COUNTRY CONTEXT THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT A. INTRODUCTION B. RECENT POLITICAL DEVELOPMENTS

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1 COUNTRY CONTEXT Itroductio Recet Political Developmets Recet Ecoomic Developmets Key Poverty ad Iequality Treds Thailad s Developmet Challeges Medium-Term Ecoomic Prospects ad Exteral Developmets

2 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT COUNTRY CONTEXT A. INTRODUCTION This documet 1 provides a framework for a ew ad iovative Thailad-World Bak Group Partership for FY Sice the previous Coutry Assistace Strategy (CAS), formulated at the height of the ecoomic ad fiacial crisis i , the relatioship betwee Thailad ad the World Bak Group has progressed from a borrower-leder relatioship toward a true developmet partership. Fiacial support does remai part of the relatioship, especially for IFC ad MIGA trasactios, but the Bak s role has evolved more toward facilitatig kowledge sharig ad providig policy advice o medium-term structural issues. Buildig o this evolvig approach, the Partership proposed for FY03-05 focuses o diagostic ad moitorig work ad a limited amout of implemetatio support for selected critical issues i Thailad s overall atioal developmet ageda. B. RECENT POLITICAL DEVELOPMENTS At the height of the ecoomic ad fiacial crisis i 1997, Thailad adopted a ew Costitutio, a ladmark i the coutry s political history. Participatory ad iclusive, the ew Costitutio is widely accepted as a People s Costitutio. It reflects the rise of civil society a vocal middle class, a vigorous NGO commuity, ad vibrat busiess iterests ad it sets out a bold visio of Thailad s future, layig the foudatio for a more ope democratic society ad servig as the impetus for major reforms. For the first time i Thai history, the Costitutio establishes a judicial review process idepedet of executive brach cotrol, ehacig the accoutability of govermet ad the protectio of civil liberties. It provides a legal basis for broader public participatio. It establishes costitutioal mechaisms to promote accoutability ad trasparecy. It is also very specific about the rights, liberties, ad welfare of the people icludig geder equality, access to iformatio, educatio ad health, ad evirometal protectio. 1 I light of feedback received from the Thai Govermet ad other stakeholders, this documet will be called the Thailad-World Bak Group Partership for Developmet istead of Coutry Assistace Strategy to reflect the chagig ature of the Bak Group s egagemet i Thailad. A ew Govermet formed i 1997 made sigificat progress i advacig the costitutioal ageda ad restorig macroecoomic stability. Uder the leadership of Democratic Party head Chua Leekpai, goverace reforms progressed with the establishmet of idepedet watchdog istitutios, icludig the Natioal Couter-Corruptio Commissio, the Natioal Electio Commissio, the State Audit Commissio, the Admiistrative Court, ad the Office of the Ombudsma. Furtherig the costitutioal goal o access to educatio, a Educatio Act grated all citizes the right to 12 years of free educatio. The Govermet also helped restore macroecoomic stability ad embarked o a comprehesive structural reform program focused o the fiacial, corporate, ad social sectors. I the 2001 electios, the first uder the provisios of the 1997 Costitutio, the Thai Rak Thai Party, led by Thaksi Shiawatra, wo a ladslide victory. Thai Rak Thai wo the electio o a pro-poor, pro-rural, ad pro-thailad platform ad formed a coalitio govermet with 325 out of 500 seats i Parliamet. The Govermet spet its first year i office puttig ito place its sigature electio programs, icludig more affordable healthcare, support for village fuds to fiace local projects, ad a debt moratorium for farmers. The Govermet has also moved o the goverace ad public sector reform ageda, with a major restructurig of cetral govermet miistries i October It is ow placig more emphasis o some of the other difficult structural reforms. C. RECENT ECONOMIC DEVELOPMENTS Thailad has made commedable progress sice the crisis. Real GDP grew by a average of 3.6 percet a year durig , ad poverty came dow to 13 percet i 2001, from a peak of 15.9 percet i 1999 (Box 1). Thailad has bee highly effective i restorig macroecoomic stability, achievig low iflatio, ad reducig exteral vulerability. Growth rebouded strogly i the first half of Estimated to reach about 4 percet for 2002, it is more tha twice the 1.8 percet registered i 2001 ad will retur real GDP to its level before the crisis. 4

3 Box 1. Summary of Recet Ecoomic Developmets 1. Growth recovery is stregtheig drive maily by cosumptio. 3. Exteral debt is fallig but public debt is risig. Domestic cosumptio has bee the mai driver of growth. A sigificat fiscal stimulus program amoutig to about 2 percet of GDP ad risig cosumer cofidece have supported rural icomes ad raised private cosumptio to over 58 percet of GDP. Private ivestmet, after hittig a low of 11 percet of GDP i 1998, has rise gradually to reach 16 percet this year, but it remais below the average of about 20 percet for Further corporate ad fiacial sector restructurig is still required, ad capacity use, though improvig i several sectors, remais low. Public ivestmet as a share of GDP has bee fallig sice , as recurret spedig o social safety ets ad fiacial restructurig icreased. Thailad has reduced exteral vulerability by preservig its export market share ad lowerig its exteral debt. I sharp cotrast to 2000, export volumes ad export ad tourism receipts grew i 2001, ad total export receipts i 2002 are expected to be more tha 20 percet higher tha i Thailad has also geerated aual curret accout surpluses of aroud 6 percet of GDP to repay debt ad accumulate foreig reserves. Exteral debt et of reserves, havig come dow from 50 percet of GDP i 1998 to 30 percet i 2001, is expected to declie further to aroud 20 percet of GDP by ed-2002, outperformig other coutries i the regio. 5

4 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT COUNTRY CONTEXT However, public debt has icreased, ad the Govermet has iitiated fiscal cosolidatio. The cumulative buildup of public spedig ad fiscal deficits boosted total public debt maily domestic debt to 60 percet of GDP i Nearly two-thirds of the icrease i spedig stemmed from fiacial sector restructurig, with the rest from the costs of social safety ets, the deficits of o-fiacial state eterprises, ad the fiscal stimulus package. As the Govermet s plas for fiscal cosolidatio are implemeted, public debt is expected to stabilize but debt dyamics remai vulerable to lower-tha-expected growth, future fiscal policy, ad state-owed eterprises performace. Corporate idebtedess has falle but still remais high relative to other coutries i the regio. Corporate profitability remais weak, ad the result is a rise i ew ad reetry o-performig loas at a aual rate of aroud 8 percet this year. Large baks are able to geerate profits ad fully provisio, but others cotiue to be uder-provisioed ad uder-capitalized. Total factor productivity growth has begu to recover sice the crisis. Although there is a cyclical compoet i this recovery, structural factors also accout for this turaroud i productivity growth. Recet improvemets i regulatory istitutios ad i the busiess eviromet cotributed to it; this is evidet from the fact that Thailad's global rakig o competitiveess rose i 2001 relative to 2000 ad also from firm-level iformatio, which suggests that the recovery is led by the more efficiet outward-orieted maufacturig sector. D. KEY POVERTY AND INEQUALITY TRENDS Thailad made impressive gais i poverty reductio from the 1980s to the mid-1990s, but poverty icreased with the crisis. Although high ecoomic growth rates pulled the icome poverty icidece dow from 32.6 percet (17.9 millio people) i 1988 to 11.4 percet i 1996 (6.8 millio), the icidece of poverty icreased sharply to 15.9 percet i 1999 (9.9 millio people). Ecoomic recovery sice the crisis has reversed some of this icrease, with icome poverty decliig to 13.0 percet (8.2 millio people) i However, poverty icidece remais above pre-crisis levels, ad a large share of the populatio is clustered aroud the official poverty lie (Box 2). Thailad s poor are cocetrated i rural areas. Nie of every te poor people reside i rural areas, ad the rural Northeast regio is home to two-thirds of Thailad s poor, with a poverty headcout of 28.1 percet i This severe regioal bias is a product of Thailad s uequal growth patter i the past. Durig , Bagkok accouted for more tha 52 percet of the rise i GDP, but oly 11 percet of the icrease i populatio. By cotrast, the Northeast regio accouted for oly 11 percet of the icrease i GDP but 32 percet of the icrease i populatio. Although icome poverty declied over the last two decades, icome iequality icreased. Icome iequality i Thailad rose betwee 1981 ad 1999, with the share of icome of the poorest quitile droppig from 5.4 percet to 3.9 percet, while the share of the richest quitile icreased from 51.5 percet to 58.3 percet. The Gii coefficiet of icome iequality rose from 45.3 i 1981 to 52.5 i I the regio, oly Papua New Guiea, the Philippies, ad Malaysia show higher iequality. Poverty ad iequality take o may shapes i Thailad. Lack of icome is oly oe dimesio of poverty ad iequality, with lack of opportuity, empowermet, access to social services, ad vulerability beig other equally importat aspects. 6

5 The cotiued degradatio of the eviromet ad iadequate atural resource maagemet deprive some of their sus taiable livelihood. As described i the ext sectio, these multi-dimesioal aspects of poverty ad iequality ad measures to address them are a priority for Thailad s atioal ageda. They are also the focus of the Milleium Developmet Goals (MDGs), agreed o by the members of the Uited Natios (UN) to create a eviromet at the atioal ad global levels alike which is coducive to developmet ad the elimiatio of poverty, ad which Thailad iteds to utilize to ehace outcomes- ad impact-based maagemet (Box 3). Box 2. Poverty Measuremet ad Vulerability Thailad s poverty is measured o a icome basis. The official poverty lie i 2000 amouted to 882 Baht, or US$1.60 i 1993 Purchasig Power Parity (PPP). The icome-based poverty headcout is 14.2 percet, while the alterative cosumptio-based idicator is 12.2 percet. Poverty lie for Cosumptio-based Populatio below 2000 headcout (%) poverty lie (millios) PPP$1 a day PPP$1.60 a day PPP$2 a day A large share of the populatio is clustered aroud the official poverty lie. Raisig the poverty lie from PPP$1.60 a day to PPP$2 a day icreases the poverty headcout from 12.2 percet to 35.6 percet ad the umber of poor from 8.9 to 22.2 millio. No matter how the poverty lie is set, poverty i Thailad remais predomiatly rural, cocetrated i the Northeast. Regios PPP$1 a day (%) PPP$1.6 a day (%) PPP$2 a day (%) Headcout Share of poor Headcout Share of poor Headcout Share of poor Bagkok Cetral North Northeast South E. THAILAND S DEVELOPMENT CHALLENGES To address the challeges of growth ad poverty reductio, a comprehesive atioal developmet ageda is beig developed aroud four pillars: Huma ad Social Capital, Competitiveess, Poverty ad Iequality, ad Natural Resources ad Eviromet. Achored i the 1997 Costitutio, this atioal developmet ageda is i lie with the broad objectives of the Nith Ecoomic ad Social Developmet Pla ( ) ad the atioal Poverty Reductio Strategy drafted i Cosultatios with the Govermet ad other stakeholders reveal that sustaied progress o these four pillars will also require improvemets i goverace, as clearly embodied i the Costitutio, ad that effective implemetatio of this ageda should help esure that Thailad cotiues to reduce poverty, icludig i the Northeast. 7

6 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT Thailad s Natioal Ageda i) Huma ad Social Capital COUNTRY CONTEXT The Huma ad Social Capital pillar is critical to realizig faster growth, better quality of life, ad greater social cohesio ad achievig the targets of the Nith Pla ad the MDGs. The Costitutio cotais explicit provisios for access to educatio ad health services, as well as social protectio for the vulerable. Educatio. Thailad is likely to achieve uiversal access to primary educatio as targeted i the MDGs. However, erollmet rates i higher educatio remai low at oly 71 percet for secodary educatio ad 25 percet for tertiary. The equity, efficiecy, ad quality of educatio also remai major issues. I 2001, Thailad was raked 44 th of 49 coutries for its competitiveess i educatio, lower tha other Asia coutries such as Korea, Malaysia, ad the Philippies. 2 Failure to address these issues could result i further deterioratio i Thailad s competitive positio over time, as well as icreased tesio as disparities grow. The Costitutio ad the 1999 Educatio Act are sweepig i their scope with respect to educatio. Their itet is to focus accoutability at the local level (through the establishmet of local educatio authorities ad school boards), itroduce more creativity ad locally-drive iovatio i curricula; move to a learer-cetric teachig model; upgrade the quality of teachers; establish effective quality assurace; ad ehace the use of techology. However, the evisaged admiistrative reforms have prove difficult to implemet, ad overall progress to date has bee limited. Special emphasis should be placed o 2 Source: World Competitiveess Yearbook 2001, Iteratioal Istitute for Maagemet Developmet. The criteria for competitiveess i educatio are comprised of i) total public expediture o educatio, ii) pupil-teacher ratio (primary educatio), iii) pupil-teacher ratio (secodary educatio), iv) secodary school erollmet, v) higher educatio achievemet, vi) educatio assessmet, vii) educatioal system, viii) uiversity educatio, ix) illiteracy of adult over 15 years, x) ecoomic literacy, xi) educatio i fiace, xii) qualified egieers, ad xiii) kowledge trasfer betwee compaies ad uiversities. 3 Uder the 30-baht health policy, all Thais are etitled to receive doctors visits at 30 baht per visit, icludig ay medicatio prescribed. The policy does ot cover procedures such as cosmetic surgery, fertility treatmets, orga trasplats, or treatmet for HIV/AIDS (with the exceptio of treatmet for opportuistic ifectios associated with HIV/AIDS). achievig uiversal secodary educatio; improvig educatioal outcomes, icludig o such critical subjects as sciece ad techology; ehacig educatioal stadards; ad establishig a quality assurace system. It will also be importat to review carefully the balace betwee public ad private provisio of services, the adequacy ad mix of public expeditures, fiacig issues, ad other costraits to achieve higher erollmet. Health. Over the past 30 years, Thailad has achieved remarkable progress i basic healthcare, with sigificat declies i ifat ad materal mortality, ad is projected to meet the MDG goal of further reducig these mortality rates. Health fiacig reform remais a key priority. The public sector fiaces about half of all health expeditures, ad about 75 percet of Thais have access to some form of health beefits. To help provide coverage for the quarter without access, the Govermet itroduced the 30 baht per visit health scheme i 2001, boostig utilizatio rates, but at a sigificat burde to the budget. 3 HIV/AIDS costitutes a importat challege. Although ifectio rates i brothel-based sex workers fell from 31 percet i 1994 to 18 percet by the ed of the decade, the rate 8

7 of ifectios amog wome is icreasig faster tha amog me, idicatig that HIV/AIDS will be a health problem for adults ad childre outside the traditioal higher-risk groups. Particular emphasis eeds to be placed o sustaiig codom use ad lauchig a iitiative to prevet ifectio by ijectig drug users. Esurig access to costeffective treatmet also remais a priority. Social protectio. Thailad s log-trusted mechaism of commuity ad family-based social protectio was tested durig the ecoomic ad fiacial crisis, ad may Thais at the friges of the ecoomy were left without resources to sustai themselves. The mai challege is to put i place formal social protectio mechaisms without displacig these iformal mechaisms that uderpi social cohesio. The mai compoets of Thailad s social protectio strategy iclude labor market policies ad programs, social isurace, ad social assistace. The first two are orieted toward those i the formal sector, ad coverage has bee expaded sigificatly. For example, the old-age pesio system itroduced i 1998 ow covers a estimated 5.7 millio workers, ad a formal uemploymet beefits scheme is plaed. Social assistace schemes are targeted toward oly the vulerable wome, childre, the elderly poor, ad the hadicapped. However, implemetatio has bee difficult, with wide gaps i coverage ad equity. For example, eterprises with fewer tha 10 employees accout for more tha 40 percet of o-govermet wage employmet but are ot covered by ay occupatioal safety ad health legislatio. Upaid family workers ad iformal sector workers are especially vulerable, as protectio uder curret laws is limited this is a geder issue, as 75 percet of the upaid workers ad 80 percet of the iformal workers are wome. Less tha 15 percet of the elderly poor receive social assistace beefits targeted at the elderly, ad oly half the recipiets of the studet loa program come from the bottom three icome quitiles. Overall public spedig favors richer over poorer provices, ad the efficiecy of may programs remais problematic, with sigificat overlaps. ii) Competitiveess Competitiveess, critical to sustaiig higher growth i Thailad, is a high priority for the curret admiistratio. The Govermet has established a Natioal Competitiveess Committee, ad its competitiveess strategy seeks to balace the successful East Asia formula of fiscal disciplie, opeess to trade ad ivestmet, ad export orietatio with a reewed focus o domestic capacity ad likages with domestic firms, icludig small ad medium size ad rural eterprises. Ecoomic maagemet. I additio to maitaiig soud macroecoomic maagemet, Thailad eeds a busiess eviromet coducive to iovatio, etrepreeurship, ad competitio o a level playig field. This requires improvemets i its trade, competitio, ad ivestmet regimes. While Thailad is a relatively ope ecoomy, it iteds to further liberalize its trade regime uder commitmets to the ASEAN Free Trade Agreemet (AFTA) ad its umerous bilateral preferetial trade agreemets. Improvig the trasparecy ad efficiecy of customs admiistratio as part of the Master Pla for Admiistrative Reform of the Customs Departmet is also importat. While the ew Competitio Law improves the overall competitio regime, the istitutioal capacity to eforce the law eeds to be stregtheed alog with public awareess of the rights provided to cosumers by the law. Thailad has bee successful i attractig foreig direct ivestmet (FDI) i some sectors, particularly electroics ad automotive, but efforts ow eed to be focused o maximizig the likages betwee those ivestmets ad the domestic ecoomy ad itegratig FDI more clearly ito the overall competitiveess strategy. I large part, this meas shiftig the strategy of the Board of Ivestmet from attractig fixed capital ivestmet through gratig discretioary tax icetives to focusig o the eablig eviromet, icludig the quality of local suppliers, huma capital, ifrastructure, ad services. 9

8 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT COUNTRY CONTEXT Fiacial ad corporate sector developmet ad legal reform. The 1997 crisis caused a eormous loss for the Thai ecoomy with o-performig loas (NPLs) peakig at 48 percet of total loas ad total costs to taxpayers estimated at over US$33 billio, or 27 percet of 2001 GDP. There has bee a gradual shift toward greater market disciplie of baks ad firms ad toward a more balaced fiacial system, with capital markets, istitutioal ivestors, ad o-bak fiacial istitutios playig a more equal role, reducig the cocetratio of risk i baks ad loas. These gradual chages will spread risks, reduce the likelihood of asset bubbles, ad better allocate fudig to the most productive uses. Although the directio for reform is clear, the speed of implemetatio has bee mixed, i part due to cocers about re-pricig ad reallocatig assets while the ecoomy is still recoverig from the crisis. Further structural reforms should provide competitive icetives which reward restructurig, re-capitalizatio, disclosure, good corporate goverace, ad risk-based pricig. A stroger legal regime, especially i terms of ecoomic laws ad streamlied judicial procedures, would build cofidece that disputes will be resolved expeditiously. Full implemetatio of iteratioal accoutig stadards ad prudetial regulatios would attract capital ito baks ad firms, while tax chages would promote mergers ad better allocatio of risk through securitizatio ad derivatives trasactios. Fially, a measured trasitio to a limited deposit isurace program would reduce the moral hazard from a bak-domiated system with a high proportio of operformig loas ad blaket deposit isurace. Ifrastructure. Although the private sector has a sizable ivolvemet i ifrastructure, state ivestmets domiate. Markets are ot yet ope for effective private participatio ad competitio, ad iadequate ecoomic regulatios cotiue to hider private participatio. I additio, poor ifrastructure i remote regios particularly for trasport has raised logistical costs ad costraied rural busiess opportuities. The Govermet has begu to address these structural weakesses. A master pla adopted i 1999 aims to separate the policy, regulatory, maagemet, ad operatig fuctios of the ifrastructure sub-sectors (icludig trasport, telecommuicatios, eergy, ad utilities). The reform effort culmiated i major realigmets of state agecies i The Govermet also iteds to establish a idepedet regulatory regime i each sub-sector. The goals are to improve goverace, promote private participatio i telecommuicatios ad utilities, stregthe multi-modal trasport likages, ad improve road ad waterway accessibility i remote regios. Thailad must cotiue to implemet this ambitious ageda, as well as focus o state eterprise reform ad capacity buildig for regulatory agecies ad ew lie miistries. Kowledge ecoomy ad iovatio. While Thailad s rapid ecoomic growth i the years precedig the crisis was drive largely by capital accumulatio, policymakers uderstad that future growth will deped largely o productivity gais icreasig the capabilities of firms to iovate ad the skills of Thailad s workforce to produce higher value products. While Thailad ejoys importat assets, such as ecoomic opeess, relatively flexible labor policies, a substatial presece of multiatioals, ad rich local wisdom ad culture, the challeges are substatial. Thai firms face a bureaucratic public service ad a system of public istitutios ad research uiversities that are see as uresposive to market eeds. I additio, Thailad produces a small umber of egieers ad scietists relative to regioal competitors. This cotributed to research ad developmet spedig of just 0.13 percet of GDP i 1997, half the level of Malaysia, ad just oetwetieth the level of Korea. Corporate goverace practices have bee slow to evolve, with miority shareholders ot empowered to play a strategic 10

9 oversight role. Perhaps more importatly, a lack of iter-firm collaboratio, alliaces, mergers ad kowledge sharig has preveted a effective respose to the pressig quality ad cost stadards that characterize high-value opportuities. The Thai Govermet, like Korea, Sigapore, Malaysia, ad several others, sees ICT as a etryway to a visio of a kowledge-based society, ad substatial research supports this view. However, without rapid progress i buildig core skills ad improvig the busiess eviromet, firms will have either the capabilities or the icetive to actually leverage ICT. Without parallel reforms i telecommuicatios policy, large gaps i iformatio access betwee rural ad urba Thais, larger ad smaller firms, is likely to persist. Give the complex, cross-cuttig ageda which by its ature requires public-private partership to be successful, the immediate challege is to establish the leadership ad goverace framework that ca help prioritize reforms ad facilitate parterships across govermet, civil society, ad the private sector. Strategic thrusts for the real sectors. The Govermet s competitiveess strategy emphasizes sectors i which the coutry is perceived to have a comparative advatage: agriculture ad agro-processig, textiles ad fashio, tourism, software, ad automotive. The Govermet is also stressig the importace of shiftig the competitive paradigm i agriculture, idustry, ad services toward value creatio, product differetiatio, customizatio, market positioig, ad cluster developmet. Greater uderstadig of sectoral coditios ad opportuities icludig supply chai likages, techological capabilities, ad clusters ca ehace Thailad s competitiveess, but it will also be importat that the Govermet avoid the temptatio of pickig wiers ad cotiue to maitai a level playig field for all eterprises, domestic ad foreig. Successful promotio of small ad medium size eterprises (SMEs) which accout for more tha 94 percet of firms, half of idustrial employmet, ad the majority of service employmet will also require that the uderlyig structural weakesses facig SMEs, icludig huma iii) capital, techological, ad regulatory issues, be effectively addressed alog with their fiacig costraits. Poverty ad Iequality Reducig poverty ad iequality remais cetral to the Govermet s atioal ageda. Poverty ad iequality feature promietly i the Nith Pla ad the atioal Poverty Reductio Strategy, which recogize that improvemets i huma ad social capital, ehaced competitiveess ad growth, ad progress o the eviromet are all critical to poverty reductio, as captured by the MDGs. Uderstadig poverty. I the post-crisis eviromet, the problem of poverty has take o ew characteristics, ad better uderstadig of poverty dyamics ad the chagig profile of the poor is eeded to stregthe the foudatio for atipoverty strategies i Thailad. The Govermet has bee ehacig the poverty database, which ca greatly assist i aalyzig poverty ad the impact of public programs ad policies. Importat iitiatives are developig a atioal poverty map, improvig the socio-ecoomic survey, ad establishig a poverty moitorig system. Further work is eeded to improve the geder disaggregatio of poverty data ad to develop a uderstadig of the liks betwee geder equality ad poverty reductio. It will also be importat to look more broadly at the rage ad quality of data curretly collected ad at its adequacy i relatio to the overall growth ad poverty reductio challege. 11

10 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT COUNTRY CONTEXT Balaced developmet. Thailad has ot made progress i lowerig iequality. Icome iequality is icreasig, ad regioal iequality remais high. The mea per capita icome i Bagkok is more tha four times that of the Northeast. To address these issues, the Nith Pla emphasizes sustaiable ad balaced rural ad urba developmet. It focuses o empowerig commuity orgaizatios ad civil society, decetralizig decisio-makig power ad resources, promotig geder equality, developig border provices as ecoomic gateways, ad providig greater access to sources of iformatio ad kowledge for outlyig regios. Such measures will eed to be accompaied by a sigificat reallocatio ad improved targetig of govermet expeditures. Because educatio has the highest explaatory power i accoutig for iterpersoal ad regioal variatios i icome ad iequality, lowerig iequality will require addressig educatioal access ad quality. Targeted programs. Thailad has a large umber of ati-poverty programs i place, ad the Govermet recetly itroduced additioal programs, such as the three-year debt moratorium for farmers ad the village fud program. If well-targeted ad effectively implemeted, these programs ca be a importat supplemet to broader strategies for growth ad poverty reductio. However, better data, moitorig, ad evaluatio will be eeded. iv) Natural Resources ad the Eviromet Maagemet of atural resources ad the eviromet, overlooked durig the high growth years, will eed to become a higher priority. Cosultatios with stakeholders have cosistetly idetified atural resources ad the eviromet as requirig urget attetio. Cotiuig evirometal degradatio, likely to aggravate coflicts over the use of atural resources, could udermie Thailad s social cohesio. Improvig evirometal quality. Thailad s ecoomic expasio has bee accompaied by sigificat evirometal costs. Rapid expasio of idustry ad icreasig populatio, especially i urba areas, has rapidly icreased the levels of pollutio (solid ad hazardous waste, air, oise, ad water). Fie particles i Bagkok s air exceed stadards by 2.5 times, ad river water i the cetral, souther, ad easter regios is of poor quality. The resultig risks to huma health are high. Thailad eeds to focus o more effective eforcemet of evirometal laws; stroger istitutioal capacity, both atioal ad local; ad icreased ivestmets i pollutio prevetio ad cotrol, with private sector participatio. Sustaiig atural resources. Lad coversio, slashad-bur agriculture, ad itese exploitatio of water have led to rapid deterioratio of atural resources. Forest cover fell drastically from 53 percet i 1961 to 25 percet i 1998, ad overharvestig of marie fisheries has reduced fishig yields by 90 percet. Of particular cocer is water scarcity, which occurs agaist a backdrop of low availability, high pollutio, ad icreasig per capita cosumptio. Thailad raks the lowest i Asia for aual per capita water availability, but it raks 14 th i the world i idustrial orgaic water pollutio. To better balace coservatio ad exploitatio of atural resources, the Govermet recetly established a ew Miistry of Natural Resources ad Eviromet. The Miistry s immediate challeges are to esure a itegrated approach to sustaiable resource maagemet, elimiate harmful subsidies (such as excessive use of pesticides ad overfishig), ad assist i the capacity buildig of local istitutios ad commuities. As the Costitutio grats local owership of eviromet ad atural resources ad promotes commuity ivolvemet i their maagemet, appropriate icetives (such as lad teure, water rights, village forest maagemet) ad capacity buildig are eeded to create opportuities for commuities to parter with local govermets to fid solutios. Evirometal commos. Thailad is a sigatory to may iteratioal ad regioal treaties, such as the Motreal ad Kyoto Protocols ad the Regioal 12

11 Haze Actio Pla. It also shares the biologically rich Mekog River with Cambodia, Chia, Lao PDR, Myamar, ad Vietam. It therefore has a itrisic iterest i participatig i regioal ad global iitiatives. Goig forward, the challege will be to deepe regioal cooperatio ad to parter with eighborig coutries o iitiatives such as the itegrated maagemet of the Mekog River. v) Goverace Progress o goverace is recogized as critical for achievig sustaied progress uder the four pillars of the developmet ageda. Progress o goverace is required at all levels: the public ad private sectors, ad civil society. Effectiveess of atioal public sector istitutios. The crisis highlighted cocers about the performace of the public sector, whose role, orgaizatio, ad processes eed a overhaul. The Thai civil service has bee overstaffed ad uderpaid, ad the orgaizatioal culture has ot rewarded performace or service. Expediture maagemet has bee characterized by weak likages amog plaig, budgetig, ad sectoral policy; lack of medium-term fiscal plaig; ad weak moitorig ad evaluatio of expeditures. To address these issues, Thailad developed a Public Sector Maagemet Reform Pla i Govermet commitmet i this area is high, as witessed by the recet passage of two public sector reform laws the Public Admiistratio Act ad the Miisterial Restructurig Act ad the impedig passage of the Budget Procedures Act, Fiacial Maagemet ad Accoutig Act, ad Public Debt Maagemet Act. Together, these laws provide a sigificat opportuity to improve public sector performace. The success of reforms will hige upo the details of their implemetatio, particularly o the careful coordiatio of expeditures ad decetralizatio. Local govermet ad decetralizatio. Thailad is a highly cetralized coutry. I 2001, the cetral govermet spet 91 percet of total expeditures ad collected 97 percet of taxes, ad oly 3 percet of local govermet reveues were locally collected ad retaied. The cetral govermet has also appoited most local officials, determied local govermet salaries, ad approved local budgets. The ew Costitutio emphasizes decetralizatio, with the Decetralizatio Act (1999), the Decetralizatio Master Pla (2000), ad the Decetralizatio Actio Pla (2002) providig the impetus. Some fuctios have begu to be devolved to local govermets, ad the share of local govermet reveue is slated to icrease from 20 percet i FY01 to 35 percet i FY06. However, may issues remai to be resolved. Fiscal trasfers are ot based o trasparet formulas ad hece are upredictable. The devolutio of reveues, fuctios, ad persoel has ot bee itegrated, ad very few persoel have bee trasferred to the local level. Furthermore, local govermet capacity is extremely limited ad may local govermets are of isufficiet scale, which could affect service delivery. Without a clear framework for addressig these issues, the move to decetralizatio poses substatial fiscal ad other risks. Trasparecy ad ati-corruptio. Corruptio remais problematic. Accordig to a corruptio perceptio survey i 2000, about 80 percet of Thai firms surveyed pay for services from govermet agecies that hadle trasactios. 4 The Costitutio ad the Official Iformatio Act (1997) aim to improve trasparecy ad accoutability by empowerig the public to moitor public policies ad public actios ad by establishig idepedet oversight bodies. These ew bodies will require sufficiet fiacial ad techical resources ad idepedece to carry out their madated fuctios effectively. Sustaied commitmet at the highest levels is eeded to achieve substatial progress. 4 Survey results preseted i Poapogsakor, Nipo et al., Ati-Corruptio Strategy i Thailad i the Year 2000, November This publicatio was prepared for the Thailad Developmet Research Istitute 2000 Year-Ed Coferece. 13

12 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT Pla ( ) as a framework for actio. Additioal measures eeded iclude developig a geder-disaggregated database to facilitate policymakig, icreasig awareess ad uderstadig of geder issues amog officials ad the public, ad eforcig equal rights ad opportuities. Thailad s Developmet Challeges i a Regioal Cotext Public participatio. Traditioally, public participatio has bee limited. Through various articles, the Costitutio has improved the eviromet for public participatio ad grated greater roles ad resposibilities for citizes i public policy desig ad implemetatio. As a result, greater civic participatio has slowly bee accepted as commo i may govermet agecies, ad civil society has become much stroger ad active i that process. Despite this positive developmet, the public s a bility to participate is limited by a lack of uderstadig of the respective duties, rights, ad resposibilities of govermet agecies ad the public ad by poor access to iformatio. I additio, some agecies do ot yet recogize why participatio is beeficial ad how it ca be carried out meaigfully. Capacity buildig for civic groups ad other stakeholders icludig some govermet agecies ad formal mechaisms for public participatio i policy formulatio, program implemetatio, ad moitorig are eeded. Thailad actively supports ad cotributes to regioal iitiatives aimed at ecoomic cooperatio, icludig the Asia-Pacific Ecoomic Cooperatio (APEC) Forum, the Associatio of South-East Asia Natios (ASEAN), ad ASEAN Plus Three (ASEAN plus Chia, Japa, ad Korea). The Iitiative for ASEAN Itegratio, for example, seeks to adopt commo policies o trade ad ivestmet ad meet the requiremets for AFTA. Thailad also participates i the Greater Mekog Subregio (GMS) Program ad the Mekog River Commissio (MRC), iitiatives which are ow beig strogly supported by the cocered govermets ad are cotributig sigificatly to the developmet of the GMS. Thailad is i a good positio to cotribute to ad beefit from such regioal public goods. Give the myriad, ogoig reform efforts i the regio, there is also substatial scope for trilateral cooperatio to share lessos ad experieces. COUNTRY CONTEXT Geder equality. Iequality of participatio ad represetatio of wome is evidet i a variety of areas beyod ecoomic participatio. I the latest parliametary electio, wome accouted for oly 9 percet of the represetatives elected i 2001 ad for oly 21 of the 200 elected Seators. The represetatio of wome i the civil service is also low, at about 18 percet i the upper raks ad oly 4 percet at the highest level. Geder equality is oe of the mai teets of the Costitutio, ad the Govermet has edorsed a ew Wome s Developmet 14

13 Box 3. Milleium Developmet Goals: Summary of Thailad s Progress Goal 1: Eradicate extreme poverty ad huger Target 1: Halve the proportio of people whose icome is less tha oe dollar a day betwee 1990 ad 2015 Target 2: Halve the proportio of people who suffer from huger betwee 1990 ad 2015 Headcout poverty ratio (%) Percetage share of icome/cosumptio held by poorest 20% The umber of poor is decliig, but Thailad s poverty rate of 14.2% i 2000 is 3 percetage poits above the pre-crisis level. It is very likely that all regios will halve poverty by 2015, but some localities may ot be able to achieve this goal. Iequality is also problematic as the percetage share of icome accruig to the poorest quitile decreased from 4.2% i 1990 to 3.9% i Goal 2: Achieve uiversal primary educatio Target 3: Esure that by 2015, childre everywhere boys ad girls alike will be able to complete a full course of primary schoolig Gross primary erollmet ratio Youth literacy rate (% ages 15-24) Uiversal gross primary erollmet has bee achieved, while et uiversal primary rate is also likely to be achieved. Erollmet i both secodary ad tertiary educatio is aticipated to pick up as the reform program, which aims to achieve uiversal secodary erollmet, progresses. Uiversal primary erollmet at the regioal level should be achieved by However, hill tribes may ot be able to attai this goal. Goal 3: Promote geder equality ad empower wome Target 4: Elimiate geder disparity i primary ad secodary educatio preferably by 2005, ad to all levels of educatio o later tha 2015 Ratio of girls to boys i primary ad secodary educatio Ratio of youg literate females to males Share of wome employed i the oagricultural sector (%) Proportio of seats held by wome i atioal parliamet 2.8 (1988) 9.2 (2001) Good overall progress is beig made at all levels. The literacy rate of elderly wome remais low ad iformal educatio opportuities could bridge this gap. Although wome s participatio i politics has bee quite limited, the umber of wome i the Parliamet is icreasig. Note: Oly MDG idicators with data for both 1990 ad 2000 are icluded here for illustrative purpose. Source: Based o the Natioal Workshop o the Relevace ad Applicatio of MDGs i Thailad, August 2002, coveed by the Natioal Ecoomic ad Social Developmet Board, UNDP ad the World Bak. 15

14 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT Box 3. Milleium Developmet Goals: Summary of Thailad s Progress (Cotiued) Goal 4: Reduce child mortality Target 5: Reduce by two-thirds the uder five-mortality rate betwee 1990 ad Uder 5 mortality rate (per 1,000) Ifat mortality rate (per 1,000 live births) Immuizatio, measles Good progress has bee made at the atioal level, but attetio eeds to be give to hill tribes ad adolescet mothers for whom access to social services is a major issue. To achieve the MDG target, the rate will have to be lowered to 27 per 1,000. Goal 5: Improve materal health Target 6: Reduce by three-quarters the materal mortality ratio betwee 1990 ad Materal mortality ratio (per 100,000 live births) Materal mortality cotiues to declie, but hill tribes ad adolescet mothers are likely to be vulerable as access to social services is limited ad greater awareess raisig is eeded. Goal 6: Combat HIV/AIDS, malaria ad other diseases Target 7: Have halted ad begu to reverse the spread of HIV/AIDS by 2015 Target 8: Have halted ad begu to reverse the icidece of malaria ad other major disease by Prevalece of HIV amog pregat wome (% ages 15-24) The umber of HIV-ifected wome is o the rise, resultig i a icrease i mother-to-child trasmissio. The existig prevetio programs are oly stabilizig the trasmissio but ot slowig it dow. The vulerable groups iclude fisherme, youth ad adolescets, hill tribes, ijectig drug users ad costructio workers. Deaths due to tuberculosis have falle by early 30 percet betwee 1985 ad 1997, while iformatio o malaria remais sketchy. COUNTRY CONTEXT Goal 7: Esure evirometal sustaiability Target 9: Itegrate the priciples of sustaiable developmet ito coutry policies ad programs ad reverse the losses of evirometal resources Forest area (% of total lad area) Natioally protected areas (% of total lad area) Access to improved water source (% of populatio) Access to improved saitatio (% of populatio) The access to water source idicator is likely to be achieved, but risig water pollutio levels cotiue to threate the viability of freshwater sources ad could setback the achievemets. Air quality i Bagkok, water quality i major rivers, ad deforestatio are major evirometal problems. Note: Oly MDG idicators with data for both 1990 ad 2000 are icluded here for illustrative purpose. Source: Based o the Natioal Workshop o the Relevace ad Applicatio of MDGs i Thailad, August 2002, coveed by the Natioal Ecoomic ad Social Developmet Board, UNDP ad the World Bak. 16

15 Thailad ad the Milleium Developmet Goals The Govermet has traditioally used the five-yearly atioal ecoomic ad social developmet plas to establish broad targets for achievig its priorities. However, these targets have mostly bee reflected i iput ad output idicators, with little attetio paid to results measuremet. Prompted by a more outcomes-focused desig of the Nith Pla, the Govermet is ow shiftig to a more outcomes- ad impact-based system for allocatig resources ad assessig progress, ad i this cotext, is carefully reviewig how best to utilize the MDGs. O a aggregate basis, Thailad is likely to meet most of the MDGs ad ideed has already met several (Box 3). However, for some idicators icludig materal ad child mortality, commuicable diseases, ad eviromet the MDGs may ot be achieved, especially for specific regios ad subpopulatios. To better track developmets at the disaggregated level, the Govermet is ow developig a ehaced MDG+ approach which will disaggregate the MDGs by regioal ad subpopulatio groups ad which will be itegrated ito its atioal plaig, moitorig, ad evaluatio framework. F. MEDIUM-TERM ECONOMIC PROSPECTS AND EXTERNAL DEVELOPMENTS Thailad is expected to grow at aroud 4 percet a year ad attai its poverty reductio targets (Table 1). Thailad s medium-term prospects for growth ad poverty reductio deped o the speed ad depth of structural reform ad fiscal cosolidatio. Aual growth rates of aroud 4 percet are the likely base case over the ext three years, give the coutry s atioal developmet ageda ad the expected global ecoomic recovery. Uder the base case sceario, export growth is projected to icrease, ad private ivestmet to rise gradually, but still remai sigificatly lower tha durig However, if a acceleratio i reforms boosts private ivestmet ad total factor productivity, growth could reach percet a year. Table 1. Medium-Term Base Case (actual) (est.) (proj.) (proj.) (proj.) Poverty (% livig o less tha US$1.60 per day) GDP growth (%) Curret accout (% of GDP) Public sector balace (% of GDP) Iflatio (%) The Nith Pla target of poverty reductio for ed-2005 is expected to be achieved, provided the degree of icome iequality i the coutry remais stable over this period. The target could be exceeded if growth is higher. However, this projectio is cotiget o policies that ot oly support sustaied growth but also esure a more vigorous participatio of the poorer Northeast i that growth so overall icome iequality does ot rise. The projected global recovery will eable export growth rates of aroud 6 percet a year. Although most aalysts have recetly revised their 2003 growth forecasts dowward for 17

16 THAILAND - WORLD BANK GROUP PARTNERSHIP FOR DEVELOPMENT COUNTRY CONTEXT high-icome ecoomies, all forecasts show sigificat recovery i global growth, trade volumes, ad commodity prices. With domestic policies becomig more favorable for improved competitiveess, it will be possible for Thailad s export growth rates to icrease ad be sustaied over the ext three years. Chia s WTO accessio provides export opportuities to Thailad, eve as it poses ew challeges i thirdcoutry markets. There is cosiderable scope for icreasig exports to a more ope Chia, as evideced by the very large icreases i exports from the Philippies, Malaysia, Sigapore, Korea, Thailad, Idoesia, ad Vietam to Chia i the first half of These exports iclude ot oly lad-itesive products like sugar, oil seeds, ad wood products but also high-tech products as iputs ito Chiese high-tech exports. I third-coutry markets, there is strog Chiese competitio particularly i garmets ad textiles although the impact has bee limited so far. The recetly iitiated fiscal cosolidatio will reduce fiscal risks but also reduce public ivestmet. The Govermet plas to reduce the public sector deficit to about 2 percet of GDP by 2005 ad to zero by 2008, i lie with the aim of cappig public debt at 65 percet of GDP ad debt servicig at 16 percet of govermet expeditures. As this will ivolve fiscal cosolidatio as well as a focus o reveue measures, the challege is to esure that roads, educatio, ad health all sufferig sigificat cuts i public ivestmet after the crisis receive a larger share of the ivestmets to maitai ad improve them. Most of the deficit ca be fiaced domestically, but some exteral fiacig is likely. I 2001, the public sector deficit ad curret accout surplus were fuded by a excess of private savigs over private ivestmet of aroud 9 percet of GDP. As private cosumptio ad ivestmet grow, this excess of private savigs will declie over the ext three years, ad exteral fiacig of some of the public sector deficit might the be eeded. Thailad s medium-term ecoomic prospects face risks i three areas: Fiscal cosolidatio may ot progress as plaed, ad public debt dyamics could become ufavorable. The Govermet is makig every effort to cosolidate the fiscal situatio ad to maage debt judiciously. However, if reveue measures geerate less collectio tha expected ad expediture reductio turs out to be more difficult because of higher state eterprise deficits or higher local govermet spedig due to decetralizatio, the public sector deficit could be higher tha curretly projected. I additio, ufuded cotiget liabilities could tur out to be higher tha estimated, ad growth could slow due to slow implemetatio of the developmet ageda or a precipitous deterioratio i the exteral eviromet. All these factors could worse the public debt dyamics. Mitigatio of these risks will require a pace of decetralizatio cosistet with improvemets i local admiistrative capacity, close moitorig of fiscal developmets, ad a willigess to react quickly to the possibility of sigificat deterioratio i fiscal ad public debt variables. The exteral ecoomic eviromet could worse sharply o several frots. Busiess ad cosumer cofidece i high-icome ecoomies could worse more tha curretly projected, reducig export demad. Further icidets of terrorism i the regio could sharply lower tourism receipts. The risig tesios i the Middle East could also push oil prices to ew heights over a sustaied period, geeratig a major terms of trade shock. Ay of these three exteral factors aloe would ot sigificatly affect the base case growth sceario, but if they occur together, growth i Thailad could be sigificatly lower tha ow projected. Structural reforms to improve the busiess eviromet ad restructure the fiacial ad corporate sectors could slow. Give the Govermet s growig commitmet to medium-term reforms ad to sustaied growth ad poverty reductio, this risk is see as low. However, the risk of a more gradual pace of some key reforms caot be elimiated. 18