ECONOMICS AND PUBLIC POLICY JOURNAL

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1 ECONOMICS AND PUBLIC POLICY JOURNAL Vol.3 No.6 July - December 2012 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC CORRIDOR OF GREATER MEKONG SUBREGION Book Review MEN s LIVES School of Economic and Public Policy Srinakharinwirot University

2 Economics and Public Policy Journal Volume 3 Number 6 July December 2012 Editorial Board Editor in Chief : Chompunuh K. Permpoonwiwat, Ph.D., Assoc. Prof. Editors : Direk Patmasiriwat, Ph.D., Prof. Somchai Ratanakomut, Ph.D., Asst.Prof. Saree Worasutthisarakul, Ph.D., Asst.Prof. Ratchapan Choiejit, Ph.D. Jirawat Jaroensathapornkul, Ph.D. Adul Supanut, Ph.D. Suwimon Hengpattana, Ph.D. Prapran Fuengfusakul Editorial Board : Praipol Koomsup, Ph.D., Prof. Direk Patmasiriwat, Ph.D., Prof. Udomsak Seenprachawong, Ph.D., Asst.Prof. Komsan Suriya, Ph.D., Asst.Prof. Porphant Ouyyanont, Ph.D., Asst.Prof. Somprawin Manprasert, Ph.D., Asst.Prof. June Charoenseang, Ph.D., Asst.Prof. Arunee Punyasavatsut, Ph.D., Asst.Prof. Siriporn Sajjanand, Asst.Prof. Salinee Worabantoon, Asst.Prof. Prapatchon Jariyaphan, Ph.D. Editor s Note The Economics and Public Policy Journal is a refereed journal, appearing twice a year. The aim of the journal is to provide a forum to publish scholarly works to in conceptual, theoretical and/or empirical articles worldwide. The journal highlights the importance and multidisciplinary of economics, business and social sciences involving public policy issues. Editorial Assistants : Miss Pimchaya Pomthong Mr. Isaret Thammadool For subscription details :

3 Contents Volume 3 Number Page DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION 1 IN ASEAN Stephen E. Reynolds, Danupon Ariyasajjakorn, James P. Gander and Somchai Ratanakomut A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING 25 CRISIS IN A SMALL OPEN ECONOMY Panawat Innurak COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 56 Siriluk Chiarakorn, Chompoonuh K. Permpoonwiwat and Papondhanai Nanthachatchavankul ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE 86 SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE Bank Ngamarunchot STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION 106 PROGRAM IN THE EASTERN REGION OF THAILAND Nichakorn Tantivanichanon, Nopphawan Photphisutthiphong and Somchai Ratanakomut EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC 122 CORRIDOR OF GREATER MEKONG SUBREGION Renu Sukharomana, Patcharawee Brahmawong Book Review MEN s LIVES 145 Rich Furman

4 1 Economics and Public Policy 3 (6) : 1-24 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic Copyright and Public 2554 Policy School Srinakharinwirot of Economic and University Public Policy Srinakharinwirot University 1 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN Abstract By Stephen E. Reynolds 1 Danupon Ariyasajjakorn 2 James P. Gander 3 Somchai Ratanakomut 4 The paper addresses micro (sectoral) and macro economic aspects of an alternative to manufacturing exports-led growth through regional trade agreements (RTAs) in ASEAN. While a return to the old protectionist, import substitution industrialization policies seems to have little support, agriculture remains, today, a large and typically lagging sector in the regional economies. The paper examines an alternative regional growth strategy: economic growth, in an open trade regime, driven by productivity growth in the agricultural sector. Comparative simulations are carried out in the empirically based GTAP computable general equilibrium (CGE) model to examine the implications of a strategy shift toward focus on agricultural productivity growth, in the region. The 57 sector Global Trade Analysis Project (GTAP) model is relatively detailed in its treatment of the agricultural sector making it suitable for this exercise. As the ASEAN Economic Community is to take effect in 2015 it is timely to examine the public policy options that will govern its development. We do so retrospectively, looking forward from 2001 to what has been more than a decade of preferential trade liberalization agreements as the engine of growth versus an alternative agricultural productivity focus. The results of the simulations indicate real GDP gains to ASEAN members from a posited 1% Hicks neutral technical progress in 14 primary sector industries or 21 including agricultural processing industries that are, respectively, 5 to 10 times those from a discriminatory elimination of all tariffs on trade among ASEAN members, alone larger than those from simulations of any of four other RTAs to include the members of ASEAN in a process similar to the ASEAN++FTA initiative announced in The technical progress leads 1 Department of Economics, University of Utah 2 Faculty of Economics, Chulalongkorn University 3 Department of Economics, University of Utah 4 School of Management, shinawatra University

5 2 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN to smaller sectoral expansions and contractions in output and trade along with the larger gains in real GDP in comparison to the RTAs. This implies lower adjustment costs of resource reallocation as well as greater benefits from a public policy focus on promoting economic growth through productivity growth in agriculture and food processing rather than through RTAs. In addition poorer members of ASEAN fare better in comparison to richer members from the technical progress in primary production and processing in contrast to the discriminatory trade liberalization of RTAs. Key Words : Development Alternatives, Export Led Industrialization, ASEAN 1. Introduction This paper addresses micro (sectoral) and macro economic aspects of an alternative to manufacturing exports-led growth in ASEAN and developing Asia more generally. It responds to some concerns of critics of that strategy. Critics in Asia called after the 1997 Crisis for a new strategy less dependent on (and less volatile than) embracing globalization. Critics in the EU and the US complaining of growing Asian trade surpluses, reserve accumulations and under-valued currencies, after the 1997 Crisis also called for adoption of a more domestically oriented growth strategy. Other critics demanded alternatives that might promote greater global and regional income equality, while still others argued that the beneficial effects on food availability of the green revolution initiated in the region in the 1960s have run their course. While a return to the old protectionist, import substitution industrialization policies seems to have had little support, agriculture remains, today, a large and typically lagging sector in the regional economies. However, the public policy response in ASEAN was to double-down on manufacturing exports-led growth through expanded emphasis on preferential, i.e., discriminatory, reductions in some trade barriers through a multitude of Regional Trade Agreements (RTAs) including development of the ASEAN Economic Community (AEC) agreed by the ten ASEAN member countries in 2007 and to be implemented by 2015 (ASEAN, 2007). Petri, Plummer and Zhai (2012) provide an analysis of the potential effects of completion of the AEC vision of a fully integrated single market and production platform with free movement of goods and services, skilled labor and foreign direct investment. A strong bias toward manufacturing growth is identified by them, with limited gains for some primary producers in ASEAN in spite of estimates of overall 5.3% GDP growth in a completed AEC.

6 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 3 This paper examines an alternative regional growth strategy. It is inspired by work of Adelman (1984) on a strategy she dubbed Agricultural Demand Led Industrialization (ADLI), i.e., economic growth, in an open trade regime, driven by productivity growth in the agricultural sector. The paper does not replicate the simulations carried out by Adelman nor does it use the hypothetical, single country CGE model she employed. The paper uses comparative simulations carried out in the empirically based GTAP CGE model (6.2, based on 2001 data) to examine the implications of a strategy shift toward focus on agricultural productivity growth, in the region. The GTAP model is relatively detailed in its treatment of the agricultural sector making it suitable for this exercise. That regional trade agreements (RTA) have been embraced by Asian economies, especially the members of ASEAN, is well documented (Baldwin, 2007). That embrace is an expression of commitment in the region to relying on the forces of globalization and discriminatory partial trade liberalization to propel economic growth in the regional economies. RTAs take many forms and may include tariff reduction or elimination on trade among members, may extend to reduction in other trade barriers while often exempting some products or industries from trade barrier reductions. RTAs may include investment related provisions as well as trade related ones. For the remainder of the paper, Section II discusses methodology and relevant literature. Section III reports analytical results at the Macroeconomic level, while sectoral level results are shown in Section IV. The conclusions are in Section V. 2. Method Conclusions regarding the consequences of any proposed RTA will depend on the particular form the RTA takes, including its membership, the size of the countries, their trade patterns before the RTA and the model employed for the analysis (Chaipan, Nguyen, and Ezaki, 2006; Sudsawasd and Mongsawad, 2007; Plummer, 2007). The model employed here is a long run, general equilibrium, full-employment, comparative static model in which goods exchange at prices equal to marginal cost and factors are paid their marginal products. 1 The GTAP model is described briefly below and in more detail in Danupon Ariyasajjakorn, et al (2009) and Hertel and Tsigas (1997). This study employs comparative static simulation exercises to find the empirical effects of FTAs on income, trade and the composition of output. Similarly, the effects of a posited one percent rate of technical progress in primary production and processing industries are calculated.

7 4 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN Multiple studies of trade liberalization and regional integration with cross-regional, multi-industry, and multi-endowment characteristics have used the CGE approach employed here. A CGE model has the ability to provide a complete assessment of trade liberalization simultaneously by taking inter-industry and cross-country analysis into account through the quantification of input-output relationships. The CGE model used here has been developed by the Global Trade Analysis Project (GTAP) of the Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University. Reasons for choosing this model include the GTAP database that is provided with the model, covering a wide range of countries and industrial sectors, and the detailed treatment of agricultural sectors. The GTAP database version-6.2 used by this study reflects the world economy in 2001, after recovery from the Asian Crisis that began in 1997 and at the outset of a decade characterized by accelerated preferential trade liberalization between ASEAN and its Asian trading partners. The database is formatted as an input output structure within each country with bilateral international trade values. Moreover, the granularity of the bilateral trade data extends down to the sector level. We can therefore analyze the effects of RTAs to the sector level. The GTAP database contains data for 57 sectors of economic production in each of 87 economies or regions which have been consolidated in some cases in this paper for analytical convenience. The model links multiple agents in multiple economies together. The behavioral characteristics of the GTAP model are based on neoclassical assumptions. These include perfect competition, maximizing behavior, positive and decreasing marginal productivity and constant returns to scale, and equilibrium conditions that follow Walras s law. When the system is disturbed it will adjust itself to the next equilibrium level. Final consumers pay for final demand in the form of government spending and household consumption expenditures, in the domestic economy. Residual payments are kept as saving. Producers make payments for intermediate inputs and services of factors of production. International payments for imported final goods and services come from the households in each region/country, while producers pay for importing intermediate goods and receive payments when exporting them. Governments impose tariffs and subsidies on various payment flows between regions/countries. Factors of production cannot move from one region to another. Capital moves only as a payment flow, settling accounts. There are no financial markets. All aspects of investment and capital are treated as commodities.

8 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 5 Each agent in each economy will have the same behavior. Each regional household is ruled by an aggregate utility function to allocate payments to government expenditures, private consumption and savings. The government expenditures function is based on a Cobb-Douglas type of utility function, with the assumption of constant budget shares and constant elasticities of substitution. The private consumption function uses a constant difference of elasticities (CDE) functional form and assumptions of elasticity have been applied to allow substitution among composite products. The production function in each sector of each region is a constant elasticity of substitution (CES) production function with the constant returns-to-scale. The CES is applied among composite intermediate inputs and among factor endowments but not between the intermediates and factors. Producers are assumed to choose the optimal mix of primary factors independently of the intermediate input prices and vice versa. Imported intermediate inputs are assumed to be separated from domestically produced inputs. The technology variable is a constant in each nest of combinations (among intermediates, on one hand, and among factors, on the other) in the production process. In the bottom nests, combinations of intermediate inputs are restricted by the intermediate input that augments technological change. Factor combinations are restricted by factor (value-added) endowments that will augment technological change as well. In the top nest, combinations and re-combinations of combined intermediates and combined factors are represented by Hicks-neutral technological changes. The model itself is so complex that we do not take the numerical results at face value but view them only as suggestive of the order of magnitudes of empirical results from various public policy initiatives. The order in which bilateral agreements are posited here is based on the historical ordering of ASEAN+1 agreements made between ASEAN members and their Asian trading partners. Results show the size of the impacts tends to follow this order, especially in the case of the ASEAN+1 free trade area with China. But note that the posited movements to free trade in each scenario exceed the actual liberalization that has been agreed and would more nearly represent but still goes beyond the degree of liberalization and integration of preferential agreements anticipated in the ASEAN++ FTA process, the Regional Comprehensive Economic Partnership (RCEP). Some tentative conclusions may be drawn from examining the simulations on original 2001 GTAP data of the elimination of all internal tariffs on trade in five RTAs defined to include respectively, the 10 members of ASEAN; ASEAN1 (ASEAN plus China); ASEAN2 (ASEAN plus China and Korea); ASEAN3 (ASEAN plus China, Korea and Japan); ASEAN4 (ASEAN plus China, Korea, Japan and India) (Table 1.a). It should be noted that the degree of integration

9 6 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN posited for the RTAs simulated here substantially exceeds that which has been achieved to date since even now all tariffs have not been removed among ASEAN members nor between the various partner entities with ASEAN in respective RTA agreements which may be described as ASEAN+1 agreements (Fukunaga and Kuno, 2012). 3. Macro Analysis Generally economies gain in real GDP if included in these simulated RTAs and lose if left out (Table 1.a). The percentage changes in real GDP tend to be larger in absolute value the more members there are in the RTA. Among the members of ASEAN, Malaysia gains the largest percentage increase in real GDP from tariff elimination among the 10 ASEAN members, alone or when China is included with ASEAN members in tariff elimination among the members (ASEAN1). All ASEAN member countries gain when China is included in the simulated RTA but Thailand has a small percentage loss of real GDP, and Viet Nam a relatively large one, when China is not included with the ASEAN members in the RTA. In all five RTAs simulated here USA, EU and the Rest of the World, ROW, experience trivially small percentage losses in real GDP. Of the members of ASEAN, Viet Nam gains the biggest percentage increase in real GDP when Korea (ASEAN2) or Korea and Japan (ASEAN3) are included in the simulated RTA. Of all possible members Korea has the largest percentage increase in real GDP when it is included in the RTA. China s percentage real GDP gains are small even when it is included but are greater when Japan (ASEAN3) and India (ASEAN4) are included. When efforts are made to update the GTAP original data to 2006 values by simulating Hicks neutral technological change across each of the economies that is sufficient to replicate the World Bank reported increase in real GDP from 2001 to 2006 and the RTA simulations are repeated the above results are only slightly modified (Table 1.b). China s gains are increased for ASEAN2, ASEAN3 and ASEAN4 scenarios, Korea s gains are reduced relative to using the 2001 GTAP data while those of the Philippines are increased. In general the percentages of gains and losses in real GDP are much less than 1% of real GDP, although surprisingly large for Korea relative to the other economies. These results are not markedly different from others in the literature on RTAs. Terms of trade (export prices / import prices) improvements may be an important source of gains from RTAs (Table 2.a). Among ASEAN members the terms of trade improve for most members in most RTA scenarios but there are frequent negative impacts for Philippines, Viet Nam and the combination of the rest of Southeast Asia (XSE), Brunei Darussalam, Cambodia,

10 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 7 Laos, and Myanmar among the simulated RTAs. China s and India s terms of trade deteriorate in all simulations. India s deteriorate more when included in the RTA. Those of Korea and Japan decline if out of an RTA but improve if included. For the economies excluded from an RTA the decline in their terms of trade is less when growth to 2006 has been taken into account (Table 2.b). When growth to 2006 is accounted for the absolute values of the terms of trade changes are generally smaller. However, the information gained from examining the simulated updated data does not warrant continuing to use it in the analysis. The several times larger potential gains from technical progress, to be discussed below, contrast starkly with the small potential real GDP gains from tariff elimination in the various RTA configurations. A 1% Hicks neutral technological improvement in 14 primary, principally agricultural sectors, only in the ASEAN members, without and when combined with possible RTA is examined. ASEAN s overall elasticity of real GDP with respect to the posited technological change is.15 with a range for individual members of.26 for the Philippines and.01 for Singapore (Table 3.a). Comparing the effects of the technical change to those of RTA, which are additive in the GTAP simulations when combined, indicates no negative impacts on countries excluded from the posited technical progress and positive impacts on real GDP in ASEAN members as a whole that are 5 times those of eliminating tariff barriers among those members. Indonesia s gain is 6 times greater from the technical progress than from the trade liberalization. Similarly for Xse ASEAN members the gain is 9 times larger and 1.5 times for the Philippines, while Thailand and Viet Nam show significant gains from technical progress rather than the losses recorded in the ASEAN, only, RTA (Table 1.a). In contrast Malaysia s and Singapore s gains are 1/3 and 1/4, respectively, from the technical progress compared to elimination of tariffs on internal ASEAN trade. The benefits of the technical progress are shared with trading partners since negative terms of trade changes generally accompany the technical progress (Table 3.b) in contrast to the terms of trade gains at the expense of excluded countries in the RTAs examined earlier (Tables 2.a and 2.b). Extending the posited 1% Hicks neutral technical progress to 21 sectors, the 14 previously considered agricultural, forestry and fishing sectors plus 7 processing industries (but excluding beverages and tobacco) nearly doubles the real GDP gains from technical progress: less than double for Viet Nam, only slightly less for Philippines, slightly more than double for Thailand, more for Singapore (Table 4.a). Again, there are frequent negative terms of trade changes sharing the gains from technical progress with trading partners (Table 4.b) but when combined with the effects of the various RTAs, the terms of trade changes are positive for most members, although not for

11 8 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN the Xse ASEAN members. In addition there is an increase in net capital inflow to all the ASEAN countries as a result of the technological change which is substantially greater with the elimination of tariffs on trade within ASEAN and grows incrementally with enlargement of the RTA (Table 4.c). Incremental impacts on China s capital flows are not found until China joins the RTA with ASEAN but net capital inflows increase to China in the ASEAN1 simulation with increases in those incremental capital flows with each successive enlargement of the RTA. Net capital outflows from USA and EU increase with each successive simulation and the same is the case for Japan until it is included in the RTA when its incremental net capital outflows become negative. This is consistent with the Danupon Ariyasajjakorn et. al. (2009) finding that the successive RTA scenarios raise the return on capital in the members of the RTAs. The macro analysis, above, indicates gains for ASEAN members from even 1% technical progress in agriculture, forestry and fishing which are much greater than those from membership in the preferential tariff eliminating RTAs. Of course these are not necessarily alternative foci of policy and the gains are greater when the two policies are combined rather than either alone. Since all members of ASEAN do not gain equally from either the posited technological progress or the tariff elimination in the RTAs distributional implications are relevant as well. In general, the poorer members of ASEAN gain absolutely and relatively more, compared to the richer members, from the technical progress rather than the RTAs. There are likely, as well, to be greater opportunities for poverty reduction from a policy focus on raising agricultural productivity through unbiased technical progress (Warr, 2006). That goal may not be well served by many RTA configurations (Chaipan et. al., 2006). 4. Sectoral Analysis 4.1. (a) Effects on Output Conducting a micro analysis of the technological progress in industries allows identification of the magnitude of changes in output by industry for all members of ASEAN combined (Table 5). With technical progress only in 14 sectors, increases in output of $100 million or more are indicated for sectors: paddy rice; vegetables, fruit, nuts; sugar cane; and the miscellaneous categories of crops, nec and animal products, nec. Additionally, although no technical progress was posited for the processing industries in this case, forward linkages to the processing industries result in increases in output of $100 million or more for processed rice, wood products and the miscellaneous categories of meat products, nec and other food products, nec. General equilibrium resource allocation effects draw resources away from electronic

12 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 9 equipment and machinery and equipment, nec. When technical progress is extended as well to seven processing industries resources are drawn away from paddy rice and sugar cane whose outputs expand less than previously. Vegetables, fruit, nuts; crops, nec and animal products, nec are joined in posting increases of $100 million or more by fishing. In the processing industries, the previously noted increases are sustained and increases in output of approximately $400 million are indicated for meat products, nec and vegetable oils and fats; twice that again for other food products, nec. The decline in output in electronic equipment and in machinery and equipment nec doubles and decreases in output of approximately $100 million are indicated also in textiles; wearing apparel; and chemical, rubber, plastic products. In general ASEAN s comparative advantage in food and food processing is enhanced by the technical progress while that in other manufacturing areas is reduced. The patterns, if not the magnitudes, described above are sustained when the technological progress in 21 industries is combined with RTAs of ASEAN or ASEAN1. The changes in the industrial sector outside the food processing sectors are especially interesting as textiles, wearing apparel, leather products and wood products contract along with electronic machinery and manufactures, nec while there is substantial expansion in output in petroleum, coal products; chemical, rubber, plastic products (dramatic expansion); mineral products nec and motor vehicles. The results for transport equipment nec are oppositely affected when the RTA excludes China from when it is included; negatively with China in, positively with it out. Two points stand out. First, the value magnitudes of the indicated changes in output in the non food processing sectors are often 4 to 10 times those recorded for the food and food processing sectors (Table 5). Second, while the real GDP gains from the RTAs are small compared to those to be derived from one percent, Hicks neutral technological progress in agriculture, fishing and forestry and their related processing industries (Table 4.a) the adjustment costs of the RTAs look much greater, given the larger positive and negative magnitudes of the impacts on output in a larger number of sectors. The likelihood that the actual RTAs negotiated through the political process will be less liberalizing than the assumption of tariff elimination used here also seems to be increased by the conflict of interests of different sectors that is shown in Table 5. The changes in value magnitudes of production are one view of the impacts of the technological change and preferential tariff cutting but additional perspective is provided by examining percentage changes in output by sector. For example, the large reductions in the value of output for electronic equipment shown in Table 5 are seen to be little more than a 1% decline if we look into changes in each sector. Of course these percentage changes are not

13 10 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN uniform across the members of ASEAN and exceptionally large percentage changes in particular countries are noted. As a percentage of output the technological change in 21 industries (assuming no trade liberalization) leads to relatively large increases, in excess of 2%, in wool and silk (6.1% in Malaysia), wheat, vegetable oils and fats (5.61 % in Malaysia), meat products nec (9.41 % in Malaysia), dairy products (7.97% in Viet Nam and 6.7% in Malaysia) and other food products, nec (3.25% in Thailand) with no negative changes of similar size. The increase in wheat production is large on a trivial base, of course, illustrating the potentially misleading consequences of looking only at the percentage changes rather than the magnitudes of changes in value. When taken in combination with elimination of tariffs on internal ASEAN trade the sectors expanding by more than 2% include oil seeds, crops nec, raw milk, meat products nec, dairy products, sugar, other food products nec, metal products, motor vehicles, transport equipment nec, and machinery and equipment nec, while only leather products output declines by more than 2%. The percentage changes are particularly large for dairy products and transport equipment nec. Additionally liberalizing trade with China in ASEAN1 in combination with the technological progress in 21 industries in ASEAN alters the pattern of changes in output. In the primary sectors ASEAN output expands by 2% or more only in crops nec, while shrinking by 2% or more in plant based fibers, wool and silk and forestry products. In the processing industries meat products nec, dairy products nec and sugar expand by 2% or more with no contraction in ASEAN output in any food processing sector. Nonfood manufacturing expands by more than 2% in chemical, rubber and plastic products, mineral products nec, motor vehicles, and machinery and equipment nec. Negative output impacts in ASEAN manufacturing of 2 % or more are shown for wearing apparel, leather products, wood products, non ferrous metals, transport equipment nec and manufactures nec. China experiences 2% or more increases in output only in transport equipment nec and electronic equipment; similar decreases, in crops nec (in both ASEAN and ASEAN1 RTAs), vegetable fats and oils, and chemical, rubber, plastic products. Technical progress in the 21 industries strengthens ASEAN s comparative advantage in agriculture and food processing expanding output in those sectors with a general tendency for output to shift away from manufacturing. In contrast preferential trade liberalization (i.e., discriminatory trade protection) in ASEAN or ASEAN1 RTAs tends to expand the manufacturing sectors in ASEAN but with much variation in the sign and magnitude of effects across different manufacturing sectors.

14 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University (b) Effects on Trade ASEAN s trade pattern is only modestly altered in the simulation of technological change in 21 industries. Without an RTA ASEAN imports change by more than 1% in only, but nearly all, the 21 industries; falling by approximately 4% or more in paddy rice, raw milk and meat products nec. ASEAN exports increase by more than 1% only in, but nearly all, the 21 industries; 8% or more for paddy rice, raw milk, wool and silk, meat, and dairy products. Trading partners seldom see changes in imports or exports of a sector by even 1%, but exports of paddy rice, processed rice, and vegetable fats and oils of other economies are commonly reduced by approximately 2%. The combination of the technological change with elimination of internal tariffs in ASEAN leads to much more dramatic changes in trade. Increases in ASEAN members imports of 3% or more are ubiquitous throughout the manufacturing sectors but the most extreme changes are found in the agricultural and processing sectors, e.g., paddy rice (23%), other crops nec (43%), processed rice (42%), and beverages and tobacco (22%). ASEAN members exports increase by extraordinary rates, more than 10%, in a number of the 21 focus agricultural and processing industries, e.g., paddy rice, oil seeds (34%), other crops nec (17%), cattle, sheep, goats and horses (25%), meat products nec, dairy products (42%), processed rice, refined sugar (22%); also, outside the 21 industries, e.g., beverages and tobacco (38%), metal products, motor vehicles (30%) and transport equipment nec (25%). There is significant crowding out of exports from non ASEAN countries in world markets in paddy rice (-5%, China), other crops (more than - 5%, China, Japan and XEA), meat products nec (-5% Korea, -6% Japan), processed rice (-4% USA), sugar (-5% China), beverages and tobacco (-5% Japan, -9% XEA) and induced increases in exports of gas (8% China and India). When tariffs on trade between ASEAN members and China are also posited to be eliminated, ASEAN1, imports by China and by ASEAN members rise by several percentage points in both economies in nearly every tradable sector. The larger percentage changes are in paddy rice; vegetables, fruit, nuts; crops nec, meat products, vegetable oils and fats; beverages and tobacco; processed rice; textiles; wearing apparel; chemical, rubber, plastic products; and motor vehicles. Export values also increase for both ASEAN members and China, often in the same sectors and frequently by double digit percentage changes. The frequency of observation of substantial percentage increases in China s imports, China s exports, ASEAN s imports and ASEAN s exports in the same sector points to the substantial role that the RTA would play in expansion of intra industry trade. There are, however, several sectors where inter industry trade

15 12 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN effects within ASEAN1 are also substantial, e.g., paddy rice; vegetables, fruit, nuts; crops nec; vegetable oils and fats; wearing apparel; wood products; chemical, rubber, plastic products; metals nec; machinery and equipment nec; and manufactures nec. These sectors often correspond to those showing significant changes in output (Table 5). Negative sectoral impacts as great as -5% on the exports of economies excluded from the RTA are relatively few when the simulation combines technical progress in 21 sectors and only ASEAN members are included in the RTA. As noted above, such negative impacts are only in agriculture and processing industries. When China is included in the RTA, ASEAN1, those trade diversion impacts on China are eliminated and China s exports grow in the same sectors in which they decline when excluded from the RTA. When China is included, in the RTA, trade diversion impacts on non members exports are focused on fewer excluded economies and fewer agricultural and processing sectors, increasing their magnitude in, e.g., crops nec and meat products nec but reducing it in paddy rice, processed rice, and sugar. However, when China is included similar negative impacts on the exports of excluded economies are found in the industrial sectors of chemical, rubber and plastic products and transport equipment nec (Table 6.c). Although the EU does not experience negative export impacts approaching even -1%, except in transport equipment nec in the ASEAN1 simulation, the USA experiences negative impacts several times that number on exports of crops nec, processed rice and transport equipment nec when China is in the RTA. The resulting sectoral specialization between ASEAN members and China does not sort neatly into agriculture versus industry. Rather, some ASEAN agricultural exports would contract while others would expand; similarly for the industrial sectors, although generally food processing sector exports would expand. The statement above, seems at variance with that of Danupon Ariyasajjakorn et. al (2009), Comparing to ASEAN industrialized developing countries, China is relatively an agricultural exporter. Thus, the ASEAN industrialized developing countries have a comparative advantage in producing and exporting manufacturing products. The results [analysis of the ASEAN1 scenario] show that this is true in all manufacturing except for products of the electronic equipment sector. However, ASEAN includes several members, Brunei Darussalam, Indonesia, Myanmar, Cambodia, Laos and Viet Nam, not counted (appropriately so) by Danupon, et. al. among the industrialized developing countries. Furthermore, the simulation of ASEAN1 being referenced there was not examined in combination with the effects of the technical progress in agriculture, forestry and fishing and in food processing posited, as is the case here. The differential macroeconomic impacts of RTAs alone, on ASEAN members are addressed above

16 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 13 and in Tables 1 and 2. Similar differential effects of RTAs combined with technological change are addressed above and in Tables 3 and Conclusions The analysis in Section IV(b) of the trade impacts of the simulations carried out for this paper indicates that the RTAs we have explored have much greater incremental impact on ASEAN members sectoral trade than does the technological progress examined here. This is the opposite of the conclusions drawn in Section III of this paper regarding the relative impacts of the technological progress versus RTAs on ASEAN members real GDP and in Section IV(a) regarding their relative impacts on sectoral outputs in ASEAN members. In contrast to the effects of the posited technical progress the RTAs result in larger both positive and negative sectoral changes in output, and still greater changes in sectoral imports and exports. Nevertheless the RTAs result in much smaller increases in real GDP than does the technical progress. The RTAs also result in greater secondary effects, changes in their sectoral outputs and trade, on trading partners outside ASEAN. Since adjustment costs to either technical change or trade liberalization will be attendant to the resource movements that are induced in bringing about output changes, the greater output changes due to RTAs are likely to mean greater adjustment costs for RTA members and for excluded economies than those that would result from the technical change. Even 1% technical progress in agriculture, forestry, fishing and processing sectors would deliver much larger gains in real GDP at less economic dislocation and lower adjustment costs than would the most likely RTAs, ASEAN members only, or the RTA most incrementally beneficial to ASEAN members, ASEAN plus China, even when making the practically elusive assumption of full elimination of tariffs on trade internal to the RTAs. The simplified treatment of a policy focus on agricultural productivity growth examined in this paper, inspired by, but not replicating the ADLI development strategy, seems to bear out the conclusion of Adelman (1984) that public investment policy to promote agricultural led development in a relatively open trading regime offers substantial growth and distribution benefits in some Asian economies. Furthermore this paper finds explicitly greater benefits to be offered by such a focus over the current focus on discriminatory trade liberalization policy initiatives, i.e., regional trade agreements.

17 14 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN The mechanism at work in the alternative policy explored here of technical progress in agriculture and related industries does not always seem to correspond to that modeled by Adelman. Substantial forward linkages effects from the industries experiencing technical progress are implied in Table 5, i.e., from 14 agricultural, forestry and fishing sectors to 7 food processing sectors and the wood products sector. However, when the assumed technical progress is extended to the 7 food processing sectors negative impacts on the outputs of the rest of the industrial sectors are almost universal although typically very small. Even the beverages and tobacco products sector, which was excluded from the assumption of technical progress in the industry as a control, shows little expansion either from forward supply linkages or demand linkages from a focus on agricultural productivity growth. The trade openness of the ASEAN members results in marginal adjustments in inter industry trade specialization toward the industries experiencing the productivity growth and away from the rest of the industrial sectors. In contrast the marginal effects of the RTAs examined most closely, here, are principally to expand intra industry trade, both imports and exports, in nearly all the industrial sectors and by much larger percentages than result from improved productivity in agricultural and food processing industries with much smaller incremental gains in real GDP that are shown to be distributed among the ASEAN members in ways that would exacerbate per capita real GDP differences (Table 4.a). The techniques of analysis employed here are insufficient to discern whether (1) the welfare gains from the RTAs are substantially underestimated by changes in real GDP because the very substantial increases in intra industry trade in the RTAs are a source of welfare gains from increased variety; or, (2) real GDP gains are not very large from the RTAs alone because much of the observed increase in trade is simply the result of welfare reducing (for the RTA members) trade diversion away from lower cost suppliers. Petri, Plummer and Zhai (2012) find much larger gains from the full integration of economies envisioned by the AEC which will go far beyond discriminatory trade liberalization after being completely phased in but the gains shown here from promoting agricultural and food processing productivity increases would be additive, off-setting to the decline or slow growth in agricultural output shown by their calculations and inequality reducing. We conclude that the potential welfare gains for ASEAN members from a public policy focus on promoting productivity growth in agricultural and food processing sectors would substantially outweigh the gains that might result from discriminatory elimination of tariffs alone and would be an important addition to the AEC for most and especially the poorest of the members. The policy focus on regional, discriminatory trade liberalization seems to be a diversion

18 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 15 from public policy that would lead to greater growth in some member s national incomes and reduce income inequality among the ASEAN members and within the members. 2, 3 Endnotes: 1Much of the analysis of this paper was developed for Reynolds, et.al., This CGE model is exceedingly complex, a marriage of 87 different individual country s empirical input-output tables with varying structures and numbers of sectors. In the GTAP there are 22 parameters of general equilibrium and partial equilibrium types, the values of which vary both across the countries and across the 57 industrial sectors. As a result our focus is on the results of the various shocks we specify rather than on complex sensitivity analysis of the consequences of varying individual parameter values with an exceptionally large number of permutations and combinations of parameter values among which to choose. The CGE model is so complex that we take the numerical results at face value but view them only as suggestive of relative magnitudes in comparisons of alternative simulations. There are known problems with the rice, motor vehicles and electronic machinery sectors that also counsel caution in the use of the values of sectoral results of the simulations (Pungchareon, 2005). 2 Danupon Ariyasajjakorn, et. al. (2009) note that in each RTA considered there, i.e., ASEAN, ASEAN1, ASEAN2, ASEAN3 and ASEAN4, as defined here, but without the technical progress posited in this paper the returns to capital increase more than those to labor. The results here are more mixed from a policy focus on raising agricultural productivity and as may be seen from Table 7 more likely to result in reduced poverty within most ASEAN members since labor often experiences greater increased factor returns than the physical means of production in response to the technical progress in 21 sectors examined here. 3 Interesting as may be the political economy of why policy makers pursue through RTAs other objectives than the consumption gains that multilateral trade liberalization can deliver, e.g., to attract foreign capital or to gain access to foreign markets, as Plummer (2006) points out, that does not obviate the need for economists to offer policy alternatives that offer greater opportunity to raise national income.

19 16 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN References Adelman, Irma. Beyond Export-Led Growth, World Development, 12(9), 1984, pp Ariyasajjakorn, Danupon. Globalization, Technological Change, and Employment, July 2007, VDM Publishing, GERMANY. Ariyasajjakorn, Danupon; James P. Gander; Somchai Ratanakomut and Stephen E. Reynolds. ASEAN FTA, distribution of income and globalization, Journal of Asian Economics, Vol. 20, No. 3, May ASEAN, 2007, ASEAN Economic Community Blueprint. ASEAN Secretariat, Jakarta. Chaipan, Chaiwoot; Nguyen, Tien Dung and Ezaki, Mitsuo. Regional Economic Integration and Its Impacts on Growth, Poverty and Income Distribution: The Case of Thailand, Discussion Paper, September Baldwin, Richard E. Managing the Noodle Bowl: The Fragility of East Asian Regionalism, ADB Working Paper Series on Regional Economic Integration No. 7, February 2007 Baltzer, Kenneth and Jesper Kloverpris. Improving the Land Use Specification in the GTAP Model, GTAP Working Paper 2008 Fukunaga, Yoshifumi and Arata Kuno. Toward a Consolidated Preferential Tariff Structure in East Asia: Going beyond ASEAN+1 FTAs. ERIA Policy Brief, No , May 2012 Hertel, Thomas W. and Marinos E. Tsigas. Structure of GTAP. in T. W. Hertel (ed.), Global Trade Analysis: Modeling and Applications, Cambridge University Press, Petri, Peter A., Michael G. Plummer and Fan Zhai. ASEAN Economic Community: A General Equilibrium Analysis, Asian Economic Journal 2012, Vol. 26 No. 2, Plummer, Michael G. Toward Win-Win Regionalism in Asia: Issues and Challenges in Forming Efficient Trade Agreements, ADB Working Paper Series on Regional Economic Integration No. 5. October Plummer, Michael G. Best practices in regional trading agreements: An application to Asia, The World Economy, 2007, Pungchareon, Vichshuwan. The China-Thailand Free Trade Agreement: a Computable General Equilibrium Model, Doctoral Dissertation, University of Utah, Ratanakomut, Somchai, Danupon Ariyasajjakorn, James P.Gander and Stephen E. Reynolds. Dependency on Imports and the Rules of Origin in Southeast Asia: ASEAN and Globalization, ACAES/RCEA Conference paper, August 2008

20 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 17 Reynolds, Stephen E., Danupon Ariyasajjakorn, James P. Gander, and Somchai Ratanakomut, Alternatives to Export Led Industrialization in Asia: ASEAN and Globalization, ACAES/RCEA Conference paper, August 2008 Sudsawasd, S., & Mongsawad, P. Go with the gang, ASEAN! ASEAN Economic Bulletin, 24(3), 2007, pp Warr, Peter. Poverty and Growth in Southeast Asia, ASEAN Economic Bulletin, 23(3), 2006, pp World Bank. Agricultural value-added per worker, World Bank Search pe_exact=indicators accessed 20 December 2012

21 18 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN Table 1. Real GDP % Change from Elimination of All RTAs Internal Tariffs 1.a 2001 GTAP Data ASEAN ASEAN1 ASEAN2 ASEAN3 ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW b Adjusted for Growth to 2006 ASEAN ASEAN1 ASEAN2 ASEAN3 ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW Source: Authors calculations from GTAP database Notes: Xea is the Rest of East Asia; Xse is the Rest of Southeast Asia: Cambodia, Laos and Myanmar; EU is Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and United Kingdom. Adjustment to 2006 shocks original data with Hicks neutral technological change sufficient to replicate the actual growth in real GDP reported by the World Bank. Growth may have been due to other factors so this is only a rough approximation of the true 2006 values for the elements of GTAP. ASEAN1, ASEAN2, ASEAN3, ASEAN4, respectively are: ASEAN members plus China; plus China and Korea; plus China, Korea and Japan; plus China, Korea, Japan and India.

22 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 19 Table 2. Terms of Trade % Change from Elimination of All RTAs Internal Tariffs 2.a 2001 GTAP Data ASEAN ASEAN1 ASEAN2 ASEAN3 ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW b Similar to 2.a but Data Adjusted for Growth to 2006 ASEAN ASEAN1 ASEAN2 ASEAN3 ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW Source: Authors calculations from GTAP data Notes: As for Table 1

23 20 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN Table 3. Macro Effects of +1% Technological Change in 14 Agricultural Sectors in ASEAN Only: Alone and Additional Elimination of All RTAs Internal Tariffs 3.a Real GDP % Change Tech14 + ASEAN + ASEAN1 + ASEAN2 +ASEAN3 + ASEAN4 China Korea Japan Xea ASEAN Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW b Terms of Trade % Change Tech14 + ASEAN + ASEAN1 + ASEAN2 + ASEAN3 + ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW Source: Authors calculations from GTAP data Notes: As for Table 1; Detail of industry groupings is shown in Table 5

24 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 21 Table 4. Macro Effects of +1% Technological Change in 21 Agricultural and Processing Sectors in ASEAN Only: Alone and Additional Elimination of All RTAs Internal Tariffs 4.a Real GDP % Change Tech 21 + ASEAN + ASEAN1 + ASEAN2 + ASEAN3 + ASEAN4 China Korea Japan Xea ASEAN Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW b Terms of Trade % Change Tech21 + ASEAN + ASEAN1 + ASEAN2 + ASEAN3 + ASEAN4 China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW

25 22 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN 4.c Trade Balance Change ($ Millions) = Change in Net Capital Outflow Tech21 + ASEAN + ASEAN1 + ASEAN2 + ASEAN3 + ASEAN4 China Korea Japan Xea Indonesia Malay Philippines Singapore Thailand Viet Nam Xse India USA EU ROW Source: Authors calculations from GTAP data Notes: As for Table 1 Table 5. Effects of +1% Technological Change, 14 vs. 21 Agricultural and Processing Sectors in ASEAN Only: Alone for 14 and 21sectors, respectively and for 21 sectors with additional elimination of all internal tariffs in ASEAN vs. in ASEAN1 (i.e., plus China) Notes to Tables 5: 1% Hicks neutral technological progress is in 14 agriculture, forestry, fishing sectors denoted in Bold Italics and in 21 industries, additionally including 7 processing industries denoted in Bold. Magnitudes are denoted by algebraic sign, * and number as: approximately US$100 million (+ or -), US$200 million (*) or US$300+ million, e.g., -736 denotes a negative change of $736million, -* a negative change of approximately $200 million and + a positive change of approximately $100 million. Changes of absolute value less than $100 million are ignored. Sectoral abbreviations and descriptions in Table 5.a, apply to all of Tables 5 and 6. Notes to Table 1 also apply.

26 Economics and Public Policy 3 (6) : 1 24 Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 23 Table 5 Technological Change and RTAs: Magnitude (US$ 100 Millions) of Aggregate Sectoral Output Changes in ASEAN Tradable Goods Sectors of GTAP ASEAN 21+ASEAN1 1 pdr paddy rice wht wheat 3 gro cereal grains nec 4 v_f vegetables, fruit, nuts osd oil seeds 6 c_b sugar cane, sugar beet + 7 pfb plant based fibers 8 ocr crops nec +* ctl cattle, sheep, goats, horses 10 oap animal products nec + +* rmk raw milk 12 wol wool, silk cocoons 13 frs forestry - 14 fsh fishing coa coal 16 oil oil - -* 17 gas gas + 18 omn minerals nec 19 cmt meat:cattle,sheep,goats,horses 20 omt meat products nec * vol vegetable oils and fats * 22 mil dairy products pcr processed rice + +* + 24 sgr sugar ofd other food products nec +* b_t beverages & tobacco products tex textiles wap wearing apparel , lea leather products lum wood products ppp paper products, publishing 32 p_c petroleum, coal products + +* 33 crp chemical,rubber,plastic products , nmm mineral products nec i_s ferrous metals +* 36 nfm metals nec -* fmp metal products +* 38 mvh motor vehicles & parts otn transport equipment nec ele electronic equipment ,109-2,414-2, ome machinery & equipment nec - -* +2,034 +4, omf manufactures nec _* -870 Source: Authors calculations from GTAP.

27 24 DEVELOPMENT ALTERNATIVES TO EXPORT LED INDUSTRIALIZATION IN ASEAN Table 7. % Change in Factor Returns, ONLY Technological Change in 21 Sectors Unskilled Skilled Capital Land Resources China Korea Japan Xea Indonesia Malaysia Philippines Singapore Thailand Viet Nam Xse India USA EU ROW Source: Authors calculations in GTAP.

28 25 Economics and Public Policy 3 (6) : Economics and Public Policy 3 (6) : Copyright 2554 School of Economic Copyright and Public 2554 School Policy Srinakharinwirot of Economic and University Public Policy Srinakharinwirot University 25 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY Abstract Panawat Innurak 1 This study constructs a framework that can account for banking crisis for a small open economy. It then explores how the stabilization policies consisting of 1) tight monetary policy, which was guided by the International Monetary Fund during the Asian Financial Crisis and 2) unconventional monetary policy, which was implemented by the Federal Reserve, find the way out of this unfavorable financial turmoil. This observation also applies to Thailand s economic conditions during as an example of banking crisis characteristics. The result of this study is consistent to Stigliz (2002) that the tight monetary policy increases borrowing cost and even deteriorates the economy. It also points out that the policymaker is supposed to pacify the banking distress through the unconventional monetary policy rather than the tight monetary policy because it can pacify the severity of the financial crisis. Key Words : Quantitative Model, Stabilization Policy, Banking Crisis 1. Introduction A bank is an institution whose current operations consist of granting loans and receiving deposits from the public. (Freixas and Rochel, 1997) In other words, a bank has a role in financial intermediation. An agent who needs funds borrows from a bank, while an agent who wants to save to insure for consumption tomorrow makes deposits to a bank. This channel allows these 3 agents better off: The borrower gets funds to make investment on his project; the depositor can get more returns from making deposits at the bank; the bank also acquires benefits from operating through this procedure. For the case of emerging economies, a source of external finance is not just only domestic deposit, but it also includes international capital 1 Master of Arts (in English) Faculty of Economics Thammasat University

29 26 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY flows from foreign lenders. Fluctuations in foreign lenders decision result dramatically in bank s decisions on sources of financing. Reinhart and Rogoff (2009) define the term Banking Crises as bank runs or the closure, merging, takeover, or large-scale government assistance of an important financial institution. This model is consistent to the definition in an aspect of the existence of financial support from the central bank when financial distress starts. In particular, financial turmoil in a small open economy is characterized as the rise of panic of lenders. During the crisis period, lenders feel anxious and force banks to reduce their loans. Therefore, the borrowers cannot get funds to finance their projects. This unsatisfying consequence transmits from financial intermediary sector to real sector. As a result, the entire economy incurs the shortage of liquidity and the financial crisis. Thailand featuring a characteristic of a small open economy encountered banking crisis. Fifteen years ago, a dramatic financial turmoil led to significant contraction in economic activity. In 1997, the source of contagion first originated in Thailand. Deterioration of macroeconomic conditions, such as current account deficits, and bad financial status, such as bank failure, resulted in the rising anxiety of the foreign investor. Although most well-known event is Currency Crisis according to the relinquishment of the pegged exchange rate subsequently led to capital outflows, the many closures in financial institutions were commonly recognized characteristics as well. Such bad financial conditions can be considered as a type of banking crises. Stabilization policies are important keys that possibly lead the economy out of the financial turmoil. Regarding Thailand financial crisis in 1997, the International Monetary Fund or IMF offered the Thai government loans by trading for a so-called austerity program, which consists of fiscal spending cut, financial reform and tight monetary policy. In particular, the tight monetary policy was announced to entice more capital inflows. Nevertheless, in doing so, several economists argue that the tight monetary policy might not be an appropriate stabilization policy for financial insolvency in banking industry. Stiglitz (2002) criticizes about the IMF policy that it is too strict and can worsen the crisis through higher borrowing cost for distressed financial institutions. As for efficiency of exchange stability, Ohno, Shirono and Sisli (1999) argue that the high interest rate can help to stabilize the exchange rate just in the beginning of the crisis. If the situation worsens, this tight monetary policy immediately loses its

30 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 27 power to pacify the crisis. Moreover, they also draw the conclusion that the subsequent recovery of stability is a regional phenomenon. However, of course, IMF proponents do not seem to agree with those opponents results. Basurto and Ghosh (2000) argue that the tight monetary policy helps to appreciate the exchange rate during the distressed period. Ten years later, the world once again faced a tremendous threat. Financial distress in financial intermediaries harmed US economy and the rest of the world. The US policymaker had to relieve this effect by coming up with the special resolution, which is so-called unconventional monetary policy. The Federal Reserve or the Fed acted as a major role to support the financial intermediaries through buying a lot of assets. One advantage of this support is that the Fed was not subject to the financial constraint. Finally, this policy can help recover the economy without urging for external supports. As mentioned, it is obvious that some characteristics of two past economic disasters were somewhat different. Because of different conditions of rising crisis and different natures of the economies, the outcomes were slightly distinguished. Nevertheless, both of them shared an essential component of banking crises that was a process of depreciation of asset prices consistent to financial intermediary s net worth. In US crisis, the Fed implemented the unconventional policy in order to moderate the decline in asset prices. After implementing, the Fed s resolutions yielded satisfied outcomes. In other words, it was able to suppress the unstable economic indicators back to favorable status. While, for Thailand, although sudden capital outflows is the reason that the IMF encouraged the monetary authorities in trouble Asian countries, including Thailand, to increase interest rate to attract capital inflows and increase deposits in financial intermediaries, the tight monetary policy begets financial distress in banking industry. Because of similarity to the US economy in an important characteristic which is the distress in financial intermediaries or Banking Crisis, the instability of the Thai economy should be at least moderated or at most back to the normal conditions if the authority implemented the unconventional monetary policy. In other words, here comes to the question What was the best resolution that the monetary authority should respond to? In other words, if a created model conforms to economic conditions as in the Asian crisis, either the tight monetary policy or the unconventional monetary policy, what is the policy that provides the most satisfying outcomes to the economy?

31 28 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY Most of all, the ordinary objective of this research is to construct a macroeconomic crisis framework that not only possibly accounts for the banking crisis for a small open economy but also test two stabilization policies on banking crisis conditions. Particularly, testing with the case of Thai financial crisis during 1997 to 1998 is the cascaded objective on the purpose of testing the macroeconomic indicators whether they are consistent to the realistic conditions and how the stabilization policies can subside the economic turbulence. Basically, the amplification of the effect originates in financial intermediaries. After that, it generally transmits to the real sector and then pervades a whole country and adjacent regions. However, the latest US financial crisis framework can be partially applied to the Thai financial crisis by applying Gertler and Karadi (2011) in terms of the unconventional monetary policy during the crisis. This paper also adapts Steffen (2011), which contains the basic real business cycle framework of small open economy with financial intermediaries. The artificial economy is able to be constructed and calibrated under different resolutions as mentioned earlier. 2. Literature Review Realization of the past banking crises involves with many losses not just only in the financial intermediary sector, but also covers the real sector. In particular, it is monstrous to let unfavorable outcomes happen. To cross over prejudicial results, many papers have been created to ransack the optimal way to response to them. A lot of studies of crises have been conducted for many years regarding either theoretical or empirical research. Most of the research concentrates on the financial crisis rather than the banking crisis. Such works bring about research extensively in both horizontal and vertical aspects. Some of them try to account for historical patterns of the crisis. In particular, predictable sequences of essential events after the crises start highly call for. Also, many studies experiment on various stabilization policies in defending against undesirable fortune. In order to create a model to capture the behavior of financial institutions during the crisis in a small open economy, many literature provide a lot of useful information and insightful concepts to build such an artificial economy. Additionally, related literature in the Thai financial crisis and the U.S. government policy after the Subprime mortgage crisis is very helpful to provide concepts and facts to create the stabilization policies for the banking crisis. In

32 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 29 particular, they share necessary features to establish a Thailand-based crisis model, which consists of 1) a small open economy, 2) unconventional monetary policy and 3) the Asian financial crisis. Nevertheless, the arguments about the tight monetary policy are highly important to be revised first because it utmost lays the research questions on this study. 2.1 Dispute in Tight Monetary Policy Tobin (1998) criticizes about IMF s bailout on the Asian countries. The austere fiscal and monetary policy could not retrieve market confidence and also result in deep recession. Ohno, Shirono and Sisli (1999) argue that the high interest rate can help the exchange rate stabilize just in the beginning of the crisis. If the situation worsens, this tight monetary policy immediately loses its power to pacify the crisis. Moreover, they also draw conclusion that the subsequent recovery of stability is a regional phenomenon. Stiglitz (2002) also disagree with the tight monetary policy. He claims that the IMF policy is too strict and can worsen the crisis through the higher borrowing cost. Nonetheless, of course, IMF proponents do not seem to agree with those opponents opinions. Basurto and Ghosh (2000) argue that the tight monetary policy helps the exchange rate appreciate during the distress period and then can attract more capital inflows. 2.2 A Small Open Economy A small open economy is another essential characteristic of Thai economy. Because of being such an economy, a macroeconomic model for Thailand is necessary to not only account for domestic activities but also covers international features as well. To study impacts of distress of financial institutions in a small open economy, a structure needs to be consistent to the original purpose. Mendoza (1991) provides a baseline model to study real business cycles under a small open economy. This model is able to account for Canadian stylized facts properly. Schmitt-Grohe and Uribe (2003) applies Mendoza (1991) to establish a small open economy with incomplete assets. This setting is very useful to help induce stationarity in order to close a small open economy. Another recent paper is Steffen (2011). This paper is rather interesting in terms of incorporating financial intermediaries into the feature of a small open economy. This arrangement aids the study to capture the relationship between the government policy and the

33 30 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY role of financial institution. Additionally, it assumes a shock to trigger the crisis, namely, the anxiety of the foreign investor. According to Fostel and Geanakoplos (2008), the realization of an anxious investor is sensitive to the global distress. If the investor receives the unfavorable information about the crisis, the investor will need the bank to reduce its leverage ratio. In other words, the bank is supposed to increase its net worth or reduces liabilities or assets. 2.3 U.S. Financial Crisis in 2007 During the U.S. financial crisis, many papers engineer the turmoil in many different situations. As for banking crisis, one of many reasons leading to the distrusted behavior amongst banks was financial health. In particular, during the crisis, the interbank market which was considerably large in U.S. was under distress. A bank which lacked of financial funds had to find sources of finance. But in a period of turmoil, none dared to supply funds because of many existences of uncertainties. Therefore, banks with scantiness cannot get enough required funds. Lost trustiness between banks resulted in banking crisis. Gertler and Kiyotaki (2010) create a Dynamic Stochastic General Equilibrium model (DSGE) in order to account for the trouble in the interbank market. Specifically, there are two types of banks which consist of 1) banks with excessive funds and 2) banks with lag funds. As in the real situation, banks with abundant funds hesitated to lend to trouble banks with insufficient funds. Moreover, the authors also integrate unconventional policies that the Fed and Department of the Treasury worked together during that time to mitigate unfavorable consequences. Another attempt to create a model with financial frictions during 2007 financial crisis is belonged to Brunnermeier and Sannikov (2011). Instead of formulating a conventional DSGE in theoretical work, they generate a nonlinear model with a full equilibrium dynamics with a continuous time method. 2.4 Unconventional Monetary Policy Unconventional monetary policy was on spot after the Fed s announcement in order to relieve credit crunch distress. The Fed bought some trouble assets from the trouble banks. Banks exchanged these assets with the equivalent banks reserves in the central bank. Banks still held these reserves in the central bank because banks can get the interest rate from holding without doing anything and the Fed will not default certainly. Banks will use these

34 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 31 reserves to increase amount of loans in the future. Increasing loans will induce increasing deposits since the household borrowers must deposit loans that they received into the bank s account. This process will increase money supply indirectly. Related papers that clarify for the unconventional monetary policy are Gertler and Karadi (2011), and Gertler, Kiyotaki and Queralto (2011). Gertler and Karadi (2011) provide the canonical model for the unconventional policy and calibrate the model to verify the effectiveness of the policy. Also, the zero-lower-bound interest is taken into account to capture the Fed fund rate monetary policy at this time. Both papers yield remarkable results that the unconventional monetary policy helps the economy stabilize during the crisis period. 2.5 Asian Financial Crisis and Thai Economy A lot of literature provides insightful models in terms of clarification of the Asian financial Crisis, which is also known as the Currency crisis. In particular, the main problem of this crisis results from the exchange rate volatility. The rapid depreciation of the exchange rate led to the unexpected increase in foreign debts. As a result, balance sheets of firms and financial institutions carried larger amount of debts became susceptible to unsatisfied economic conditions. Gertler, Gichrist and Natalucci (2007) develop a model to analyze the role of exchange rate regime by focusing on quantitative results. In particular, their experiment examines how well the model fits to the real data during the crisis period. Most DSGE-type models to account for Thai economy are widely used in the Bank of Thailand. Especially, a paper provides a small open economy with financial frictions is Tanboon, Piamchol, Ruenbanterng and Pongpaichet (2009). It integrates price stickiness, which is the key attribute of the New Keynesian, with the balance sheet relationship. Especially, this DSGE model adds the balance sheet constraint into firm sector. This characteristic distinguishes this study from the most well-known paper in the balance sheet effect, Bernanke, Gertler and Gilchrist (1999). The latter allows the balance sheet effect on just an agent namely Entrepreneur, who has roles to manage production and obtain funds for financing in the production process. This entrepreneur s idea can be considered as a firm-bank combination. However, the former separates this integration to help us understand behaviors of each agent even better.

35 32 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY 2.6 Summary This paper sets up a similar model to Steffen (2011). The reason of this setting is to concentrate on a role of financial intermediation on banking crisis in a small open economy. Furthermore, this model follows Fostel and Geanakoplos (2008) that the crisis is triggered by the rise of lenders anxiety. In terms of stabilization policies, this study applies 2 remarkable resolutions to find out what policies are appropriate to response to this kind of crisis and stabilize the economy. The tight monetary policy is the first one that was suggested by IMF in The tight monetary policy is defined as the increasing high interest rate by the monetary authority. Although there has been existing arguments about its effectiveness, this model still adopts this policy to test on conditions of banking crisis. Moreover, another advantage of this study is an ability to integrate the unconventional monetary policy, which is mostly based on Gertler and Karadi (2011). To help banks increase credit demand, the central bank issues the central bank s bond to get funds, and then uses such funds to buy firm s equities. In doing so, the central bank is not subject to balance sheet constraint while banks are. This policy can be considered as an alternative way to deal with the banking turmoil. 3. Theoretical Framework In order to establish a quantitative model to be consistent to banking crisis in the case of Thailand, significant characteristics should be taken in account. In particular, a fundamental structure of Thai economy or so-called Small Open Economy is available in this model. Also, vital attribute is the role of financial intermediary during the financial crisis. Additionally, the indispensable attributes in this work are stabilization policies for the crisis. In comparison between the IMF s tight monetary policy and the unconventional policy, the policymaker s instrument constraints should be added in the policymaker decision functions. Regarding the first stabilization policy, on the one hand, the tight monetary policy that this paper wants to capture is the increase in the domestic interest rate during that time as a purpose of attracting foreign capital inflows to boost up financial confidence. On the other hand, the increase in interest rate helps the financial intermediaries accumulate deposits rapidly. Furthermore, the purpose to integrate the second stabilization policy; the unconventional monetary policy; is to observe an effect of this extraordinary implementation whether it works significantly to mitigate the turbulence of the economy.

36 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 33 In order to establish a model that is satisfied the objective of the study, this model gathers such aforementioned necessary characteristics from previous works. Mostly, it relates to Steffen (2011) in terms of a small open economy model with a financial intermediary sector. It is very helpful to build a model based on Thailand s economy. Also, settings of the unconventional monetary policy follow Gertler and Karadi (2011), which the central bank supports the firms by increasing demand for assets Households In this model, a continuum of identical households lives in measure unity. Each of them can consume, save, borrow foreign debts, and work. As for saving, it is like that households lend to financial intermediaries, and the central bank in the case that the authority issues riskless bonds. As in a standard model, households gain more utility from consumption c t and less from work l t. Let be a degree of risk aversion; be an elasticity of labor supply. So, household preferences are given by following equation. u( c, l ) t t 1 1 ( ct lt ) 1 1 Households consist of 2 types of agents: workers and bankers as fractions 1 f and f respectively. Workers supply labor and return wages to households. They also save as a form of risk-free bonds, which consist of saving bonds and central bank bonds, and borrow foreign debts from foreign lenders in the international financial market. A friction of foreign borrowing represents as a portfolio adjustment cost, as in Schmitt-Grohe and Uribe (2002). For saving, households will hold the central bank bonds if the central bank decides to implement the unconventional monetary policy. Bankers operate financial intermediaries. Every period bankers face a probability 1 to become workers. If bankers become workers, they will transfer their current wealth to their belonged households. In the meantime, workers also turn into bankers simultaneously. Also, workers transfer a fraction of their wealth to be start-up funds for new bankers. The purpose of this setup is to enforce bankers not to arrive the point that they can finance themselves through their own net worth. (3.1) 2 The final results can be acquired through numerical method. I construct a system of linear rational expectation equations and then apply Christopher A. Sims algorithm GENSYS to solve for policy functions.

37 34 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY f I let w be the real wage, t R be the gross domestic risk-free interest rate from t f H t 1to t, Rt be the gross foreign interest rate at the same duration as R, t dt be the foreign 1 debts that were borrowed by households by period t and will be paid back foreign investors at the gross level by period t 1, bt be the risk-free bonds that households save at period t and 1 will get as incomes by period t 1, and be the transfers. The household budget constraint is t shown as the following equation. d R b wl T R d b c ( d d ) (3.2) H f H H H t1 t t t t t t t t t1 t t1 Meaning of this constraint is that each period households select to consume c t, save H at the total quantity bt, borrow foreign debts at the amount 1 dt and work 1 l t hours under their net current wealth, which consists of the labor incomes wl t t, the net distributions from ownership of banks and capital producers t, transfers from the central bank in operating bond f markett t, the total return from savings Rbfrom t t holding bonds, net the total debts from the H d foreign borrowing Rd and cost from adjusting level of debts H H H H 2 t t ( dt 1 d ) ( dt 1 d ), 2 where d is the coefficient of the adjustment. A representative household problem is to maximize his expected lifetime utility (3.1) under his budget constraint (3.2). t0 1 1 t ( ct l t ) 1 max [ ] 1 subject to dt 1 Rt bt wl t t t Tt Rt dt bt 1 ct dt 1 d Therefore, the Lagrangian for this maximization problem is given by ( ). H f H H H t0 1 1 t ( ct lt ) 1 L {[ ] 1 (3.3) ( d R b w l T R d b c ( d d ))} H f H H H Lt t1 t t t t t t t t t1 t t1 where Lt is the shadow price and is the discount factor. First order conditions are shown as consumption decision, labor supply decision, savings decision and foreign debts decision. A representative household chooses a level of consumption to maximize his utility ( L/ c t 0) as the following equation. 1 ( ct l t ) t (3.4) The interpretation of both equations (3.4) is the cost-benefit relationship. That is, the marginal cost from reducing expected utility of consuming one unit of consumption is equal to the marginal benefit from gaining more utility of income.

38 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 35 He also chooses to work and trade off between consumption and labor to maximize his utility ( L/ l t 0) as the following equation. 1 1 ( ct lt ) ( lt ) t w (3.5) t The marginal cost from reducing consumption today to supply more hours worked is equal to the marginal benefit from increasing wealth to consume more. He chooses to save as risk-free bonds maximize his utility ( L/ bt 1 0) as the following equation. f t Ett 1( Rt 1) (3.6) The marginal cost from reducing consumption and making deposits today is equal to the marginal benefit from getting more the gross bank savings to consume more in the next period. H He chooses to borrow foreign debts maximize his utility ( L/ dt 1 0) as the following equation. H H t (1 ( dt 1 d )) t 1( Rt 1) (3.7) The marginal benefit from borrowing more foreign debts, which is deducted by the deviation of debts from steady state, to consume today is equal to the marginal cost from repaying gross foreign debts tomorrow. After combining (3.4) and (3.5), the new equation shows a relationship between real wage and labor. It can be illustrated as the following equation. 1 l t w (3.8) t The above equation represents the labor supply curve. The marginal substitution of leisure for consumption is equal to the real wage. After combining (3.4) and (3.7), the new equation can be shown as where 1 ( d d ) E[ ( R )] (3.9) H H t1 t, t1 t1 ( c l ) 1 t1 t1 tt, 1 1 ( ct lt ). (3.10) From the equation (3.9), if household chooses to borrow an additional unit of foreign debt, then the marginal benefit of a unit foreign debt is equal to marginal cost to pay it back in the future. The variable is the marginal rate of substitution of consumption or so-called the tt, 1 stochastic discount factor. After combining (3.4) and (3.6), the new equation can be shown as the following f 1 E[ R ]. (3.11) t t, t1 t1

39 36 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY Equation (3.11) implies that if household chooses to reduce consumption today and save in a form of a unit of risk-free bond, then he receives gross return to increase consumption tomorrow. 3.2 Banks Banks which are operated by bankers act as financial intermediaries. They acquire funds from foreign borrowing and households deposits, and purchase firms equities. Such purchasing can be considered as a form of financing. This setting is somewhat different from Steffen (2011) and Gertler and Karadi (2011). For the former, a model allows banks to borrow foreign debts as liabilities. The latter permits banks to obtain deposits from households. In this model, banks can either borrow foreign debts or get saving bonds to purchase firms equities. The reason of this combination is to observe behaviors of financial intermediaries in regard of relationship between the unconventional monetary policy and foreign behavior. The term j represents bank j. For simplicity, bank j is separated as 2 subunits: liability unit and operating unit. Liability unit acquires two sources of funding from deposits and foreign lender and then sells them as liabilities to the operating unit. The operating unit acts as a role of general bank. It uses liabilities to expand its balance sheet through obtaining firms equities. f Regarding the liability unit, it obtains deposits bjt with risk-free interest rate 1 R and t B foreign debt d jt with foreign interest rate R jt. It then sells liabilities L jt with return on liabilities R Lt to the operating unit. However, in obtaining deposits and foreign debt, the liability l B unit faces the convex adjustment cost d jt l 2 l. is the desired level of ratio of foreign ( ) 2 L jt debt to liabilities. If the liability unit restructures levels of deposits or foreign debt, it costs at the adjustment cost. Purposes of introducing of this friction are to set different 1) wedge between return on liabilities and foreign interest rate and 2) wedge between return on liabilities and riskfree interest rate. The liability unit maximizes profit as the following l B i B f B jt l 2 max E, ( ( ) ) B t t ti RLt Ljt Rt d jt Rt bjt bjt d jt Ljt dt1, bjt1 i0 2 Ljt d (3.12) B subject to Ljt bjt d jt. (3.13) First order conditions are shown as foreign debts decision and saving bonds decision.

40 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 37 Liability unit chooses to borrow foreign debts to maximize his objective. It can be shown as the following equation. R d B l jt1 jt1 Lt1 Rt 1 ( ) 2 Ljt 1 ( Ljt 1 ) b (3.14) In addition, liability unit also chooses to obtain saving bonds to maximize his objective. It can be shown as the following equation. R B B f l jt1 jt1 Lt1 Rt 1 ( ) 2 Ljt 1 ( Ljt 1 ) d d (3.15) I rearrange equations. The equation (3.14) is divided by the equation (3.15). The result can be shown as the following equation. R R b R R d Lt1 t1 jt1 f B Lt1 t1 jt1 (3.16) Second I rearrange the equation (3.16). Then the result can be shown as the following equation. d R R R b B jt1 f jt1 Lt1 t1 t1 Ljt 1 Ljt 1 (3.17) The implication of the above equation is that the return on liabilities is the combination of weighted average of interest rates. Domestic interest rate relates to borrowing cost. On the one hand, increased interest rate attracts households to hold more saving bonds. On the other hand, banks have to bear the burden from increase in cost of funding saving bonds. This model allows banks can decide the amount of how much saving bonds bank can take. Additionally, if cost of saving bonds is higher than cost of borrowing foreign debts, banks would rather borrow foreign debts. This implies the negative relationship between risk-free interest rate and saving bonds. This condition can be set through Proposition 1. f Proposition 1: Risk-free interest rate Rt increases and saving bonds 1 bjt decreases if and only 1 l B d 0. 2 L t1 if t1 Operating unit receives liabilities from the liability unit. It uses liability as source of funding to purchase firms equities, which are considered as assets. Let qt be the equity price; st be the amount of equities that the operating unit chooses to invest. Liabilities Ljt, which 1

41 38 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY B comprise of foreign debts d jt 1 and saving bonds bjt, are obtained from the liability unit. The 1 rest is the net assets of the bank or so-called net worth n jt. This relationship is shown as equation (3.18). qt s jt njt Ljt 1 (3.18) Balance sheet relationship in the equation (3.18) is a constraint for the bank at time t. However, from periodt 1 to period t, there is a dynamic relationship due to the banker s operation in this enterprise. I let Rkt be the gross rate of return on a unit of firm s equities, so net worth in period t 1 is equal to the last-period difference between the gross earnings from holding assets net gross liabilities, which is given by n. jt1 Rkt 1qt s jt RLt 1Lt 1 (3.19) After combining (3.18) and (3.19), the new equation is shown as following njt 1 ( Rkt 1 RLt 1) qt s jt RLt 1n jt. (3.20) Implication of (3.20) is that growth of net worth depends on lending premium Rkt 1 RLt 1and total value of assets qs t jt. This is similar to the situation if the operating unit receives payment on its shares ( Rkt 1qt s ), then it repays on its liabilities jt ( RLt 1Ljt 1). In other words, the operating unit obtains liabilities to finance a firm if lending i premium is greater than or equal to zero all the time. t, ti is a discount for a banker at periodt applies to earnings at period t iwhere i 0, so the relationship can be shown as the following equation. i Et i t, t1i ( Rkt 1i RLt 1i ) 0 (3.21) As mentioned in households, at the end of each period, a banker retires from working at the bank and turning into a worker with probability1. Therefore, the objective of a banker is to maximize the lifetime value of the bank, which is given by the following equation. i i1 jt max t (1 ) t, t1i jt1i { s jt } i0 (3.22) V E n Intuitively, the net worth of a bank can be considered as the wealth of a banker. The net present value or the value of the banker s wealth at period t is equal to the sum of the discount banker s wealth from period t 1, t 2, until the last period that the banker retires. To feature a trigger of crisis in the model, a problem between foreign lenders and bankers is attached as a constraint. At the beginning of period t, a banker has an incentive to divert (e.g. pay out a large bonus and dividend) a fraction t of assets qs, and transfer them t jt back to households of which he is a member. If they extend this fraction of asset over a bank s

42 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 39 present value, foreign lenders will force a bank into bankruptcy. A banker will certainly lose his ownership on this bank as well. Therefore, t qs can be considered as a total benefit from extending a level of t jt holding firms equities. Cost in doing so is the bank s present value V that foreign lenders can jt force a bank into bankruptcy if he does not follow the cost benefit relationship constraintvjt t qt s. 3 However, a banker decides a level of benefit from holding firms jt equities until the constraint above is binding as the following equation. Vjt t qt s (3.23) jt Regarding a crisis generator, in the model foreign investors do not trust in banker s behavior. During the crisis period, anxiety of foreign investors rises and they want a banker to reduce a level of holding firms equities. Such a setting can be represented by increasing t. If increases, a banker holds a lower level of firm s equities and also satisfies cost-benefit t condition as the equation (3.23). In contrast, if the foreign investors feel optimistic on the economy, anxiety of foreign investors, which is also represented by t, decreases. A banker holds a higher level of firm s equities. To solve for bank s maximization problem, this model applies a guess and verify method. The solution of this method can be shown as Proposition 2. Proposition 2: The solution of the banks can be determined by V q s n (3.24) jt t t jt t jt q s (3.25) t1 t1 where (1 ) ( R R ) t t, t1 kt1 Lt1 t, t1 t1 qs t t nt (1 ) R. (3.26) 1 t t, t1 Lt1 t, t1 t1 nt The term t is the marginal gain of holding firms equities. The term t 1is the marginal return from adding additional unit of n. jt After combining between (3.23) and (3.24), the new equation can be shown as the following q s n q s t t jt t jt t t jt. 3 If a bank does not commit to this constraint, foreign investors will not lend funds earlier.

43 40 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY The above equation can be aggregated for all j firms, which then can be determined by the following arrangement. tqt st tnt t qt st qt st qt st t t t nt nt qt st qt st t t t nt nt qs t t t ( t t ) nt qs t t ( t t ) t nt qs t t t n t t t (3.37) I let be a leverage ratio. Then the equation (3.27) turns into the following equation. t qs t t (3.28) t n t The total net worth of banks in period t consists of the existing banks net worth and the entering banks net worth. The value of existing banks net worth is equal to the following equation. net [( Rkt RLt ) qt 1st 1 RLtnt 1] (3.29) Regarding entering banks, households transfer a fraction of their wealth for new bankers, which is equal to / (1 ) of value of assets (1 ) q t 1s t 1 that exiting bankers had intermediated in their final operating period. Therefore, the value of entering banks net worth is equal to the following equation. nnt qt 1st 1 (3.30) Total banks net worth is the sum of both types, which is equal to the following equation. n [( R R ) q s R n ] q s (3.31) t kt Lt t1 t1 Lt t1 t1 t1 3.3 Firms There are a lot of firms in the competitive economy. They produce the final output by using capital, labor and production technology as inputs. The firm s constant return to scale production function can be shown as following 1 y z k l (3.32) t t t t

44 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 41 where y is the output, t z is a technology factor, t k is the capital, and t l t is the worked hours. represents a share of capital on output. As for capital acquisition, firms have to plan one period ahead. Firms obtain capital kt at the end of period t and use it to produce output for the next period. In doing so, 1 firms issue equities and trade with banks. Banks get s equities and pay as a form of funds. t Firms use such funds to purchase capital kt from the capital producers. For the next period, 1 since banks hold equities, firms are obliged to pay gross return R from holding last period kt equities to banks. The price of a unit of capital is given by q. Therefore, the relationship t between capital and equities is given by the following equation. qt s jt qtkt (3.33) 1 Apart from purchasing capital from capital producers, firms also sells capital after depreciation to them at the same price of a unit (1 ) k t of capital. Therefore, the firm s profit maximization problem is given by lt, kt i t t, ti t kt t1 jt1 t t t t i0 (3.34) max E [ y R q s w l q (1 ) k ] subject to (3.32). First order conditions are given by labor decision and capital decision. The first decision is that firms choose to hire labor to maximize their objective. It can be shown as the following equation. yt (1 ) wt (3.35) l t This equation can be considered as labor demand. Firms will hire labor at the real wage that provides an equivalent marginal product of labor. The second decision is that firms choose to acquire capital to maximize their objective. It can be shown as the following equation. R y (1 ) q t t kt kt (3.36) qt 1 Return on equity that firms pay to banks is equal to a ratio of gross revenue at periodt to period t 1. Gross revenue at period t consists of marginal product of capital and capital after depreciation and the value of capital after depreciation, while gross revenue at period t 1is the value of capital at period t 1.

45 42 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY 3.4 Capital Producers As in Bernanke, Gertler and Gilchrist (1999) and Carlstrom and Fuerst (1999), introduction of capital producers is on the purpose of matching price of capital to investment. Mendoza (1991) raises that the capital adjustment costs are typically needed for small open economy model to reduce excessive investment volatility. Therefore, for this model, change in investment level, which is endogenously determined in capital adjustment costs, affects price of capital, vice versa. At the end of period t, capital producers buy capital after depreciation from firms at price q t and quantities (1 ) k t. They use such quantity and invest at the amount i to get t t capital kt. Also, cost to adjust level of investment is equal to ( ) 1 i i i i t t t 2 ( ) kt [ ( ) ] kt kt kt 2 kt i k t k t, which has a form. After that, capital producers sell this capital kt to firms. As 1 described in firms sector, firms use this capital to produce output in the next period. So, the law of motion of the capital stock is shown as the following equation. it kt 1 (1 ) kt ( ) kt k (3.37) t Therefore, capital producers profit maximization problem can be determined through the following i t t, ti t t1 t t t i0 max E [ q k q (1 ) k i ] it subject to (3.37). First order condition is given by investment decision. Capital producers choose to level of investment to maximize their objective. It can be shown as the following equation. q i i t 1 t [1 ( )] (3.38) kt The meaning of equation above is that capital producers will sell capital at price that is equal to cost of adjustment. If investment increases, then price of capital increases, vice versa. 3.5 Central Bank s Stabilization Policies The central bank can apply two monetary policies. First, this model follows Gertler and Karadi (2011) by allowing the central bank helps banks buy firms equities to increase asset demand. The central bank will buy firms equities qs by issuing the central bank t gt f bonds b gt to households. Households obtain these bonds as savings and get risk-free return Rt 1. I let s be the amount of firms equities held by banks. Therefore, the total amount of firms pt

46 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 43 equities is equal to the sum of equities held by banks and the central bank, which can be shown as the following equation. qt st qt spt qts (3.39) gt However, the central bank intermediates equities as a fraction of total amount of firms equities. It can be shown as the following qt sgt t qt s (3.40) t f f where t get [( Rkt 1 Rt 1) ( Rk R )]. (3.41) From equation above, in most of the financial distresses especially in the financial institution, an obvious fact is that the gap or the spread of the returns on capital or the return f on equity Rkt 1 and the risk-free rate Rt 1is wider because of shortage of demand of firms equities. Therefore, if the spread increases too high, there might signal to the policymaker to take some actions. In such a providing more credit availabilities, the amount of the central bank s support should proportionate to this spread. In this model a criterion that the central supports the stocks of capital bases on the difference between interest rate spread f Et ( Rkt 1 Rt 1) and its steady state value. The equation (3.39) can be modified as the following qs t q s q s n n n t t pt t gt. (3.42) t t t The equation (3.42) can be rearranged by plugging (3.40) into it. It turns into the following equation. while qs t n t pt q s qs q s (3.43) t t t pt t t t nt nt nt qst n The term t t is defined as the ratio of aggregate assets to the banks net worth ct, is the ratio of banks intermediated assets to banks net worth t. So, the equation (3.43) can be also written as the following equation. ct t t ct (3.44) Second, for the conventional monetary policy, the central bank adjusts interest rate to stabilize inflation. However, for this case of tight monetary policy, as guided by the IMF, the central bank increases interest rate at a high level. Therefore, real risk-free interest rate is adjusted through feedback rule as the following equation. R f f f f R (1 f ) R R f (3.45) t R R t1 t

47 44 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY 3.6 Closing the Model Exogenous processes for this model consist of 4 variables. The first one is the technology process, follows AR(1). ln z ln z (3.46) z t z t1 t Next, as described in the equation (3.23), the foreign investor shock represents the crisis generator. For this model, this unpredictable event is an AR(1) exogenous variable as well. Let be a steady state value of divertible asset. Therefore, a crisis generator follows by (3.47) t t where ln t ln t1. (3.48) t The third exogenous variable is the foreign interest rate. According to being the small open economy, Thailand is likely affected by the world interest rate, which is determined exogenously as following R t R (3.49) where 1 t ln ln. t t t The last one is the risk-free interest rate, as in equation (3.40). f f f f R t (1 f ) f R R t1 t R R R (3.50) Market clearing conditions consists of 2 constraints. The one is an aggregate resource constraint, which can be shown as the following equation. y c ( ) k R d d R d d ( d d ) (3.51) H H B B H H t t t t t t1 t jt jt1 t1 The output for the economy is necessary to be equal to aggregate demand. The other is the trade balance relationship. For this model, trade balance is similar to the residual from the aggregate demand, which can be shown as the following equation. tb y c ( ) ( ) k (3.52) t t t t The central bank has to issue the central bank bond to finance firms equities. Constraint for the unconventional monetary policy can be determined by the following equation. f Rkt qt 1sgt 1 bgt 1 Tt Rt bgt qtsgt (3.53) At period t, the central bank issues the central bank bonds bgt to finance firms 1 equities qs t gt. In the meantime, the central bank receives gross return from holding firms equities from last period Rkt qt 1s, and commits to pay gross return from holding the central gt 1 f bank bonds Rb t gt to households. Risk-free bond market consists of saving bonds and the central bank bond. b b b (3.54) t1 jt1 gt1

48 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Equilibrium This model is defined as a stochastic sequence of 19 allocations, which consist of H B [ ct, lt, dt 1, Lt 1, st, nt, t, t, t, dt 1, kt 1, it, yt, tbt, t, t, t 1, bjt 1, ct, t ] t0, and 5 prices, which consist of [ qt, wt, Rkt, RLt, Rt ]. 5 initial conditions given at the beginning consist of t 0 H B k, d, d, b, L. 4 exogenous processes generating shocks in the model consist of j0 0 f zt t t R. t t 0 [,,, ] Additionally, the amount of allocations and prices need to match with all agents decisions, which consist of optimal conditions and market clearing conditions. They are summarized as 24 conditions. Each set of them is grouped separately. 3.8 Parameterization Most of the parameters used in this model are based on Thailand economy during Most of these parameters follow Queralto (2011) because such paper studies Thailand financial crisis at the same period. Several parameters can be from Steffen (2011). The first group of parameters is about the preference and production. The capital share of output is The quarterly discount factor is equal to , which is estimated from 13 percent of real interest rate during The depreciation rate of capital is equal to , which is calculated from the annual rate of depreciation 4.1 percent during Risk aversion is equal to 2. Elasticity of labor supply is equal to The second group is about the real sector. The ratio of households foreign debt to GDP is set to 0.1 set to force the model be a convergent level. Also, real foreign interest rate is equal to 2.03 percent, which is an approximate value of US interest rate. Frictions in capital i d adjustment and portfolio adjustment, and, are equal to and These two values are assumed to be very small in order to affect much in the model. The third group relates to the banks sector. Probability of survival of bankers is equal to Start-up capital of banks is equal to During the period of the study, the ratio of banks foreign debts to net worth is equal to 3 for technical reason for an acceptable level of volatility of net worth during the shock. The last group of parameters relates to the unconventional monetary policy response. The parameter represents implicit fractions of central intermediation assets for the g financial institutions. They vary from 0 to 100. Value 0 represents no credit policy response, while 100 refers to full support from the government.

49 46 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY Table 3.1 Parameters Parameter Description Value Capital share 0.32 Discount factor Depreciation rate of capital Risk aversion 2 Elasticity of labor supply H Ratio of households foreign debt to GDP 0.1 dy R Foreign interest rate i Capital adjustment coefficient d Portfolio adjustment coefficient Probability of survival of bankers Start-up capital of banks B Ratio of banks foreign debts to net worth 3 dn g Fractions of central intermediation assets for the financial institutions 0 to 100 Source: Author s Designation 4. RESULTS This chapter provides details about crisis experimentation. The beginning is to introduce how the economic indicators respond to the banking crisis generator, which is triggered by the foreign anxiety. It can be also considered as a baseline model to compare to the two stabilization policies. This study explores the effect of the IMF s tight monetary policy. Next, the results of the unconventional monetary policy are shown. Finally, the consequences of the actual and the optional stabilization policies are compared and concluded as the implications of this study.

50 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Baseline Model (Crisis Generator) Regarding a crisis generator of banking crisis or a foreign investors shock, this paper follows Steffen (2011). Anxious investors panic about news and they need banks to increase their current leverage ratios. The mechanism can be explained stepwise. In particular, it can be modeled as an increasing bankers ability to divert assets. Foreign investors realized that the bankers incentive to divert assets increases when the crisis occurs. Foreign investors will force bankers to sell the assets or increase net worth. In Figure 4.1, dashed lines show the impulse responses to foreign investors shock. This model allows the rise of foreign investors panic about 15 percent to grasp the fact that during Thailand s GDP contracted by about 7.7 percent. At the beginning, after the panic rises, foreign investors force bankers to sell assets and net worth declines immediately. If banks reduce assets, they have to reduce their liabilities as well. Since liability unit encounters adjustment cost for obtaining foreign debts, liability producer makes decision to reduce more foreign debts than deposits. Therefore, foreign debts reduce by 30 percent while deposits decrease just by 20 percent. Since only one source that buys firm s equities is the bank sector, selling assets leads to reduction of demand for assets. In this case, the capital, which also represents for amount of firms equities, reduces to 6 percent. Also, this reduction of demand for assets puts pressure downward on the asset prices and the return for holding firm s equity. The asset prices decrease by about 4.5 percent. As a result, the capital producers lose incentive to invest, so investment reduces a lot. Therefore, because of a lot of reduction in aggregate demand, the residual, which is the trade balance or the net export, rises up. For subsequent period, according to the reduction of demand for assets, the return on capital shoots up because of low asset prices in the previous period. The amount of capital that a firm uses for production also reduces. This results in the decline on output and hours worked. Likewise, households foresee that their future incomes reduce according to the reduction of hours worked, so they reduce their consumption. As for recovery period, the net worth gradually increases. This implies that banks build their net worth to match with leverage ratios that foreign investors require by obtaining deposits. As a result, the demand for assets starts growing and asset prices recover immediately. Investment also increases and back to the steady state. Firms can use capital and hire more labor to produce the output. Household gets more income from working, so they start to consume more.

51 48 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY Figure 4.1 Baseline Model and Tight Monetary Policy Source: Author s Illustration 4.2 Stabilization Policy 1: Tight Monetary Policy Also, for Figure 4.1 solid lines illustrate the impulse responses for the case of the tight monetary policy. As for this case, there will be 2 sources to generate shocks to the economy. The first is the degree of panic or the crisis generator. It is configured similarly to the case of baseline model. The second shock is from the domestic interest rate. To match the tight monetary policy for the case of Thailand, the exogenous variable for this fact is under the assumption that the central bank adjusts the interest rate based on feedback rule. In other words, this can be considered as a riskless interest rate shock. In this model, the central bank adjusts the riskless interest rate higher by 3.9%, which is derived from the average change of interest adjustment during June 1997 to March According to the crisis shock, the bank is forced to sell the assets and their net worth declines. Also, the reduction of demand for assets leads to decline in asset price. Investment declines as capital producers lose incentive to invest. Trade balance starts shooting up again. Lack of capital lets the firm cannot produce output and hours worked reduce. However, this case is very special. The tight monetary policy is very helpful in attracting capital inflows because of the difference between the international rate of return and the domestic rate of return. Since the domestic interest rate becomes exogenous and greater

52 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 49 than the foreign interest rate, households make decision to borrow from international capital market to make deposits in the banks. Nevertheless, domestic interest rate is generally a cost of borrowing for banks. If it is higher, banks have to bear more burdens. Therefore, banks use deposits less than foreign debts for financing their assets. That answers why deposits declines much greater than foreign debts in Figure 5.1 for this case of the tight monetary policy. This stabilization policy even deteriorates liabilities financing. Plunging into low levels of both deposits and foreign debts leads to shrink of banks assets. Demand for assets and asset prices reduce much lower than in the baseline case. Firms obtain fewer funds to produce output. Moreover, decline in asset prices decreases incentive of capital producers to invest. Because of lower output, firms hire less labor. Households realize that their incomes reduce, so they reduce their consumption. Figure 4.2 Baseline Model and Unconventional Monetary Policy Source: Author s Illustration 4.3 Stabilization Policy 2: Unconventional Monetary Policy The next case is the effect of the unconventional monetary policy. From Figure 4.2, the effects of the unconventional monetary policy are shown in the line with the asterisk. By comparing to the case of the baseline model, the unconventional monetary policy pacifies the deterioration of most indicators. The central bank helps demand for assets increase by issuing

53 50 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY bonds to finance firms equities. By comparing to the baseline model, decline of asset prices improves for this stabilization policy. Since the demand for assets improves from the baseline case, banks reduce lower liabilities than the baseline case as well. According to the central bank s intermediation, the capital declines less and the asset prices also improve. Capital producers invest relatively more. Additionally, the trade balance reduces since the aggregate demand increases. Support from the central bank help firms get capital rapidly. Firms hire more labor to produce more output faster. Therefore, the decline in the output in this case is not as much as the baseline case. Therefore, the unconventional monetary policy can help the economy stabilize. 4.4 Comparison between 2 Stabilization Policies: Tight Monetary Policy and Unconventional Monetary Policy The purpose of this analysis is to compare the outcome of 2 stabilization policies. Figure 4.3 shows the impulse responses of foreign investors shock and subdue the turmoil by 1) the tight monetary policy and 2) the unconventional monetary policy. In terms of unsatisfied magnitudes of macroeconomic indicators, the unconventional monetary policy yields lower declines in most variables. Plausibility behind this is that the unconventional monetary policy increases demand for assets directly while the tight monetary policy does not. The tight monetary policy even deteriorates the economy by amplifying the effect of financial crisis through higher borrowing cost. Financial institutions encounter a hard time to buy firms equities. Therefore, the decline of output for the case of the tight monetary policy is worse than the case of unconventional monetary policy. One interesting point is that the trade balance for the case of the tight monetary policy improves significantly. The reason behind this improvement is the reduction in the aggregate demand. This implies that if the policymaker chooses to implement the tight monetary policy, the worst event e.g. recession, increase in unemployment, will be more severe than she does the other way. It creates the higher borrowing cost of banking sector. On the other hand, if the policymaker chooses to implement the unconventional monetary policy, this central bank tool is powerful enough to impede the severity of banking crisis.

54 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 51 Figure 4.3 Baseline Model and Unconventional Monetary Policy Source: Author s Illustration 5. Conclusion and Recommendation This study constructs a framework that can account for banking crisis for a small open economy. It then explores how the example policies so-called Stabilization Policies, which consist of 1) tight monetary policy and 2) unconventional monetary policy, find the way out of the unfavorable financial turmoil. This observation also applies Thailand s economic conditions during as an example because it is suitable for focused characteristics: banking crisis or small open economy. The definition of banking crisis in this study follows Reinhart and Rogoff (2009) as a large-scale government assistance of an important financial institution. Banking crisis are started by the unexpected increase in panic of banks lenders and then will be observed the resolution through the central bank s two aforementioned policies. According to the rise of anxiety of lenders, banks are forced to reduce their assets immediately. This channel consequently transmits through the reduction of demand for assets. Because of the lack of credit, the output of the economy decreases and the crisis starts. To find out the resolutions for counteracting the effect of banking crisis, the past policies are introduced to test whether they can actually help the economy stabilize. As guided by IMF to set the interest rate at a high level, the tight monetary policy is adopted by the Thai

55 52 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY authority because it is able to support the exchange rate appreciation. Basurto and Ghosh (2000) conduct research and obtain convincing results the same as IMF claims. However, there are several arguments about this policy. The most important reason is that the higher interest rate pushes more burdens to financial intermediaries. Higher borrowing cost leads to financial distress in the bank sector. Stiglitz (2002) gives the reason that the tight monetary policy even worsens the economic conditions downward to a lower level. Therefore, it has been doubtful whether the tight monetary policy is good for restoring the Thailand s economic conditions at that time. Once again, the rise of the banking crisis in 2007 started originally in U.S. s financial intermediaries sector had a major role in amplifying the severity of the crisis. The Fed intermediated credit availabilities through increasing in asset demand. Then, the asset prices recover back to the steady level. The output of the economy ameliorates remarkably. Two stabilization policies represent examples of many resolutions among financial turmoils. Comparison their efficiencies is another target of this study. This model adopts Steffen (2011) which incorporates the real business cycle framework with small open economy. Structures of decentralization economy in this study are established on this paper. Moreover, integration of banking sector is helpful in terms of accounting for the banking crisis. Another outstanding characteristic is sources of financing. This model allows banks can make decision on external financing, which comprises of obtaining deposits from households and borrowing from foreign lenders. Introducing this features benefits in observing banks decisions on choosing sources of funds during the crisis period. Last but not least, the unconventional monetary policy is a vital characteristic that this study needs to capture. This model follows Gertler and Karadi (2011) by allowing the central bank issues bonds to finance the firm assets. According to this mechanism, the demand for assets improves significantly. Increasing in demand eases the decline of asset price and other macroeconomic variables. Methodology applied to solve this study is based on Sims (2002). All of decision equations are arranged in the form of linearization. Most parameters are set for the case of Thailand when it experienced the financial crisis during The rest of them follow Queralto (2011).

56 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 53 Several key findings in this study infer from the path of impulse response functions. First, increasing interest rate leads to higher borrowing cost of the financial intermediaries, so they reduce credit availabilities to the real sector. The primary transmission to the real sector for this mechanism is under asset pricing channel. Reduction in demand for capital leads to the decline of asset prices and so on. Therefore, the tight monetary policy worsens the economy as in Stiglitz (2002). Second, the increasing in the central bank s asset intermediation helps the asset demand increase remarkably. The monetary authority can issue bonds to get funds and use such funds to inject the credit availabilities. In this policy, the role of the central bank is similar to the bank. The central bank generates more loans to the firms than the banks do because the central bank is not constrained by financial conditions. The rise of degree of panic can generate the economic fluctuations. In particular, banks face tough time to intermediate loans can be considered as banking crisis. Two stabilization policies are chosen to test whether it can be resolutions for such a crisis in small open economy. The results of this study point out that the policymaker is supposed to pacify the banking distress through the unconventional monetary policy rather than the tight monetary policy because it can pacify the severity of the financial crisis. This research is conducted based on the assumption of the crisis generator. The rise of lender s panic is the origin of the crisis. In particular, this assumption follows Fostel and Geanakoplos (2008) on the aspect that the lenders feel anxious and force the bank to reduce the level of assets. However, this model applies the real business cycle model, which focuses on banking crisis and neglects the exchange rate. The central bank s interest rate rule is a feedback rule.

57 54 A QUANTITATIVE MODEL OF STABILIZATION POLICIES FOR BANKING CRISIS IN A SMALL OPEN ECONOMY References Basurto, G. & Ghosh, A. (2000). The interest rate-exchange rate nexus in the Asian Crisis countries. Working paper of the International Monetary Fund no. 19. Bernanke, B. & Gertler, M. (1989). Agency costs, net worth, and business fluctuations. The American Economic Review, 79, Bernanke, B., Gertler, M. & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework., Handbook of macroeconomics, Amsterdam: Elsevier. Blanchard, O. & Kahn, C. (1980). The solution of linear difference models under rational expectations. Econometrica, 48, Brunnermeier, M. K. & Sannikov, Y. (2010). A macroeconomic model with a financial sector. Working paper. Fischer, S. (1998). The Asian crisis: A view from the IMF. Journal of International Financial Management & Accounting, Fostel, A. & Geanakoplos, J. (2008). Leverage cycles and the anxious economy. The American Economic Review, 98, Freixas, X. & Rochet, J. (1997). Microeconomics of banking, London: MIT Press. Gertler, M., Gilchrist, S. & Natalucci, F. (2007). External constraints on monetary policy and the financial accelerator. Journal of Money, Credit and Banking, 39, Gertler, M. & Karadi, P. (2011). A model of unconventional monetary policy. Journal of Monetary Economics, 58, Gertler, M. & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis., Handbook of monetary economics, Amsterdam: Elsevier. Gertler, M., Kiyotaki, N. & Queralto, A. (2011). Financial crises, bank risk exposure and government financial policy. Journal of Monetary Economics (forthcoming). Kiyotaki, N. & Moore, J. (1997). Credit cycles. Journal of Political Economy, 105, Mendoza, E. (1991). Real business cycles in a small open economy. The American Economic Review, 81, Ohno, K., Shirono, K. & Sisli, E. (1999). Can high interest rates stop regional currency falls?. ADB Institute working paper no.6. Queralto, A. (2011). Financial liberalization, credit booms and financial crises. Working paper.

58 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 55 Reinhart, C. M. & Rogoff, K. (2009). This time is different: Eight centuries of financial folly, Princeton: Princeton University Press. Schmitt-Grohe, S. & Uribe, M. (2003). Closing small open economy models. Journal of International Economics, 61, Sims, C. (2002). Solving linear rational expectations models. Computational Economics, 20, Steffen, C. G. (2011). Business cycles and financial intermediation in emerging economies. Working paper. Stiglitz, J. E. (2002). Globalization and its discontents, New York City: W.W. Norton & Company. Tanboon, S., Piamchol, S., Ruenbanterng, T. & Pongpaichet, P. (2009). Impacts of financial factors on Thailand's business cycle fluctuations. Bank of Thailand discussion paper, SP/01/2009. Tobin, J. (1998). Asian financial crisis. Japan and the World Economy, 10(3),

59 56 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 1 Abstract Siriluk Chiarakorn 2 Chompoonuh K. Permpoonwiwat 3 Papondhanai Nanthachatchavankul 4 This paper aimed to analyze the net social benefits from switching petroleum-based plastic to bioplastic based on Cost-Benefit Analysis (CBA). The status quo was no PLA production in Thailand and another case is having PLA production based on the assumption that the HDPE production was not replaced by the PLA production. This paper calculated cost of PLA production from two cases: 1) cassava root to PLA resin and 2) cassava starch to PLA resin. The cost structure of PLA production comprises of investment cost, direct production cost and indirect environmental cost. Total costs and benefits of PLA and HDPE production were calculated on the basis of 100,000 tonnes. For case 1, the integrated PLA production provided positive net benefit as 7.34 millions USD due to large benefit from selling cassava meals. Without the revenue from cassava meal, the net benefit is negative ( millions USD). Plus CDM implementation, the case 1 gains more benefit from selling carbon credit than another case due to less amount of wastewater produced. In comparison to PLA production, the net benefit of HDPE production is millions USD. Therefore, only the PLA production under case 1 can be competitive with the HDPE production. The case 2 was selected as Status quo for calculation of net present values (NPV) using real discount rate of 1.89 %. Moreover, NPV of three options: 1) change in benefit due to expected PLA price development, 2) change in cost due to technological development and 3) combination of option 1 and 2 were calculated. All three options provided positive NPV. The sensitivity analysis was conducted based on the variation in real discount rates; 1.89 % (status quo), 4.5% and 7.0%. All results were insensitive to the increase of real discount rates. 1 Based on a Research Project on Financialand Economic Viability of Bioplastic Production in Thailand, funded by Economy and Environment Program for Southeast Asia (EEPSEA) 2 School of Energy, Environment, and Materials, King Mongkut s University of Technology Thonburi 3 School of Economics and Public Policy, Srinakharinwirot University 4 School of Energy, Environment, and Materials, King Mongkut s University of Technology Thonburi

60 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND Introduction Since petroleum-based plastic has been commercialized in the late 18th century, it has been widely utilized to serve our daily life in various purposes such as clothes, containers, packaging, and so on. As a result, it becomes one of the most important and unstoppable consumable product. However, it does not provide only advantages but it also leads us to the unexpected consequences. Firstly, because their feedstocks are derived from petroleum product which is the non-renewable resource, the more it has been manufactured, the less the fossil fuels exist. Next, the production of petroleum-based plastic generates carbon dioxide (CO 2 ), the most prominent greenhouse gas. According to energy technology perspective 2008 (IEA 2008), chemical and petrochemical industry had globally emitted around 800 Mt CO 2 in As widely known, the increase in quantity of greenhouse gas in the earth atmosphere results in climate change or global warming problem, which is the most globally intriguing issue at this moment. Last but not least, the degradation time of petroleum-based plastics requires about few hundred years to be perfectly decomposed. From that reason, there are many attempts to utilize their wastes such as recycling, reuse, energy conversion, but most of them have been currently managed by landfill operation which brings about the undesirable environmental pollution problem. Even though it is difficult to immediately discontinue the petroleum-base plastic consumption, the possible option is to alternatively introduce new material which is produced from renewable feedstock. Bioplastic is; therefore, be the desirable alternative because it is originated from the natural resources such as corn, cassava, etc which is considered as renewable materials. At present time, there are only two major commercial bioplastic in the market, Polylactic acid (PLA) and Polyhydroxyalkanoates (PHA), that can be biodegradable and truly produced from renewable sources such as sugar cane, cassava, and rice (Rudnik 2008). As Thailand is one of the world leader agricultural countries and regional petrochemical producer in Southeast Asia, bioplastic industry may be a challenging alternative for our petrochemical industry as well as agricultural sector. Among all carbohydrate plants in Thailand, cassava production was ranked 4 th in the world and the 1 st exporter to global market in 2007 (Central of Agricultural Information, 2007). In addition, its price is the lowest as compared to potato, wheat, and corn. In 2007, the lactic acid plant has just been established in Thailand to produce lactic acid which is the main raw material for producing PLA. Apparently, this should

61 58 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University be good opportunity to utilize and enhance the cassava s value rather being commodity food products. Accordingly, Thai government established the National Innovative Agency (NIA) as a national focal point for bioplastic industry development and has launched the five years National Roadmap for bioplastic production ( ), which aims to prepare readiness and strengthening bioplastic industry and its product chains in Thailand. The roadmap action plan requires many relevant researches and developments as supporting database. Current researches are mostly deal with financial analysis of bioplastic production. No indirect cost and benefit from environmental aspects has been taken into account. In order to support the National Roadmap, the study of economic analysis of bioplastic production is urgently required Thus, this paper aimed at applying the economical analysis tool (Cost Benefit Analysis) for determining the potential of bioplastic production in Thailand. 2. Objectives The main goal of this research was to analyze the net social benefits from switching petroleum-based plastic to bioplastic based on Cost-Benefit Analysis (CBA). The specific objectives were: 1. To analyze economic estimations involving cost and benefits of PLA production 2. To calculate net social benefits based on the assumption that bioplastic is an alternative to the existing petroleum-based plastic 3. Methodology A concept of Cost-Benefit Analysis-CBA was applied as a tool for evaluating a project in order to help public sector to inform their decisions about pursuing bioplastics as the new wave industry. The CBA has been conducted to evaluate the scenarios of bioplastics production as a replacement of fossil-based plastics. The conduct of this study follows the 9 step procedures: Step 1: Specify the set of alternative project. The portfolio of the project consists of two scenarios:

62 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 59 Scenario 1: Status Quo scenario in which no bioplastics production is introduced. The baseline is only the production of the comparable petroleum plastic as High-density polyethylene (HDPE) Scenario 2: New scenario in which PLA bioplastics production is taken place with the production capacity of 100,000 tonnes. This study is based on assumption that the production of conventional plastics is not replaced by the production of bioplastic because currently bioplastics are served for some niche and green markets. No replacement of conventional plastics with the bioplastics are commonly found. Under scenario 2, two cases are studied. Case 1 : There is PLA production starting from cassava root to PLA resin. Case 2 : There is PLA production starting from cassava starch to PLA resin. The latter case is considered as more realistic than the previous one due to the surplus of cassava starch production in the country. The investor can buy cassava starch as a raw material for sugar production and then converting sugar to lactic acid which is a monomer for PLA production. Due to the surplus of cassava starch, the exact same amounts of cassava starch will be produced with and without the Scenario 2. Step 2: Decide whose benefit and costs count The referent group refers to the group(s) of individuals whose welfare will be accounted for when assessing the costs and benefits of the project. Within this study, the people of Thailand are the referent groups but there are a number of constituent groups which are (1) the fossil-based plastic and bioplastic industries (2) the cassava farmers and (3) the govenment. Those referent groups are selected based on the policy from Thai government to which the benefit and welfare will be provided according to the roadmap for development of bioplastics production. Scenario 2 will show who relatively gain or who lose. For example, farmer and social may gain the social benefit from the production of PLA. However, the fossil-based plastic industry might be relative losser. Step 3: Catalogue the impacts and select measurement indicators The potential positive and negative impacts used in this study are itemized in Table 1.

63 60 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 1. Items of costs and benefits from PLA production. Production process Costs Benefits Data sources 1. Starch production Investment Cost Animal feed product research journals, plant owner interview Operation cost Cost of waste water treatment 2. Lactic acid production Investment Cost By products such as ethanol, gypsum Operation cost NatureWorks, NIA, research journals Cost of waste water treatment 3. PLA polymerization Investment Cost Carbon offset NatureWorks, NIA, Cost of hazardous waste treatment research journals Operation cost Step 4: Predict the impact quantitatively over the life of the project Bioplastics production will have an impact over extended periods of time. This study assumes a time horizon of 25 years due to timeframe of the current roadmap for development of bioplastic industry. Analysts have to predict the magnitude of all impacts in terms of measurable units over the life of a particular production. If there are any impacts that cannot be quantified or measured in physical units, for example, social and cultural impacts, analysts should provide descriptive information on them. Sometimes, the required information may not be available for prediction. In such a case, analysts will have to make certain assumptions to estimate anticipated impacts. Step 5: Monetize all impacts The monetization of outputs and impacts does not imply that money is all that matters, but merely a convenient way of translating the physical measures of the impact comparable in common units (Hanley 2000). Given that many of the environmental goods and services are not traded in the market, there are no prices to use as reference. Shadow prices, therefore, will be used to reflect the true economic values of the costs and benefits. In this study, benefit transfer

64 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 61 is the method used to estimate the costs and benefits of a similar environment in a specific area. Environment values may be estimated from existing studies or secondary data. Fixed value transfer and expert opinion will be adopted in order to derive the monetary values used in the calculation. In addition, shadow exchange rate (SER) for tradbles and nontradbles will be adopted to proxy economic price of foreign currency. Step 6: Discount benefit and cost to obtain present values Net present value (NPV) is computed by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. The discounting reflects the time value of money. In this research, we assume a 25-year project life time. All future benefits and costs of bioplatic production, including nonmonetized benefits and costs, are discounted. For the investment in bioplastic, with costs concentrated in early periods and benefits following in later periods, raising the discount rate tends to reduce the net present value. In this case, a real discount rate that reflects expected inflation will be used to discount nominal benefits and costs. As of November 2009, the Bank of Thailand has issued the 30-year interest rate of government bond yeild of 4.29%, the real discount rate of 1.29%. The NPV for the status quo (PLA production starting from cassava starch to PLA resin) and other three options: 1) change in benefit due to expected PLA price development, 2) change in cost due to technological development and 3) combination of option 1 and 2 were calculated. The sum of discounted benefits and costs of the different projects are then compared. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement. In principle, all projects with NPVs > 0 are considered to have passed the NPV test since it is deemed as an improvement in the social welfare. Comparison of the values of NPVs constitutes the main criteria to choose among projects. A number of criteria such as the B/C ratio and the Internal Rate of Return (IRR) while useful as supporting information, are not the decisive factor to determine whether or not projects should be adopted. The B/C ratio indicates the cost effectiveness of investment while the IRR can support decision-making by comparing returns of one project against another relative to the opportunity cost of funds (Hanley 2000).

65 62 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Step 7: Compute the net present value of each alternative The NPV of a project is equivalent to the present value of the total cost minus the total benefits. With the project time frame of this study being 25 years, the NPV is calculated from the following: NPV = V 0 n Vt NPV = (1 i V1 V2 (1 i) (1 i) t t0 ) 2 Vt... (1 i) Where V t = Value at time t i = Discount rate t = Year n = 0,1,2,.,25 Step 8: Performing sensitivity analysis The purpose for conducting the sensitivity analysis stems from the uncertainty over various assumptions that relate to the predictions of the parameters and their future relative values (Folmer and Gabel 1998). Sensitivity analyses are therefore an essential stage of CBA to determine the sensitivity of the NPV given changes in key parameters. The parameters that deserve the most attention will depend on the dominant benefit and cost elements and the areas of greatest uncertainty of the program being analyzed. In the year 2005, the rate of Thailand government bond has increased up to 6.72%, higher than the present rate (4.29%). In this study, sensitivity analysis should be considered for estimates of different real discount rates of 1.29%, 3.29% and 5.29% with the flation rate of 3% during the 25 - years period. Step 9: Make a recommendation After having gone through the successive steps described above, the interpretation of the results of the CBA must be made with recognition of the principle of what the tool offers as well as the limitations in application. The limitations can arise from the fact that a number of parameters may be unpredictable while others maybe unknown in the present times (Hanley t

66 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND ). Eventhough there are some existing policy relavent bioplastic,the outcome of this study will be beneficial to the policy maker (government sides such as NIA, ONEP) in order to initiate the new environmental law/ legistration as well as to amend the existing laws as mentioned previously. RESULTS AND DISCUSSION HDPE production process and input data In Thailand, HDPE is produced from the naphtha and ethane based feedstock. However, the production cost of HDPE in this research is evaluated from naphtha production route. While the technology for HDPE production is Ziegler Slurry process licensed by Mitsui Chemical (Mitsui CX process) which account for 91% percent of HDPE total production in Thailand. The production of HDPE in this study is 100,000 tonnes (as equal as PLA for their comparison). According to IPPC 2007, the average ethylene consumption of HDPE production is ton/ton HDPE. Ethylene yield from naphtha in steam cracking process yields is approximately 28.4 ton/ton naphtha. (IPPC, 2003). It is reported that Naphtha 1 tonne is produced from crude oil refinery by consuming curding 1.1 toe (tonnes of oil equivalent)/ tonne naphtha referred from Eco-profiles of the European Plastic Industry. Air pollution and energy use are transferred from the Eco-profiles of the European Plastic Industry of crude oil, naphtha, ethylene, and HDPE. The gate to gate of each product can be obtained by the deduction the cradle-to-gate Eco-profile of each product with that of their raw material. The equations below show the gate-to-gate calculation of each product HDPE (gate-to-gate) = HDPE (Cradle-to-gate) Ethylene (cradle-to-gate) Ethylene (gate-to-gate) = Ethylene (cradle-to-gate) Naphtha (cradle-to-gate) CO 2 emission is the summation of energy use (electricity and fuel oil) and air emission. Since the production technology of HDPE has been developed more than sixty years (since 1951), its energy consumption was efficiently improved to the maturing stage. As a result, the HDPE process should logically require less energy (by tonne product) than the production of PLA which is in the embryonic stage. In this research, the fuel oil will be assumed to be the representative of fuel use as same as the assumption of PLA energy use calculation.

67 64 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Cost of HDPE production is shown in Table 2. Aside from the direct cost, there is another indirect cost from the opportunity of land that will be lost from the payment of renting the plant area. The renting cost of area in the industrial estate is approximately 0.74 millions USD per year but it will be increased by 5% every 5 years. Plus, plant owner have to pay for other fees, environmental fee and maintenance fee. Consequently, the average 25 years for the opportunity cost from the rental fee of 100,000 tonnes PLA s plant is 0.92 millions USD per year. Thus, the total cost of HDPE is millions USD. The benefit from selling HDPE is 143 millions USD. Table 2. Cost and Benefit of 100,000 tonnes HDPE production from naphtha (1USD = 0.8 Euro, as of 25 August 2010) Direct Cost Millions USD Percentage of Total Cost 1. Production cost (a) a Investment cost - Capital & Technology (b) Land cost (c) b Total Direct Cost (d) = (a)+(b)+(c) Indirect Cost c 1. CO 2 emission (e) d CH 4 emission (f ) CO emission (g) SO 2 emission (h) NO 2 emission (i) Opportunity from land cost (j) e Total Indirect cost (j) = (e)+(f)+(g)+(h)+(i)+(j) Total Cost (k) = (d)+(j) Benefit f 143 a Total cost of HDPE (from Naphtha) = Total cash cost + Depreciation = = 770 USD/tonne Total cash cost = Variable cost + Direct cost + Allocated cost = 702 USD/t Variable cost = Monomer (ethylene) and Comonomer + Other raw material + Utilities = 600 USD/t + 30 USD/t + 30 USD/tonne = 660 USD/tonne Direct costs = 21 USD/tonne Allocated costs = 21 USD/tonne Depreciation = 68 USD/tonne

68 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 65 b The renting cost for the area in Map-ta-Phut Industrial Estate of 160,000 (100 rai) 40,000 m 2 for HDPE s plant with 100,000 tonnes capacity is approximately 0.74 millions USD per year. c Environmental cost evaluated from the EPS model developed in Sweden. The external cost of air pollutants are listed as below (Nguyen and Gheewala, 2008). - CO 2 40 USD per tonne CO 2 - SO USD per tonne SO 2 - CO 130 USD per tonne CO - NO USD per tonne NO 2 - CH USD per tonne CH 4 d CO2 emission factor of electricity is 140 tco 2 /TJ while that of fuel oil is 77.4 tco 2 /TJ. e The opportunity cost of land was calculated from the deposited money for the five-year bank warranty which is equal to oneyear rental fee or 680,533 USD. This money will be refunded in the 5 th year on the investment. The calculation was based on the government bond rate which is 3% for the first and the second year and 4% for the third year and 5% for the fourth and the fifth year (BOT, 2011). f The benefit of HDPE is the average domestic price of HDPE (Jan-Aug 2010) sourced from Thai plastic industry association. PLA production process and input data In this research, there are two cases constructed for the production of PLA as described in the subsequent section. The first case considers the production of PLA starting from the production of cassava starch using cassava root as a raw material, production of glucose, and production of PLA whereas the second case changes the starting point by commencing with the production of glucose from cassava starch and following with the same flow. Case 1 Polylactic acid (PLA) is a transparent plastic produced from Glucose. As the only commercial Technology of PLA bioplastic, the NatureWorks production process called Cargill Dow process is applied in this study. As shown in Figure 2, cassava roots are used as feedstock to produce PLA resins. Cassava root produced in Thailand has 25 wt% starch content which can convert to lactic acid with the weight ratio of 1.3 to 1 (TTSA, 2010). The expected production capacity of PLA in Thailand was estimated from the availability of cassava production studied by the NIA (Suppasri and Sermcheep, 2010). By transforming cassava starch to glucose, to lactic acid, and to PLA, cassava meals and gypsum are the two main by-products. In the whole production process, certain amounts of wastewater are also produced.

69 66 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Cassava root (760,000 t) Electricity (83.7 TJ) Fuel oil (42.8 TJ) Cassava starch (170,000 t) Cassava meal (45,600 t) Wastewater (3,247,000 m 3 ) Glucose (161,500 t) Wastewater (1,113,500 m 3 ) Electricity (1,315 TJ) Fuel oil (1,315 TJ) Lactic acid (130,000 t) Gypsum (130,000 t) Wastewater (1,846,000 m 3 ) Electricity (660 TJ) Fuel oil (660 TJ) Polylactic acid (100,000 t) Figure 2. Mass and energy flow for PLA production from cassava root (Case 1) According to Chavalparit and Ongwandee (2009), wastewater produced from cassava starch production was about 19.1 m 3 per ton. However, there is no publication regarding to the quantity of wastewater produced from glucose production of cassava starch available. The information from owner plant interview was approximately 27 m 3 water used per ton sugar during converting cassava roots to sugar. The quantity of wastewater produced in the fermentation process converting cassava starch to sugar is, therefore, the net of 1,113,000 m 3. Moreover, the process of lactic acid production from dextrose consumed 14.2 m 3 of water per kg lactic acid produced which was assumed as amounts of wastewater discharged (Johansson, 2005). In terms of energy use, the sum of energy uses from dextrose (D-glucose) to lactic acid production and lactic acid to PLA production was 26.3 and 13.2 MJ per kg PLA, respectively (Vink et al., 2003). However, the ratio of energy sources was not specified in Vink s study. In this study, an assumption that total energy comes from 50% of electricity and 50% of fuel oil is applied. To calculate the overall energy use starting from cassava root to PLA production, the amount of energy used in the process of dextrose production (cassava root to dextrose) was added. However, the information of energy and electricity use regarding to dextrose production from cassava in Thailand has not been published. Thus, the interview process from one of the

70 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 67 owner of the existing plant was carried out. The referent plant produces glucose from cassava root with the production capacity of 300 tonnes sugar per day. The process consumes the electricity of 144 kwh and the fuel oil of 6.67 liters per ton of sugar produced. Case 2 The indirect benefit (sales of cassava meal) from the previous scenario did not directly go to the PLA producers but to the cassava starch owner. As a consequence, another scenario is simulated to study whether it is worth to invest the PLA production in Thailand by focusing on the advantages of the PLA investor. In figure 3, the new route of mass and energy flow for PLA production is proposed. Cassava starch (170,000 t) Electricity (4.7 TJ) Fuel oil (4.7 TJ) Glucose (161,500 t) Wastewater (1,113,500 m 3 ) Electricity (1,315 TJ) Fuel oil (1,315 TJ) Lactic acid (130,000 t) Gypsum (130,000 t) Wastewater (1,846,000 m 3 ) Electricity (660 TJ) Fuel oil (660 TJ) Polylactic acid (100,000 t) Figure 3. Mass and energy flow for PLA production from cassava starch (Case 2) Practically, PLA producer is likely to use cassava starch as a raw material so this should be another plausible case concerning in the PLA producer s perspective. It is; therefore, assumed that cassava starch is purchased as the raw material of PLA production. As shown in figure 3, cassava root and cassava starch production are removed from the energy and mass flow diagram of PLA production. Therefore, their by product (cassava meal) and wastewater are also eliminated from cost and benefit calculation in the subsequent sections. According to Vink (2003), energy and fuel to be used in production of glucose are not specifically identified. Hence, those values are assumed to be equal (0.047 MJ/kg PLA) while other values of lactic acid and PLA production in this diagram are similar to the first case.

71 68 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Cost of PLA production Aside from the financial cost or the direct cost, which is typically applied in the feasibility study of the project, in this study, environmental cost or the indirect cost is also accounted for the cost of PLA production. Therefore, cost of PLA production can be divided into 2 parts, namely direct cost and indirect cost of PLA production which are carefully scrutinized in the following two sub-sections. Direct cost of PLA production Currently, no information on production cost of PLA from cassava root is publicly available. This study, therefore, applied an estimated cost of PLA produced from US corn which followed Cargill Dow s process of USD per kg PLA with capacity of 140,000 tonnes per year (Shen et al. 2009). The yield of corn to PLA resin is 1.74 (Vink et al. 2003). The difference in the production cost is mainly from the cost of starch production which depends on types of crops. Basically, there are two PLA production routes; ring-opening of lactide and direct polymerization of lactic acid. Nowadays, only ring-opening of lactide has been recognized and commercialized. Thus, the process of sugar conversion to PLA becomes well-known technology. The process is similar; even though its raw materials come from different crops. For case 1, the total cost is the production cost of PLA which includes an investment cost, and an operating cost. For the investment cost, it composes of two categories, including land cost and capital&technology cost. In order to calculate the total cost of PLA production, the below formula is applied: Case 1 Total production cost of PLA from cassava = total production cost of PLA from corn - production cost of corn - production cost of corn starch + production cost of cassava starch In case 2, the price of corn starch is replaced by the price of cassava starch. In order to calculate the cost of PLA production starting from cassava starch, the below formula is applied: Case 2 Total production cost of PLA from cassava = total cost of PLA from corn - price of corn starch + price of cassava starch

72 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 69 For the first case, the production cost of PLA production from cassava (conversion of cassava root to PLA resin) was the production cost of PLA production from corn which is 2.2 USD per kg PLA subtracted by production cost of corn and corn starch and added production cost of cassava starch. The cost of US corn production is USD per kg PLA. The cost of corn starch production; ready-to-use corn to starch is USD per kg PLA. And the cost of cassava starch production in Thailand is 0.30 USD per kg PLA. For the second case, the average price of corn starch (EXIM 2009) and cassava starch (TTSA 2010) are 0.68 and 0.94 USD per kg, respectively. Therefore, the production cost (excluded any land cost) of 100,000 tonnes PLA from cassava for both cases are equal to USD 225 million and USD 246 million, respectively. According to news published on Bangkok Post dated on 27 December 2010, the investment cost of PLA production based on 100,000 tpa (tonnes per annual) for licensing the NatureWorks technology is approximately 330 millions USD. According to the interview from the industrial estate in Thailand, the renting cost for the 160,000 (100 rai) 40,000 m 2 for PLA s plant with 100,000 tonnes capacity is approximately 0.74 millions USD per year and the rental fee will be increased by 5% every five years. As a result, the total direct cost (operating cost and investment cost) of 100,000 tonnes PLA production for the first case is USD million and USD million. Indirect cost of PLA production The environmental costs or the indirect costs comprise two cost items: the cost of CH 4 emission from waste water and the cost of CO 2 emission from electricity and fuel consumptions. The calculation of CH 4 emission from wastewater was adapted from the Project Design Document (PDD) for Clean Development Mechanism (CDM); #2556, #2645 and #2678 based on the assumption that wastewater treatment was aerated lagoon with an capacity of COD removed as ton per m 3, B 0 of 0.8 and MCF of 0.21, and there is no CH 4 emission from the sludge. Wastewater produced 0.19 and 0.09 tonnes of CH 4 per ton PLA for the first and second case respectively. In the first case, the CO 2 emissions from fuel oil and electricity are 1.56 and 2.89 tonnes of CO 2 per ton PLA, respectively while those of the second case are 1.53 and 2.77 tonnes per ton PLA respectively. The CO 2 emission factors are 77.4 ton CO 2 per TJ for fuel oil and ton CO 2 per MWh or 140 ton CO 2 per TJ (DEDE, 2010), respectively. According to Shen (2009), carbon embedded in PLA is determined from PLA molecular structure with the molecular weight of 566 kg per mol PLA (n=7,858). The CO 2 avoided from using renewable materials for PLA production is 1.83 tonnes CO 2 per ton PLA. The summary of the

73 70 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University environmental impact from the PLA production, namely CO 2 emission, CH 4 emission, and CO 2 avoid are presented in table 3. The net of CO 2 emission for both cases are 2.62 and 2.47 tonnes CO 2 per ton PLA respectively as shown in Table 3. Table 3. Environmental impacts from PLA production Environmental impacts Case 1 Cassava root to PLA (kg per kg PLA) Case 2 Cassava starch to PLA (kg per kg PLA) Greenhouse gas emission a) CH 4 from wastewater b) CO 2 from electricity c) CO 2 from fuel oil Greenhouse gas avoided d) CO 2 avoid from renewable material Net CH 4 emission Net CO 2 emission (b+c-d) In addition, there is another indirect cost from the opportunity of land that will be lost from the payment of renting the plant area. As addressed earlier, the renting cost of area in the industrial estate is approximately 0.74 millions USD per year but it will be increased by 5% every 5 years. Plus, plant owner have to pay for other fees, environmental fee and maintenance fee. Consequently, the average 25 years for the opportunity cost from the rental fee of 100,000 tonnes PLA s plant is 0.92 millions USD per year. Finally, the total indirect cost for the first and second case of 100,000 tonnes PLA production in Thailand is and millions USD as shown in table 4. Net Benefits of PLA Production from Cassava Like the previous section, the benefits of PLA production are also categorized into 2 subsections, namely direct benefit and indirect benefit. Both are detailed in the following parts. Direct benefit of PLA production According to Wolf et al. (2005), the expected price of PLA in 2005 is 3.00 USD per kg PLA which is nearly equal to the current PLA market price interviewed from PTT in Therefore, the direct benefit from the PLA production applied in this study for both cases is 3.00 USD per kg PLA.

74 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 71 Indirect benefit of PLA production The indirect benefit from the PLA production is 2.94 USD per kg PLA in which the price of cassava meal is about 6.45 USD per ton (TTSA 2010). Gypsum as a by-product from PLA production process has relatively low market value and is not accounted in this study. By deducting the total cost from the total benefit, the net benefit accrued from the 100,000 tonnes of PLA production in both cases are USD 7.34 million and USD million respectively as shown in table 5. Table 4. Cost of PLA production from cassava a (of 100,000 tonnes PLA) Case 1 Millions USD a Case 2 Millions USD Direct cost Operating cost of PLA production b Investment cost of PLA production - Capital & Technology Land cost c Total direct cost Indirect cost d 1. CH 4 emission CO 2 emission Opportunity cost of land e Total indirect cost Total costs NOTE: a 1 USD = 0.8 Euro, reported on 25 August 2010 b cost of US corn production (corn plantation and harvest) = 0.14 USD per kg US corn (USDA, 2010). cost of US corn starch production (corn receiving, storage and milling) = USD per kg corn (Krishman et al., 2000) cost of cassava starch production in Thailand = USD per kg starch including cost of fresh cassava root (0.154 USD per kg starch) and operating cost of USD per kg starch (Chavalparit and Ongwandee, 2009). c Land cost is referred to the current rental land rate and other fees in Map-ta-Phut Industrial Estate in which HDPE and other petrochemicals plants are located. d 40 USD per ton CO2 and 1070 USD per ton CH 4 which were estimated from the EPS model developed in Sweden. The hypothesis in adaption of the model to Thailand is that the Willingness to Pay (WTP) is proportional to the GDP per capita. The ratio of WTP Thailand and WTP Sweden is derived as (Nguyen and Gheewala, 2008) e The opportunity cost of land was calculated from the deposited money for the five-year bank warranty which is equal to oneyear rental fee or 680,533 USD. This money will be refunded in the 5 th year on the investment. The calculation was based on the government bond rate which is 3% for the first and the second year and 4% for the third year and 5% for the fourth and the fifth year (BOT, 2011).

75 72 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 5. Benefits - Cost Analysis of PLA production Case 1 Case 2 Millions USD Millions USD Direct cost Operating cost of PLA production Investment cost of PLA production question - Capital & Technology Land cost Total direct cost Indirect cost 1. CH 4 emission CO 2 emission Opportunity cost of land Total indirect cost Total costs Benefit 4. Direct benefits Indirect Benefits Total benefits Total Net Benefits The comparisons between PLA and HDPE production cost and benefit are demonstrated in Table 6 and 7. As shown in table 6, the net benefit from PLA production from case 1 is USD 7.34 million, higher than the benefit from HDPE as 25 times. On the contrary, the comparison of case 2 of PLA production and HDPE production in table 7 shows the opposite result which the net benefit of HDPE production is higher than that of PLA about 111 millions USD. This mainly results from the different starting point of the each case where cassava starch is purchased as a raw material. In the other words, the second case does not account for the sales of by product or cassava meal which turns into the substantial lower net benefit of PLA production. By considering the selling price of both resins, it is interesting that the price of PLA is more expensive than that of HDPE almost two times but the benefit of PLA resin is significantly lower. This can be explained by the three times higher of PLA investment cost comparing to that of HDPE. However, the technology of PLA production is still being in the initial stage so there should be more room of improvement for the production of PLA which can be further minimized.

76 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 73 Table 6. Cost-benefit analysis of PLA (Case 1) compared to HDPE production Case 1 PLA production HDPE production (Millions USD) (Millions USD) Direct Cost Production cost a Investment cost - Capital & Technology Land cost Indirect Cost GHG emissions b Opportunity cost of land Total Cost Direct benefits Sales of product c Indirect benefits Sales of by product Total Benefit Net benefit Table 7. Cost-benefit analysis of PLA (Case 2) compared to HDPE production Case 2 PLA production HDPE production (Millions USD) (Millions USD) Direct Cost Production cost a Investment cost - Capital & Technology Land cost Indirect Cost GHG Emissions b Opportunity cost of land Total Cost Direct benefits Sales of product c Total Benefit Net benefit NOTE: a Production Cost = Investment Cost + Operation Cost b Environmental cost or emissions evaluated from the EPS model developed in Sweden. This values were corrected by Nguyen and Gheewala (2008) using the ratio of Willingness to Pay (WPP) of Thailand to Sweden as The external cost of air pollutants include 40 USD per tonne CO 2, 1070 USD per tonne CH 4, 840 USD per tonne NO 2, 1300 USD per tonne SO 2, and 130 USD per tonne CO c The direct benefit of HDPE is the average domestic price of HDPE (Thai plastic industry association, 2010)

77 74 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University As mention earlier, this study interests in the advantages of PLA investor. Accordingly, case 2 is chosen as status quo in the NPV calculation in the next section in order to evaluate if it is worth to invest the PLA production in Thailand by taking both financial and environmental costs and benefits into account. Moreover, this study assumes a time horizon of 25 years which will commit the industry to the stream of expenditures appearing in column (2) of the table 8 below and which will result in a series of benefits appearing in column (3). The discount factor for a 1.89 percent real discount rate is shown in column (4). Before eliminating an impact of inflation, a nominal discount rate of 4.77% from the Asian Development Bank for Thailand 30-year project loan has been applied in the analysis, considered as a social opportunity cost of capital (SOCC). The present value cost for each of the 25 years is calculated by multiplying column (2) by column (4); the present value benefit is calculated by multiplying column (3) by column (4). The present values of costs and benefits are presented in columns (5) and (6) respectively. It is noted that total cost is the sum of investment cost and operation cost and the operation cost is from the sum of production cost and indirect cost. The production cost of PLA production is estimated from 45 % share for lactic acid production (PROBIP, 2009). Table 8. Present values of cost and benefits for PLA in Status Quo (Case 2) Year (1) Expected yearly cost a Expected yearly benefit (3) Discount factors (1.89% b ) (4) Present value of costs (5) Present value of benefits (6) (2) 1 280,169, ,000, ,169, ,000, ,960, ,000, ,799, ,449, ,460, ,000, ,252, ,001, ,980, ,000, ,835, ,655, ,513, ,000, ,539, ,407, ,102, ,000, ,399, ,256, ,671, ,000, ,344, ,200, ,258, ,000, ,406, ,238, ,861, ,000, ,579, ,368, ,480, ,000, ,862, ,588, ,193, ,000, ,315, ,896, ,842, ,000, ,805, ,291, ,505, ,000, ,395, ,771, ,181, ,000, ,082, ,335,805

78 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 75 Year (1) Expected yearly cost a Expected yearly benefit (3) Discount factors (1.89% b ) (4) Present value of costs (5) Present value of benefits (6) (2) ,870, ,000, ,864, ,981, ,658, ,000, ,802, ,708, ,372, ,000, ,763, ,513, ,097, ,000, ,812, ,397, ,833, ,000, ,945, ,356, ,580, ,000, ,161, ,390, ,432, ,000, ,522, ,498, ,198, ,000, ,895, ,677, ,974, ,000, ,344, ,927, ,759, ,000, ,867, ,247, ,553, ,000, ,463, ,635,189 Total 6,872,512,532 7,500,000, ,549,229,921 6,048,796,330 NPV 499,566,408 NOTE: a Investment cost was recalculated by depreciation rate of 4 % each year. (Total cost = Investment Cost + Operation Cost). b Real Discount Rate = (1-nominal)/(1-inflation) = (1-4.77) / (1-3) = 1.89 % From table 8, the sum of column (5) is the total present value of costs and the sum of column (6) is the total present value of benefits. Net present value is USD (total benefits total cost), the difference between the sum of discounted benefits and the sum of discounted costs. The net present value for 25-years life time project is positive value as 499,566,408 USD. In addition, three more scenarios have been applied in this study. Option 1 is a case of expected PLA price developments. Option 2 is a change in cost of PLA due to technological development. Option 3 is a change in both benefit and cost of PLA. The first scenario is under the expected price developments of PLA over the time period. For Option 1, according to Wolf (2005), PLA price would fall approximately 0.7% each year due to further improvements in price competitiveness. The benefit in column (3) of table 9 shows a decreasing in selling price as a proxy for PLA benefits. The NPV of this option, then, shows a reduction of net present value, despite a remaining of positive sign.

79 76 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 9. Present values of cost and benefit for PLA with expected price developments (Option 1) Year (1) Expected yearly cost (2) Expected yearly benefit (3) Discount factors for 1.89% (4) Present value of costs (5) Present value of benefits (6) 1 280,169, ,000, ,169, ,000, ,960, ,916, ,799, ,404, ,460, ,833, ,252, ,988, ,980, ,750, ,835, ,745, ,513, ,666, ,539, ,673, ,102, ,583, ,399, ,768, ,671, ,500, ,344, ,025, ,258, ,416, ,406, ,442, ,861, ,333, ,579, ,014, ,480, ,250, ,862, ,738, ,193, ,166, ,315, ,612, ,842, ,083, ,805, ,630, ,505, ,000, ,395, ,790, ,181, ,916, ,082, ,090, ,870, ,833, ,864, ,525, ,658, ,750, ,802, ,092, ,372, ,666, ,763, ,790, ,097, ,583, ,812, ,614, ,833, ,500, ,945, ,561, ,580, ,416, ,161, ,630, ,432, ,333, ,522, ,817, ,198, ,250, ,895, ,120, ,974, ,166, ,344, ,536, ,759, ,083, ,867, ,062, ,553, ,000, ,463, ,695,991 Total 6,872,512,532 6,875,000, ,549,229,921 5,585,372,884 NPV 36,142,963 Option 2 is applied by the fact that several companies have been active in developing their technologies for bioplastic production. With one possible outcomes is Purac company publicly indicates that the company s technology could lower the production cost of lactic acid production by 40 percent of PLA production cost in the year 2016 (Bohlmann, 2007).In this study, we assumed that the reduction of production cost of lactic acid was constant at 4% each

80 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 77 year for 25 years. As mention previously, lactic acid is accounted for 45 percent of total PLA production cost (PROBIP, 2009). Thus, the production cost of lactic acid is 1.10 USD per kg PLA. With this technological change option, a reduction in the cost of PLA production cost is shown in the column (3) of table 10. As a result, the NPV of this option is 1,482,543,147 USD, which is higher than the Status Quo s NPV of 499,566,408 USD. Table 10. Present values of cost and benefit for PLA production with technological developments (Option 2) Unit: USD Year (1) (2) (3) (4) (5) (6) Expected yearly cost Expected yearly benefit Discount factors for 1.89% Present value of costs Present value of benefits 1 280,169, ,000, ,169, ,000, ,541, ,000, ,462, ,449, ,622, ,000, ,738, ,001, ,723, ,000, ,300, ,655, ,837, ,000, ,135, ,407, ,007, ,000, ,274, ,256, ,157, ,000, ,641, ,200, ,325, ,000, ,263, ,238, ,509, ,000, ,133, ,368, ,709, ,000, ,243, ,588, ,003, ,000, ,652, ,896, ,233, ,000, ,222, ,291, ,477, ,000, ,013, ,771, ,734, ,000, ,017, ,335, ,004, ,000, ,230, ,981, ,373, ,000, ,711, ,708, ,668, ,000, ,321, ,513, ,974, ,000, ,123, ,397, ,291, ,000, ,111, ,356, ,619, ,000, ,279, ,390, ,052, ,000, ,688, ,498, ,399, ,000, ,201, ,677, ,756, ,000, ,879, ,927, ,122, ,000, ,720, ,247, ,497, ,000, ,716, ,635,189 Total 5,546,812,532 7,500,000, ,566,253,183 6,048,796,330 NPV 1,482,543,147

81 78 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Under the last assumption, this scenario combines the two possible outcomes realistically with future changes in both cost and benefit sides. As shown in table 11, an estimate of positive NPV (1,019,119,702 USD) has been influenced by expected market price for PLA and technological improvement within the same time frame of 25 years. Therefore, it would be more worthwhile for policy makers to step up efforts in launching a bioplastic plant in Thailand. Table 11. Present values of cost and benefit for PLA production (combination of option 1 and 2) Unit: USD Year Expected yearly Expected yearly Discount factors Present value of Present value of cost benefit (1.89%) costs benefits (1) (2) (3) (4) (5) (6) 1 280,169, ,000, ,169, ,000, ,541, ,916, ,462, ,404, ,622, ,833, ,738, ,988, ,723, ,750, ,300, ,745, ,837, ,666, ,135, ,673, ,007, ,583, ,274, ,768, ,157, ,500, ,641, ,025, ,325, ,416, ,263, ,442, ,509, ,333, ,133, ,014, ,709, ,250, ,243, ,738, ,003, ,166, ,652, ,612, ,233, ,083, ,222, ,630, ,477, ,000, ,013, ,790, ,734, ,916, ,017, ,090, ,004, ,833, ,230, ,525, ,373, ,750, ,711, ,092, ,668, ,666, ,321, ,790, ,974, ,583, ,123, ,614, ,291, ,500, ,111, ,561, ,619, ,416, ,279, ,630, ,052, ,333, ,688, ,817, ,399, ,250, ,201, ,120, ,756, ,166, ,879, ,536, ,122, ,083, ,720, ,062, ,497, ,000, ,716, ,695,991 Total 5,546,812,532 6,875,000, ,566,253,183 5,585,372,884 NPV 1,019,119,702

82 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 79 Sensitivity Analysis As a new project for Thailand, different discount rates must be set in order to perceive a risk of the project. In this study, we consider higher discount rates than a status quo for illustrating sensitivity of the possible NPVs. Three nominal discount rates are conducted in the calculation of NPV, namely 4.77% (as status quo), 10.00%, and 15.00% (as a new and high risk project). Therefore, the testing over a range of 1.89 to 7.00 % in real term is proposed. By using an artificially low discount rate for project evaluation can make future generations worse off. The real discount rate of 1.89% as a base rate is considered to be low due to the expected inflation of 3%. In addition, the maximum commercial loan rate of 15% (Bangkok Bank, 2011) draws an assumption in this study of a possibility of an increase in the nominal interest rate. The NPVs for PLA production with 25-year life time are presented in Table 12. As a result, all assumptions are good for investment; NPV > 0. In every option, except a case of reduction in profit over time by changing in PLA prices, the NPVs decrease gradually when the discount rates increase. Even though the NPV becomes smaller and the discount rate is larger as theoretically indicated, the result is insensitive to the changes in the above assumptions. Therefore, the choice of discount rate has no or little influence on the cost and benefit of PLA production in Thailand. Table 12. Costs and benefits of the various options Unit: USD Options Discount rates PV Benefit PV - Cost NPV Status Quo 1.89%* 6,048,796,330 5,549,229, ,566, %** 4,648,643,510 4,271,464, ,179, %*** 3,740,800,200 3,442,160, ,640,163 Reduction in 1.89% 5,585,372,884 5,549,229,921 36,142,963 Benefit only 4.50% 4,333,694,828 4,271,464,256 62,230,572 Reduction in Cost only Reduction in Cost and Benefit 7.00% 3,516,375,542 3,442,160,038 74,215, % 6,048,796,330 4,566,253,183 1,482,543, % 4,648,643,510 3,603,420,308 1,045,223, % 3,740,800,200 2,996,128, ,671, % 5,585,372,884 4,566,253,183 1,019,119, % 4,333,694,828 3,603,420, ,274, % 3,516,375,542 2,966,128, ,247,135 Note: * Real Discount Rate = (1-nominal)/(1-inflation) = (1 4.77) / (1-3) = 1.89 % ** Real Discount Rate = (1-nominal)/(1-inflation) = (1 10) / (1-3) = 4.5 % *** Real Discount Rate = (1-nominal)/(1-inflation) = (1-15) / (1-3) = 7 %

83 80 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Conclusions The cost of PLA production from cassava calculated in this study was transferred from the cost of PLA production from corn in the boundary of Gate-to-Gate. The cost structure of PLA production comprises of direct cost (production cost and investment cost) and indirect environmental cost. The cost of PLA production starting from cassava starch production to PLA resin with the production capacity of 100,000 tonnes PLA (case 1) is millions USD. When considering the PLA production starting from sugar production using purchased starch to PLA resin production, the cost is little higher, millions USD. The production of PLA from cassava root provides by product as cassava meal during starch production. The large benefit from selling of cassava meal is 294 millions USD which turns to the positive net benefit of PLA production equal to 7.34 millions USD. Without the revenue from cassava meal, the net benefit is negative ( millions USD). Thus, the integrated PLA production industry is potentially more attractive for the investment. Plus CDM implementation (example: biogas recovery project), the case 1 gets more benefit from selling carbon credit but another case (excluding starch production) has more negative net benefit due to less amount of wastewater. In comparison to PLA production, the net benefit of HDPE production is millions USD. Therefore, only the PLA production under case 1 can be competitive with the HDPE production. The NPV of the PLA production (cassava starch to PLA resin) calculated for the 25-year life time with the real discount rate of 1.89% is positive. Even subjected to both PLA price development and technological development, the NPV is still positive. The sensitivity analysis indicated that the NPV of the PLA production in this study is insensitive to the increase of real discount rates (1.89, 4.5 and 7%). In environmental aspects, the CO 2 avoided from using cassava as a renewable material for PLA production was 1.83 kg CO 2 per kg PLA, which is less than equivalent CO 2 emission from its electricity, fuel oil used and wastewater. This study indicates that the HDPE production has better environmental performances in terms of energy efficiency and environmental pollution control than the PLA production. This finding might be resulted from the differences in advances of production and pollution control technology of both plastics. Accordingly, it is implied that there are large opportunities of PLA production for its production improvement; for examples, increasing energy efficiency, utilizing biomass waste as fuel and recovery of greenhouse gases from wastewater treatment as energy source. Even though the environmental impact from PLA in this study is higher than those from HDPE, it should be noted the embedded carbon in HDPE will not be released until its final state of their life cycle (waste treatment). Consequently, further study for investigating the entire life cycle of both materials is required in order to evaluate their total environmental impacts.

84 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 81 Suggestions According to the result from this research, the benefit of PLA production starting from cassava root to PLA resin (case 1) is more attractive for the investor due to its positive net benefit. Inversely, the net benefit of PLA production starting from cassava starch to PLA resin (case 2) presents the negative benefit. Even 25-years project life time with the reduction of price and the development of technology, the case 2 still has positive NPV. In the economic point of view, the PLA production following both scenarios has the potential to be established in Thailand. However, the investment cost of PLA production is considerably expensive compared to the conventional one. Interestingly, with the positive NPV, the bioplastic production contractly emits more greenhouse gas than the conventional plastic production. This leads to the environmental burden especially global warming. Results from this study indicated that wastewater treatment from cassava starch production was a major source of greenhouse gases, followed by electricity and fuel oil consumption. Thus, these environmental burdens should be intensively reduced. Initially, the government should pay more attention on how to reduce energy used and pollutions emitted from the production process and encourage the relevant stakeholders to implement. For example, the cassava starch and sugar producer should be recommended to enroll the energy and environmental related programs such as energy audit and energy efficiency improvement, cleaner technology (CT) or waste minimization programs coupling with 4Rs (Reduce, Reuse, Recycle and Recover) strategy and implementing the appropriate pollution control technology to ensure that the PLA production is truely green. Moreover, the investment in the research of advance technology and innovation for alternative cleaner PLA production is essential for sustainable development of bioplastic industry in the long run. Therefore, the coherence between environmental and innovation policy are needed. At present, the law of fiscal measures for the environment has been enacted in Thailand since October The measures are focused on environmental tax, production tax, pollution treatment fee, and emission permit. These measures will be implimented to the whole PLA production chains to ensure that bioplastic is an environmental friendly product and worth to invest. However, in order to gain net social benefit, government also need to provide favorable conditions for policy supporting both demand and supply for bioplastic industry, not only from the supply side. Further studies on polution impact and lifecycle management of bioplastic will be benefitial for the greening of bioplatic industry.

85 82 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Acknowledgements The authors would like to thank to the Economy and Environment Program for Southeast Asia (EEPSEA) for the support of this research. Moreover, we gratefully acknowledge the National Innovation Agency (NIA), Ms. Pornpan Thiensathid, PURAC (Thailand) Company Limited, Dr.Narin Kabbuathong, PTT Public Company Limited, and Ms. Porntipa Somboonlertsiri, P.S.C Strach Products PCL. for their kind corporations. References Agriculture and Horticulture Development (HGCA), Industrial uses for crops: Bioplastic, Available from: ( 9 September 2010). Bank of Thailand, Government Bond Yield Curve, Available from: FinancialMarkets/IntroductionToGovernmentDebtSecurities /InterestingContent/Pages /GovernmentBondYieldCurve.aspx (19 June, 2011). Bangkok Bank, Loan Rates, Available from: web%20services/rates/pages/loan%20interest%20rates.aspx (19 June, 2011). Bohlmann, G. M Bioplastic & biofuels Pricing & production trends, Industrial Biotechnology, Vol. 3. No. 1, pp Chiarakorn, S, Permpoonwiwat, C.K., and Nanthachatchavankul, P Financialand Economic Viability of Bioplastic Production in Thailand, Economy and Environment Program for Southeast Asia (EEPSEA), Available from: (22 November, 2011). Chavalparit, O and M. Ongwandee Clean technology for the tapioca starch industry in Thailand, Journal of Cleaner Production, Vol. 17, pp Department of Alternative Energy Development and Efficiency (DEDE), the Ministry of Energy of Thailand, Annual Reports and Energy Situations, Available from: (22 August,2010). Dornburg, V.; A. Faaij, M. Patel and W.C. Turkenburg Economics and GHG emission reduction of a PLA bio-refinery system-combining bottom-up analysis with price elasticity effects. Resources, Conservation and Recycling, Vol 46, pp

86 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 83 Energy Information Administration (EIA), Monthly crude oil price (Nymex), Available from: (10 September 2010) European Bioplastics, 2008, Bioplastics, Avalable from: (5 September 2010). Export-Import Bank of Thailand (EXIM), 2009, Economic direction and Thai entrepreneur opportunities, pp Feteke, Tibor. 2009, Production of Bimodal Polyethylene. MOL Scientific Magazine. 2009/1 pp Fiscal Policy Office (FPO), 2010, The law of fiscal measures for the environment, Available from: (26 October 2010) Garlotta, D A Literature Review of Poly (Lactic Acid), Journal of Journal of Polymers and the Environment, Vol. 9, pp Gielen. D.J.K., B. Cecilia, T. 2006, IEA Petrochemical Scenarios for : Energy Technology Perspective 2006, International Energy Agency, Paris. Groot, W.J. 2010, Life cycle assessment L-Lactide and PLLA, Research and Development, PURAC. Integrated Pollution Prevention and Control (IPPC), 2003, Best Available Techniques in the Large Volume Organic Chemical Industry, February Integrated Pollution Prevention and Control (IPPC), 2007, Best Available Techniques in the Production of Polymer, August Integrate Refinery Petrochemical Complex (IRPC), 2009, IRPC Annual Report Intergovernmental Panel on Climate Change (IPCCC), 2006,IPCC Guidelines for National Greenhouse Gas Inventories, Vol.2, Energy Sector. Johansson, M. 2005, Life cycle assessment of fossil and bio based materials for 3D shell applications. Material eco-profiles and example with a blow moulded clear rigid packaging, Krishman, M.S.; F. Taylor; B.H. Davison and N.P. Nghiem, Economic analysis of fuel ethanol production from corn starch using fluidized-bed bioreactors. Bioresource Technology, Vol. 75, pp Martin P, 2001, Review of Life Cycle Assessments for Bioplastics. Science, technology and society, Utrecht University., Available from: of an LCA. (9 September 2010). Mitsui Chemicals. n.d, Mitsui CX Process High and Medium Density Polyethylene.

87 84 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University National Innovation Agency (NIA), 2008, National Roadmap for the Development of Bioplastics Industry, Ministry of Science and Technology, Thailand, pp Nguyen, T.L.T. and S.H. Gheewala, Fossil energy, environmental and cost performance of ethanol in Thailand, Journal of Cleaner Production Vol. 16, Office of Agricultural Economics (OAE), the Ministry of Agriculture and Cooperatives of Thailand. Agricultural Statistic, Available from: (22 August 2010). Office of Industrial Economics (OIE), Prices of Plastics in Thailand, Available from: (12 September 2010). Orawan Cheumkum, 2001, Production of Lactic Acid from Cassava Solid Waste. Master thesis of Engineering in Environmental Engineering, Suranaree University of Technology, Thailand. PURAC. Purac starts construction Lactide plant in Thailand, Available from: (5 September, 2010). Rafael A. A., L. Lim, S. E. M. Selke and H. Tsuji, 2010, Poly(lactic acid): Synthesis, Structures, Properties, Processing and Applications, John Wiley & Sons, Inc. Rundik, E. 2008, Compostable polymer materials, Amsterdam, The Netherlands: Elsevier Shen, L.; J. Haufe and M.K. Patel, 2009, Production Overview and Market Projection of Emerging Bio-based Plastics PRO-BIP 2009., Final report. Copernicus Institute of Sustainable Development and Innovation, Utrecht University. Sriroth, K.; B. Lamchaiyaphum and K. Piyachomkwan, Present Situation and Future Potential of Cassava in Thailand, Available from: ( 22 August 2010). Suppasri., C. and S. Sermcheep, 2010, Bioplastics Industry: Economic Analysis Part. Presentation in Brainstorming of Policy making for promoting Bioplastic Industry in Thailand, 12 May 2010 Thailand Greenhouse Gas Management Organization (TGO), 2009, Guidelines for carbon footprint of Thai products (in Thai), Available from: (9 September 2010). Thailand Greenhouse Gas Management Organization (Public Organization) (TGO), Thailand CDM Projects, Available from: (31 August 2010). Thai Plastic Industries Association (TPIA), Monthly price of HDPE in Thailand, Available from: (10 September 2010)

88 COST BENEFIT ANALYSIS OF BIOPLASTIC PRODUCTION IN THAILAND 85 Thai Tapioca Starch Association (TTSA), 2010, The Process of Tapioca Starch Production, (20 August 2010). United Nations Framework Convention on Climate Change (UNFCCC), 2009, Bangna Starch Wastewater Treatment and Biogas Utilization Project, Thailand. Project Design Document #2556. United Nations Framework Convention on Climate Change (UNFCCC), 2009, Wastewater Treatment with Biogas Technology in a Tapioca Processing Plant at Roi Et Flour Company Limited, Thailand, Project Design Document #2645. United Nations Framework Convention on Climate Change (UNFCCC), 2009, Tapioca starch wastewater biogas extraction and utilization project, Sakaeo Province, Thailand, Project Design Document #2678. United States Department of Agriculture (USDA), Commodity Costs and Returns Data, Avail;able from: (22 August 2010). Vink, E.T.H. K.R Rabago, D.A. Glassner and P.R. Gruber, 2003, Application of life cycle assessment to NatureWorks polylactide (PLA) production, Vol Wolf, O, (ed), Martin, P, Frank, M. W, Joachim, S, Barbel. H, and Gerhard, H, 2005, Technoeconomic Feasibility of Largh-scale Production of Bio-based Polymers in Europe, Technical Report Series, European Commission Joint Research Center. World Business Council for Sustainable Development (WBCSD), Cargill Dow LLC and Nature works for NatureWorks PLA, Available from: ( 9 September 2010)

89 86 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 1 Bank Ngamarunchot 2 Abstract The economic analysis of law is a valuable theoretical concept that is used to analyze the efficiency of the justice system. This paper illustrates such concept to identify inefficiency elements in the legal process, which comprise the cost of operation in the process, Ca, and the cost of the judgment s error, C(e). Qualitative procedural efficiency, such as the neutral treatment of a judge, is also discussed but not a main focus of the study. The paper first reviews the literature on environmental lawsuit cases and subsequently develops indicators to analyze judges decision making. The environmental cases can be categorized into three case types. The first type is Lok-Ron cases (global warming case), in which the government sues ordinary, non-capitalist citizens for allegedly aggravating the global warming problem by practicing deforestation or by utilizing state-owned land. Both Ca and C(e) inefficiencies are prevalent in Lok-Ron cases. The second type is legal cases arising from the local s concerns on the protection of public resources. Despite the citizens good intention and efforts, the legal system makes the task harder because of Ca. The third type are legal cases involving impacts from environmental pollution, where the affected have filed against both the polluters and the government for nonfeasance and are likely to face another form of injustice such as an underestimation of the compensations, which is fundamentally C(e). All inefficiencies in term of costs are resolved by the concept of cost minimization and fair cost distribution. Key Words : Law and Efficiency, Environmental Lawsuits 1 This paper is briefed from research that original version was named Justice Judgment Environment. The research is funded under Reform Thailand Project which is collaborated with National Health Foundation. Author grateful to Pokpong Chanvit, Patcharawee Brahmawong, Chol Bunnag, Trin Aiyara and others for helpful comments and discussions. 2 King Mongkut's University of Technology Thonburi (Ratchaburi Campus)

90 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE Introduction The efficiency of the justice system is important because efficiency is justice in itself. For example, justice is inaccessible if the cost of accessibility is high and unaffordable. Even when justice is affordable, but the benefits from suing are lower than the cost, the plaintiff will likely not sue and will never achieve justice. The state, as a designer of the justice system, should be concerned about efficiency. Thus, it should reduce the cost of the system and fairly distribute cost among stakeholders, such as the state, polluters, and externality receptors. However, justice efficiency is rarely evaluated in Thailand. Therefore, this study has three primary objectives, namely, to illustrate the efficiency indicators, to evaluate the efficiency of Thailand s justice system in terms of the economic analysis of law, and to challenge policy implications in the micro and macro level. 2. Theoretical framework This paper uses the economic analysis of law theory, which has been popularized in the US since the 1920s. During that period of introduction, legal realism was more concerned about law in action than law in text, and economic perspectives contributed consistent analytical solutions (Butr-indr, 2012). Two economic principles have greatly contributed to the analysis, and these principles are instrumental rationality and cost minimization. Instrumental rationality in economics means representative agents in the model are constantly trying to maximize their net utility function. In a legal process, if a person is affected by pollution, he may consider the costs of and benefits from prosecution. Under the economic principle of rationality, the affected party will prosecute if the benefits are higher than the cost. Cost minimization is hypothesized as an objective of a benevolent government. Under this principle, the state should be concerned about reducing the cost of the justice system because lower cost provides the citizens with a higher chance of achieving justice. Considering the polluter pay principle (PPP), the government should distribute the cost more to polluters than to externality receptors. 3. Methodology and data collection Given the deficient disclosure of the final court judgment in Thailand, this paper uses secondary data from two relevant studies. The first paper is a literature review of Malailoy &

91 88 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Pongboonjan (2011) entitled Repertoire of Thailand s Groundbreaking Environmental Legal Cases: 30 Outstanding Cases. The paper provides empirical evidence about the court s decision making in many cases. The second paper surveys the perception of attorneys, nongovernmental organizations (NGOs), and local citizens toward the developments needed in the justice system. The second paper is entitled Attestation of Property Rights in Forest and Land Legal Cases written by Hattasan & Trongngam (2011), lawyers of citizens who sued the government and the capitalists in cobalt-60, which was a radiation emission case. Also included in the review is supplementary literature from qualitative studies and books about the court s judgment on environment-related cases in Thailand. To synthesize the two sources of data, namely, the evidence of court s judgments and the stakeholders perspectives, this paper uses qualitative [economics] analysis [of law] and descriptive statistics as the main methodology. The classification of cases depends on the categorization of the Thai Supreme Court. The court categorizes environmental cases into two, namely, natural resources and environmental pollution. The categorization is dependent on the nature of the case. On the one hand, if the case involves conflict in the right over a territory or resources, it should be considered a natural resources case. On the other hand, if the case is solely about pollution without any rights issue, it should be classified as an environmental pollution case. The natural resource category is further sub-divided for better analysis. The first category is the Lok-Ron case (the state sues the citizens), and the second is the protection of a community s common case (the citizens sue the state). 4. Results: Efficiency of the Thai justice system in relation to environmental lawsuits 4.1 Measurement of the efficiency of the justice system The efficiency of the justice system can be measured in three dimensions, namely, cost, procedural quality, and quality of result (Gramatikov, Barendrecht, & Verdonschot, 2008). The measurement of each dimension requires a tailored and careful approach if reliable results are desired. Considering many limitations, this paper intends to illustrate the following literature from a baseline element such as the cost dimension.

92 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 89 Table 1 Efficiency of the justice system and indicators for each dimension Cost Procedural quality Quality of Result Procedural justice, such as Distributive justice such as participations, neutrality of the equality and proportionality to entire justice process, need consistency of judgment, and accuracy Out of pocket expenses, such as attorney fees, court fees, and transportation costs, among others Cost of time spent or opportunity cost, which includes the duration of the justice process Emotional cost or stress interpersonal relationship equity, such as respect and non-condescension Informative justice or the appropriate information about the justice process as well as the cost and benefits of suing or compromising Source: Gramatikov, Barendrecht, & Verdonschot (2008) Restorative justice or the awareness of harm, acceptance, and corrective justice Transformative justice, which means that the justice should support peaceful society or social welfare and interests 4 Formal justice or the transparency of the justice process Based on Table 1, all indicators can be compressed into two variables. Ca is the cost of the legal process, including out-of-pocket expenditures and opportunity cost. Some elements in the procedural quality of justice can also be internalized as cost. For example, inconsistency or risk is hard to qualify. C(e) is the quality of the result, which if interpreted in economics is the cost of error judgment. For example, if the polluter causes externality that amounts to approximately $500, and the judge decides to charge him $400, then the cost of error judgment is $100. Cost distribution is a part of C(e) because its effect supports distributive justice and the polluter pay principle (PPP). 4 Justice should eliminate conflict among people in a society. The court s decision making may lead to conflicts outside of court, or to inefficiency in term of result if the judgment of the court cannot harmonize the people or is not generally acceptable by society.

93 90 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 4.2 Global warming case Lok-Ron case (Global warming case) is a natural resources case in which the government sues the non-capitalist citizens as polluters who add to the global warming problem by practicing deforestation or by utilizing state-owned land. Examples of this case type are civil red case (decided case) number 789/2552, and crime red case numbers 2223/2550, 230/2552, and 1737/2550. These examples have similar characteristics, most especially in terms of the people sued by the government, all of whom were marginalized, such as tribes in highlands, settlers in rural areas, or low-educated groups. These cases have three inefficiency issues, namely, judgment without proof of right and multicultural ignorance, horizontal inconsistency, and bad compensation model Judgment without proof of right and multi-cultural ignorance The National Forest Reserve Act is necessary for understanding inefficiency in this study. The act authorizes state officers to announce reserved forestry areas by satellite map without conducting a field survey. This approach can result in errors and trespass private lands. Thus, the government allows people who disagree with the state s decision to veto the announcement. However, tribes and low-educated citizens have difficulty in understanding this act and in accessing official documents. Hence, they are easily charged with a technicality, that is, the illegal deforestation on their own land, if they do not complain at the first procedure (see Bunprasert & Korwutthikunrangsri, 2011). For some of the actual cases, judges consider the case with the presumption that the government s claim is credible without reproving the right over the land. For example, the judge s decision in the case of Phu-Pah-Daeng wildlife sanctuary, red case number 789/2550, read: that the defendants are fighting with a continuously running coordination committee and that the territory ownership is to be clarified are claims made by the defendants to exert their self-defined rights, which is a problem in utilization policy for reserves or forest areas and needs to be considered separately from this legal case, hence the Region 6 Appellate Court's ruling on the defendants' status of wrongdoers is upheld (see Malailoy & Pongboonjan, 2011).

94 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 91 Several cases similar to that of the Phu-Pha-Daeng wildlife sanctuary exist. Such cases involve both the state and the marginalized people who have to bear the cost of the legal process, which could have been avoided by communication and compromise. Hence, public cumulative cost of legal process is increased. Meanwhile, the presumption that land being claimed by the government is state owned leads to a higher chance of wrongful judgment, such as higher marginalized people s cost of judgment s error and terror Horizontal inconsistency Although many cases of global warming are judged like the aforementioned example, others are handled differently. Mae-Sot 5 court s decision in Baan-Klity-Larng (Lower Klity s village), red case number 230/2552, read: The prosecutor s witness once attended a meeting with representatives from Lower Klity and Sub Nakasathira Foundation, altogether reaching an agreement in which the forestry officers will be lenient by extending away the limit, which had been on a white demarcation line, of the local people s utilization territory, to solve the problem of the people s originally allotted plots for utilization exceeding the publicly allotted areas, so that the people will not be arrested for utilizing the plots without felling trees or expanding the utilization areas further. In addition, That the defendants had continuously utilized the problematic plot until receiving the lenient treatment from the forestry officers has made rightful the defendants possession of the problematic plots (see Malailoy & Pongboonjan, 2011). This case indicates that NGOs have a significant role in increasing the bargaining power of defendants. If the group of suspects defended individually, the result would be doubtful. In the case of Baan-Mae-Omki (Mae Omki s village), red case number 1737/2551: The defendants had utilized the problematic land plot before the government announced the plot as part of the national forest reserve. That the defendants inherited the plot from their parents caused the 5 Name of district in Tak province, north of Thailand

95 92 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University defendants, who are ordinary rural people, especially Thai-illiterate Karens 6 who had settled in the village of Mae Omki for a long period of time and had utilized the problematic plot before the announcement, to understand that the government leniently allowed the plot to be utilized by the same people as before, demonstrating that the defendants acted by mistakenly understanding that clearing the plot was allowed, hence an unintentional act. Therefore, the defendants act is not guilty as charged (see Malailoy & Pongboonjan, 2011). The court s decision indicates that multi-cultural factors can be internalized as bifurcation of judgment. On a positive note, red case numbers 230/2552 and 1737/2551 can be considered as an indication of hope and development. On the downside, these cases show horizontal inconsistency in the court s decision. The inconsistency can be interpreted as a risk of the result, or C(e). Poor households are less likely to be willing to bear risks out of respect to wealthier households that share identical preferences (Alderman & Paxson, 1992). Therefore, the cost of judgment s error, C(e) affects the poor more severely compared with others Bad compensation model For a more critical analysis, we presume that the state s charge is true in all global warming cases, and marginalized people are indeed the wrongdoers. The justice system is still unfair and still distributes cost, C(e), among marginalized polluters based on the ideological point of view through bad evaluation and compensation model. This section illustrates three notices about the inefficiency of the evaluation, namely, principle of compensation, economic model, and method of data collection. First, the principle of compensation can be categorized into two types: [1] compensation by action and [2] compensation by cash. For example, if Mr. A practices deforestation, the judge may have three legal options to force compensation or recovery on Mr. A. First, the judge may order Mr. A to engage in the forest s rehabilitation through various ways such as reafforestation. Second, the judge may use an economic model to estimate externality and recovery cost from the polluter, Mr. A, and then implement pecuniary sanction on him. The third solution is a complementary approach that orders compensation both by action and by cash. 6 or called in Thai Ka-Rieng, who are highland tribe people in the Northern Thailand

96 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 93 For example, the administrative court s order, number 603/2551, to the Marine Department of Thailand stated that the department should compensate by action to help the beach recover from erosion caused by the department s dam establishment. The order also required the department to compensate by cash, particularly to the people who were affected by the externality. Compensation by action should clearly be more accurate than compensation by cash to recover public damages. Real actions from wrongdoers are necessary to recover decadent forests until such time that the biological and physical status of these forests is reclaimed. However, in compensation by cash, the government will use the money that is based on the value calculated by the model to reclaim the forest on behalf of the public; thus, the accuracy rate depends on the model and not on the actual value. Moreover, compensation by action has high incentives for wrongdoers to ensure efficient rehabilitation. Otherwise, the wrongdoers will incur higher cost. Thus, social cost, such as timing cost, will decrease. By contrast, the mark-tomodel solution will disincentivize the efficiency of state officers because no matter what they do, the cost is lump sum. In practical cases, the Thai government often charges for the second type of compensation, and the Thai court usually delivers its judgment following the indictment. For example, Bunprasert and Korwutthikunrangsri (2011) illustrate the case of trespassing into a national forestry area at Pattalung, a province in the south of Thailand. The judge ordered the noncapitalist polluters to compensate by cash, which included the cost of fertilizer to improve soil nutrition, the cost of the truck that carried water for spraying to increase ground moisture, and the cost of operating an air conditioner that was used to reduce global-local weather warming. Although this approach is grounded on the fact that compensation by action through afforestation does not cover the cost of externality, the trespassing case in Pattalung was unlike case number 603/2551 that has actual casualties. The case was actually victimless; therefore, compensation by action through afforestation was more significant. The case of Bunprasert and Korwutthikunrangsri (2011) also shows a problem related to a nonreliable economic model. Assuming that the case of Pattalung has visible externality receptors, compensation by cash should therefore be a concern. However, the methodology of calculation remains doubtful. Similar to the inaccurate estimation of the loss of nutritional value, the operational cost of an air conditioner may not accurately represent global warming side effects.

97 94 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University For example, if the lack of soil nutrition causes the death of wild mushrooms and consequently reduces the income of legal mushroom collectors, the case can be considered as an externality. However, the value of fertilizer is not an externality cost but an internality cost, which can be interpreted as a cost of recovery. The current model of global warming s externalities, which state officers use as basis in charging marginalized people, remains imprecise. Interestingly, judges are aware of errors, but they do not have an alternative model. In the case of the Phu-Pah-Daeng wildlife sanctuary, or red case number 789/2550, the Department of National Parks, Wildlife, and Plant Conservation sued Ms. Kanthong Pimsena for trespassing into the national forestry area. The state requested compensation of around 97,645 Baht for negative externality and 32, Baht as accumulative interest rate (7.5% annually). After the legal process, the judge announced the decision: from investigation, calculation of plaintiff bases on general damage which mismatches with specific situation like trespassing to the forest and cutting trees, therefore it s possible that calculation model cannot represent as a proxy of the case (see Malailoy & Pongboonjan, 2011). However, the judge ordered that Ms. Kanthong be compensated with 45,000 Baht or approximately half of the plaintiff s proposal. Note that interest rate is higher than the real market rate, which has never reached 7.5% since 2000 (World Bank, 2011). Evidence shows that problem exists not only in the model but also in the method of data collection. In this kind of problem, the result is wrong despite the plaintiff s accurate calculation of externality. Bunprasert and Korwutthikunrangsri (2011) discover that loss of nutrition is estimated by digging target soil, burying a small tank into the dug-up space, and hanging the soil on a grate over the tank. After the rain, the nutrients in the water are tested and then compared to that of the soil in a natural forest. However, the experiment conducted by the plaintiff on the soil field in the Pattalung case was incomparable with the field the defendant used daily. The experiment was conducted on a non-cultivated land, whereas the defendant s field was cultivated. The abovementioned issues indicate that Thai polluters, especially the marginalized people, in global warming cases undoubtedly face high cost of judgment s error.

98 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE Protection of community s resources case The protection of community s resources case, or protection case, is a natural resources case in which citizens coordinate to sue to protect common [and public space] from misconduct by the state s institutions and private firms that are granted with a responsibility or right from the state. For example, the Department of Land may issue a title deed that intercepts the public space of some communities. The members of the community may then coordinate to sue for the cancellation of the deed. In an economic perspective, this kind of protection should be defined as public service because of its characteristics. The first characteristic is non-excludability, which means that contributors cannot exclude others from the benefits of protection. The second is non-rivalry, which means that benefits do not decrease by sharing benefits. Hence, a free rider problem is likely to arise in protection cases. In other words, no one has willingness to pay, but any gain will be appreciated. Although the free rider problem is not a proxy for the inefficiency of the justice system, the relationship between the two is obvious. Protection cases may have high sensitivity to both cost of legal process and cost of judgment s error as a result of the situation created by the free rider problem wherein coordination among protectors entails a higher cost. If the cost of the legal process and the error of its results are high, then protection cases may be low in number. The inefficiency of the justice system in relation to protection cases can be explained by the ambiguity of the court s jurisdiction and standing to sue issues Ambiguity of the court s jurisdiction In many cases, citizens charge the state s action, such as trespassing or overruling on the land rights of communities. When citizens are the plaintiffs suing the administrative court for interruption, the judge of the administrative court sometimes avoids abrupt considerations and sends the accusation to the Court of Justice. This action from the judge can be explained by the fact that defining rights, including whether the land is a public or private property, is under the jurisdiction of the Court of Justice. These duplicative processes generate high cost of legal process, and likely to make the protectors suffer from bearing the high cost of coordination.

99 96 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Standing to sue problem Although states, firms or citizens clearly damage natural resources or illegally invade public space, ordinary people who are aware of such violations have no right to sue if they are not affected by the damage like outliers are, the private rights of whom are violated. This principle, called the subjective right, is concluded in cases such as those with Supreme Court decision numbers 647/2513, 1410/2513, and 2604/2540 and in an international case, such as that of the Buzen Power Plant by Meebunsarng (2011). Figure 1 Legal process under the subjective right principle Government Law enforcement Resources destroyer [Government or Private] Normal path: 1. Voices 2. Sues the administrative court 3. Fights in court Exploit resources Citizens Citizens whose private rights are affected can directly sue. For example, Or-Bor-Tor (sub-district administrative organization) and participants sued the Minister of Agricultural Ministry and his partisans for allowing film-making activities in the area, which caused damages to the Aow-Narng (Narng bay), the port to Ma Yha bay. The Supreme Court s decision in this case (red case number 5818/2549) is stated below. Do plaintiffs number 3-19 [who are not members of Or-Bor-Tor] who claim themselves as members of traditional community in Krabi [province where locate at southern of Thailand] have right to sue or not? From the Constitution article 46, the law does not clearly define scope and meaning of traditional community, in addition, this article requests organic law which still do not exist when plaintiffs number 3-19 sue defendants. Therefore, plaintiffs numbers 3-19 have no right to sue and have no right to repetition (see Malailoy & Pongboonjan, 2011).

100 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 97 Many problems exist under the subjective right principle. First, as shown in the left-hand side (LHS) path and the right-hand side (RHS) path of Figure 1, people who need to protect natural resources from exploitation have to follow LHS path procedures that comprise many steps, require longer time, and have higher cost than RHS. Second, in the context of exclusive developmental state, wherein the government plays the leader of capitalists or excludes political minorities from economic developmental process, persuading the government or a firm to stop exploiting resources is difficult. This difficulty can be attributed to the first step on the LHS path, that is, citizens voices, not having a price. Literature delving on social exclusion in Thailand is extensive. Examples include the studies of Buergin and Kessler (2001), Phongpaichit (2002), and Rigg (2002). All these issues lead to one conclusion, that is, high cost of legal process (Ca). 4.4 Environmental pollution case Pollution or, in economic terms, negative externality, is a case in which the polluter emits pollutants without being issued rights over resources. The court s decisions show two significant points about the efficiency of the justice system: government s ignorance and bad compensation model. To illustrate the problems, this part randomly presents three classic environmental lawsuit cases, which include the emission of Cobalt-60 s radiation, emission of hazardous lead in Klity river, and emission of Map-Ta-Phut (Eastern industrial estate of Thailand) Government s ignorance All three emission cases in Thailand share a similar characteristic, that is, government ignorance. In the first case, a garbage collector stole Cobalt-60 from a private firm that did not carefully manage the radiation matter. After the garbage collector sold the matter to garbage resellers, three people died an aborted embryo and two adults and ten were physically injured. The study of Aroonwong and Chockchaichumnankit (2551) shows that the Ministry of Science and Technology (MST), as the radiation-regulating body, failed to compensate cash and to force the private firm to be accountable for the injuries and casualties. Moreover, in terms of procedural justice, the minister of MST claimed that the garbage collector was a thief who had no right to receive compensation.

101 98 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University In the second case, a lead mining firm illegally dumped toxic substance into the river without suitable pretreatment. The toxicity affected the locals, referred to as the Karens. After three decades, the Karens realized that something was wrong with their health. Mortality rate was increasing, with young adults dying before reaching the age of 30. Lead levels in their blood were over the standard level. For example, Nanumeir Thongpah, a 34-year old Karen, had about microgram per deciliter of lead. The Karens believed that the firm did not respond to their request because they were an ethnic minority, and that the government did nothing but watch them suffer (Buntaotuk, 2011). In the third case, the Map-Ta-Phut industrial estate had high concentration of plants and a high volume of pollution emission. The Administrative Court s notices were clear. The meeting to discuss concerns about pollution in Map-Ta-Phut was initiated in Information obtained from the meeting indicated 20 suspicious particles, which were found to cause cancer. Patients in the main district of the Rayong province were three to five times more prone to developing leukemia compared with those in the rural districts. The Department of Industrial Estate was prepared to announce Map-Ta-Phut as a pollution-controlled area. However, the owners of the private firm disagreed with such announcement. The court believed that the capitalist s ignorance was the main reason for the postponement of the announcement. Afterwards, a subcommittee was created, eventually drafting an operational plan for pollution treatment. However, the pollution continued to worsen. Therefore, the Administrative Court decided to proceed with its announcement, labeling Map-Ta-Phut as a pollution-controlled area (See Malailoy & Pongboonjan, 2011). The role of the government as a barrier to achieving justice makes ordinary people take higher cost of legal process. Their situation is worsened by pollution, and they bear the cost of the legal process of charging the polluter. However, in many cases, the government makes them feel more inferior Bad compensation model As in global warming cases, environmental pollution cases also have problems on the compensation model. By contrast however, environmental pollution cases have different sources of inefficiency. This part explains the three cases of inefficiency, namely, the limitation

102 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 99 of law to cover laggard side effects, illogical underestimation of loss, and distribution of polluter s burden forced by the court. The first case of inefficiency is caused by the technical limitation of law. Normally, judges can preserve the right of change in their decision. However, this right is limited to a certain number because if not, cases will overload the court. Therefore, Article 444 in Thailand s Civil Procedural Code allows judges to change their decision in a two-year interval, which is counted starting from the day when the decided case was activated. However, some factors such as radiation s externality can occur after two years. Hence, this limitation leads to higher cost of judgment s error [C(e)]. The second case of inefficiency is caused by inexplicable or illogical underestimation. For example, in the Cobalt-60 case, the judge decided to require compensation for the opportunity cost of injury covering only the days when medical attention was received. Whether or not the injured person received medical care, he still cannot work because of his injury. Buntueng Sila, a 20-year old man, lost his leg as a side effect of radiation. The judge decided to require compensation for the opportunity cost related to Buntueng s productivity loss covering only 20 years. If the judge calculated the value of the compensation based on the general retirement age, Buntueng should have been given 40 years worth of compensation (see Aroonwong & Chockchaichumnankit, 2551). Table 2 Underestimated compensation from pollution case, Cobalt-60 List of Damages Administrative Court s Decision Decision of Court of Justice Accusation Decision Difference Accusation Decision Difference Cost of medical care prior to lawsuit 385, ,261 48,105 8,050,366 73,436 7,976,930 Cost of medical care for 15 years 48,634, ,634,900 48,634, ,100 48,493,800 Productivity loss (present time) 864,500 2,653,667-1,789, , ,500 Productivity loss (future) 12,066, ,000 11,850,000 12,066, ,066,000 Other indemnities 26,000,000 1,040,000 24,960,000 29,000, ,000 28,720,000 Opportunity cost for dead person 27,500 21,613 5,887 27, ,500 Funeral cost 320, ,760 86, ,000 34, ,260 Cost of being orphaned 2,144, ,000 1,424,000 2,696, ,000 2,586,000 Sum 90,442,266 5,222,301 85,219, ,641, , ,001,990 Source: Modified from Punkere, Malailoy, and Paisarnpanitkun (2008)

103 100 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 2 shows the compensation discrepancies between the Administrative Court and the Court of Justice. The case was split and was decided in two courts because the injured were ignored by the MST. They had no choice but to sue either the government agency through the Administrative Court or the private polluter through the Court of Justice. The system of justice in the Administrative Court is inquisitorial, in which the judge can investigate the actual facts of the case. The Court of Justice uses the accusatorial system, in which the plaintiff suffering from the pollutant is responsible for the investigation. The Administrative Court has only two procedures, namely, the Trial Court and the Supreme Administrative Court. By contrast, the Court of Justice has three procedures, namely, the Trial Court, Appellate Court, and the Supreme Court. Hence, the Administrative Court often takes less time to deal with cases compared with the Court of Justice. When pollutant receptors sue both courts, the judge views the two cases as one. Therefore, the compensation derived from a faster decision (Administrative Court) may be excluded from the follow-up decision (Court of Justice). From this exclusion, the real polluter may take a lower burden than the government agency. When the method is considered within the economic theory, the situation makes more sense. The transfer of burden from the polluters to the state s institution that plays the role of regulator is a credible threat to the latter, motivating them to exert more effort to monitor pollution. However, this scenario is inefficiency in distributive justice [C(e)], and it violates the polluter pay principle (PPP). To resolve the dilemma, when the decided case is implemented, and the government realizes the value of the burden, the government can sue the firm again for cost transmission. In the Klity river case, the Karens sued the firm and won (case number 1565/2549, citizens sue firm; 637/2551, citizens sue state). Afterwards, the government sued the polluter firm in red case number 724/2552. In the Klity river case, the result was modified and converted to PPP, but the process of transferring the burden in the third round of prosecution also increased the administrative cost and the case load of the justice system.

104 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE Policy implication This section aims to present some implications to solve inefficiency problems in Thai judges decision making, which is analyzed based on the Economics Analysis of Law. The cost minimization of the justice system is the main objective, including the cost of the legal process and the cost of error judgment, given the concern about administrative cost to decrease the cost of justice. Through a review of perspectives of experts who are court members of environmental NGOs and of academicians, common solutions are suggested. These solutions are to decrease barriers to entry, establish a system on expert witness, and to develop punitive damages. 5.1 Reducing barriers to entry This solution remains vague because it concerns several concrete policies. However, every proposal focuses at decreasing cost of legal process. First, the court should provide translators for ethnic minorities and enhance the procedural quality of justice for them. The positive experiences they will obtain from communication and socialization will increase mutual understanding and decrease the gap between the judge and the marginalized people. Second, although Thailand has the Official Information Act (1997), in practical cases, people believe that they cannot easily access information regarding filing charges, especially about suing a state s organization. Therefore, the government should decrease red tape and promote informative transparency. Moreover, under an inquisitorial system (cases in the Administrative Court), the judge can help in bargaining and providing access to information, which tend to decrease either Ca or C(e), on behalf of the plaintiff and the defendant. Third, legal ideas, such as rigidly applying a conventional court s jurisdiction and subjective right within standing to sue, should be modified. Hattasan and Trongngam (2011) suggest that stakeholders should develop new text that allows the Administrative Court to justify the case of a state s trespass into a public or common area. Such recommendation is also recognized by Muenpawong (2011), a modern thinker and judge of a Thai court. Her study shows an alternative principle, that is, open standing to sue by the community or the local administrative organization. Open standing will promote judicial review for application to civil law enforcement and orders. Their advice may help decrease cost of legal process.

105 102 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 5.2 Establishing a System on Expert Witness This recommendation is proposed by Bunprasert and Korwutthikunrangsri (2011). They investigated judges decisions in various environmental cases, concluding that the standards for the system on expert witness in Thailand remain below the international level. For example, the Thai court usually allows the plaintiff and the defendant to offer evidence without implementing the rule of evidence exclusion. Therefore, an illogical computational model is introduced in the court. Consequently, the marginalized people, who have no intellectual support, cannot counter the model by themselves, bearing the cost of injustice because of an avoidable error. If a system on expert witness is standardized, then cost of judgment s error may be decreased. 5.3 Developing punitive damages Traditionally, legal compensation is usually seen as a sanction instrument (criminal law) and an allocative tool (tort law). Today, however, economic analysis of law considers fine as a protective tool that dissuades the polluter or trespasser from illegal actions under the assumption that humans are strategic law breakers. If legislative designers illustrate law for protection, it could be better than compensation or sanction after real damages occur. The punitive damages principle is also used as an instrument to compensate or to punish for imperceptible price, such as the value of death, trauma, and other emotional loss. Like in the Cobalt-60 case, many of the injured acquired unpredictable illnesses that were not covered in a two-year period. In this case, punitive damages should be considered to implement to compensate the injured in advance. However, awarding punitive damages is not cristal magique, which has no limitations and cons. Eisenberg et al. (1997) explain a controversial phenomenon about punitive damages in the US. For example: An editorial from a leading liberal newspaper presents one commonly held view: legislation is needed because punitive damages are widely unpredictable, so arbitrary as to be unfair and are awarded without any guidance to juries, which simple pick numbers out of the air (Eisenberg et al., 1997, page 624). The rational critique about discretionary punitive damage awards can be resolved from an economic perspective, as initiated by Learned Hand, a judge in the case of the US v. Carroll Towing Co. (1947). The rule was then named after him (Hand s rule). The rule can be used to

106 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 103 estimate the cost of wrongful death, which is regularly valued at infinity. The equation for Hand s rule can be illustrated as B = P*L, where B is the marginal cost of precautions, and P*L is the expected marginal return from lower probability of existing damages, wherein P is the probability of lost that negatively relates to B, and L is the cost of damages. In other word, P*L is marginal return from precaution. (see Panpiamrat et al., 2012). The rule is a really useful method for separating negligence and non-negligence through a controversial concrete concept. For example, the installation of a water treatment machine that costs about 1,000 dollars [B = 1,000] will decrease the probability of emission by 1% [P = 0.01]. If untreated water results in damages amounting to 50,000 dollars [L = 50,000], Hand s rule will explain that the marginal return from the installation of a water treatment machine (P*L) is less than the marginal cost (B). Therefore, failure to install is a non-negligent decision. However, if the injured dies from negligence, Hand s rule also explains how to estimate punitive damages. If the above situation is changed, adoption of new technology will decrease P to about 10%. Hence, a firm s owner who decides not to install the machine will be judged as a negligent polluter. If the pollutant is lethal, ultimately causing death, then Hand s rule can be developed to estimate punitive damages to polluter. The main idea is the estimation of punitive damages when the casualty had zero risk of dying from the actions of the wrongdoer. In this case, the idea is to determine how much the polluter should pay for water treatment machines until it is enough to decrease the risk from polluted water by 100%. Based on previous information, the value of life or death from this case is rated at L = B/P = 1,000/0.01 or 100,000 dollars. Moreover, an integration of Hand s rule and a system on expert witness is important because an essential indiscernible factor in Hand s rule is the marginal risk or the probability of damages. Specialists are significant resources who determine the accuracy rate of Hand s rule and its cost of judgment s error. Although punitive damages and Hand s rule remain unstable and debatable with regard to rationality, they are worth considering. As mentioned in this study, developing punitive damages is not a cut and paste task; the developer should modify it for the Thai context.

107 104 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 6. Conclusion Table 3 Conclusion of the efficiency status of environmental lawsuit cases Type of Case Sub-category Sources of Inefficiency Inefficiency Judgment without proof of right Ca and C(e) and multi-cultural ignorance Global warming Horizontal inconsistency C(e) Natural Bad compensation model C(e) resources Ambiguity of the court s Protection of community s Ca jurisdiction common case Standing to sue problem Ca Environmental Government s ignorance Ca - pollution Bad compensation model C(e) This paper deals with three main issues. It illustrates the rough indicators to detect partially the efficiency status of the justice system, presents evidence by analyzing the reports on judges decisions, and designs a draft of implications in micro and macro levels. First, the paper categorizes efficiency indicators into two, namely, legal process cost [Ca] and cost of error from inaccurate judgment [C(e)]. Second, analyzing the Thai judges decisions, the paper concludes that the justice system is inefficient, especially for the poor and the marginalized people (see Table 3). Finally, implications are collected from environmentalists perceptions, which prioritize reducing cost of legal process and cost of judgment s error. Further issues, which are remarkable in this line of theory, should quantify justice efficiency and analyze it directly through the text of law, which this work cannot perform because of many limitations. Reference Alderman, H., & Paxson, C. H. (1992). Do the poor insure? A synthesis of the literature on risk and consumption in developing countries. World Bank. Aroonwong, I., & Chockchaichumnankit, S. (2551). Cost of justice: One case, two court in case of cobalt-60 under EnLaw project. EnLaw Project. Buergin, R., & Kessler, C. (2001). Intruslons and exclusions: Democratization in Thailand in the context of environmental discources and resources conflict. GeoJournal, 71.

108 ECONOMIC ANALYSIS OF LAW AND THE EFFICIENCY OF THE JUSTICE SYSTEM IN RELATION TO ENVIRONMENTAL LAWSUITS: THAILAND s EXPERIENCE 105 Bunprasert, P., & Korwutthikunrangsri, L. (2011). Guidline on the Development of the System on Expert Witness on the Environmental Litigation. thai universities healthy for public policies. Buntaotuk, J. (2011). Karens way, the way of fight and access into court of justice of the lower Klity people in Karnchanaburi. EnLaw. Butr-Indr, B. (2555). Regal Reasoning. Bangkok: Textbook project, Thammasart University. Eisenberg, T., Goerdt, J., Ostrom, B., Rottman, D., & Wells, M. T. (1997). The predictability of punitive damages. Journal of Legal Studies. Gramatikov, M., Barendrecht, M., & Verdonschot, J. H. (2008). Measuring the Costs and Quality of Paths to Justice: Contours of a Methodology. TISCO Working Paper Series on Civil Law and Conflict Resolution Systems. Hattasan, S., & Trongngam, S. (2011). Attestation of Property Rights in Forest and Land Legal Cases. Thai Universities for Healthy Public Policies. Malailoy, S., & Pongboonjan, S. (2011). Repertoire of Thailand s Groundbreaking Environmental Legal Cases: 30 Outstanding Cases. Thai Universities for Healthy Public Policies. Meebunsarng, N. (2011). Class Action. Bangkok: Nititham. Muenpawong, S. (2011). Refinement of Thai Procedural Law for Environmental Cases. Thai Universities for healthy public policy. Ngamarunchot, B. (2012). Justice Judgment - Environment. Bangkok: National Health Foundation. Panpiamrat, J., Tangkitvanish, S., Charoensedtasin, T., Piyanirun, T., & Sanguanchit, S. (2012). Economics analysis of law: Tort case's damages evaluation. Bangkok: Thailand Development Research Institute (TDRI). Phongpaichit, P. (2002). Social Movements in Thailand. International Conference on Thai Studies. Rigg, J. (2002). Roads, marketization and sodal exclusion in Southeast Asia: What do road to do people? KITLY. World Bank. (2011). Data Bank: Real interest rate (%) Thailand.

109 106 Economics and and Public Policy 3 3 (6) (6) : 106 : Copyright School of of Economic and and Public Policy Srinakharinwirot University STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND Nichakorn Tantivanichanon 1 Nopphawan Photphisutthiphong 2 Somchai Ratanakomut 3 Abstract The first part of this study was the application of Trip Frequency One Site Model for tourism in each province of the Eastern Region of Thailand. This Single Site Model used Individual Travel Cost Approach and most suitable regression results (Double Log Demand Functions) for Thai and foreign tourists. The second part was the application of General Logit Model for Multiple Sites. This was to analyze the probability of reservation of accommodations, excursion and/or tour packages through internet. The results implied that, for the Eastern Region in 2011, the value of recreational benefits for both Thai and foreign tourists were far exceeding the total amount of the budget allocated for the tourism development promotion. Therefore, the government should invest in tourism promotion especially for Thai tourists who are traveling by cars and not for foreign tourists. The foreign tourists should be promoted in groups. Key words : Strategic Economic Assessment, Individual Travel Cost Approach 1 Faculty of Business Administration, Rajamangala University of Technology Thanyaburi 2 Faculty of Business Administration, Rajamangala University of Technology Thanyaburi 3 School of Management, Shinawatra University

110 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND Introduction Nowadays, growth in many countries, especially developing ones, based on tourism. Tourism helped generating direct and indirect income and employment in its owned as well as other related sectors. Governments in many countries provided priorities to tourism development. This was mainly to attract larger quantity of interested tourists. They, however, faced with many issues and problems including negative tourism image, lack of tourism development funds, shortage of tourism related personnel, weak and unclear tourism development plan and lack of government capability in tourism development (Bukenya, 2002) In addition, they faced with difficulty arisen from difference of culture between the tourists and the local or rural people (Baimai et al., 2009). There were many attraction factors that help in increasing the number of tourists and expand the length of tourist stay. These factors include carrying capacity (Wunder, 2000), tourism infrastructure, promotion of local tour guides, arts and culture show, sales of handicrafts (Tsaur et al., 2006), quality control on accommodations, restaurants and tour agencies, clear and detailed information on fee and service charges (Habibi & Rahim, 2009), attitudes and demographic information and general characteristics and quality of recreation areas that attract the interest of visitors as well as other amenities like clean air, clear water, forest and wildlife (Loomis, 1995) The strategic tourism development is, therefore, the imperative tool for national tourism development plan. As the requirement of sustainable tourism development, government should simultaneously bring together many aspects like sustainable management of natural resources, through role of community, stakeholders in tourism (Tsaur et al., 2006) To make the ecotourism sustainable, there must be a tangible or intangible benefit for both tourists and the community. Also local government and the local people should benefit from economic benefit through the improvement of local environment such as benefit from employment, better living condition, poverty eradication and crime suppression. (Aniah et al., 2009) This study also touches on the strategic tourism development plans, Ministry of Tourism and Sports and implemented by Chonburi, Rayong, Chantaburi and Trat. Natural resources such as beaches could be classified as a public good, which provides economic value through visitors recreational benefits (Chen et al., 2004). To make a systematic

111 108 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University assessment, one should utilize individual information for each person involved. This approach based on people s choice or revealed preferences (Tisdell et al., 2008). In particular, tourism benefit could be derived directly from use of recreational activities. (Chen et al., 2009). However, tourism development might also depend on quality of the local infrastructure as well as the cost of visiting, including travel time. (Loomis, 1995). That is to say, time of traveling and distant between the origin and destination is positively related with the cost and negatively with the demand for tourism by the tourists (Bell & Strand, 2003). Therefore, Travel Cost Method (TCM) could also be used to evaluate the benefit derived from tourism (Font, 2000). It is to note that there are both advantage and disadvantage for using the travel cost approach, namely, while we can incorporate several contributing factors into tourism, it will be complicated when we have to deal with multiple destination within the same trip. To deal with this aspect, we might employ the General Logit Model to cope with probability of visiting more than one destination in a trip. 2. The Models The Travel Cost Model can be derived from utility maximization of visitors. The model can be represented as the following objective function and constraints: Objective function: Max. UX, V Constraints: (1) Budget constraint INC r T X P V w w w Px (2) Time constraint T T TT OSTV t The above constraint functions can be rewritten as follows: w visit INC T rwtt P X TC ; x V TC TT OST P visit r w Where Working income ( INC w ) includes Wage rate ( r w ),Working time ( T w ),Prices of communities are fixed ( P x ), the consumed quantities of goods in marketing system ( X ), Actual payment for visiting the tourism site ( P visit ), The number of visits to a site per year

112 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 109 (V ), Total times of visitor ( T t ), Travel time ( TT ),On-site time ( OST ), Total Travel cost ( TC ), and INC T is Total incomes. Individual Travel Cost Model (ITCM) of Trip Frequency One Site Model: ITCM; Q i = V i = f, _ DAY,,, OBJ,, SOECO, DIST i TC i TRANS i Quarter i i ATTRI i i ATTRACT i From the above equation, we can write the Double Log-linear Demand Function as follows: ln Tour _ Day D _ Out _ Pr ovin ln_ TC3 _ DAY Exp _ On _ Way Exp _ quarter 34 DISTANCE Cleanl _ lv D _ OCCU 2 D _ OBJ D _ Bus 35 8 SIZE Inter _ Accom D _ OBJ 8 D _ Car 15 Food reason reason8 16 reason3 D _ Arrange Infor _ Friend Quality 17 access _ Lv Infor _ Agent 11 D _ Package reason2 24 Infor _ TV Domicile 5 Before 12 D _ Friend 25 N _ Trip 32 Vehicle 19 D _ OBJ1 26 D _ OCCU 4 5 income Docimile 7 33 age Table 1 Determinants of Days per trip of Thai visitors in Eastern region No. Factors Meanings lntc3_day Exp_On_Way Exp_Before D_Out_Provin Income D_Bus D_Car reason8 DISTANCE D_Package SIZE Quarter Vehicle D_OBJ1 Quality Food Infor_Friend reason2 Total Travel Cost per day with opportunity cost using 1/3 of the wage rate ( /day) Expenditure on way to provinces in Eastern region ( ) Expenditure before the trip at provinces in Eastern region ( ) Tour outside provinces of Eastern region (Dummy: 0 = No, 1 = Yes) Visitors income ( /month) Visit to provinces in Eastern region by bus (Dummy: 0 = No, 1 = Yes) Visit to provinces in Eastern region by car (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is accessibility (Dummy: 0 = No, 1 = Yes) Visitors distance from stay province to visited province (km.) Visitors the purchase of packaged tour (Dummy: 0 = No, 1 = Yes) Tour group (persons) Quarter of trip (Quarter1, 2, 3, and 4) Expenditure of local transportation ( ) The main purpose of visiting is holiday / vacation (Dummy: 0 = No, 1 = Yes) Quality of accommodation at provinces in Eastern region (Bad, Fair, Good) Food of accommodation at provinces in Eastern region (Bad, Fair, Good) Source of tourism information is visitors friends (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is the security / safety (Dummy: 0 = No, 1 = Yes)

113 110 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University No. Factors Meanings Cleanl_Lv D_Arrange access_lv Inter_Accom reason4 age D_OCCU4 D_OBJ2 reason3 D_Friend Domicile7 Infor_TV N_Trip Infor_Agent Domicile5 D_OBJ8 D_OCCU2 Evaluation of local transportation in aspect of cleanliness (Critical, Problem, Warning, Standard Levels) Tourism arrangement by tour agency (Dummy: 0 = No, 1 = Yes) Evaluation of tourism sites in aspect of accessibility (Critical, Problem, Warning, Standard Levels) Reservation of accommodation through internet (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is good value of money (Dummy: 0 = No, 1 = Yes) Visitors age (years) Visitors occupation is unemployed (Dummy: 0 = No, 1 = Yes) The main purpose of visiting is Convention / Conference / Exhibition (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is the delicious food (Dummy: 0 = No, 1 = Yes) The visitors were accompanied by their friends (Dummy: 0 = No, 1 = Yes) Visitors domicile in Northeastern region (Dummy: 0 = No, 1 = Yes) Source of tourism information from TV (Dummy: 0 = No, 1 = Yes) The number of visitors trip per year (trip/year) Source of tourism information is tour agency (Dummy: 0 = No, 1 = Yes) Visitors domicile in Northern region (Dummy: 0 = No, 1 = Yes) The main purpose of visiting is religious purpose (Dummy: 0 = No, 1 = Yes) Visitors occupation is Government and Military Personnel (Dummy: 0 = No, 1 = Yes) Double Log-linear Demand Function of the foreign visitors in the Eastern Region can be written as follows. Table 2 Definitions of factors influencing Days Length of Stay (Days per trip) of foreign visitors in the Eastern Region No. Factors Meanings lntc1_day D_Train q6 D_Car Inter_Reserve income reason2 Family Infor_Agent Total Travel Cost per day without opportunity cost ( /day) Visit to provinces in Eastern region by train (Dummy: 0 = No, 1 = Yes) Total visited provinces (provinces) Visit to provinces in Eastern region by car (Dummy: 0 = No, 1 = Yes) Reservation of tourism site through internet (Dummy: 0 = No, 1 = Yes) Visitors income (US$/year) Reason of visit to provinces in Eastern region is the security / safety (Dummy: 0 = No, 1 = Yes) The visitors were accompanied by their family (Dummy: 0 = No, 1 = Yes) Source of tourism information is tour agency (Dummy: 0 = No, 1 = Yes)

114 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 111 No. Factors Meanings N_Trip D_Asia SIZE hygiene_lv Entrance_Fee pollut_lv Infor_Others reason4 reason9 reason7 Inter_Accom Quarter Cost_Trans D_OBJ3 D_OBJ7 reason5 Shopping D_OCCU5 Cleanl_Lv Inter_Trans Infor_TV Friends Accomod D_OCCU1 N_Prov_in_Group reason10 D_OCCU2 D_America Food_Bever D_SEX The number of visitors trip per year (trip/year) Visitors are in Asia region (Dummy: 0 = No, 1 = Yes) Tour group (persons) Evaluation of tourism sites in aspect of hygiene (Critical, Problem, Warning, Standard Levels) Expenditure of entrance fee / service fees ( ) Evaluation of tourism sites in aspect of pollution (Critical, Problem, Warning, Standard Levels) Source of tourism information from the others (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is the accessibility (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is the traveling times (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is good value of money (Dummy: 0 = No, 1 = Yes) Reservation of accommodation through internet (Dummy: 0 = No, 1 = Yes) Quarter of trip (Quarter1, 2, 3, and 4) Expenditure of local transportation ( ) The main purpose of visiting is business (Dummy: 0 = No, 1 = Yes) The main purpose of visiting is Incentive / Sponsored (Dummy: 0 = No, 1 = Yes) Reason of visit to provinces in Eastern region is the festival (Dummy: 0 = No, 1 = Yes) Expenditure of shopping ( ) Visitors occupation is retire (Dummy: 0 = No, 1 = Yes) Evaluation of local transportation in aspect of cleanliness (Critical, Problem, Warning, Standard Levels) Reservation of transportation through internet (Dummy: 0 = No, 1 = Yes) Source of tourism information from TV (Dummy: 0 = No, 1 = Yes) The visitors were accompanied by their friends (Dummy: 0 = No, 1 = Yes) Expenditure of accommodation ( ) Visitors occupation is Government and Military Personnel (Dummy: 0 = No, 1 = Yes) The number of tourism provinces in Eastern region (provinces) Reason of visit to provinces in Eastern region is the others (Dummy: 0 = No, 1 = Yes) Visitors occupation is Agricultural Worker (Dummy: 0 = No, 1 = Yes) Visitors are in America region (Dummy: 0 = No, 1 = Yes) Expenditure of food and beverage ( ) Visitors gender (Dummy: 0 = Female, 1 = Male) As a result of consumer s resource allocation, the recreational value and the value of consumer surplus can be derived by the following equations.

115 112 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Q i = V i = e TC DAY 0 2 _ mi TC _ DAY mi Q e 1 2 i 0 CS i QMax. TC _ DAY QMin. dq TC _ DAY Max. Q Max. Q Min. Consumer Surplus ( CS i ) of individual visitor s sample, i, can be calculated as Average Consumer Surplus / day per trip ( ACST ) of individual visitor s samples ( / visitor / day / trip) on tourism site, and then multiply by Total Visitors to tourism site in studying year 2009 (Visitors / year) as Recreational use value of tourism site in year 2009 ( ). Lastly, Recreational use value of tourism site in 2009 ( RV 2009 ) will be transformed into Present Value of Recreation Value on tourism site in 2011 ( RV 2011 ) by using Consumer Price Index of Quarter1 in year 2011 ( CPI 2011 ) as result of Assumption: Recreational use values are the same in every year. RV = RV CPI CPI The change in consumer surplus(cs) can be derived from the situation with and without tourism promotion program. Cost per day ( ) TC Max. Recreation Demand TC min. CS V f DIST, TC _ DAY, TRANS, Quarter, OBJ, ATTRI, i SOECO, ATTRACT V,, f DIST TC _ DAY TRANS Quarter OBJ ATTRI, i,,, SOECO 0 V V The number of visiting (Days / trip / year) Figure 1. The Recreation Demand Curve and the change of Consumer Surplus after having Tourism Promotion Program.

116 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 113 The probability of visiting choice for 4,3,2 provinces will be analyzed with the General Logit Model which consists of McFadden Conditional Logit Model (1974) and the General Logit Model. The probability for an individual i to choose the alternative j is given by Dragos & Veres (2007) The General Logit Model can be written as: The General Logit Model: exp xijb xi b j Pij Pyi j j, k 0, 1, 2,..., m m exp x b x b P g j k 1 m k 1 exp exp ik g j g k i k Where y ij represents the qualitative dependent variable for an individual i to choose the j alternatives of choice as visit to 4 destinations (provinces) in Eastern region ( j 1);visit to 3 destinations (provinces) in Eastern region ( j 2 );visit to 2 destinations (provinces) in Eastern region ( j 3); visit to 1 destination (province) in Eastern region ( j 4 is Baseline Category), and x ik represents the independent variable for an individual i of the k site attributes. 3. Results From the secondary data collected in the year 2009, there were 12,352 Thai visitors and 7,717 foreign visitors. The data can be described in terms of mean, mode as preliminary statistical description, the regression results are also presented in terms of coefficients, elasticity values, the standard deviations of estimates, t-statistics and the significant level. The regression results are presented in the following table:

117 114 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 3 Double Log Demand Function of Thai visitors in Eastern region Model Independent Variables Mean Mode B or D Std. Error t Sig. 35 (Constant) D_Out_Provin ln_tc3_day Exp_On_Way 1,001-3, , Exp_Before 1,001-3, , income 10,001-15,000 10,001-15, quarter D_Bus D_Car reason Quality Good Good D_Package Vehicle E DISTANCE km. 179 km. 0.00E SIZE 6.01 persons 5 persons -3.00E reason E Infor_Friend reason D_Friend D_OBJ Cleanl_Lv Critical Critical Inter_Accom reason access_lv Critical Critical Infor_TV N_Trip Domicile D_OCCU Food Good Good D_Arrange Infor_Agent Domicile D_OCCU age years 30 years D_OBJ D_OBJ Dependent Variable: lntour_day R 2 = ; Adjusted R 2 = F = ; Sig. F = 0.000

118 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 115 Table 4 Double Log Demand Function of foreign visitors in Eastern region Model Independent Variables Mean Mode B or D Std. Error t Sig. 39 (Constant) ln_tc1_day D_Trian q provinces 3 provinces Inter_Reserve D_Car reason income $ 20,000-39,999/year $ 20, ,999/year Infor_Agent Family N_Trip 1.14 trip/year 1 trip/year D_Asia Infor_Others Inter_Accom reason SIZE 3.71 persons 4 persons Entrance_Fee E Cost_Trans E reason reason D_OBJ Inter_Trans D_OBJ D_OCCU Accomod 2, E Cleanl_Lv Critical Critical Shopping E D_OCCU reason hygiene_lv Warning Warning pollut_lv Warning Warning D_America Infor_TV Quarter reason D_OCCU N_Prov_in_Group 1.17 provinces 1 province Friends Food_Bever 2, E D_SEX Male Male Dependent Variable:lnTour_Day R 2 = ; Adjusted R 2 = F = ; Sig. F = While modes were used to represent the characteristics of the Thai and foreign visitors, means were used for the estimation of recreation values which differentiate the demand curves before and after the implementation of the tourism promotion program for the Eastern Region.

119 116 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University General Description: the visitors for Chonburi, Rayong, Chantaburi and Trat: Age of the majority is higher than 30 years of age, the information is acquired through friends. The purposes of visits are for tourism by traveling by cars and most of the visits are for a single destination. After the trip, Thai tourists expressed their high satisfaction with food and quality of accommodations while expressed their disapprovals on accessibility, cleanliness of local vehicles which need to be rapidly improved. Most of the foreign tourists travel to the Region once a year and visit at least 3 provinces in groups of 4 persons with their friends. After the trip, they expressed their concern with cleanliness and pollution at the destinations as acceptable but need minor improvement. In addition, they expressed their disapproval of the cleanliness of the local vehicles just the same as Thai tourists. From the regression analysis: The Double Log Demand Function for Thai tourists indicated that the factor of most influential affecting the tourist length of stay (ln Tour_Day) is the total cost of traveling (ln_tc3_day) which includes the opportunity cost estimated at 1/3 of daily wages. The total cost is negatively related with the length of stay. The second influential factor is the type of activities of temples visit (D_OBJ8) with positive relation with the length of stay. The third influential factor is the type of vehicles the tourists traveling with, it was the traveling by buses which is negatively correlated with the length of stay. The Double Log Demand Function for the foreign tourists indicated that the highest influential factor determining the length of stay (ln Tour_Day) is the use of train (D_Train). This factor is negatively correlated with the length of stay. This implies that the more the tourists use train the less will be visiting days as they will move on to other destinations The second influential factor is the type of arrangement as incentive tour from the employer (D_OBJ7). This factor is positively related to the length of stay. The third influential factor is the total cost of traveling excluding the opportunity cost. This factor is negatively correlated with the length of stay of the foreign tourists.

120 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 117 The derivation of recreational tourism value implied substantial higher benefit of the tourism than the promotion cost allocated to the budget for tourism development. (2.83 trillion baht versus 169 million baht, respectively). It is noted that, as the tourism promotion program through internet took place, the recreation demand of Thai tourists shifted to the right whereas that of foreign tourists shifted to the left. Hence, the tourism promotion program through internet enhanced more of only Thai tourists. The Approach of General Logit Model was employed to analyze the visitors in multiple sites model and the findings are shown in Tables 5 and 6. Table 5 The General Logit Model for Thai visitors at provinces in Eastern region Parameter Estimates Dependent Variable Thai visitors No. of provinces (No. of visited provinces in Eastern region) a B Std. Error Sig. Wald Exp(B) 4 provinces (j=1) There is only one Thai respondent chosen 4 provinces in Eastern region. 3 provinces (j=2) quarter access_lv Entertain [D_Out_Provin=0] [D_Bus=0] [D_Car=0] [D_Family=0] [Inter_no=0] [Inter_Accom=0] [Inter_Package=0] [Inter_Reserve=0] [Domicile2=0] provinces (j=3) quarter Exp_Before Exp_On_Way N_Trip Accommod

121 118 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University No. of provinces Dependent Variable (No. of visited provinces in Eastern region) a Thai visitors B Std. Error Sig. Wald Exp(B) Shopping Entertain Serv_Charge Miscellan [D_OCCU6=0] [D_OCCU7=0] [Infor_Agent=0] [Infor_Internet=0] [D_Car=0] [D_Friend=0] [D_Family=0] [Inter_no=0] [Inter_Accom=0] [Inter_Package=0] [Inter_Infor=0] [Domicile1=0] [Domicile2=0] [Domicile3=0] a. The reference category is: 1 visited province in Eastern region. Table 6 The General Logit Model for foreign visitors at provinces in Eastern region Parameter Estimates Dependent Variable Foreign visitors No. of provinces (No. of visited provinces in Eastern region) a B Std. Error Sig. Wald Exp(B) 4 provinces (j=1) There is only two foreign respondents chosen 4 provinces in Eastern region. 3 provinces (j=2) Tour_Day TC1_DAY Exp_Before Exp_On_Way [D_OCCU8=0] [Infor_Friend=0] [reason3=0] [reason6=0] [D_Trian=0] [Inter_Pack=0]

122 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 119 Dependent Variable Foreign visitors No. of provinces (No. of visited provinces in Eastern region) a B Std. Error Sig. Wald Exp(B) 2 provinces (j=3) income Tour_Day access_lv Exp_Before Exp_On_Way Clothes Entrance_Fee [D_OCCU3=0] [D_OCCU8=0] [reason3=0] [reason9=0] [D_Out_Provin=0] [D_Trian=0] [D_Car=0] [Inter_no=0] [Inter_Accom=0] [Inter_Pack=0] [Inter_Infor=0] [Loner=0] [Friends=0] [Family=0] [Colleague=0] a. The reference category is: 1 visited province in Eastern region. Table 5 shows that 1, to Thai tourists who visited three provinces per trip, they preferred to travel on their own cars as it was more convenient to visit different tourist sites. To those who visited two provinces per trip, they were likely to be retirees or farmers and preferred to travel on their own cars. 1 The case of visiting four provinces per trip was not analyzed as there was only one sample of Thai visitors in the case.

123 120 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Table 6 shows that 2, to foreign tourists who visited three provinces per trip, they preferred to travel by train and were likely to plan their trip and expense by gathering information from friends. To those who visited two provinces per trip, they were likely to travel with friends or family and booked their accommodation on internet. 4. Conclusion There are two implications in this study. Firstly, for Academic purpose, it is important to differentiate between the Thai and foreign tourists who visit the Eastern region at different points in time and involve with different types of activities. This might imply the possibility of executing tourism price discrimination or promotion of tourism with different programs of activities. Secondly, for policy recommendation, the government sector should work with the private sector in determining the policy, strategy and action plan to develop tourism sites and communities. It is suggested that the government improves the quality of public transportation, for example service and cleanliness on bus, and facilitates the access of visitors to tourism sites. It is also recommended that the government launches different tourism promotions to enhance more visitors all year round. The tourism promotions can be the fruit festivals and road show in countries with potential customers, like in China, Japan, South Korea, India and Russia. Promoting a MICE purpose in visiting the eastern region is another strategy to raise the number of visitors in off-peak period. The limitation of this study is the use of the primary data collected from other study in This set of data might be out-of-date and not collected to answer some specific research questions, such as, the visitors attention to visit several destinations in Eastern region under Tourism Promotion Program, and that the visitors do not differentiate the type of visit, such as, being a MICE arrangement or not. 2 The case of visiting four provinces per trip was not analyzed as there were only two samples of foreign visitors in the case.

124 STRATEGIC ECONOMIC ASSESSMENT ON THE TOURISM PROMOTION PROGRAM IN THE EASTERN REGION OF THAILAND 121 References Aniah, E. J., Eja, E. I., Otu, J. E., Ushie, M. A. (2009). Patronage of ecotourism potentials as a strategy for sustainable tourism development in Cross River State, Nigeria. Journal of Geography and Geology, 1 (2), Baimai, C. & Daniel, J. L. (2009). Market potential estimation for tourism in emerging markets. PASOS, 7 (3), Bell, K. P. & Strand, I. E. (2003). Reconciling Models of Recreational Route and Site Choices. Land Economics, 79 (3), Bukenya, J. O. (2002). Application of GIS in ecotourism development decisions: Evidence from the Pearl of Africa. Research paper. Morgantown: West Virginia University. Chen, N., Li, H., Wang, L. (2009). A GIS-based approach for mapping direct use value of ecosystem services at a county scale: Management implications. Ecological Economics, 68, Chen, W., Hong, H., Liu, Y., Zhang, L., Hou, X., Raymond, M. (2004). Recreation demand and economic value: An application of travel cost method for Xiamen Island. China Economic Review, 15, Dragos, C. & Veres, V. (2007). Romanian farmers market. A multinomial logit model approach. Original scientific paper, 25 (2), Font, A. R. (2000). Mass tourism and the demand for protected natural areas: A travel cost approach. Journal of environmental economics and management, 39, Habibi, F. & Rahim, K. A. (2009). A bound test approach to cointegration of tourism demand. American Journal of Economics and Business Administration, 1 (2), Loomis, J. B. (1995). Four models for determining environmental quality effects on recreational demand and regional economics. Ecological Economics, 12, Tisdell, C., Wilson, C., Nantha, H. S. (2008). Contingent valuation as a dymanic process. Socio-Economics, 37, Tsaur, S. H., Lin, Y. C., Lin, J. H. (2006). Evaluating ecotourism sustainability from the integrated perspective of resource, community and tourism. Tourism Management, 27, Wunder, S. (2000). Ecotourism and economic incentives an empirical approach. Ecological Economics, 32,

125 122 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC CORRIDOR OF GREATER MEKONG SUBREGION 1 Abstract Renu Sukharomana 2 Patcharawee Brahmawong 3 The East-West Economic Corridor (EWEC) and the Southern Economic Corridor (SEC) of the Greater Mekong Subregion (GMS) are development projects with the potentials to significantly affect the region in a variety of ways. This article attempts to tentatively answer which stakeholder countries will gain and which will lose from the repercussions of the corridors, by first reviewing on the modern history of China, Japan, and Thailand, and the development history of the corridors, then identifying the stakeholders, identifying the social, economic, and environmental impacts, and evaluating all the associated benefits and costs. Key Words: East West Economic Corridor, Southern, Economic Corridor, Greater Mekong Subregion 1. Introduction East-West Economic Corridor (EWEC) and Southern Economic Corridor (SEC) are part of Greater Mekong Subregion (GMS) Cooperation, a project initiated in 1992 with the support of the Asian Development Bank (ADB). ADB has aimed to enhance economic relations among the GMS countries, which include Cambodia, Laos, Myanmar, Thailand, Vietnam 1, and the Yunnan province and Guangxi Zhuang Autonomous Region of the Republic of China. There are 3 economic corridors pertaining to GMS Cooperation, namely North-South Economic Corridor (NSEC), East-West Economic Corridor (EWEC), and Southern Economic Corridor (SEC). This study focuses on the EWEC and SEC. 1 Academic paper partially based on a preliminary study in Socio-Economic, National Resource, and Environmental Impacts Research Projects for Thailand and the Neighboring Countries along the East-West Economic Corridors and the Southern Economic Corridors, funded by Thailand Research Fund. 2 School of Economics and Public Policy, Srinakharinwirot University 3 School of Economics and Public Policy, Srinakharinwirot University

126 EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC CORRIDOR OF GREATER MEKONG SUBREGION 123 The EWEC is a land route linking the Andaman Sea of the Indian Ocean with the South China Sea of the Pacific Ocean, starting from the Myanmar port city of Mawlamyine, passing through the Myawaddy-Mae Sod border crossing in Tak, Thai provinces in Central Thailand and Northeastern Thailand, the Mukdahan-Savannakhet border crossing in Mukdahan, Lao provinces, the Dansavan-Lao Bao border crossing, and the Vietnamese provinces along the R9, including the Vietnamese cities of Dong Ha and Hue, and ending at the port city of Da Nang. Diagram 2 Southern Economic Corridor Source: Asian Development Bank (2010) The SEC links Thailand, Lao, Cambodia, and Vietnam by 4 subcorridors as follows: 1) Central Subcorridor, starting from Bangkok (or Dawei if its deep sea port is operational), passing through Aranyaprathet-Poipet border crossing, Phnom Penh, Bavet-Moc Bai border crossing, Ho Chi Minh City, and ending at the port city of Vang Tau

127 124 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University 2) Northern Subcorridor, starting as the Central subcorridor but after Poipet running eastward passing Stungtreng in Cambodia, Pleiku in Vietnam, and ending at the port city of Quy Nhon in Central Vietnam. 3) Southern Coastal Subcorridor, starting from Bangkok, running along the coast of the Gulf of Thailand, passing Klongyai-Chamyeam border crossing, Prek Chak (Lork) - Ha Tien border crossing, Ca Mau city, and ending at the port city of Nam Can; and 4) Intercorridor Link, a North-South route linking EWEC and the three SEC subcorridors from Kaysone Phomvihane in Lao to Sre Ambel in Cambodia. To give a tentative answer to the question of who gains and who loses from EWEC and SEC, a review is conducted on the modern history of China, Japan, and Thailand and the development history of EWEC and SEC (Section 2), the nature of the stakeholders (Section 3), the social, economic, and environmental impacts (Section 4), and a discussion on the gainers and losers from EWEC and SEC (Section 5). The article is ended by a concluding session. 2. History of EWEC and SEC Emergence of EWEC and SEC is part of the continual modernization of Southeast Asia, propelled by both the domestic elites and outside powers, allegedly the ultimate beneficiaries of the modernization. This development process can be traced back to the Western Colonial Era. The Western Colonialism The Europeans first came to Southeast Asia in the 16th century with the incentives to trade with the natives for silk, spices, and other exotic goods and to spread Christianity by the missionaries. Starting by Portugal s conquest of the Sultanate of Malacca in 1511, the Netherlands followed and took over Malacca from the Portuguese in 1641 while Spain began to colonize the Philippines from the 1560s. The Dutch East India Company established the city of Batavia (now Jakarta) as a base for trading and expansion into the other parts of Java and the surrounding territory. As a late comer, the British based their operations at Penang and gradually expanded their Southeast Asian empire, by acting through the British East India Company. In 1819, Stamford Raffles established Singapore as a key trading post for Britain. In 1824, an Anglo-Dutch treaty demarcated the two countries respective interests in Southeast Asia. Up to then, the European countries had had limited influences over Southeast Asia, even for the subjugated lands. However, New Imperialism emerged in the mid nineteenth century, where the colonial powers managed to conquer nearly all Southeast Asian territories by forces. The Dutch

128 EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC CORRIDOR OF GREATER MEKONG SUBREGION 125 and British governments dissolved their respective East India Companies to take over the direct administrations of the colonies. By 1913, the British ruled Malaya, the northern Borneo territories, and Burma, the French controlled Indochina, the Dutch occupied the Netherlands East Indies, and the Portuguese managed to hold on to Portuguese Timor. As for Spain, the Philippine revolutionaries declared independence in 1898 but Spain ceded control over the country to the United States as a result of the Spanish-American War. Colonial rule had a profound effect on Southeast Asia. The colonial powers attempted to implement institutional, political, or cultural changes to the region to facilitate their access and utilization of the natural resources and the regional markets. The colonial powers developed the agriculture, mining, and export sectors of the colonies. Increased labor demand resulted in mass immigration, especially from British India and China, which brought about massive demographic change. The introduction of Christianity also affected societal changes, notably for the Philippines. The institutions for a modern nation state, namely a state bureaucracy, courts of law, printed media, and modern education system, brought into existence a new class of intellectuals. This intelligentsia led their countrymen in their aspiration for independence and self-governance. Since the first half of the 20 th century, rising nationalism in the colonies threatened to upset the colonial powers controls. The Three Independents Greatly affected by the power politics of the Western powers during the colonial period, Thailand remained independent from foreign rule, joining China and Japan as the only three Asian countries not colonized by Western powers. The contemporaneous history of each of the three countries deserves to be briefly mentioned here. The Sick Man of Asia was a name given to China by those observing the country during the decline of the long-reigning Qing Dynasty ( ) and the subsequent turmoil. Despite the country s poor condition, China was too vast and culturally advanced to be ruled by a single or few colonial powers. After the promulgation of the republic (1911) by revolutionaries led by Dr. Sun Yatsen, and the subsequent Warlord Period ( ), the Northern Expedition ( ), and the Long March ( ), only the nationalist-capitalist Kuo Min Tang and the Communist Party remained as the contenders for dominance over the country. Both made a truce with each other when the Japanese Imperial Army invaded mainland China in July 1937.

129 126 Economics and Public Policy 3 (6) : Copyright 2554 School of Economic and Public Policy Srinakharinwirot University Having been under the isolationist-conservative regime of Tokugawa Shogunate for three centuries, Japan was finally forced by the American fleet under Matthew C. Perry to abandon isolationism in 1853 (Bakumatsu). Afterwards, the subsequent social and political reorganization, marked by Meiji Restoration, and the economic modernization during the Meiji period strengthened Japan against outside aggression. In the early 20 th century, Japan aspired to be a regional and colonial power herself. The influence and size of Zaibutsu, the industrial and financial business conglomerates, allowed government control over significant parts of the Japanese economy. The resource-rich China had been the prime target for the industrialized Japanese Empire. After Mukden Incident (18 September 1931) and the subsequent conquest of Manchuria, the Japanese placed Puyi, the last Qing Emperor, as a constitutional monarch of her satellite state of Manchukuo. The Marco Polo Bridge Incident (7 July 1937), allegedly incited by the Japanese, brought about invasion of mainland China. The Kingdom of Thailand adapted to cope with outside threats since the early Ratanakosin Era (beginning with the establishment of Bangkok in 1782), starting with relatively liberal trade policies during the reign of Rama III ( ), followed by reformation of the state religion Buddhism and adoption of the scientific method and others of the Western culture during Rama IV ( ). The kingdom was then greatly modernized by the Western-educated Rama V, whose reign ( ) saw slavery and serfdom being abolished while a strong central bureaucracy being established, in effect transforming the traditional feudal state into an absolute monarchy. Construction of railroads and other infrastructure paved the way for economic transformations, while the Westernstyled education exposed the younger generation to new political ideologies and economic dogmas. World War I, deficit spending during the reign of Rama VI ( ), and the Great Depression adversely affected the finance of the kingdom under Rama VII ( ). The 1932 Revolution by Gana Ratsadon (People s Party) established a constitutional monarchy and ushered in the era of elitists struggling for political power with occasionally observable outside interferences. World War II and the Cold War In the late 1930 s, international conflicts led to renewed confrontations in Europe and East Asia. During this period, the Japanese Empire expanded her dominance or sphere of influence toward the resource-rich Southeast Asia. To sustain her Empire in East Asia, mostly over areas

130 EAST-WEST ECONOMIC CORRIDOR AND SOUTHERN ECONOMIC CORRIDOR OF GREATER MEKONG SUBREGION 127 conquered from China and coerced from the French Indochina, Japan needed to secure the strategic resources of iron, steel, other metals, rubber, and petroleum, all of which were placed in a coordinated embargo by the US, the UK, the Dutch East Indies, and Australia to deter Japan s further aggressions. In 1940, the Japanese government declared the Greater East Asia Co- Prosperity Sphere, a self-sufficient autarky bloc of Asian nations freed from Western powers and led by the Japanese. 2 In reality, the peoples of the countries under the protection of the Japanese Empire suffered oppressive treatments. With only two-year of oil reserve 3, Imperial Japan simultaneously attempted diplomacy to lift the embargo and planned for a full-scale, region-wide assault on the Allied. After diplomacy had repetitively failed, Japan attacked Pearl Harbour on December 7, 1941 and invaded Thailand and Malaya on the following day, opening the Pacific Theatre of World War II. Diagram 3 Colonial Powers of the 1939 Pacific Source: