities, has an increasing share in every region and has become the second most important source of income.

Table 6. Number of holdings by type and number of crops cultivated (percent)

Source: NSO, Agicultural census 1993, Inter-censal survey of agriculture 1998.

Table 7. Ratio of farm and wage income of farm households

(percent of total household income)

Note: Total cash income is not included in in-kind income. Part of wage income is the payment to hire agricultural workers, but cannot be separated in the survey data.

Source: Calculated from NSO, Socio-economic survey, various years.

3.3 Effects on exports

Despite the fact that the real export value of most traditional crops declined during 1985 to 1996, rising export volumes offset the decline. Export volumes of rice jumped from a norm of 1.5–2 million tonnes in the 1970s to a norm of five million tonnes in the early 1990s, despite a sharp fall in the real price (Figure 2). The main reason was a drastic reduction of domestic consumption of rice in both urban and rural areas (Siamwalla and Na Ranong 1990; Poapongsakorn 1996). Thailand has also become the largest exporter of rubber, replacing Malaysia in the early 1990s. Volumes exported increased steadily from less than one million tonnes in the 1980s to 1.7 million tonnes in 1994 to 1995 and then jumped to three million tonnes in 2003, due to China's growing demand. Sugar exports also surged from around 2–3 million tonnes in the 1980s to a norm of 3–4 million tonnes. The exceptions were cassava and maize, as already discussed. Frozen chicken exports also increased from less than 150 000 tonnes to more than 300 000 tonnes for the same period. Moreover, processed food exports have become more important, with their share in total food exports increasing from 55 percent in the early 1980s to 64 percent in the early 2000s.

The expansion of export volumes has been attributed to the plentiful supply of land, hitherto the main source of Thailand's comparative advantage in agriculture. Closure of the land frontier, resulting in a decline of land per worker in the mid-1980s, was, however, offset by higher yields. As most of Thailand's major agricultural output is exported, a modest change in farm productivity can boost export levels.¹³ About 90 percent of cassava and rubber outputs are exported, 62–68 percent for sugar, 40 percent for rice and 35 percent for chicken.

Another factor that affects Thailand's comparative advantage is its resource availability and productivity compared to other countries. This issue is outside the scope of this paper. However, it should be noted that Viet Nam, which is one of Thailand's main competitors in the world rice market, has severe resource constraints and its farming practices are far more intensive than in Thailand, which means that it has less room to increase production. Another competitor, the United States, has shifted towards production of medium-grain rice demanded by Japan and Republic of Korea. Finally, since the Malaysian farmers have shifted their rubber planting areas to palm production, Thailand has enjoyed a large increase in exports of rubber. Other developing countries which have obtained World Bank loans to increase rubber production do not yet threaten the Thai position.

Moreover, Thailand's ability to diversify both its types of agricultural exports and their destinations has enabled Thailand to remain competitive in world markets. The share of the top 18 agricultural products fell from 11.8 percent in 1990 to 1994 to 9.96 percent in 2000 to 2005. Export value to Asia as a share of total agricultural exports also declined, from 74.7 to 58 percent in the same period. Yet, export share to some Asian countries, including ASEAN, China and India, increased. A decline in the shares of Asian and European destinations is compensated by the increasing share of exports to the United States and Australia. Finally, the list of the top 18 products as well as their ranks changed from year to year; e.g. two products in the 1994 list were not in the 2000 or 2005 lists; two products in the 2005 list and one in the 2000 list were also new products.

3.4 Impact of agricultural growth on poverty

As a consequence of rapid economic growth over more than four decades, poverty incidence has continuously declined from 57 percent in 1962 to 1963 to 10 percent in 2002 (Tinakorn 2002; and www.info.tdri.or.th).This declining trend was temporarily reversed twice, in 1984 to 1985 and 1998 to 1999 (Figure 10). The decline has been faster in the more developed regions, resulting in an increased poverty differential among regions, especially during the crisis (World Bank 2001). Income inequality, as measured by the Gini coefficient, has been strikingly high, compared to Latin America, although since 1992, it has begun to improve, following the Kuznets hypothesis (Figure 10 and Tinakorn 2002).

Given the huge labour productivity differentials between agricultural and non-agricultural activities, it is not surprising that poverty is highly concentrated in agriculture and thus in the rural areas, particularly in the Northeast and the North. The ups and downs of agriculture will, therefore, have a large impact on poverty.¹⁴ Siamwalla (1996) argues that the sharp decline in poverty incidence from 57 percent in 1962 to 1963 to 23 percent in 1986 was largely due to agricultural growth. But since the deceleration of agricultural growth in the mid-1980s, one would expect overall economic growth rather than farm income to exert more influence on poverty. Changes in agricultural prices also affect poverty incidence. Thus the depression of world agricultural prices was the major factor responsible for the temporary spike in poverty in 1986. Changes in income inequality also affect poverty (Warr 2005; Kakwani and Pernia 2000; Sussangkarn et al. 2002). Advocates of pro-poor growth stress the importance of reducing inequality as a means for reducing poverty.

Source: Poverty incidence from TDRI, based on a new official definition; Gini ratio from NSO.

Figure 10. Poverty incidence (head count) by area and Gini coefficient

This study tests the above hypotheses. One additional hypothesis is also tried, i.e. we expect the movement of agricultural workers into the non-agricultural sector to reduce the poverty incidence because the poverty incidence is highly concentrated in rural areas, and thus in the agriculture sector.

The dependent variable is the logistic transformation of poverty incidence.¹⁵ Some economists suggest that the most appropriate measurement of economic growth is the growth of household real income per capita (Warr 2005). This study uses both the real GDP per capita and household real income per capita from the socio-economic survey.

The results in Table 8 confirm that poverty incidence is negatively correlated with real GDP and agricultural prices, with estimated poverty elasticities of -0.7 to -0.76 for GDP and -0.37 to -0.41 for farm prices. But it is disappointing that household per capita income is not significant. An increase in income inequality also worsens poverty incidence. This result is consistent with the finding of Sussangkarn and Jitsuchon (2002). The ratio of agricultural employment to non-agricultural employment, which is a proxy for the decline in agricultural workforce, is not statistically significant.

In his pro-poor growth study, Warr (2005) decomposes the changes in poverty into three components - the growth component, the inequality component and the residual. He finds that during the rapid growth period (1988–1996), poverty incidence in Thailand declined by 14.38 percent. The economic growth, measured by the changes of real household income per capita, would reduce poverty by 15.84 percent (or 110.1 percent of poverty incidence). But inequality caused poverty to increase by 1.45 percent. The residual is very small (-0.13 percent). His estimate shows that “the increase in inequality over this period, widely considered alarming, lowered the poverty reducing power of growth by about one tenth” (Warr 2005, p. 15). Using a different estimate of pro-poor growth proposed by Kakwani et al. (2004), Jitsuchon (2005) finds that the growth in the 1986 to 2002 period is more or less pro-poor, i.e. both the poor and the non-poor equally benefit from the growth.

Table 8. Poverty incidence regressions, 1986–2004

Dependent variable: Logit transformation of poverty incidence (p) or ln (p/1-p).

Sources: (1) Poverty incidence is from NESDB's new definition. (2) Real GDP per capita from NESDB. (3) Household real income per capita from NSO, Socio-economic survey. Household income is deflated by the consumer price index. (1998 base year). (4) Farm price index from Office of Agricultural Economics. (5) Q1, Q5 are the average income of the first and fifth quintiles. Both Q1 and Q5 and poverty incidence are from TDRI.

Studies of household characteristics find that poor households earn most of their income from agriculture, have small landholdings but relatively large family size and their household heads have a low level of education (Tinakorn 2002; World Bank 2001). Our tabulation of the socio-economic survey data also supports these findings: In the most recent survey, farmers who own land had a lower poverty incidence than tenants, although this has not always been the case. Farmers with smaller landholdings tend to have higher poverty incidence than those with larger landholdings (Figure 11). Moreover, the real household income of farmers who either own or rent land is also higher than that of landless farmers (Table 4), except in the case of those renting or owning a small area: Thus the small landholders are the poorest group (Figure 11). Finally, between 1994 and 2004, the percentage decline of the number of poor farm households (50.6 percent) is higher than that of poor non-agricultural households. This finding is difficult to explain. It may be because there are increasing numbers of poor farm households leaving the farm sector.

Source: NSO, Socio-economic survey.

Figure 11. Poverty incidence by size of landholding

¹ The tentative but plausible explanation is that many workers who have migrated permanently to the cities have left their children with their parents on the farm. The cost of living in the cities is high. Many northeastern migrants still return to help with farm work during the peak planting and harvesting seasons. Moreover, although 97 percent of farm households have their own land, less than 60 percent has title deeds. The other types of land documents provide only usufruct rights. If the owner leaves the land and allows others to occupy the land peacefully for more than one year, he will lose the usufruct rights.

² The discussion draws heavily on Siamwalla (1996) and Coxhead and Plangpraphan (1998).

³ Non-traded goods are goods and services that are not traded in the world market, e.g. barber services, real estate, some locally consumed products whose international trade is less than 5 percent of production. Non-traded agricultural products are listed in Table 3 (notes). Prices of non-traded goods are determined in domestic markets. Between 1988 and 1996, the prices of traded goods relative to those of non-traded goods declined by 30 percent (Siamwalla 2000).

⁴ Despite a decline in the relative price of traded manufacturing products, there was a net resource transfer into the manufacturing sector because there was large increase in foreign direct investment (FDI) in the manufacturing sector.

⁵ Unfortunately, agricultural exports continued to decline in 1996 to 1998 for two reasons, i.e. the decline in world agricultural prices in 1998 and the effects of El Niño-induced drought in 1997 to 1998.

⁶ Products with export or import over 10 percent of production are traded goods, otherwise they are non-traded.

⁷The El Niño-induced drought reduced the average rainfall by 200 mm from the 45-year average, causing production of most upland crops to decline in 1997. Cassava output fell by 14 percent and maize by 15.5 percent, soybean (-6 percent), and sorghum (-30 percent). The effect lasted until 1998 and seriously affected the production of sugar cane (-17 percent) as well as the production of rice (-0.7 percent), soybean (-5 percent), etc.

⁸ The annual rainfall was 1 507.8 mm in 2004, compared to a 45-year average of 1 723.9 mm.

⁹ But their evidence does not relate to the irreversible investment hypothesis. Their estimates show that, contrary to previous studies, the postcrisis wage rate exceeded that of the precrisis rate due to a combination of factors, including reduced hours of work, selective movement from wage to non-wage employment and to unemployment by lower-wage workers.

¹⁰ In 1997, marine capture fishery production was 79 percent of fisheries product, but its real value-added share was only 47 percent. On the other hand, coastal aquaculture production was only 9 percent by volume, but its value-added share was 43 percent. There are no value-added data for the different types of fisheries after 1997.

¹¹ Between 1981 and 2004, the South's share of national agricultural value added increased from 20 to 33.6 percent, while that of the Northeast declined from 32 to 30.8 percent, the North from 22.6 to 16.3 percent and the Central region from 15.8 to 12.8 percent.

¹² Farmers in the South tend to own a few small plots of land suited to a variety of crops. Normally, one plot is paddy, the second and the third may be for rubber, fruit trees or vegetables.

¹³ In the case of rice, the jump in rice export from 1.5 to 2 million tonnes in the 1970s to five million tonnes in the 1990s and to seven million tonnes in the early 2000s is mostly attributed to a sharp reduction of domestic consumption of rice (Poapongsakorn 1996). Improvement in yield was a secondary, but much less important factor.

¹⁴ Using the new definition of poverty, the poverty incidence (head count) was 15.5 percent of the total population in 2002. Rural poverty incidence was 19.7 percent compared to 6.7 percent in urban areas. (www.info.tdri.or.th/ kit_web/123pdf).

¹⁵ The logistic transformation is in (P/(1-P)), where P is poverty incidence with the values between 0 and 1.