Trade policy and the structure of incentives in Thai agriculture.(Report)

I. Introduction and Summary

Thailand is a major net agricultural exporter and its agricultural trade policy is dominated by this fact. The list of agricultural exports includes many of the most important agricultural products produced and consumed within the country, including the staple food, rice, exports of which account for between 30 and 50 per cent of its total output, but also cassava, sugar, rubber and poultry products. The list of imported agricultural commodities is much shorter. Maize has been a net export in most years but was a net import for some years in the 1990s. Soybean was a net export for several decades, but since the early 1990s it has become a net import. Palm oil has fluctuated between a net import and a net export but has been a net export since the late 1990s.

Historically, Thailand's large agricultural surplus has led to a degree of policy complacency regarding the agricultural sector (World Bank 2000). Agricultural importing countries are typically concerned about food security and raising agricultural productivity to reduce import dependence. In Thailand, these matters have not been a significant concern, although stabilizing food prices for consumers has been a recurrent theme of agricultural pricing policy. Until the 1980s, agricultural exports were viewed as a source of revenue for the central government. Unlike manufacturing, traditional agriculture was not seen as a dynamic sector of the economy which could contribute to rapid growth. Because the price elasticity of supply of most agricultural products was very low, at least in the short run, their production could be taxed heavily without producing a significant contraction of output. (1) Moreover, most agricultural producers were impoverished, poorly educated and politically unorganized. Each of these statements applied in particular to rice, so taxing agriculture, and especially rice, was politically attractive, and rice exports were indeed taxed until 1986.

With greatly increased incomes per person, rapid urbanization and the move to more democratic political institutions, policy has shifted away from taxing agriculture and towards a more neutral set of trade policies. This change has almost certainly owed more to politics--the political necessity of finding ways to attract the support of the huge rural electorate and the desire of the urban electorate for better economic conditions for the farm population--than to a desire to liberalize agricultural trade for the efficiency-based reasons that economists emphasize. But the move away from taxing agriculture has not progressed far in the direction of subsidizing it, for one key reason. The fact that so many of the important agricultural commodities are net exports has made subsidizing agriculture problematic, inhibiting what would otherwise have been strong political pressure to protect Thai farmers had the commodities they produced been net imports.

Thailand is an active member of the Cairns Group of agricultural exporting countries, but while its agricultural trade is relatively liberal, it cannot be described as a free-trading country with regard to agricultural commodities. Within Thailand, opposition to agricultural import liberalization is strong in the cases of soybeans, palm oil, rubber, rice and sugar. The measures employed include non-tariff instruments permitting a high degree of discretion on the part of government officials. The set of import controls includes import prohibitions, strict licensing arrangements, local content rules and requirements for special case-by-case approval of imports. The commodities for which these restrictions are applied include the five mentioned above and also onions, garlic, potatoes, pepper, tea, raw silk, maize, coconut products and coffee.

The inclusion of rice in this list of commodities subject to import restrictions may seem strange. Thailand is the world's largest exporter of rice and is undoubtedly one of the world's most efficient producers. Why should its rice industry require protection from imports? Imports of rice are in fact prohibited unless specifically approved by the Ministry of Commerce. The Ministry of Agriculture and Cooperatives vigorously opposes any liberalization commitments with regard to rice. The reasons apparently relate to the Ministry's wish to keep its options open with respect to rice policy in the event that market conditions should change unexpectedly. Sudden changes in the price of rice can have far-reaching political consequences. The domestic rice market operates almost entirely without government intervention, but the instruments for potential intervention are ever ready.

A lesser reason for the import controls on rice is that, as with most agricultural commodities, "rice" is in fact a highly differentiated commodity. Not all grades of rice are produced efficiently within Thailand and the government wishes to protect domestic producers from imports of grades of rice that are closer substitutes for local grades on the consumption side than they are on the production side. Lower grades of rice produced in Vietnam but not in Thailand are an important example.