Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A STRUCTURAL ADJUSTMENT LOAN TO THE KINGDOM OF THAILAND February 8, 1982 FILE COPY Report No. P-3201-TH { This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Thai Baht (B) B 1 = $0.043 B 1 million = $43,478 $1.00 = B 23 ACRONYMS AND ABBREVIATIONS BAAC - Bank for Agriculture and Agricultural Cooperatives BOI - Board of Investment IFCT - Industrial Finance Corporation of Thailand MOAC - Ministry of Agriculture and Cooperatives NEA - National Energy Administration NESDB - National Economic and Social Development Board STK - Sor Tor Kor ("right to farm" certificates) SAL - Structural Adjustment Loan ROYAL THAI GOVERNMENT FISCAL YEAR October 1 - September 30

3 FOR OFFICIAL USE ONLY KINGDOM OF THAILAND STRUCTURAL ADJUSTMENT LOAN Table of Contents Page No. ----Loan Summary PART I - THE ECONOMY A. Recent Political Developments B. Past Economic Trends and Recent Changes C. Development Prospects and Constraints D. Government Adjustment Plans and Programs PART II- THE STRUCTURAL ADJUSTMENT PROGRAM A. Introduction B. Agriculture and Rural eveomt d9 C. Industrial Development.12 D. Energy Use and Development E. Fiscal Policy.19 F. Institutional Development.21 PART III - THE STRUCTURAL ADJUSTMENT LOAN A. Loan History B. IMF Activities in Thailand, and Relationship to the Proposed Loan.26 C. Expected Effects of the Medium-Term Structural Adjustment Program D. Relationship between the Proposed Loan and the First Phase of the Structural Adjustment Process E Benefits and Risks.38 F. Loan Amount.39 G. Monitoring.39 H. Categories of Goods to be Financed I. Counterpart Funds J. Procurement and Disbursement PART IV - OTHER BANK GROUP OPERATIONS IN THAILAND AND RELATIONSHIP TO PROPOSED LOAN.41 PART V - LEGAL INSTRUMENTS AND AUTHORITY PART VI -RECOMMENDATION.43 I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 -2- ANNEXES Page No. I. Country Data II. Status of Bank Group Operations III. Supplementary Loan Data Sheet IV. Government Letter o; Development Policy V. Use of IMF Resources.75

5 THAILAND STRUCTURAL ADJUSTMENT LOAN Loan Summary Borrower: Amount: Terms: Kingdom of Thailand $150 million equivalent 20 years, including five years grace, with interest at 11.6% per annum. Loan Description: The proposed loan would support the implementation of the Government's comprehensive structural adjustment program outlined in a Letter of Development Policy submitted to the Bank. The principal aim of the program is to restore a sustainable balance of payments position while maintaining the growth momentum of the economy. To achieve these medium-term objectives, specific action would be taken to (i) promote agricultural growth and exports, (ii) increase the export orientation of industry by a reform of the industrial incentive structure, (iii) provide a basis for efficient energy development and utilization through the preparation of a comprehensive energy sector program, (iv) strengthen public sector resource mobilization efforts, and (v) foster the development of public institutions so as to use public resources efficiently and provide an environment conducive to structural adjustment. The foreign exchange provided by the loan would be used to finance essential imports. The main risks arise from uncertainties in the external environment which could affect export prospects and borrowing costs. Estimated Disbursements: The entire loan is expected to be disbursed by June 30, Staff Appraisal Report: None.

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7 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE KINGDOM OF THAILAND 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Thailand for the equivalent of $150 million to support its structural adjustment program. The loan would have a term of 20 years, including 5 years of grace, with interest at 11.6% per annum. PART I - THE ECONOMY 2. A Basic Economic Report entitled "Thailand: Toward a Development Strategy of Full Participation" (Report No TH) was issued on September 18, Subsequently Thailand's economic situation deteriorated, and an economic report entitled "Coping with Structural Change in a Dynamic Economy (Report No. 3067a-TH)," which proposed a medium-term strategy to deal with the problems which were being encountered was discussed with the Royal Thai Government in September 1980 and issued on January 8, An appraisal mission for the proposed loan visited Thailand in August/September Country data are given in Annex I. A. Recent Political Developments 3. Frequent changes at the top levels of government have characterized recent political developments in Thailand. General Kriangsak Chomanan was Prime Minister from November 1977 to February His third cabinet resigned following increasing public and parliamentary criticism of its economic policies. General Prem Tinsulanonda was elected by the National Assembly as Prime Minister after receiving the support of nearly all major political parties. General Prem's government, formed in March 1980, included leaders from the political parties which supported him. General Prem soon announced his government's policies on a number of issues including economic and social development. These policies place high and immediate priority on accelerating rural development, raising rural incomes and improving health and education. Particular emphasis was given to generating more jobs and a rural public works program, similar to the 1975/76 Tambon Program, was included as a major element in the strategy. The Government also committed itself to contain inflation, although it recognized the need for a substantial adjustment of energy prices and most public enterprise tariffs. Furthermore, it decided to institute reforms in monetary and fiscal policy and to reduce the trade deficit through improved export performance and development of domestic energy resources.

8 After a period of political consolidation, during which an attempt was also made to inform the public better about the need to take corrective measures, the Government began to take steps to implement these policies in the fall of i980. In March 1981, however, the Social Action Party and other coalition parties withdrew from the cabinet on an issue of handling fuel oil contracts and a new cabinet Was formed comprising members of the United, Chart Thai, and Democrat parties as well as a number of technocrats. Shortly thereafter there was an attempted coup by a group of military officers which, however, failed. Curing much of the summer of 1981, the political position of the second Prem cabinet appeared to be weak, particularly in the wake of the devaluation of the baht against the dollar in July, which resulted in much public criticism. Since then, however, the Prime Minister's position strengthened, not least because of relatively favorable economic developments, especially in the agricultural sector. Parliament passed the FY82 budget nearly unanimously. In December 1981, the Government's parliamentary basis was broadened significantly when the Social Action Party rejoined the cabinet. B. Past Economic Trends and Recent_Changes 5. The 1960s and early 1970s were a period of unprecedented economic development in Thailand, with GDP growth averaging 7-8% per year (or 4 to 5% per capita). Real agricultural growth of nearly 5% per year, based largely on an expansion in cultivated area and development of new crops in response to export opportunities was a major factor contributing to these developments as well as to a sustained growth of exports. An increase in the investment level from about 20% to 27% of GDP contributed to rapid industrial growth. Investments were largely financed by domestic savings, keeping the debt service ratio quite low. The incidence of poverty was reduced substantially, from about 57% in 1962/63 to about 31% by 1975/76. However, poverty still remains a problem, and significant regional disparities exist with the Central Region, including Bangkok, not only having the highest per capita income, but also being much better served by roads, telecommunications, schools, public health and other services than the other three regions, the North, the Northeast and the South. Considerable variations also remain within regions: farmers who have diversified into the new cash crops have in many cases succeeded in crossing the poverty line, while the incomes of those unable to shift out of subsistence rice culture have stagnated. By the mid-1970s it became apparent that Thailand was facing increasingly difficult problems of development, including the lack of new arable land to continue to absorb the rapidly growing labor force, and an emerging balance of payments constraint as a result of deteriorating terms of trade. In order to deal with such problems the country needed to shift its pattern of growth from one based on the extension of land under cultivation and on import substituting industries to one based on

9 increasingly intensive use of land and on industries producing for and export markets under competitive conditions. domestic 6. In the past three years Thailand's development problems have been compounded by adverse external factors including oil price increases, a resurgence of inflation and slow growth in developed countries. A relatively high rate of overall growth was maintained (8.7% per annum between 1975 and 1978, 6.1% in 1979 and 6.3% in 1980) but this was accompanied by accelerating inflation, large fiscal and external deficits and growing dependence on foreign borrowing. Consumer prices increased by 8% in 1977 and 1978, by 10% in 1979 and by 20% in The central government deficit reached 4.4% of GDP in Notwithstanding continued rapid export growth, the current account deficit came close to 5% of GDP in 1977 and 1978, but it rose to 7.5% of GDP in 1979 and 7.2% of GDP in 1980; consequently there has been a rapid accumulation of Thailand's initially low external debt. 7. Over the years the Government was slow in responding to the changing internal and external conditions. In fact it stimulated an already high level of activity in the economy by, for instance, failing to pass on externally generated price increases, especially for energy. But, beginning in 1979, policy adjustments were undertaken at a gradually accelerating pace. They included sharp increases in prices for most petroleum products and electricity, measures to increase government revenues, amendments to the usury laws, which permitted an increase in interest rates, and the introduction of regulations to increase financial stability and exercise more monetary restraint. In the second half of 1980, the Government began to give serious attention to developing a longer-term comprehensive adjustment program for the economy, and continued to implement necessary, but politically contentious, economic decisions. In October 1980 price controls were lifted on 29 of 36 goods. In the same month the Government started on a reform of the tariff structure, reducing import duties on 10 categories of electrical goods by between 10% and 60%. In November, retail prices of sugar, which had fallen out of line with international prices, causing domestic shortages, were increased by 60%. In a number of successive steps, electricity and petroleum prices were increased further, and by mid-1981 they were nearly two-and-a-half times as high as at the start of During the first half of 1981, charges for other public services (water, transport, communications) were increased substantially (mostly by at least 50%). During this period, the Government also introduced various fiscal measures designed to limit the central government deficit. On the tax side, the changes were expected to yield an increase in revenues of B 3 billion (0.4% of GDP) during FY81; on the expenditure side, FY81 expenditures were reduced significantly from the originally budgeted amounts. In FY82, similar measures are being taken (see para. 50 below). 8. Despite the effect that most of these measures inevitably had on the price level and on effective demand, economic performance in most areas appears to have been good during the first nine months of 1981.

10 - 4 - Agricultural production and incomes increased rapidly, due to favorable weather and, until recently, agricultural export prices (which a domestic rice price support program helped to reflect in farmgate prices). The demand and interindustry effects of a buoyant agricultural sector are stimulating the other sectors of the economy, largely compensating for the reduced stimulus from the public sector. Thus, while some sectors of the economy, notably construction, are weak, the authorities do not foresee a general recession. At the same time, price pressures have lessened considerably; on a June to June basis, the increase in the Consumer Price Index of 24% was reduced to 12% in , and by November it had moderated further to 11%. Because of reduced inflation and increased nominal interest rates, real interest rates on 1-2 year time deposits have now become positive, and private commercial borrowing entails a substantial real cost. 9. The one area in which the situation did not improve in the first half of 1981 was the balance of payments. The trade deficit in that period was $1.6 billion, about $0.5 billion more than in the first half of Some deterioration was to be expected, as the deficit in 1980 had been below trend as a result of a bulge in imports of non-oil intermediates in 1979, which led to a below-normal level of such imports in In addition, exports in the first quarter of 1981 fell below the trend, while the capital account was negatively influenced by high interest rates abroad. In July, the pressure on the balance of payments became so strong that the Government decided to break the longstanding link of the baht to the (then rapidly appreciating) dollar, decreasing the dollar value of the baht by about 9%, but keeping the trade-weighted exchange rate of the baht approximately at the level of the preceding year. Subsequently, the trade deficit has started to decrease, but for the year 1981 as a whole, the current account deficit is presently estimated at about $2.5 billion, or slightly higher than the 1980 deficit in absolute amount, although slightly lower (6-7% of GDP) in relative terms. Deficits of such magnitude are unsustainable in the medium term, particularly in view of the recent increases in international interest rates. C. Development Prospects and Constraints 10. In the coming decade, many of the positive features which contributed to Thailand-s rapid socio-economic development over the past two decades will continue to do so. These factors include a relatively equitable distribution of rural land, responsiveness of Thai farmers to economic incentives and improved technology, provision of infrastructure by the Government, and the dynamism of the private sector in both industry and agriculture. Also, major gains have been made in family planning in recent years, slowing the annual rate of population growth from about 3% during the 1960s to an estimated 2.2% in 1979 (but only affecting labor force growth two decades later). A new favorable factor is that the infrastructure to tap the substantial natural gas reserves which have been discovered in the

11 Gulf of Siam has just been completed, enabling a gradual but significant reduction in Thailand's dependence on foreign oil. Very recently, oil and gas have been discovered onshore, and hopes are high that these finds will turn out to be substantial. 11. Against these favorable factors, however, three major negative ones must be recognized. Firstly, partly as a result of external influences, Thailand's current account deficits have over the years reached levels which are unsustainable in the medium term and therefore must be reduced. This implies that, in contrast to recent years, the growth in the country's expenditures must be kept below the growth in its domestic income, at the same time that net income growth is being reduced by the need to service recently incurred debt. Secondly, this adjustment, which also implies that exports have to grow more rapidly than imports, has to be attained in a situation in which the outlook for the world economy is not favorable, and tendencies toward protectionism are increasing, thus limiting the opportunity to increase exports (unless offset by effective domestic policies). Thirdly, the exhaustion of land reserves threatens to severely constrain the growth in agricultural production, exports and absorption of labor. All these three factors would tend to reduce the availability of imports to the economy quite substantially, thus reinforcing the tendencies toward lower growth in incomes and employment caused directly by the reduced export and agricultural potentials. This would occur at the same time that the labor force would continue to expand at a rate of about 3% a year, thus putting severe pressure on labor incomes, especially for the unskilled. The consequences for equity, one of the major concerns of the Government, would in all likelihood be severe, and this could threaten the social cohesion of the country. 12. If, in the face of these favorable and unfavorable changes in circumstances, the Government would continue its policies of the second half of the 1970s more or less unchanged, making gradual but limited adjustments, the macro-economic results would not be favorable. Projections made by the Bank and by the Government (using different models) show that under such policies the current account deficits would continue to grow rapidly in absolute terms and would even increase as a proportion of GDP. The total debt service ratio under this scenario as estimated by the Bank is 22% in 1986, and, if one were to extrapolate even further, 33% in Of course, before the latter level were reached, undesirably rapid corrective measures would have been forced upon the authorities, and the consequences for equity would be even more severe than indicated in the previous paragraph. Thus, the Government has searched intensively for policy alternatives which would correct the fiscal and external imbalances without undue consequences for the growth of incomes and employment, especially for the poor. D. Government Adjustment Plans and Programs 13. In response to the challenges posed by the general econqmic outlook for Thailand, the Government has drafted its Fifth Five-Year Plan, which

12 -6- covers the period October 1981 to September The major (and interrelated) objectives are, in summary, equity, financial stability, and national security (growth, of the appropriate kind, is seen as a derived rather than a primary objective). The Government aims at reconciling these objectives over the five-year period of the Plan, partly through a reduction in lower-priority public expenditures, which is already being implemented, but mainly through medium-term structural adjustments which improve production incentives and increase the efficiency of the economy, and improve its competitiveness, both in the external and domestic markets. Important economic and institutional instruments to attain these objectives include improved fiscal, monetary and balance of payments management; adequate pricing of public services; efficient use of public and private resources; accelerated rural development and income creation in poverty areas; restructuring of the production process in agriculture and industry; and accelerated natural resource development, especially in the energy sector. To the extent that the needs in these areas were urgent and the remedies obvious, the Government has already moved on them (para. 7 above). In some cases, where significant preparatory analysis was needed, policy studies have been undertaken, many with support from the Bank. In addition, the Government created a number of planning subcommittees to assist the National Economic and Social Development Board (NESDB) in the preparation of the Fifth Plan. The committees have reviewed the major structural issues and have begun to develop concrete policy packages. However, partly because a firm information base was not yet available, and partly because of institutional weaknesses, program development is continuing in most areas even now that the Plan period has started. 14. Th.e macro targets and projections incorporated in the Plan, while necessarily based on often yet incomplete sectoral inputs, reflect an internally consistent estimate of the effect of the Government-s policy package and of the country-s external environment on the economy, obtained through the use of a macro-economic model. The major estimates are summarized, and compared with previous periods, in Table 1. By 1986 the current account deficit would be reduced somewhat in absolute terms (to about $2 billion), but it would be reduced by two-thirds in relative terms, to 2.4% of GDP, a level which would be quite sustainable in the long term. This improvement would be the result of continued high real export growth at a rate of about 11% p.a., combined with a significant reduction in real import growth, to about 7% p.a.; the latter related mainly to stagnant or even falling energy imports. In terms of the savings-investment balance, the improvement would be located predominantly in a large increase in public sector savings. There would be a moderate reduction in the overall growth rate, but growth would still continue at a rate of about 6.5% p.a., quite respectable by international standards. Provided that the structure of this growth is appropriate, and that special - but not necessarily very costly - measures are taken to assist backward areas, where most of the poverty is concentrated, this scenario is, in the Government's view, consistent with continued progress in the alleviation of poverty.

13 - 7 - Table 1: FIFTH PLAN MACRO-ECONOMIC TARGETS A. Growth Rates of Constant Actuals Projections Price Aggregates (%) GDP at market prices Private consumption Public current consumption Total investment in fixed assets Exports (GNFS) Imports (GNFS) Agricultural production Actuals Projections B. Ratios to GDP (%) Op 1986 Investment National savings Current account deficit Government revenue p = preliminary data. Source: NESDB. 15. To assist it in realizing these objectives, the Government has sought the assistance of the IMF and the Bank. Agreement was reached with the Fund on a major standby program, which covers a two-year period starting in June 1981, and amounts to SDR million. In addition, Thailand purchased SDR 186 million under the Fund's Compensatory Financing Facility in July The standby program, of which a first review took place in August-September 1981, is described in Part III (para. 68) of this Report. With regard to the Bank, the Government has requested assistance in further developing and implementing the structural adjustment program, incorporated in the Fifth Plan, through a series of Structural Adjustment Loans (SALs). Since the Bank had already worked with the Government on many of the issues involved, it has been possible to develop the structural adjustment program, described in Part II of this Report, relatively rapidly.

14 -8- PART II - THE STRUCTURAL ADJUSTMENT PROGRAM A. Introduction 16. The Fifth Five-Year Plan provides the broad framework for development policies in Thailand over the next five years. Many of the Plan's policies and programs have been developed in close cooperation between the Government and the Bank, and have drawn on a large number of Bank reports and documents related to the structural adjustment issues. The broad goals and policies of the Plan were reviewed in Part I (paras ), in the overall context of the trends and prospects of the Thai economy. Part II describes in greater detail those components of the Plan which aim at structural adjustments, identifying the activities in five major areas which should receive priority attention and will be supported by the proposed Structural Adjustment Loan. Part III discusses the proposed Structural Adjustment Loan in more detail. It includes a broad assessment of the impact which the Government's programs may be expected to have on economic developments in the medium term (especially in terms of the necessary gradual reduction of the balance of payments deficits on current account), and describes the relationship between the proposed loan and the first phase of the structural adjustment process. Part IV discusses the role of structural adjustment lending in the Bank's overall lending program for Thailand. 17. In Thailand's case there is no single structural issue which overshadows all others in importance and should therefore be the focal point of the structural adjustment process. As a result the Government's program is quite broad, covering five major areas. In agriculture, it is essential that rapid growth continues even in the face of limited availability of new arable land, since agricultural exports are a major pillar of Thailand's balance of payments, and a majority of the population is still dependent on farming for its livelihood. Thus, the structural adjustment program aims at increased farmer incentives and regularization of the land tenure of a substantial part of the farming population. Industry has been developing rapidly and is still relatively distortion free. However, there have been tendencies toward increased protection and ad hoc application of incentives. A change in the direction of industrial policy is therefore needed if industry is to become more efficient and export oriented, thereby assuming an increasingly important role in supporting the balance of payments and creating incomes and employment. In the energy sector, major progress has been made toward more appropriate pricing. There remain, however, important issues with respect to energy conservation and the development of indigenous energy resources, and an integrated program for policy formulation and implementation needs to be developed. In the fiscal area, budgetary deficits have substantially contributed to the increasing balance of payments deficits. Apart from shorter-term fiscal and financial management issues which are being addressed by the IMF, there is a need for longer-term fiscal and budgetary reforms. These will serve the objectives of

15 - 9 - development as well as financial balance, recognizing that the private sector in agriculture and industry is the engine of growth in Thailand and that fiscal policy must therefore minimize disincentive effects. Finally, since the success of many elements in the structural adjustment program depends on effective institutional development, the program aims to improve the efficiency of resource management in the public sector, and the creation of additional analytical and policy implementation capabilities in the Government. 18. The Government is attempting to introduce substantial change in all these areas. This is a process which will take time. The program which is described below therefore includes not only specific actions taken since the Government opted for a program of structural adjustment in the fall of 1980, or expected to be taken in the immediate future, but also places considerable emphasis on steps that need to be taken to prepare effective policy action in the remainder of the Fifth Plan period. This involves the preparation of detailed and phased implementation programs, and in some areas requires studies designed to provide the necessary background for the development of such programs. B. Agriculture and Rural Development 19. While agriculture's share of GDP had declined to 26% by 1980, its value added has been growing at about 5% per year. Agricultural exports still account for more than half of total exports, and the sector has continued to absorb a substantial share of the growth in the labor force. The past pattern of agricultural growth based on expanding the cultivated area is now coming to an end, however, and future growth therefore will have to depend largely on increased yields. In Thailand this change from extensive to intensive agricultural development will have to depend to a large extent on private initiatives. But the Government also has an important role to play in rationalizing incentives and removing impediments to agricultural intensification. 20. According to recent projections, the growth rate of agricultural production, in real terms, will fall to about 3% annually (and to less than 1% in the Northeast) unless appropriate action is taken. Through measures to support intensification, to improve production incentives and to accelerate development of backward areas, the Government expects to raise the growth rate to about 4.5%, the target for the Fifth Plan. This target is to be attained in part through the implementation of projects, covering irrigation, rainfed agriculture and rural infrastructure, and in part through policy reforms in the following critical areas under the Government-s structural adjustment program: (a) development and implementation of a rational land use and classification policy; and (b) reform of taxes, regulations and market interventions, which currently reduce returns and incentives to farmers and act as constraints on a generally effective and efficient private marketing system. Studies on land use and development

16 policy and on agricultural marketing and pricing policy were carried out with Bank support and are now completed. They provided the background for NESDB's preparation of the Fifth Plan and have led to the identification of major actions to be included in the program supported under SAL. 21. Land Use and Development Policy. Agricultural development at the intensive margin will in many areas of Thailand depend on improvements in the security of tenure and on the implementation of appropriate land development measures. Bank projects for land reform, land titling, land development and forestry are now under preparation. Progress in these areas has, however, been seriously hampered by the adherence to an outdated land policy, especially in regard to forestry, under which about 4 million ha (about 20% of the total area under cultivation) are still gazetted as forest reserves, even though these are suitable for, and actually being used for, cropping. Reclassification of these lands for agricultural use will permit the extension of farm support services to these areas and will improve the security of tenure for the affected farmers. This, in turn, would eliminate a major obstacle to on-farm investment, and result in much improved access to credit and better cropping patterns and input use. While reclassification of these forest reserve areas is a contentious issue in Thailand, because it affects the responsibilities of several agencies and the livelihood of about one million farm families, it is important not only for improved agricultural performance in general, but also as a prerequisite for further interventions supporting agricultural development. Reclassification is therefore expected to open the way for significant and lasting increases in the rate of growth of agricultural production and exports. 22. The areas requiring reclassification were identified broadly in the land use and development policy study but more detailed surveys (including socio-economic surveys) will have to be carried out as a first step in the process of reclassification. Once the necessary information is available, farmers cultivating gazetted forest areas that are considered suitable for agriculture will be issued "right to farm" (STK) certificates which are inheritable and assure the family's tenure indefinitely, but cannot be sold. These certificates satisfy the eligibility requirements for production and long-term credit of the Bank for Agriculture and Agricultural Cooperatives (BAAC). The Government-s decision to issue STK certificates, rather than full ownership titles at this point, is based on its concern (shared by the Bank) that immediately giving full title to farmers who are cultivating lands now classified as forests might encourage further deforestation of areas not suitable for long-term agricultural use, and could lead to widespread land sales, thereby running counter to the Government's land distribution policy. Once the land tenure situation throughout the country has been stabilized, the Government will consider formal degazettement and issuance of full titles. 23. The Ministry of Agriculture and Cooperatives (MOAC) has made budgetary provisions for FY81/82 to initiate the process of forest reserve reclassification, including detailed land use, land suitability and

17 socio-economic surveys. The Royal Forestry and Land Development Departments have, in coordination with the Office of Agricultural Economics, prepared a broad program for surveying all the areas to be considered, with the objective of initiating the process of reclassification in all the encroached forest areas suitable for agriculture by the end of the Fifth Plan Period (1986). Also, the BAAC will expand its operations in forest reserve areas as and when they are reclassified. Further detailed implementation programs for these items are presently under preparation and will be finalized by March Agricultural Pricing, Regulation and Marketing. The marketing activity of a dynamic and generally efficient private sector will continue to stimulate the commercialization and intensification of agriculture. The returns, and therefore the incentives to farmers, could, however, be significantly improved through a reduction in export taxes, removal of unnecessary regulations and controls, and improved marketing facilities and information flows. 25. The Government's policy as stated in the Letter of Development Policy is aimed, in principle, at minimizing its intervention in the agricultural marketing and pricing processes while ensuring that farmers' returns increase toward levels consistent with world market prices for the commodities they produce. In recent months this policy has been translated into a number of important measures: export quotas for cassava have been eliminated; the ban on exports of white sugar has been lifted; the allocation mechanism for maize export quotas has been made more flexible, permitting more efficient trading in maize; and the export tax for rubber has been substantially reduced from an average level of about 25% to 11% (at September 1981 prices). The largely ineffective rice price support program of the 1979/80 season (based on paddy purchases through the Marketing Organization of Farmers) was improved in 1980/81 (rice was purchased by the Public Warehouse Organization through tenders), and farmgate paddy prices rose by about 20% between September 1980 and August The effectiveness of the "cheap rice" distribution program has also been increased, through an improved geographical distribution (during the first half of 1981, 65% of the cheap rice was distributed outside Bangkok, compared with 40% in 1980) and a significant reduction of existing "leakages" in handling the cheap rice. Furthermore, the gap between market price and subsidized price is gradually being narrowed. Given these improvements, the rice reserve requirement, which is the major burden on rice exports, was halved in December 1981, thus reducing its burden from about 20% to about 10%. 26. A high priority will continue to be given to increasing farm returns and thereby improving incentives for agricultural production. In the case of paddy, the 1981/82 target price has been set at B 3,750 per ton vs. B 3,500 in crop year 80/81; this will be supported, if necessary, by further reductions in the overall charges on exports. The Government has also agreed to begin deregulating livestock and meat marketing, by permitting the operation of private slaughterhouse facilities for export. While the

18 Government has expressed its commitment to intervene in the marketing and pricing of agricultural commodities as little as possible, it wishes for the present to retain a flexible and pragmatic approach toward export regulation. 27. As part of the structural adjustment program a study will be undertaken which will serve as a basis for further support of agricultural intensification through increased fertilizer usage. This study, under the responsibility of the MOAC's Office of Agricultural Economics, will analyze the fertilizer supply system and review public sector participation in it. In general, the Government has stated in its Plan that the private sector will be expected to provide agricultural services and inputs in the relatively affluent areas, while the public sector may have to serve the poorer areas, where there may be insufficient incentives for the private sector to perform these functions. The study will ascertain whether this principle should apply in the case of fertilizer. It will also investigate methods to ensure optimal use of concessional fertilizer supplies by foreign donors to the Government. In the context of its FY83 economic and sector work program, the Bank plans to undertake a major study of the effects of taxation, subsidies and price interventions on agricultural incentives, production and incomes. C. Industrial Development 28. The industrial sector in Thailand has in recent years contributed significantly to the country's rapid growth and diversification of economic activity. Manufactured exports grew rapidly during the 1970s, reaching about 40% of total exports in The industrial share in value added now exceeds that of agriculture, but its share of employment is only about one-tenth that of agriculture. Since in future agriculture will be less able to absorb labor force growth, industrial and related service sector growth will have to play an increasing role in the creation of incomes and employment. 29. Thailand completed the "easy" stage of import substitution in the early 1970s, and export development now exceeds import substitution as a contributor to industrial growth. Pressure for industrial protection has increased since the middle 1970s. While the sector is not yet subject to the severe distortions that prevail in many other countries, the rising levels of protection tend to reduce efficiency, increase prices and reduce labor absorption. The Government has also been under pressure to support large, capital-intensive projects, some of which may not suit Thailand's comparative advantage. If the economic structure of the country is to be transformed efficiently from one that is primarily agricultural and rural to one based predominantly on secondary and tertiary production, employment and export, these pressures have to be reversed. Under the Government s structural adjustment program the major areas to be addressed are: preparation and implementation of an integrated industrial development strategy; strengthening of export promotion; reform of the protective structure; improvements in the system of investment incentives; and implementation of an improved system for the evaluation of large-scale industrial projects.

19 Industrial Development Strategy. The NESDB's Subcommittee on Industry, an ad hoc interdepartmental group consisting of policy level officials from the agencies concerned with the industrial sector in Thailand, has articulated the Government's Fifth Plan strategy and broad policies for future industrial growth. This strategy has now been incorporated in the Fifth Plan and is in line with the policy thrust of the Bank's past proposals./l Implementation of elements of this program has already started, as indicated in the following paragraphs. Since many agencies are involved, a permanent Committee on Industry consisting of cabinet members and senior policy level officials of the agencies concerned, will work out a detailed implementation program following the Fifth Plan guidelines, and then monitor and direct the implementation of the proposed policy package. 31. Export Promotion. A cornerstone of the Government's policy package for the Fifth Plan is the stimulation of export-oriented growth of the industrial sector, and a number of policy and legislative changes have already been introduced in support of this objective. The recent devaluation of the baht against the dollar suggests that the Government intends to follow a realistic exchange rate policy. Other measures are being taken to reduce biases against exporting and to improve the system of export incentives. A new Export Tax Drawback Act was approved by Parliament and is being implemented. The Act replaces specific-rate formulae for the refund of import duties and business taxes paid on intermediate goods used in export production by ad valorem rates; it provides for an automatic allocation of 1% of total Central Government tax collection for the refund scheme instead of the previous insufficient budgetary allocations; and it facilitates reimbursements through a simplified coupon system. The Customs Department, which implements the export tax drawback Act and administers the import duty refund scheme, is also streamlining its procedures and preparing to improve its organization and decentralize its functions, with technical assistance f.rom the IMF. 32. To stimulate exports further, the Government will continue to increase the number of bonded warehouses from 15 to 25, and intends to set up five export processing zones in addition to the one already established within the industrial estate at Lat Krabang. The Government has also decided to establish an Export Development Fund, along with a high level Export Development Council to coordinate and supervise its functions, within the existing Export-Import Act of The Ministry of Commerce, which already provides a wide range of institutional support for export promotion, will serve as Secretariat. The Government will ensure financing for the Export Development Fund and enable it to begin operation by June Details concerning the functions and financing of the proposed Fund will be /1 See especially "An Industrial Development Strategy for Thailand" (Report No. 2804a-TH, June 5, 1980).

20 decided by June Further possible improvements in the export credit and guarantee arrangements are under review, and consideration is being given to drafting a new export promotion act. Legislative changes will, however, take some time to enact and implement. 33. Reform of the Protective Structure. The Government has stated its firm intention to reform the protective structure, moving toward more uniform tariffs in the interest of improved industrial efficiency and of a deepening of the industrial structure of Thailand. However, given the magnitude and complexity of the reform, the overlapping interests of strong pressure groups, and the far-reaching fiscal implications, changing the protective structure will be a lengthy process. Hence a phased approach, buttressed by detailed studies on major implications of the reforms and by special studies which identify the best way to proceed in case of major industries, is indicated. The process will begin with modest general changes in tariffs toward a more homogenous structure. As a first step, the Government has already lowered tariffs on a few selected electrical goods. During the rest of FY82, the Government intends to narrow the range of tariffs further by reducing nominal tariffs higher than 60% down to 60% and increasing zero or near-zero tariffs to a level of about 5 to 10%./1 This represents a major departure in the industrial policy of Thailand. While some exceptions to these general tariff reforms will be necessary, the Government has indicated that such exceptions will be granted only in special cases so that the general tariff measures are not rendered meaningless. In addition, nontariff restrictions will not be modified in a manner to compensate for general tariff reforms. In any case, compared to tariffs, nontariff restrictions are at present not important in providing protection, except in the case of the automotive industry. 34. For the subsequent phase of the reforms, the Government will develop, by mid-1982, a phased program that will include further changes in the tariff and nontariff restrictions, which will result in general reforms across the board as well as specific changes in protection at the subsector level. The latter, however, will require in-depth analysis of the subsector so as to identify the best way to proceed with specific tariff adjustments. To this end, priority subsectors have been selected. Arrangements have been made for the Bank to assist with the first in a series of such studies. This study, to be completed by mid-1982, will assess the impact of tariff and other policies on the electrical goods sector. Similar studies will follow, for the automotive sector later in 1982; chemical, plastic products and ceramics in 1983; iron and steel products, machinery and other equipment in Arrangements to carry out these studies will be worked out in appropriate years. Nontariff restrictions, such as the domestic content /1 Currently, nominal tariff rates exceeding 60% are levied on such items as automobile assembly parts (160%), television sets, clothing, and beer (100%), to name but the most important.

21 requirements in automotive industry, will be a part of the program for the overall reform of the protective structure. 35. Investment Incentives. These are administered mainly by the Board of Investment (BOI), with some overlapping responsibilities vested in the Ministries of Finance, Commerce and Industry. The existing system of investment incentives has raised many concerns which have been investigated in a major study under the UNDP/IBRD technical assistance services to the BOI. Its interim findings are now available and are based on the analysis of the current incentive package, its implementation, and the functions and procedures of BOI. Another study was done by a Bank consultant last year on the impact of the incentive system. These studies indicate that, with few exceptions, the incentives have tended to reinforce existing distortions which favor capital use relative to labor, import substitution rather than exporting, and location around Bangkok rather than decentralized locations. These observed effects stem not only from the nature of the investment incentives themselves, but also from their discretionary application by BOI. 36. Lately, the Government has moved toward a full review of investment incentives as well as of BOI's procedures. Among the possible actions considered were the most important ones proposed by the Bank's report on industrial development (Report No. 2804a-TH), including the replacement of the present positive list of promoted industries by a negative list; the introduction of automaticity in granting promotional privileges; and the inclusion of the present import privileges granted by BOI into the overall reform of the protective structure. Well-attended public seminars have been held, covering four major industrial groups, and widespread press coverage was given to the impending evaluation of the incentives package, especially fiscal incentives. In September 1981, the Government appointed a Committee chaired by the Deputy Minister of Industry and including several cabinet members who are also members of the Board of Directors of BOI, to review the BOI operations and propose next steps and policy action. This Committee has prepared a broad program of suitable reforms for implementation over a number of years. In the short term, reforms will be made within the existing law governing BOI; these will primarily involve changes in the tax structure to provide incentives to new economic activity, as well as elimination of tariff and business tax exemptions on machinery that favor capital-intensive investment. Other possible new BOI activities, such as responsibility for screening of foreign investment and technology agreements, would require amendments to existing legislation, and are to be contemplated for the longer term. A more detailed program for changes in the investment incentives will be finalized in March With the exception of the proposed tax changes mentioned above, full implementation programs of reform still have to be developed, their implications analyzed and a time profile of the policy changes prepared. The Planning Division of the BOI has begun specific work in this area starting with the engineering goods subsector, where considerable preparatory work has already been done by the consultants on the BOI study.

22 Furthermore, the BOI Committee will initiate a study of the fiscal implications of the incentives currently offered by BOI. 38. Evaluation of Large-Scale Projects. As almost all the large industrial projects are being undertaken in the private sector, and their financial profitability is at present closely linked to effective protection and incentive packages, the tacit assumption that financial profitability also ensures economic viability needs to be carefully evaluated. In this context, the Government's intention, as stated in the Letter of Development Policy, to undertake economic evaluation of all major projects for which incentives are sought is an important element in its effort to avoid making costly mistakes. 39. The Government has set up an inter-departmental committee chaired by the Prime Minister to oversee large-scale projects, but lack of technical expertise for the time being prevents the concentration of responsibility for the technical staff work in one government agency. Therefore, the present ad hoc approach to large-scale industrial investment evaluation is the only feasible one. The Bank is directly involved in the preparation of the Eastern Seaboard Development Program, for which a Center for Integrated Plan of Operation (CIPO) was established in NESDB to coordinate the planning and implementation of the Eastern Seaboard projects. The Bank's experience with CIPO as a planning and evaluation agency for a large investment program involving both the public and private sectors has been encouraging. However, the institutional capacity for project review needs to be built up over the next two years. For promoted private industries, this would be a component of the general restructuring of BOI; for large public investments, and private investments requiring substantial complementary public investments, this will be included under the broader reforms of NESDB's project evaluation capacity, discussed below in para. 60. D. Energy Use and Development 40. Over the last decade, the rapid growth of the Thai economy and underpricing of energy have led to a steep rise in overall energy consumption, from 7.4 million tons of oil equivalent in 1970 to 15.6 million tons in 1979, when oil accounted for about 75% of total energy consumption. Most of the increase in energy consumption took the form of imported crude oil and petroleum products. Given renewed petroleum price increases, the petroleum import bill in 1980 amounted to almost $3 billion, or about 30% of total import value (as compared with 9% in 1970) and nearly half of total merchandise export earnings. 41. The Government's Fifth Plan sets forth a number of targets and general policy directions for the energy sector, on the basis of the work carried out by the NESDB Energy Subcommittee which consisted of representatives from various agencies concerned with energy. It establishes a target for total energy consumption growth of 4.6% p.a. over the Fifth Plan period.

23 This target is to be met by frequently adjusting energy and fuel prices to reflect real costs, by introducing measures for energy conservation in industry and transportation, and by enforcing additional direct measures to save energy. Another Plan objective is for oil imports to fall by 3% annually on average between 1981 and 1986, and for the share of oil consumption in total energy consumption to fall to 46% by The implied import substitution reflects the impact of current gas and lignite development, the potential exploitation of oil deposits presently being explored, and further specific actions which are to be proposed in a master plan study for energy development that will be completed in early The Plan stipulates futher that the Government will support research and development in new domestic energy resources, especially renewable resources such as geothermal, solar, alcohol and wind, although these sources are not expected to have much impact on the structure of energy production during the Fifth Plan period. 42. A number of technical and policy-related studies have also been undertaken or have been set in train by the Government, many of them in connection with the various Bank projects. There is an urgent need to pull together the various strands of sectoral analysis, policy and investment planning into a comprehensive and consistent energy sector program. Such a program, which will deal with the three interrelated areas of energy conservation, pricing and taxation, and energy development, is to be developed under the structural adjustment program. 43. Energy Conservation. The Government has already taken a number of steps to reduce energy consumption directly, especially during peak hours (e.g., improvements in the Bangkok traffic flow, limiting viewing hours for television and opening hours for gas stations, reducing power consumption in government buildings, etc.), and has introduced an automobile license tax progressively levied on engine capacity. Concerned agencies are preparing policy and program proposals to induce energy conservation in transport, industry and households. In transport, energy policy studies are underway. A program of public education is being developed to encourage households to save energy. Agencies such as the National Energy Administration (NEA), the Ministry of Industry, and the Industrial Finance Corporation of Thailand (IFCT) are individually or cooperatively collecting technological information, operating and expanding pilot schemes, and seeking external assistance for the design and implementation of energy conservation programs. To strengthen these efforts further, the Government will in 1982 conduct a study to assess the existing incentives for industrial energy conservation as provided by various agencies. The subject cuts across the energy and industrial sectors and involves a large number of planning and implementing agencies. NEA will be the lead agency. Terms of Reference for the study have been agreed. 44. Pricing and Taxation. Most energy conservation is likely to occur as a result of appropriate policies on energy prices, which also serve the purpose of resource mobilization. In the pricing of energy, and of energy

24 using public services such as transport, public policy has shifted dramatically since Between 1970 and 1978, domestic energy prices in Thailand increased only slightly faster than the Consumer Price Index, as successive administrations were unable or unwilling to reflect international price increases domestically. But as of 1979 significant efforts were made to adjust domestic prices of power and petroleum products. By October 1981, average power tariffs had been raised by 124% over the average level in March 1979, and petroleum prices by an average of 120%. Subsidies to power users were thus effectively eliminated and petroleum products are again being taxed (i.e., priced at levels above opportunity cost). As a result, covenants in Bank power projects are now being observed. Some distortions remain in the structure of energy prices, as for example, in the relationship of gasoline to diesel fuel prices, but much progress has been made, and the resulting impact on energy demand has begun to be felt. 45. For the future, the Government in its Letter of Development Policy has reiterated its resolve to continue implementing frequent adjustments in energy prices to reflect cost changes, including those occasioned by the recent devaluation. With a view to correcting any unjustifiable relationships that may still exist in the relative structure of petroleum product prices, the Government will undertake a study to analyze the efficiency, revenue and equity implications of the existing and alternative price structures, and plans to initiate appropriate changes in the price structure in The Ministry of Finance will be the lead agency responsible for coordinating and reviewing the study. Terms of reference have been agreed. 46. Energy Strategy Formulation. Given the importance and dynamism of the energy sector in Thailand-s economy, the Government attaches high priority to formulating an integrated and consistent strategy for energy development in Thailand. To this end, a large number of studies have been completed or are underway. Many of these studies are expected to be completed by March 1982, notably the Energy Master Plan Study, Gas Utilization Study, Long-Term Refinery Expansion Study, and the Special Study on Natural Gas Development Policy. There is, however, widespread concern both in the Government and in the Bank that the large number of agencies active in the energy sector may work at cross-purposes, and that policies may be inconsistent, unless an effective institutional framework for policy coordination is created. The Government has therefore selected the NEA to undertake, in consultation with other concerned agencies, the responsibility to steer the studies in progress, evaluate those which are completed, propose appropriate recommendations for implementation, and identify areas for further investigation. The NEA will complete the initial stock-taking of these studies and prepare by September 1982 a medium-term energy strategy to achieve the Plan objectives and targets. Subsequently, this mechanism for policy coordination will be retained on a continuous basis so that the dynamic changes in the energy sector are taken into account in further strategy formulation and implementation.

25 E. Fiscal Policy 47. Traditionally, the public sector has been small in Thailand. Strong private savings have also reduced the need for a public savings effort. Thus, the ratio of central government revenues to GDP has been stagnant at 12-14% for many years. Up until the early 1970's, overall central government deficits were equal to about 2% of GDP, and public enterprises tended to be self-financing. During the s public sector deficits increased, however, as central government and public enterprise expenditures grew in relation to GDP, tax proceeds were inelastic, and prices for many public services were not raised in line with costs. Thus, by 1980, the total public sector's cash deficit was some 6% of GDP, and was contributing substantially to the pressures on the price level and the balance of payments. For the future, given the Government-s determination to play a more active role in development (especially in poor rural areas), the need for continued substantial public enterprise investments, the probability of increased expenditures for security, the inevitable increase in debt service payments, and the need for civil service salaries not to lag too much behind those in the private sector, it will be difficult to reduce public sector expenditures as a percentage of GDP, even if expenditure efficiency is improved. This, together with the need to reduce public sector deficits, implies that public sector revenues will have to be increased in relation to GDP. The Fifth Plan has set a target for central government revenue of 18% of GDP by 1986, but this target has not as yet been clearly linked to other macroeconomic variables, to the expected trends in central government expenditure, and to the financial performance of the rest of the public sector. Such links clearly need to be established. Also, it is necessary to spell out where the major potentials for increased resource mobilization lie, and how they can be realized. 48. In view of the need for better information and planning, the Fiscal Policy Office in the Ministry of Finance has begun to set up a management information system as a basic tool for fiscal policy planning. A major study has been completed (with Bank support) on "Fiscal Policy for Revenue Mobilization." In the meantime, the Government has been implementing a two-year fiscal action program for FY81 and FY82, aiming at a revenue/gdp ratio of 14.6% for FY82. Organizational reform is being taken in hand in selected departments of the Ministry of Finance. Bills to reform local taxes have recently been passed (vehicle tax) or are now before Parliament (real estate tax). Public enterprise tariffs were increased substantially for power, water, buses, railways and communications. Government estimates indicate that the pricing changes will yield more than B 11 billion during FY82, and transfers from central government to state enterprises are expected to drop in absolute and relative terms in FY82, compared with FY81 (from 2.4% to 1.9% of total expenditure). Expenditure restraints and additional revenue measures, together with a target for the overall fiscal deficit and a strict limit on bank financing of the deficit, were included as elements of the adjustment program supported by the IMF stand-by

26 arrangement (see para. 68). Finally, fundamental reforms have been started in the budgetary process (see para. 55 below). Under the Government s structural adjustment program for the medium term, two main policy areas have been given particular attention: development of an overall medium-term fiscal strategy, and specific improvements in tax policy. 49. Development of a Medium-Term Fiscal Strategy. By September 1982 the Government will develop through the Ministry of Finance a medium-term fiscal strategy designed to translate the fiscal objectives of the Fifth Plan into phased action programs and concrete policy measures. In this context, an analysis will be made of the trends of major revenue and expenditure components to ensure their mutual consistency and their compatibility with the Fifth Plan goals. In the tax field, the contributions to be made to increased proceeds will be split between changes in tax rates, tax structure, broadening of the tax base, and improved collection. On the expenditure side, past and foreseeable future trends in major expenditure items will be analyzed. The Government will include under this item the establishment of realistic financial targets for all major public enterprises and a phased program for the achievement of these targets, aiming as a minimum at the elimination of operational losses. These targets will provide a framework for ensuring that state enterprise prices are regularly reviewed and set in line with overall development goals and resource constraints, rather than on an ad hoc and agency-specific basis. A more systematic approach will be taken towards investment programming throughout the whole public sector (see further para. 60 below). Finally, the Government will review the various extra-budgetary funds, about which currently little is known, except that there are a great number of them, with a few involving substantial financial flows. This study will be initiated by M4arch 1982, to review the operations and effectiveness of these funds, with the objective of considering whether they should continue to operate as separate entities and if so, to establish clear performance criteria and a central monitoring system. 50. Tax Policy. The Government will take the following actions in the area of tax policy. First, fiscal measures to be implemented during FY82 include: restructuring of the personal and corporate income taxes and reducing exemptions; a progressive income tax on sales of property; selective increases in import duties on goods now exempted or taxed at low rates (see para. 33); and increases in some excise taxes, including cement (converting from a specific to an ad valorem base). The yield of these measures is estimated at B 4 billion or 0.5% of GDP in FY82, and higher on an annual basis; this represents a first step in the direction of achieving the tax ratio desired for Furthermore, these measures, together with measures recently taken (such as the prepayment of corporate income taxes and the change in vehicle taxation from a weight to an engine-capacity base), represent a step in the direction of an improved tax structure.

27 Second, the Government will move ahead with its program for improved tax administration in the Revenue, Customs and Excise Departments of the Ministry of Finance and in local government. Specifically, the Letter of Development Policy states that the Revenue Department will, by March 1983, have set up eight Area Tax Offices in Metropolitan Bangkok, will have separated its headquarters from operational functions, and will have organized its headquarter offices along functional lines by mid To permit the implementation of this program, the Government expects to complete all necessary regulatory action by mid-1982 and to make available the necessary financial resources. Preparatory work for these reforms has been underway, with IMF technical assistance, for a number of years and they are expected to lead to a significant improvement in tax administration. The reforms are a necessary element in any attempt to increase public resource mobilization in Thailand, since currently many potential taxpayers escape the tax net. In the corporate sector, for instance, less than half the companies pay any tax at all, and there is substantial underreporting of profits. Improved tax administration therefore has ample scope for broadening the tax base and for raising increased revenues in a more equitable manner. 52. Finally, the Government will, by September 1982, identify an appropriate long-term tax structure, and develop a phased program of movement toward it, compatible with its overall fiscal strategy. The high-level Tax Policy Board, which has recently been set up, will play a major role in developing this program by facilitating interagency discussion and decisionmaking. The Government's overall goal is to modernize Thailand's tax structure by moving gradually away from its heavy dependence on indirect taxes, (including taxes on foreign trade) toward greater reliance on direct taxes, to expand the direct tax base by including a wider category of incomes and wealth, and to move gradually toward uniform business and excise taxation. F. Institutional Development 53. The various measures described above, which are to be taken to restructure the Thai economy, will place considerable strains on the existing machinery of the central government. Indeed, many of the structural problems which confront Thailand today can be attributed, directly or indirectly, to weaknesses in Thai Government institutions and bureaucratic systems, which impinge on proper policy analysis and coordination, public sector investment programming, reconciliation of annual budgets with longerterm development objectives and plans, and the appraisal and monitoring of public expenditure programs. While it is not possible to quantify the effects of these deficiencies on the past growth of fiscal or balance of payments deficits, they have clearly contributed to a pattern of utilization of resources which, although not obviously wasteful in a narrow sense, has slowed the Government's response to rapidly changing economic conditions.

28 Thus policy changes alone, if unaccompanied by measures to strengthen institutions and modernize the central bureaucratic systems, will be limited in their effectiveness. 54. Since March 1980, when the present Prime Minister formed his first government, the national leadership has demonstrated a strong awareness of these problems. A major effort was made to strengthen national development planning and policy analysis for the preparation of the Fifth Plan. Several important policy studies were commissioned, making extensive use of Thai economists and social scientists in local universities and research institutes. To improve the coordination of central economic management, a permanent National Economic Policy Steering Committee was formed in November 1980, comprising key economic ministers and senior officials from the central staff agencies, under the chairmanship of the Prime Minister. The NESDB, whose management has also recently been strengthened, serves as the official secretariat to this committee, thereby greatly enhancing the planning agency's status and influence. 55. A number of significant budgetary reforms have also recently been introduced in the preparation of the FY82 budget, including the predetermination by the cabinet of indicative ministerial budget ceilings or targets, reflecting national priorities in the context of more stringent fiscal limitations; the delegation of responsibility to ministries to determine departmental expenditure allocations in accordance with established sectoral priorities; and the joint evaluation of consolidated ministerial budget submissions by the NESDB and the Budget Bureau prior to final cabinet consideration. A new capital budgeting system has been established to identify the full costs, location and recurrent budget implications of project activities, and a start was made in designing and testing a system of program budgeting, elements of which are being applied on a trial basis in the preparation of the FY82 budgets of two selected ministries. These reforms in the budget formulation systems have paved the way for greater collaboration between the central planning and budgeting agencies, for greater devolution of responsibility to ministries for detailed budget preparation, and for the ultimate extension of program budgeting principles to the entire Government. Complementary changes, aimed at delegating greater responsibility for program implementation to provincial governors and departmental managers have also been introduced: provincial governors have been given authority over several line items of departmental expenditure; the long-established, cumbersome and inefficient trimestrial allotment system was extensively revised; and greater flexibility was introduced by giving line managers authority to transfer expenditures between line items within approved departmental program estimates. The initiatives taken in modernizing the budgetary systems represent a most important breakthrough, but are only a partial first step. The Government intends not only to maintain the momentum of institutional reform in the Budget Bureau, but also to extend it to the other central management systems to which the budget system is closely linked, particularly the planning, investment programming, accounting and auditing systems.

29 In sum, it is clear that the Government is committed to continuing the process of institutional reform as part of its structural adjustment program, emphasizing measures to improve the coordination of economic management, public policy research and analysis, planning, programming, and project appraisal; budget administration; and personnel management. These measures can be grouped into two categories: those which seek to modify the procedures and systems governing public sector institutions, and those which strengthen the institutional infrastructure itself. The Government has concentrated to date on the first category, but will also pay increased attention to the enhancement of institutional capabilities, as described below. 57. Systemic Changes. During the next two years, the adequacy of the present planning, budgetina, accounting and auditing systems will be thoroughly reviewed and changes identified and introduced to improve the allocation and utilization of resources. The Government intends to employ a single firm of consultants to undertake this task, to ensure that system improvements are mutually compatible and are implemented in a coordinated and orderly manner. The consultants will work with designated counterpart groups and policy committees in the Budget Bureau, the NESUB, the Controller GeneralVs Department and the Auditor General's Department to study the existing procedures, design and test new systems, supervise their introduction and train local staff in their application and administration. Financing of these consultancies is being provided by USAID and was approved in October The major objective of the consultants in the Budget Bureau will be to finalize the design and supervise the installation of a simple program budgeting system by FY84. Their main tasks will be to complete the reprogramming of the budgets of the two ministries (agriculture and education) selected for testing the new systems, and to initiate and undertake the budgetary reprogramming of the six other sectors. In addition, they will continue the work on budget computerization and expenditure reclassification initiated under the first phase consultancy, redesign the budget preparation forms and instructions related to noncapital development programs, subprograms and departmental work plans, and assist with the reorganization of the Bureau and the retraining of staff. 59. The work of the consulting team in the Controller General's Department will be divided into two phases. During the first, a comprehensive analysis of the present accounting procedures, documents, staff and equipment capabilities, and pre-auditing systems will be undertaken. Based on this survey and the consultant's recommendations, essential improvements to the accounting systems and documentation will be introduced, and the necessary changes will be made in financial regulations, equipment, organization and training in the Controller General's Department. The first phase of the consultancy will be completed by the end of calendar year 1982 (i.e., at the beginning of the budget preparation process for FY84). The second phase, devoted to extending and refining the basic accounting system through

30 the introduction of a cost accounting system, a fixed asset control system and an internal audit system for use within the Department, will run to the end of The consultants working in the NESDB will be required (a) to specify and design the details of medium-term planning and sectoral programming systems linked to the introduction of program budgeting; (b) to clarify the roles and responsibilities of the many different planning units at each level of government in relation to new planning and programming systems; and (c) to conduct a management study of NESDB, making recommendations concerning its organization, management, staff development, and information and data requirements. The medium-term planning and programming system is expected to comprise (i) a (probably three-year) rolling investment program compatible with the requirements of program budgeting and the capabilities of the accounting system; (ii) a uniform project preparation and appraisal system; and (iii) a project/program monitoring and evaluation system which would provide the Executive Committee of the NESDB and the National Economic Policy Steering Committee with up-to-date overviews of implementation performance and other major developments. This work is likely to take eighteen months and to be completed by mid Of particular importance to the Bank is the completion of a public investment program. The first such program is expected to be completed by mid-1982 covering FY83 to FY85. The Bank will review and assess the program at that time in the course of its economic work on Thailand. From preliminary information presently available, the overall level and growth of public investment for the Plan period appears to be consistent with the broad expenditure targets of the Plan. Moreover, there does not appear to exist any severe misallocation of public investment funds among or within sectors. These conclusions, however, remain tentative, and, in any case, improved investment programming and project analysis are essential in view of the increasingly important role that these activities will have to play in the future. 61. At present, the Auditor General in Thailand, although required by law to review the general performance of governmental agencies, only has the capacity to conduct routine financial audits. The aim of the consultancy in his Department is to design and introduce a modern performance auditing system, in close coordination with the reforms in the budget, planning and accounting systems. This will require the installation of computer hardware, as well as some departmental reorganization and staff training. 62. Strengthening the Institutional Infrastructure. The Government intends to press ahead with measures to strengthen institutional capacity in public policy research and analysis. Although experience with the preparation of the Fifth Plan has demonstrated that Thailand possesses considerable indigenous analytical capabilities outside its core policy-making agencies - in universities and research institutes in Thailand and abroad, and in the private sector - institutional and budgetary constraints have stood in the

31 way of its effective utilization. Thus, Thai planning and economic management agencies have come to depend heavily on foreign support for policy analysis, which is undesirable, particularly during a period of rapid economic change requiring constant policy assessments and adjustments. The Government has now decided to reform present policies and regulations preventing agencies such as the NESDB from obtaining the services of Thai economists or social scientists on acceptable terms to work on important policy studies, program evaluations or special task forces. 63. The Government has also commissioned a study of ways and means of enhancing or supplementing the limited in-house analytical capabilities of the NESDB and other government agencies responsible for policy review and formulation. The study, which was financed under an ongoing Bank project, was completed in September It recommended that an independent policy research institute should be established, either by law or as a governmentowned public corporation, with a small nucleus of high-quality staff capable of organizing research and policy studies required by contracting government agencies. These proposals have been accepted by the Government, which intends to complete the arrangements for the creation of what is to be called the Thailand Development Institute early in 1982, and a number of the policy studies to be undertaken as part of the Government-s structural adjustment program are likely to be undertaken by the Institute. 64. Finally, faced with evidence that the quality of public sector management has been steadily undermined by weak personnel administration and uncompetitive salaries, the Government also decided to initiate studies of the organization, management and compensation for the civil service during Civil service reforms are unlikely to progress rapidly or without opposition. But it is important that every opportunity is seized to address this facet of institutional development. PART III - THE STRUCTURAL ADJUSTMENT LOAN A. Loan History 65. Over the last several years, there has been an intensive policy dialogue between the Royal Thai Government and the Bank, based to a significant extent on the findings of the last Basic Economic Report and subsequent economic and sector work. With the emergence of Thailand-s growing balance of payments difficulties during the late 1970s, and especially in the wake of the oil price increases of 1979/80, the Bank urged the Government at various stages of the preparation and discussion of the latest economic report (in 1980) to initiate a comprehensive program of structural adjustment. The formation of the first cabinet of General Prem Tinsulanonda in

32 March 1980 resulted in the establishment of a cohesive economic team, and in the fall of 1980 the Government started to make substantial policy changes over a broad front. It also began to formulate its Fifth Five-Year Plan, in a much more systematic manner than earlier Plans, and including explicitly a strategy for structural adjustment of the Thai economy. Soon afterwards, the Government approached the IMF to support its adjustment program through a standby arrangement, which has since been concluded. In January 1981 the Government formally requested the Bank to consider extending a series of SALs to Thailand. 66. As the Bank had been working closely with the Government on issues of structural adjustment, the SAL Reconnaissance Mission which visited Thailand in May/June 1981 could proceed quickly. The mission found broad support, both at the political and the technical level, for a medium-term approach to structural adjustment, with assistance from the Bank. The mission was requested to help identify a package that would address the issues of structural adjustment over a broad front. Following a review of the Government-s Droposed program within the Bank, an appraisal mission visited Thailand in August/September Substantial agreement on the nature and timing of the SAL program was reached between the Government team and the mission. Negotiations were held in Washington from December 14 to 18, The Thai delegation was headed by H.E. Dr. Phaichitr Uathavikul, Deputy Minister of Finance. B. IMF Activities in Thailand, and Relationship to the Proposed Loan 67. In the past year the IMF has significantly increased its involvement in Thailand. Discussions were held with the Government on appropriate policies to address the growing balance of payments difficulties, and a number of policy measures in the areas of financial, fiscal and pricing policy have become the basis for a large standby arrangement, covering a period of two years (starting in June, 1981) and amounting to SDR million. The program focuses primarily on the immediate balance of payments problem and on some of the short-term policies necessary to cope with it, including reductions in fiscal deficits, limits on credit expansion and on short-term external borrowing by the public sector, and close review of interest and exchange rate policies. As of December 31, 1981, Thailand has drawn SDR 345 million under the stand-by arrangement (see Annex V). Based on reports of a recent IMF mission, the Fund's Board on December 28, 1981, approved the Government's policy program for 1981/82 as the basis for continuing purchases under the arrangement. In addition, the IMF has provided Thailand in 1981 with SDR 186 million under the compensatory financing facility. 68. There has been an extensive exchange of information and consultation between the Bank and the IMF during the preparation of the programs for the standby arrangement and for the proposed loan. The SAL appraisal mission overlapped with a mission of the IMF which reviewed Thailand's performance

33 under the two-year standby arrangement. For the future, continued close collaboration of the IMF and the Bank staffs is foreseen, especially in the area of fiscal policy, where both institutions have complementary interests, and the capacity to assist the Government in formulating its short-, medium-, and longer-term programs for increased resource mobilization and improved expenditure programming. With regard to short-term fiscal management, the IMF standby arrangment includes a Government commitment to limit the central government budget deficit sharply in fiscal years 1981 and 1982, reducing it from nearly 4.5% of GDP in FY79/80 to less than 2.5% of GDP in FY81/82. Also, the IMF has already, over several years, provided technical assistance to reform the organization and administration in the Internal Revenue Department, and it is presently reviewing the administrative practices in the Customs Department of the Ministry of Finance. 69. Traditionally, the Bank has in its economic work paid significant attention to fiscal policy, and especially to resource mobilization and efficient utilization of public resources. It has been encouraged by the Government to continue its efforts in these areas. In the context of this SAL, the Bank is supporting an improvement in the link between overall development planning and medium-term fiscal policy, and is especially concerned that, given the requirements of the overall structural adjustment program, increased resource mobilization is pursued over the medium term in order to reduce overall government deficits while safeguarding necessary development expenditures. In the area of expenditure control, the Bank likewise is concentrating on medium-term issues, including the timely identification of necessary structural changes in prospective public expenditure patterns, and the formulation of appropriate multi-year investment programs. It is also addressing the institutional interfaces between planning, budgeting, programming and monitoring of the development process. 70. Intensive consultations between Bank and Fund staff have been taking place to arrive at an appropriate division of work in the public finance field under this SAL, and for the future. There is agreement that the activities of the two Bretton Woods institutions in Thailand have been complementary and will remain so in the work planned. Under this SAL two main policy areas are being addressed: development of a medium-term fiscal strategy, and improvements in tax policy to implement the first time slice of this strategy. IMF staff will work closely with the Government and Bank staff in developing the medium-term strategy for the whole public sector. As this work progresses during 1982, the division of activities between the IMF and the Bank will be kept under review.

34 C. Expected Effects of the Medium-Term Structural Adjustment Program 71. As discussed in paragraphs 13 and 14 above, the Government has incorporated its medium-term structural adjustment policy program in the framework of its Fifth Five-Year Plan, and has targeted a current account balance of payments improvement by about 5% of GDP between 1980 and 1986 (Table 1). In the context of the preparation of this loan, the Bank has attempted to estimate independently whether, even under relatively conservative assumptions for the external environment and for the effects of the various policy measures on the economy, these measures may be expected to bring the balance of payments deficits down to a sustainable level by In the first instance, the orders of magnitude of the proposed measures in the various policy areas can be broadly assessed in order to judge whether they are substantive enough to expect a quantitatively significant effect. Such an assessment for the fiscal policy area, where central government revenues are to be increased by about 4% of GDP while expenditures are to be kept at the same level in relation to GDP, indicates that this effort is indeed very significant in relation to the objectives sought, even if it is realistically assumed that improvements in the fiscal balance are not reflected fully in the balance of payments. As another example, it can be noted that the price increases for petroleum products and electricity over the period January July 1981 have increased the relative domestic prices for these products (as compared to the general price level) by as much as 60-70%. This is resulting in a significant income transfer to the public sector, a reduction in the demand for energy - which translates itself nearly completely in reduced import demand - and in a reduced need for investments in the power sector, which is very capital- and importintensive. Even if the effect of these measures has already at least partly been realized before the onset of the Plan period,/l most of it will still occur in this period. A rough calculation indicates that the effect of higher energy price in reducing the current account deficit will probably be of the order of magnitude of 1-1.5% of GDP. 72. Similarly, in other policy areas, where quantitative estimates are even more difficult to make, the prospective effects are substantial. In agriculture, the reclassification of forest reserves suited for agriculture will positively affect a significant proportion of the farm land and population, and increased farmgate prices through reduced taxation and improved marketing will, if past experience is any guide, induce an appreciable supply response from the Thai farmer. In industry, stimulation of exports /1 This is probably the main reason why the current account/gdp ratio has not increased much since 1979, in spite of the large petroleum price increase since that year.

35 and a move in incentives toward strengthening Thailand's comparative advantage may well have quantitatively important effects by Given reasonable assumptions with regard to the various factors governing the size of the effects in agriculture and industry, the gross effects for each could be about as large as that in the energy sector./l Finally, there is every reason to expect that an improvement in the efficiency of the public sector, which presently directly spends nearly 20% of GDP, and indirectly affects a much larger proportion of the nation's expenditures, will influence the overall resource expenditure balance favorably. Thus, a broad and intuitive review of the Government's program suggests that indeed substantial effects may be expected. 73. The combined direct and indirect effects of the various policy measures can be estimated through the utilization of an economic model. As indicated in para. 14 above, the Plan projections themselves have been made with the assistance of a model. The Bank has, in cooperation with Thai counterpart institutions, been working on the construction of a new model, especially designed to assess the income distribution implications of various factors affecting the Thai economy. Since it is always difficult to translate the various mechanisms through which any specific policy measure influences the economy into the stylized inputs which a model needs, such model projections can only give an approximate indication of the economic effects which can be expected./2 74. With this caveat, Table 2 shows the projections obtained from this model./3 Under the "without" alternative it is assumed that the Government would have continued its policies of the second half of the 1970s largely unchanged, making gradual but limited adjustments. Economic growth would be somewhat lower than in the past. Real export growth would decelerate and import growth even more; because of unfavorable terms of trade, and accumulating external interest payments, the current account of the balance of payments would however further deteriorate in percent of GDP, and, as /1 Probably the net effects will be smaller, as incomes are created which will be partly spent on imports. However, to the extent that savings are increased, for instance through the public resource mobilization efforts mentioned above, this secondary effect will be compensated. This illustrates the way in which the various components in the SAL policy program complement each other. /2 For the same reason, no attempt has been made to use the model to estimate disaggregated effects of the various policy measures. /3 The projections for the "with adjustment" case are incorporated in Annex 1 to this Report.

36 already mentioned in para. 12, the debt service would grow beyond tolerable levels. With structural adjustment, but using conservative estimates for the various coefficients and inputs governing the estimates, the outcomes would be substantially more favorable. Economic growth would be essentially the same as in the previous four-year period, and agricultural growth would Table 2: PROJECTIONS OF SELECTED ECONOMIC INDICATORS UNDER ALTERNATIVE ASSUMPTIONS Without With Str. Adj. Str. Adj. Growth Rates of Constant Price Aggregates, GDP at market prices Agricultural production Exports GNFS Agricultural exports Manufactured exports Imports GNFS Imports of petroleum and products Ratios Investment (% GDP) Government revenue (% GDP) Current account deficit (% GDP) Petroleum imports (% imports GNFS) Debt service ratio (% exports) Debt service ratio, 1991 (% exports) - (33.0) (16.8) be even higher./l While real export growth, at 10% per annum, would be two percentage points higher than in the "without" case, it is estimated that imports would hardly grow any faster. As a result the balance of payments situation would improve. As Table 2 shows, the improvement, as compared with the "without" case, would, among other things, occur through increased agricultural exports (due to increased availability of agricultural export goods), improved industrial export performance (due to higher efficiency) /1 Even so, the agricultural growth rate which is assumed here - based on an estimate by a recent agricultural mission - is somewhat lower than the Plan estimate. It should be noted that the agricultural growth rate over the years , as stated in Table 2, is below the trend because of the influence of the weather.

37 and decreased energy imports (mainly through energy conservation induced by higher prices). Given the relatively conservative assumptions made, the resulting current account deficit in percent of GDP is less favorable than the Plan target /1 but in the Bank's judgement the Plan projections fall within the range of plausible outcomes. Under the "with adjustment" scenario the debt service is projected to level off in the second half of the 1980s and remain within the acceptable range. Summarizing the above discussion, it appears that, using the analytical tools presently available, the proposed structural adjustment program may be expected to have beneficial effects of sufficient order of magnitude to bring the balance of payments deficit down to a sustainable level in the medium term. D. Relationship between the Proposed Loan and the First Phase of the Structural Adjustment Process 75. The proposed loan is in support of the first phase of the fiveyear structural adjustment program envisaged by the Government. The rationale for this program was discussed in Part II above, and the expected macro-economic effects were reviewed in the preceding section. The approach and the specific measures which have been or will be taken under this SAL are set out in a Letter of Development Policy which has been received from the Government (see Annex IV) and are summarized in Table 3. This table distinguishes between actions already taken since the Government decided to embark on a program of structural adjustment in the fall of 1980, and the steps to be taken in 1982 and early in These steps, in turn, are divided into three categories, viz. studies, program development, and actions. Studies are designed to provide the necessary analytical base where this does not yet exist; program development consists in the formulation of sectoral or subsectoral strategies and action programs designed to achieve specified goals and targets and, to the extent possible, officially announcing them as government policy; actions are policy interventions taking place before or after negotiation and approval of the SAL as part of the Government's agreed program to implement structural adjustment. While actions are necessary to achieve the desired results, studies and program development are essential to the further elaboration of a medium-term phased * adjustment program, supported by a series of SALs. 76. Thus, to clarify a number of issues, studies included under this * SAL are concerned with fertilizer supply, the feasibility of tariff policy change in electrical goods and automobile production, the fiscal costs of industrial incentives, energy conservation in industry, relative prices /1 Part of the difference is due to the fact that the Government's estimate for the nominal GDP is higher. Using the Government's estimated GDP, the deficit estimated by the Bank would be 3.7% of GDP in 1986.

38 of petroleum products, operations of extrabudgetary funds, and civil service organization and compensation. The timing and terms of reference of the studies which will be undertaken early in the SAL period have been finalized during negotiations; for the remaining studies the terms of reference will also be agreed between the Government and the Bank. Program development, prior to implementation of policy actions, will be undertaken under this SAL in the areas of land reclassification, reform of the industrial protective structure, reform of industrial incentives, evaluation capability of large projects, energy strategy, medium-term tax policy, overall fiscal policy and public enterprise financial policies. These programs will set out, in detail for the next two to three years, and more generally for the later years of the Plan period, the specific steps and procedures to be followed in attaining the Plan goals. It is expected that several of these programs will already begin to be implemented during the period of this SAL, while other actions will be deferred for implementation under subsequent SALs. Finally, the many specific actions already taken by the Government since the inception of its structural adjustment program, and the others that will still be taken under this SAL, discussed in Part II of this report and enumerated in Table 3, cannot easily be summarized, but the main ones cover the areas of agricultural pricing, regulation and marketing, reform of industrial protection, export promotion, energy and public enterprise pricing, tax policy, and institutional reform in the public sector. 77. The components included in SAL I constitute an appropriate first "time slice" in the medium-term structural adjustment program incorporated in the Five-Year Plan which can only be implemented over time. In some areas substantial progress toward the realization of the overall medium-term program has already been made or will be made under this SAL; in others further preparatory work will still be necessary and is to be undertaken under this SAL. In broad terms, much progress has already been made in pricing, especially, but not solely, of energy. Significant improvement has been underway already also in the area of budgetary reform. In the fiscal and institutional areas quite a large amount of detailed analysis and implementation will however still have to be undertaken under this and subsequent SALs to attain the set objectives. With regard to industrial policy, the most important accomplishment under this SAL will be to reverse direction in the area of incentives and protection, moving away from an increasingly discretionary and unsystematic regime toward a set of incentives more in conformity with comparative advantage and efficiency. Preparatory to further continued progress, substantial analysis and program development will however be necessary in the industrial as well as the energy sectors. Finally, in agriculture, progress is being made under this SAL in several areas (e.g., export taxation of rice and rubber), but further detailed preparatory and analytical work will be needed to implement the principal programs indicated in the Government's Letter of Development Policy. Overall, it appears that under this SAL appropriate progress should occur toward the realization of the objectives set out in Thailand's Fifth Five-Year Plan.

39 Page 1 of 5 Table 3: THAILAND: STRUCTURAL ADJUSTMENT LOAN PROGRAM Structural adjustment program Sector and policy issue Action already taken Steps to be taken I. AGRICULTURE AND RURAL DEVELOPMENT 1. Land Reclassification Land policy study, completed in May Program Development: By March 1982 the 1981, identified the broad extent and MOAC will have finalized a detailed prolocation of areas classified as for- gram aimed at initiating the process of ests, but suitable for long-term agri- land reclassification in all encroached cultural use. B 73 million allocated forest areas that are suitable for agriin current FY budget to initiate culture by 1986; and BAAC will have reclassificationi process. Broad.work finalized a companion program for its program over Fifth Plan period already operations in support of agricultural prepared. production in the newly reclassified areas. Action: Reclassification process involving detailed soil and socioeconomic surveys and leading to issuance of "right to farm" certificates to start in first half of Pricing, Regulation and Marketing (a) Export quotas Cassava quotas eliminated. Export ban Government policy is aimed at minimizon white sugar lifted. Quota system ing intervention while retaining the for maize exports improved. flexibility towards export regulation required by trade circumstances. (b) Export duties Export tax on rubber reduced (at Sep- Achievement of farmgate price targets tember 1981 prices) from about 25% to for paddy is to take priority in rice 11%. Rice reserve requirement halved policy even if that requires further (reducing its burden on exports from reductions of the tax burden on rice approx. 20% to 10%). exports. (c) Domestic intervention Improvements in the efficiency of rice Action: A start towards deregulation and regulation procurement programs. of livestock and meat marketing will be made by allowing the operation of Improvements in the effectiveness and private slaughterhouse facilities for geographical distribution of "cheap export purposes by April rice" program. (d) Fertilizer marketing Study of fertilizer supply, including system a review of the public sector participation, to be carried out under Office of Agricultural Economics responsibility, during Terms of Reference agreed. II. INDUSTRY 1. Articulation and Implementation An interdepartmental subcommittee on Action: A permanent interdepartmental of an Appropriate Industrial industry has developed the strategy committee consisting of senior policy Development Strategy for industrial development for the level officials will direct imple- Fifth Plan. After submitting its mentation of industrial policies and report, this committee was disbanded. monitor progress. 2. Protective Structure Studies have been carried out for Action: Initial reduction in the changes in general tariff structure. range of existing duties by lowering Tariffs have been reduced for several tariffs on the high side to a maximum electric and electronic goods and of 60% and increasing tariffs on the there have been no major increases in low side to a minimum of 5-10%, durtariffs or quantitative restrictions ing FY82. recently. Program Development: Program of medium-term reform of protective structure, including quantitative restrictions, to be drawn up by mid Studies: Tariff policy feasibility study to be undertaken for electrical goods industry early in 1982, and for automotive industry late in Terms of Reference for first study, to be implemented by Bank, agreed.

40 Page 2 of 5 Structural adjustment program Sector and policy issue Action already taken Steps to be taken II. INDUSTRY (continued) 3. Investment Lncentives A comprehensive study has been comple- Program Development: By March 1982 the ted on the functions and procedures of Committee on boi is to draw up a detailthe Board of Investment; it has recom- ed phased program of reform of investment mended far-reaching policy reforms in incentives, including the introduction line with the broad goals of the Fifth of automaticity in granting privileges, Plan. and incorporating the present import privileges granted by BOI into thecover- A cabinet-level committee has been set reform of the protective structure. up, has reviewed the incentive system and suggested broad reforms. Study: To analyze the fiscal implications of present investment incentives. 4. Export Promotion A number of policy and legislative Actions: A proposed Export Developchanges have been introduced to foster ment Fund will begin operation by June export growth. Baht was devalued Five additional bonded manufacagainst the dollar in July turing warehouses will be established Export Tax Drawback Act is being in implemented. Customs organization and procedures are being streamlined with technical assistance from the IMF. 5. Evaluation of Large-Scale An interdepartmental committee Program Development: Capabilities of Projects chaired by the Prime Minister has NESDB to evaluate public projects will been set up to oversee large-scale be strengthened (see V.l.a. below). projects. A Center for Integrated Increasing the capability of BOI to Plan of Operations (CIPO) has been set do the evaluation of promoted private up at the NESDB to coordinate the investments will be made a part of planning and implementation of the program development by the projects in the Eastern Seaboard area. Committee on BOI mentioned above. III. ENERGY 1. Conservation The Government has taken a number of Study: To identify improvements in steps to reduce energy consumption the existing system of incentives for directly, including improvements in energy conservation in industry. Bangkok traffic management, restric- NEA will be lead agency and complete tions on TV viewing hours, reduction study in Terms of Reference of power consumption in public build- agreed. ings, and introduction of an automobile license tax progressively levied on engine capacity. 2. Pricing and Taxation Most of the energy conservation is Government has reaffirmed its likely to result from an appropriate commitment to frequent adjustments in energy pricing policy. Between March energy prices to reflect costs and October 1981, significant adjustments were made to power tariffs Study: To review the implications of (124%) and average petroleum prices existing retail price structure of (120%). petroleum products and propose appropriate changes. Ministry of Finance will be lead agency and complete study in Terms of Reference agreed. 3. Strategy Formulation Major investments in domestic energy Program Development: NEA will take development (gas lignite, power) have stock of available sector information been completed, are underway, or and prepare by September 1982 an inteplanned. A large number of studies on grated medium-term energy strategy to energy planning and development have achieve Fifth Plan objectives and tarbeen completed or are underway. gets. Subsequently, this mechanism The Fifth Plan puts forward major will be retained on a continuous basis targets regarding indigenous energy to ensure that changes in the energy resource development. The National sector are taken into account in Energy Authority (NEA) has been further strategy formulation and identified as the agency responsible implementation. for strategy formulation on a continuing basis.

41 Page 3 of 5 Structural adjustment program Sector and policy issue Action already taken Steps to be taken IV. FISCAL POLICY 1. Development of Fiscal Strategy (a) Fiscal program for con- NESDB/Bank fiscal policy study has Program Development: Ministry of solidated public sector been completed. Fifth Plan has set Finance will, by September 1982, overall targets for public expendi-- organize the preparation of a phased tures and resource mobilization, and implementation program for attainment developed Droad policy approaches for of Fifth Plan fiscal targets for the revenue mobilization. entire public sector. (h) State enterprise finan- Public enterprise tariffs were increa- Program Development: Ministry of cing sed substantially for the following Finance will, by September 1982, estaservices: power, water, municipal and blish realistic financial targets for intermunicipal buses, railways and all major public enterprises and a communications. phased program for the achievement of these targets, which will, as a minimum, aim at the elimination of operational losses. (c) Lxtrabudgetary funds Study: Ministry of Finance will, by March 1982, initiate a study to review the operations and effectiveness of extrabudgetary funds and to consider whether they should continue to operate as separate entities. 2. Tax Policy (a) Tax structure NESDB/Bank fiscal policy study has Action: Tax measures have, or will be identified major directions for taken, during FY82 with estimated inreforms in tax structure. The Fifth cremental tax yield of Baht 4 billion Plan has set a goal to increase direct (0.5% of GDP). tax share in total taxes and to increase the tax/gdp ratio from 14 to Program Development: Tax Policy Board 18%. Selective improvements in tax will by September 1982 identify approstructure and rates were made during priate long-term tax structure and FY81, including introduction of develop a program of phased movement interim payments for corporate income towards it. tax. Tax Policy Board was set up in August (b) Tax adainistration Computerization of tax payer identifi- Action: By March 1983 Revenue Departcation ano tax collection, as well as ment will set up a total of eight Area preparation of program for organiza- Tax Offices in Bangkok. by mid-1983 tional reform in Revenue Department, it will have separated headquarter with IMF technical assistance. Five from operational functions, and will Area Tax offices set up on a pro- have organized headquarter officers visional basis in Bangkok by along functional lines. Required December regulatory action is expected by mid-1982.

42 Page 4 of 5 Structural adjustment program Sector and policy issue Action already taken Steps to be taken V. INSTITUTIONAL DEVELOPMENTS 1. Systemic Changes (a) Planning and programming, Major effort made to define and. Action: NESDB to engage consultants project appraisal, and specify policies and public sector to: monitoiing and evaluation programs in the Fifth Plan as basis (a) design and assist in the instalfor budgeting and investment lation of a medium-term planning analysis. and sectoral programming system, New approach adopted to budgeting for and of a uniform project prep- FY82 (see Budgeting below) involving aration/appraisal system; closer collaboration between central (b) clarify roles and responsibilistaff agencies concerned with resource allocation. ties of planning units at each level of government; (c) examine adequacy of existing monitoring and evaluation systems, and recommend and install improved systems; and (d) determine appropriate organizational and staffing arrangements for NESDB and other planning bodies. This work is to be completed by mid (b) Budget formulation Consultants commenced work in Bud- Action: Budget Bureau will: and execution get Bureau in March 1980 to assist (a) implement in FY82 the recommenin design and introduction of bud- dations concerning improvements getary reforms. in allotment system and FY82 budget prepared on basis of relaxation of central controls sectoral (ministerial) allocations on budgetary transfers; fixed by Cabinet on recommendations (b) apply program budgeting approach of Budget Bureau and NESDB. to MOAC and Ministry of Educa- New capital budgeting concepts and tion on trial basis in FY83 and procedures devised and agreed. evaluate their experience by Changes in allotment system and November 1983; and (c) prepare authority for approving budgetary FY84 budget on full program transfers recommended and under budgeting principles. active consideration. (c) Government accounting Consultants commenced work in Control- Action: By December 1982, the Controlsystems ler GeneralJs Department in January ler General's Department will, with 1981 on project to clarify and stan- the assistance of consultants, carry out a comprehensive analysis of pre- sent accounting procedures, documents, staffing, equipment and pre-auditing systems. Based on this analysis, accounting systems and financial regulations will be improved. dardize accounting data; draft report has been completed. (d) Performance auditing Request has been submitted to USAID Action: During 1982 and 1983, for consultants to design, test, and Consultants in Office of Auditor install performance auditing system. General will design and install necessary audit systems, compatible with revised budgetary and accounting systems, and recommend appropriate organizational changes.

43 Page 5 of 5 Structural adjustment program Sector and policy issue Action already taken Steps to be taken V. INSTITUTIONAL DEVELOPMENTS (continued) Action: (a) Funds to be made avail- 2. Strengthening the Institu- Numerous policy studies initiated in able in FY82 to core agencies to tional Infrastructure context of preparing Fifth Plan with finance studies of key policy issues. funding provided mainly from inter- (b) Relaxation, by March 1982, of national and bilateral aid sources. restrictions on ability of core policy agencies to commission Thai National Economic Policy Steering institutions to carry out policy Committee established in November 1980 studies. to coordinate national economic man- (c) Establishment of an independent agement with NESDB designated as research or development institute to secretariat. organize the conduct of policy analyses and reviews by mid Major review of existing development policies and programs undertaken in Study: Study of the organization, context of preparing the Fifth Plan. management and compensation for the civil service to be initiated during 1982.

44 E. Benefits and Risks 78. Benefits. The main benefits of the loan are in the form of the policy adjustments mentioned above which may be expected to lead to an improvement in the performance of the economy in general, and in the balance of payments in particular, over the medium term. This will help maintain Thailand's ability to raise funds from international capital markets on reasonable terms. The present positive attitude of private lenders toward Thailand is based on competitive considerations, and mostly on short-term assessments of Thailand's creditworthiness. This implies that Thailand's access to these resources is very uncertain and can quickly be impaired if structural balance of payments problems in the Thai economy are left unresolved. Private foreign banks have indicated to Bank staff that the existence and implementation of an adjustment program, as well as significant financial support for it from the Bank, will be important considerations in their assessment of Thailand's further creditworthiness. The loan will also provide quick-disbursing foreign exchange at favorable maturities, which will assist Thailand in dealing with the substantial financing needs that will persist over the period which the country needs to implement its well conceived structural adjustment program. 79. Risks. The Government's structural adjustment program has three major risks. The first risk relates to the uncertainty of whether the targeted balance of payments improvement will in fact be attained, given the difficulties of estimating the balance of payments implications of the program, even assuming the external environment as given. The second risk arises from the uncertainties regarding the external environment, which could affect prospects for export growth, interest rates in international capital markets, and the price of imported energy. The third risk is that the program of policy reforms will not be fully implemented under this SAL or that adequate programs are not developed as a basis for policy reform in the future. 80. As regards the first and the second risks, the balance of payments impacts estimated above are on the conservative side and even some estimation errors or moderate setbacks in the international economy would probably still allow the overall objectives to be achieved. The third risk relates to political developments in Thailand which might impede the Government's determination or efforts to continue the development and implementation of an effective structural adjustment program. Under the present Prime Minister, General Prem, the Government has been able to maintain steady progress in implementing policy change even under adverse political circumstances. Moreover, the present general directions in economic policy appear to enjoy substantial support across the political spectrum and in the Thai Government bureaucracy, and there is therefore good reason to believe that they would continue, even with a change in the leadership. Furthermore, the gradual approach and broad focus chosen in developing and implementing the structural adjustment program should help to minimize and distribute widely

45 the costs to be borne by any particular group, thus reducing any possible negative political fallout. Indeed, one of the major reasons for associating the Bank with the structural adjustment program in Thailand is to strengthen the support for gradual but steady change over a broad front. F. Loan Amount 81. The proposed loan of $150 million would meet about 7% of the total gross external capital requirements of Thailand in The amount of the proposed loan was determined in the light of the size of the Bank's lending program for Thailand and that of other priority projects for which Bank assistance has been requested. G. Monitoring 82. The progress of the SAL program will be monitored in two ways. First, regular supervision will be carried out. In this context, the Government has agreed that it will regularly exchange views with the Bank on progress achieved under SAL; as part of these exchanges the Government will furnish the Bank with a report on the status of the implementation of its structural adjustment program in such detail as the Bank shall reasonably request. The first such exchange of views will take place by June 30, 1982 (Section 3.02(b) of the draft Loan Agreement). Second, the preparation of an early second SAL would require extensive discussions with the Government, beginning in the fall of 1982, and would be based on the successful implementation of the program specified under the first SAL. To ensure such implementation, the government is instituting a high-level Economic Structural Adjustment Committee. H. Categories of Goods to be Financed 83. All goods imported into Thailand from eligible countries, except goods in a few categories which are specifically excluded, would be eligible for financing under the loan. The excluded categories involve goods which are being otherwise financed by national or international financing institutions or any other agency, goods intended for military or paramilitary use, and goods for luxury consumption. A list of ineligible imports is given in Schedule 1 of the draft Loan Agreement. Loan proceeds would represent less than 3% of the anticipated imports in the eligible categories, making rapid disbursement possible. It is expected that disbursement will be completed within three months of loan effectiveness, i.e. about June 30, 1982.

46 I. Counterpart Funds 84. The funds generated by the sale of foreign exchange provided under the loan would be credited to a special account to be established in the Ministry of Finance. The Government has indicated that it intends to use the counterpart funds to finance various essential components of its structural adjustment program, including some of the studies, the programs for administrative reform in the Ministry of Finance and the Budget Bureau, the program to strengthen core agencies (including the evaluation capability of the NESDB), and the establishment of the Thailand Development Institute. Beyond this, SAL counterpart funds will be used to finance the Government-s development expenditures. J. Procurement and Disbursement 85. Contracts for the procurement of goods by the private sector estimated to cost the equivalent of less than $7.5 million each will be awarded on the basis of normal commercial practices of the purchaser. Public sector imports under contracts below $7.5 million equivalent will be procured in accordance with standard government practices, which are acceptable to the Bank. All purchases, both public and private, under contracts amounting to $7.5 million or more each will be procured through international competitive bidding in accordance with Bank Guidelines. Certain commonly traded commodities may be purchased through price quotations available from organized international commodity markets. Whatever procurement methods are used, not more than $50 million of the funds would be used to finance the import of any trade classification subgroup. 86. The Kingdom of Thailand will be the Borrower. It has designated the Bank of Thailand to be responsible for maintaining the loan account, the collection and coordination of the relevant letters of credit and supporting documentation and for the preparation and submission of withdrawal applications. 87. Procurement and disbursements for the proposed loan have been designed to ensure rapid drawdown of loan proceeds. The proposed loan will be disbursed at the rate of 100% of foreign expenditures of directly imported items through reimbursement to the Borrower or direct payment to foreign suppliers. Expenditures for goods procured under invoices for $50,000 equivalent or less will not be eligible for financing out of the proceeds of the loan. Reimbursement applications normally would be consolidated and submitted from time to time in amounts of at least $1.0 million equivalent.

47 part IV - OTHER BANK GROUP OPERATIONS IN THAILAND AND RELATIONSHIP TO PROPOSED LOAN 88. Thailand first borrowed from the Bank Group in 1950 for a railway project and, as of September 30, 1981, had received 66 IBRD loans (including two third window loans) and six IDA credits, totaling (net of cancellation) $2,266 million in loans and $125 million in credits. As of that date, $ million remained undisbursed on effective loans and credits. No IDA credits have been extended to Thailand since FY79. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as well as the status of Bank Group projects under implementation. 89. The sectoral distribution of Bank loans and IDA credits, in dollar terms, has been as follows: 34% for energy; 25% for agriculture and rural development; 19% for transportation; 6% for telecommunications; 6% for urban development; 5% for education; 3% for industry; and 2% for population/health/nutrition. As of September 30, 1981, IFC had made commitments totaling about $111 million in 11 projects in Thailand. IFC's investments have been primarily in industry and in the development of financial institutions aimed at mobilizing domestic resources and providing financing to smaller enterprises. 90. Over the past five years, the Bank has shifted its lending in Thailand from a program dominated by investments in traditional infrastructure projects (accounting for over 80% of the lending through FY75) to a program which places increasing emphasis on assisting the Goverrnment s efforts to reach the poorer segments of its population more directly. Since FY76 investments in transportation, power, water supply, telecommunications and industry have accounted for only about 60% of Bank Group lending and about half of these, in dollar terms, were for projects specifically designed to benefit the rural population. The proportion of Bank lending to the agricultural/rural development sector has trebled, accounting for about 30% of lending operations since FY76. The design of projects in this sector has also changed, from exclusively large irrigation projects to a more balanced program covering irrigation (including land development and support services to the farmer) and a variety of innovative projects to assist farmers outsid the central flood plain (rubber replanting, livestock, agricultural extension, research and credit, and rural development). Projects in the social sectors, which prior to FY76 were limited to three in education accounting for 6% of the program, have both diversified and grown. In recent years education, population and low-income housing projects have accounted for about 10% of the program.

48 The role of the proposed Structural Adjustment Loan is to support the Government's efforts of reducing over the medium term its substantial balance of payments deficits which have arisen in recent years as a result of the rapid increase in energy prices a slowdown in world demand for exports, insufficient savings effort particularly in the public sector, and Thailand's emerging limits on newly cultivated land. The loan is designed in principle as the first in a series of such loans. This would offer the Bank the opportunity to continue to assist the Government in the design and implementation of structural adjustment policies as part of its implementation of the Fifth Five-Year Plan, which came into force on October 1, The programs which are supported under the proposed SAL are designed explicitly to complement the Bank's project lending by focusing on policies which cannot be adequately addressed at the project level, but which in many cases provide important support for effective project design and implementation. 92. For instance, in the area of agriculture and rural development, many interventions) such as land reform and land titling, can be supported through Bank projects, but the broader issue of forest reserve reclassification cannot be adequately addressed through specific projects. Similarly the issues arising in the context of reform of agricultural taxation, regulations and market interventions, while essential to a successful agricultural growth and export strategy, cannot be addressed at the project level, since they cut across too many Thai agencies and transcend the scope of any individual project. In the case of industrial development, because of the dominance of the private sector, Bank involvement to date has been relatively small; as a result, the scope of operations has not been adequate to carry out an effective dialogue on major industrial policy issues. The proposed SAL is therefore seen by the Government and the Bank as the most effective way of continuing policy discussions in an area that is crucial for the successful restructuring of the Thai economy. In the energy sector, the Bank has been very active in recent years. Its lending has been mostly for power generation, transmission and rural electrification, but more recently also for a gas pipeline and for lignite development. However, individual project loans have been and will continue to be made to specific agencies and do not provide the opportunity for full participation of the Bank and the Government's core agencies (NESDB, Ministry of Finance, Budget Bureau) in the process of overall energy policy formulation and implementation. The SAL provides a vehicle for such participation and aims at pulling together the various strands of sectoral analysis, policy and investment planning into a comprehensive and consistent energy sector program. 93. Fiscal policy reform and broad institutional development of the type supported by the proposed SAL are, by their very nature, outside the scope of project lending, and yet affect project operations very directly through (a) the extent to which financial resources are available for financing project-level investments and through the incentive or disincentive effects of specific fiscal measures; and (b) the institutional capabilities and constraints of specific agencies implementing projects which frequently are inherent to the entire institutional framework in which the public

49 sector operates, rather than exclusively of concern for the agency itself. Structural adjustment lending for fiscal reform and institutional development therefore, as for agriculture, industry and energy, provides a unique opportunity to assist the Government is a way that is complementary to the Bank's project lending. PART V - LEGAL INSTRUMENTS AND AUTHORITY 94. The draft Loan Agreement between the Kingdom of Thailand and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 95. Special conditions of the loan are listed in Section III of Annex III. The specific actions that the Government plans to take by March 31, 1983 are listed in the attachment to its Letter of Development Policy (Annex IV). 96. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 97. I recommend that the Executive Directors approve the proposed loan. Attachments February 8, 1982 Washington, D.C. A. W. Clausen President

50 -44- ANN EX I Page 1 of 5 THAILAND - SOCIAL INDICATORS DATA SHEET THAILAND REFERENCE OUPS (WEIGHTED AVEWES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTKATE)- TOTAL MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL /b 1970 lb ESTIMATE lb ASIA & PACIFIC LATIN AMERICA & CARIBBEAN GNP PER CAPITA (US$) ENERGY CONSUMPTION PER CAPIIA (KlLOGRAHS OP GOAL EQUIVALENT) POPULATION AND VITAL STATISTICS POPULATION. MID-YEAR (THOUSANDS) URBAN POPULATION (PERCENT OF TOTAL) POPULATIUN PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 68.2 STATIONARY POPULATION (MILLIONS) YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENSITY PER SQ. KM PER SQ. KM. AGRICULTURA LAND eupulation AGE STRUCTURE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL URBAN CRUDE BIRIH RATE (PER TIOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS. ANNUAL (THOUSANDS) /c USERS (PERCENT OF MARRIED WOMEN) FOOD AND NUTRITION INDEX OF FOoD PRODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) PROTEINS (GRAMS PER DAY) OF WHICH ANIMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECIANCY AT BIRTH (YEARS) INFANT MORIALITY RATE (PER THOUSAND) L ACCESS TO SAFE WATER (PERCENT OF POPULATION) LUTAL URBAN RURAL ACCESS TO EXCRETA DISPOSAL (PERCENT UF PuPULATION) TOTAL URBAN * RURAL * POPULATION PER PHYSICIAN POPULATION PER NURSING PERSON POPULAIION PER HOSPITAL BED TOTAL e URBAN RURAL ADMISSIONS PER HOSPIrAL BED HOUSING AVERAGE SIZE OF HOUSERULD TUTAL 5.5/e URBAN 5. 3/e RURAL 5.6/e AVERAGE NUMBER uf PERSONS PER ROOM TUTAL URBAN RURAL ACCESS TO ELECTRICITY (PERCENT UF DWELLINGS) TOTAL URBAN * RURAL.. 9.0

51 - 45 ~ ANNEX I Page 2 of 5 THAI1I;h - SOCIAL INDICATORS DATA SHEET THAILAND REFERENCE GROUPS (WEIGETED AVE:IIS - MOST RECENT ESTDIATEeZ MOST RECENT HIDDU INCHlE HIDDLE DNCOHZ 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC LATIN AMIUICA & CADREAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FIHALE SECONDARY; TOTAL MALE EEMALE VOCATIONAL ENROL. (2 OF SECONDARY) PUPIL-TEACHiR RATIO PRIMARY ,6 SECONDARY ADULT LITERACY RATE (PERCENT) CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE PER CAPITA LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) FENALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 21.6/f 23.8/g 14.0/h HIGHEST 20 PERCENT OF HOUSEHOLDS 50.9T ?h LOWEST 20 PERCENT OF HOUSEHOLDS 6.2/f 6.1/g 7.67*- LOWEST 40 PERCENT OF HOUSEHOLDS 14.9/f 15.9Li 19.1/h POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URbAN i RURAL Ai LSTIMATED RELATIVE POVERTY INCOME LEVEL (U8$ PER CAPITA) URbAN RURAL LI ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends o. availability of data and is noc uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and /c Government program only; /d ; /e 1962; /f ; /g 1968; /h Preliminary data for ; due to lack of data on national basis, the methodology for aggregating the available regional data overstates incomes of lo. income groups and understates incomes of higher income groups. Thus, this data is not suitable for any analytical comparisons. /i Eatimates for May, 1981

52 - 46- ANEX I Page 3 of D1FIOITII(1S OF SOCIAL INDICATORS The tfer... V-oP. are (1) Ch. se coutry.. group of ch. sblact touttoy.d4 (2) a Coun.try AtOP 00th eon.wt hiamoe -. sb( tlc.. Clt. th. country apoop of Ch:.. bj.at... *.,V (-.opt for 'CUpico1 Surplus 0i1 tup-otr group ehv.o 'Middle Inc. Sooth Al"..t and 1(1d41. tact" L. ob.-e hoto# of Sumpoga eot-ulu fftistla). In rho -9-onu troo.p dat. the -votg. art popuatio weighted tritttit Sta. for -ath todi.tto cod th-. aiy Oh. -Jo,ity of trho couori. in. grop ha. d"t. for Cht Indloator. Sin.e tht co-rag of..ountie L. 00 the tndioto... d.pend. on ths -ol.ebtlity of dt aad i o nfr,0.00se -- 1b.e anorofed tratu os.g... of Cooe inditutr to onuthe. The. -- rge...r. on ly -jf'l inueprigthu 0-1. of tote. Although ths dat. Cre dr f C.ro Sout... ge..erally Judged the mort.uthorittifi ted eliabl.. it shold.1.0 b outed thu t hytzy Aot be tote.- -ti.o-aly ooe...ebl. becaus. of Cho l1ch of.t.odaodt.ed delftoitiono n.4 W tocpt. vsed by dif f.orot oooeurlet L. coll1.tio th. data.. dut. ac.nns _hlon.crfo to d.re.ib. teds,. of Osctde odioot. trond.,.ad oh&... ttsoi t J.. digfr-..e lbetwe -octrie..' htl. LAWI AttO (toot-od eq.).) youltict ro 1'0.00t1I Nod - total, urba Tota Id rurlona IPoutfon (totl.1 - cuotuenoe ooprutin9, ludeoo.d tolarod eutuo- co,tdrrl) 40,04.4 by thico _ CLOtOio noceho of Ph,.;u. be. Atfo e!io of Ieot eolotouea ceo cod tyorou"ly 00 pto"eaoaly eail.bls in pblcho cod polton ge-t.i got and optoholind crops. peeturee. hcpit.1 sachet asite sod kitche garden. or to IL. f.llos; 19lt d.ta. hubilit.ti.n -t.entr. soepitals OO.. t.blioant. pernetly etaf d by at 1oat ono phyei.i.. tetohli9_6opn.. poridg Lonolpt.Ip ro_t_- (ISlP P CAPITA (1(S81- G pr.o pit. wi-t.te at 0000r0 otokat yn Co.1- d40i.cr uro Ott tul-d.4. uro)l hoepittle. hoorr teld. bo.tbt octod ht nt"ntoti"o "nth"d en O-cl4 Btoh bolt. ( hunin;; tobi, nod noicl "t.cor nut Puouetly MUM 8. by a ptyojota. (btra: y 19y0, and 1979 dana. ned1:al.. toiin. ao oo..l obiob offr. -einu. dotocled p,.oid. a lgnted r..g. of sedlol faoilitis, For Stwim.- MSOT CUNUOGTIOO5MU CPI - anu osorc of Ota -alanoy(o ticci Pcpoaa urban heapitulo taloda WM.t p,ia.ipallgtner1 oopinlu., end ilgite, pat-olerc ourur..e and bydo-, eoored nobra lc n roaru he.pitl." locu b-sponcl an adicepl w. ane-ity totoity) L4 bwestan of coa eqcivuiouoo ~cpio (70, cd outer.. SpaolaiI.d heopitel. no. ioudd only sedor totl. dete. Adt.iou0e- our gonitul Ned _ Total urbto f bd-iouon to 00 dibchng. lonb.pit.l. 4Tdidd by the.&no of bedt POPOI,TIU dtlotal STATISTICS CoeIPelto. Mi-Tot Lthao-ndg) - A. of July 1; sad 1(1701 ltiu dato. A-Ot 800i. of S..ueheId (enrcn - oabl - totnl. cobs. -d rooe - Urhoo Poentiu loscet of diffte.n.. total) W2f2ito" - Ratio of Cnbuo of u-bun0.0.syefo to tott1 poyr1otion; errblt f4 AbctbolId oopsi.tsf e tnd their pony of ta iniiduo aol A hodno b h..r liin jeeten or lod-o ay C0 say at he inciodnd Lo aang ooentnioe; 1960, 1(170, ai P9dt. hoeo.cd for ettisiu oupe..tn "oo P"01"0"4" A,,,&,.be- of Peron oa Loruc ig. r_se Ic -t totu.,uban, lou te - rnrt - Aenru. (--ton.pupution poclootincoo hone...d en 044boo of Pooat pro.oo Ln ull cob., Ond 00.1 entophaiam rtoa tou oplto b a rdeoad thoin sortelaty end ferility rut... drenliing. oespecti-ly. DolnsocoeonPesteruns P-ceoin S utet uref 0 -ortality Cat. oonyio of thoto l-al AeSe- Coaoou.pied part.. L.g lif. copacteny at boroh hoonetne1. rth anotnr'o par -apit. ioura ACooO0 larilnieonto 11.-0,cd riot)-ttl f nl.1 lif. apctenty rban, ta tnbil.i.ho rur.1 or 77.5 your.. Th.eF tr-coornnrioa d.oloatit.larct ho JtOh Or-at-r to puo.tat not.ce for fotutiity frt htr three 1~levl seno d.lihoj. iof totel. arloo, and rura dv.llhois epeor fnctility to Lnocte lvl end P.00 tunily plhoonos pront t..b c-ctry is thsn.oeeotno ote of CMeo alecabouto of soot1ity 9C_AZION eod fertility tonode far projootion Poros AdOnotOd tnlnatttio. ttatono,ooot.stin -Ina oooe oeto-ecry ppttoohotennnth..l. r,, Li...Bo bol te al r. top-l.".els and.fna. TC t. Cohiao 07eoofriiyrts4000t 0r acboo1-ift-g nl.n.iana;oosy OoidS ido gdnl Iho Oepltoot 1-01 oi unit out C,poodtooi rete, -b,:,bgee hnyour bat edjuetd fot diffnrout lnths of priseyop decotio; for of.o rtpiaoot it "lf cattly. Th' utetioour Pcp.lant_ iee msotolt I..th piv-ree -dotttt.!onoollne my nea4 101 pe.tot.titnatd an the heal. of tbo projectd oh.-atorioni. of the pauitan instapupil. a- abit. 00 then Chs fflohol.ehn 84p. Lr. the you 2000, nod the -t.0 cf dnclinu of fertility oatn tonpuc- oce,ncaoi 00t.L ed I.-I. C.Wot.d an ohon;ennoat ant level eduction :reanre et lut Poor your oappeored pniary tefo Yf!r ntthnrv- ouato ia noa.hod - The yea vae. otnlc-y popletien p-oida. gesrl. -eathonal or tenor trahohg hot-tuton tsr p.pifl ale.hu b b 0. noched, usualy of 12 to 17 poart of toe ; ooonepadtce tor- 00gerly booutolot D-noiny anadd K id-yec "poplctloo p.0 squar klloateo (100 hactaooe) of Poainc nalao eroot. of oacda, t- Ltostlttian tot)esa 0g. 1(170 end 1(17(1 Wct. hoolde toubaol. teou-t,o, ar otbar Vpruo- ehib apu..tn hdodped- P00 o. he. oeia.l l an - Conotad coabo.- f 00 eg Iotra l_danly C. ae dopart-ote af esoodar iati-otoa. Only; laso 1917 end l197n du.". Poi-eua c - onaro - domodr - feta ntniate 00Usd to PooUtolaho don eoruoco (sn t - hildrsa (0-lu pyor.). rorkiag-ogo (15- prnr n eodo lvl 14. y 0o of -teco Le cho.b ho.ee) Wo roiom (1 r cod _1r)O par-otage of nd-year pnpu- - Pcnoupndus.00 letioo; aed 1(1791dt. dl lite.. :f00hoerer - Linot-" 6adt. (ebb to Csed ud -it*) P.. "uiot crt Non Otonr -0 l,1- uae-l mrth f totul nd-... nerteo toa edalt poocoo a 15 ourt sad -ve. laiono ic N o 1(1-70. cod 1(17-79."- Fecoato Cote 1p,0 tbaosae enonati-n - P..esgo -car.. op.is Crod. 810th t- Ien tour tbt.-adl - Aocol lire births per cthceuad of nid-yoan ruro entcg I.e. thec oiht p-ron; taldt.clo u N---o.s and pop=lo.le;1(16 19t70.an.d 1(17(1 dat.. ilon.ry bul. rosdth Pte _u theson) - Coeca1 doothe Pantoed of oid-yaon 0040 Na-ai-e (Pen tbac.-d oornbtlo) - All typue of -oi..n. fct ponafo;1(6.1(170..di. and da.. brondoant to Sanro pobllo Per tha...tod of Popultihon; enindee.0 enoute Rro.t0 - AveoSot oubon of daughcrto -e ill hour Lolicansad no-i-or. L4 contrh. end ho yanre b-e rogit-ten of radio bwo -o-ia.poncdccti- Pnnid if sh%- oico reocuooeib ito-rt oe ; da.- f- 0rcan yours -y oat ho ooanabl. elet tiiy os; ealy tir-yo eveugt ediog 04 1( (17. cod 9(71. otor oe ba1iobd Iioonain. fal loi a -acntn.40 (tho-nds - Aao.ol c,bnr of -utpoono TV leoro ortuae on.tol-tv of rc-tvao bioth--cntol for broadoct d-i..e to ouden antpictof co tienu f eniy Pltcoig p0cm... S-..,u orichltproas pupoletion; -Icd.. TVi.ad7( aaov Panll, plenla - fanre (rcent of Stoied woo) - P-retuge of aonitdl -orntio. aod in yer.rt oo oisrt of TOVe. e ho efroo. cof ohld-b-uho oe 17I( ye-noe nb h.e bioth-cooteo1 duvi..o. n aoos irrutien (to t eli protdonno.luto arted n iceta an - gbe ocp.oc nba courag CtOn o dily gana- teot onppo*dfa oopnoma oir poblicatien do-oted pniarily to oeodin aoa a. I-scnl.e FOO A rtmttifcu tc he 'deily if inl per o os t o_nnf COnsca mods. of P004 POoduoti 000 Cutta e oi. ccl (en M tduo onlutncu s CtOi00 oar Yoa - %0.ad on the ccbe of produnoion C.1, o. f foo condt o.! Pocdn1_Ott eusode sed.0 W f,.x i.. endtooe.=oud donialt. youo. holodon adnleoho to doiva-h cinon is - ycaodo -ro Moele. C.di'tio co-en polnoy gode (e.g.ooren nod boil. icon.. Ooat.ud of ng.r) which ao ediblo. ancaortnicote t.4 (a... coffee nod too cr ouclded). AgOoeatn produtiac of ouch -taon LA hosed oc LADO1t OPOC _-luc Sueg pnodoue price enioht.; 1= ,. ad 197(1 dote. Total Lobun 7,0.0. -c.da) - liooousally actin..p-tn. iclodins aiaonl Ie of cabrt of rciotnt) - opotu ton a tcoc E. en Vlc.7 bat encldho bao-ei-no ntduntn, t asg qiuetof cot food u;pplie avilable L4 ootnr per cepirs cooisng popul.tion of ell agn- DtfOotiunJ. 04 Ooo cottoi.. 00 pe dy.avilbl opplho. topiodaeatc poodcctioo, opoct. le- 00 coporble; 1(160. 1(170 uod 1(179 dat.. upooe.e and chuosc ft.tnck. Oct ouppiios ntlud. eno-1 f.od, -oo., F.-I. U(tot _n) - IO lubar fo..t..0 p-n"ng. of to-1talbho foroc. qu-titioaa04fco.pocesar an bta i4 ditribotic.l Rs 9 uina-.la&iok&e!j oeat - Lahoc f roo.a0 fao"iag 0for.tny.h b Loti aod ant eeuettntd by P7 to aad on Lheil.golood W c cof lcfi- Oohin ta penrootuge of total lbor fort;1(60, 1970 ted 197(1 data. 000ten huao cnidt e oonono tn Coe ody weto,aoid-eerv(eooo -Ltho fa-o 04tOLg, con tianoo, nfoto tad *ndiotoihotlo of popoltioo. cod eloo 10 pon-t fcn,ran.toa ad abotcrioty. neoeo and no. hhooaohold levl; 1(161-65, a. -prcnta 170. o 1(177 of to...l data. lubar farce; 1(160, 1(170 o 979 dotc. Per.. pit. oel o rti dy) "naao- p rnteut at p.o oapitu ParOielO.io juoforat) - total neo.ad fl - P utioputic on Pt nopply cf Ic.d p.o dc. Rot Ouppl7 of food 0. df0iccd a. tho.. No- emtiolt naoe..oepat-d 000.1, al,-d ftlelbt far.to qoioaot too.11.coo.e. utablisbed by USDA pnoid. fcc eloiinpraaa of cta., alo and f.-l. popltion of all gs- eapacoiv-ly; elbnstc ot 60gi c -toa p,ot.io Pet day tad 20 goon of -tino1od1(160, 1(170, 41(17(1 dun.. Th.au a- bood on LO'e puotiipetion rrte prob = ctaiv, ofh-o 0 onoaid ho atoine pootott. Theoo taand- rofloutio age-an etnotcrofa thu population, a 100g 0t. trad. A cnd. earo l=n thnthoan of 75 g--- of tota pruttin end 23 got otftont=tnee onr o. octional Mcn en1lpot7 t -to cr000 ton thu -. 01d, pnop"aod by FAO in the Third ton_ i toodono Notio - uiaoi of pplotncder 15 end 65.o 0, Ocoi d Sara -f oad 1977 dare, to th -o1 labor tfrc.. p. culc ntoo,0.000_ no ota end1- rle - Potatoc ecpply of food d.- oiveid Ontoo en- e n p:i -aola. S-par day; , and 1977,d.Cc. ocoif oicttioytion Chi4 ane 1A)Notolt,No. (ton thousnd~ - Aocca deotbe pen thoc... inl Pe-rorooo of 7,10-00 lora (bcth L4.- hb ad kind) - Octotod by richcec as. aroup 1-6 yeane, no oh1ldroc to thin og. anoop, ton eastd I.voiou000 5 p-noot, rictct 20 P-.c-"o Poore 10 p s.d poor-n 4o p-.t00 ottle dnoa dcrinod foon lift tahblo; 1(160. 1(170 uod 1(17(1 dht. f bn.hlde. XKAlTO 709ERTY TARGET GRDOPS litlroet 080b (00.) - A'onuua ocebso of Yceoflt eiic Th. f 1lOn,lg -ononttar Obiotch; (170 sad yr. 7 approni-craecao data. oet ooe audshould ho int.rp..ord imb cotoidoobbo cotio.. Indent Herteli tat -oa th.cad A-1Au dostha of i.fect. codon ynntdAeluoPvnnOt. nrl(ioorrrt) ra o ua ot00pnthoe oot(i biotba Aob-ouco po rny L_c 1-01 L4 thor Ouca lin 1 hbo1 eblht onn A-t. to Sato W_ta _r._ra of -lotiatoo- toal.ohu. td -uru - N- tnitbooally edoquato 4i040 hn of p-p.07 (.totl;,coe,b Pbnod pfo ral) ith ceancoblracee ou n. L.et4 i out t -ooafodba notso.opply (inlwda octdeuftneto or coot,tod hut... onoio.to tftfnstdbnlstv ooo ho.toe 00prcptl os a ua f50aoo tohito -op-cti-op inin.it at -chen err.t public pcono io.oc co the U oe 1on.One L. dovitr fno becornel -co-cblt c-050 Id ioply oh-o tb. -oaoloo d, Cot hoo t,,iif 0 diopr-p i-orca P-0 of ohl duyo, fetmohi 0 ob-r of toobofh bcl od rurol - Ptront of ~poplatioo 000h poor" (urban edrural) obo err "cb.olut. Snoof -cplc (1001 oha, ucd pr.r.) e-n-d by ooccrtcffnoep Ponr Sot. of their -oeprti- popolattic. to-octo diapoo -. Y Icld too col11oi-oc cd ipeo... 00tlih or clitot oputet,o h-. -- ofanoonpby Ot-r-Ccc syota_ Eot to..i optho ond.eo of Social pit pnlioieoof000 hots Divition oconoci Olyo1 cod Pncj c-1- onp.orc- Ilopinclic.: P-1-lai.c -s Ph ricll- - Popolcooo fdi04d4 br t-bor of prorti.tno phyool... qualified too, a noiol -rbo- a t o._itoly lo_ol. Y ar PooRE lo cj Oualc oro- P.pul.Oiot diridod by ounhon of patc -1. -d fpolonodocon- p0000l --roe -0d --- OaocrO e..