Industrial policy or completely "free" markets?
Questions begin to be asked as a factory closes
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The sudden closure of the Thai Silp's clothing export factory left 5,000 factory workers without jobs yesterday.
Is recent baht appreciation to blame or was the factory just uncompetitive and unprofitable, a business doomed to fail eventually anyway?
The factory closure certainly brings the issue of baht appreciation into the public limelight.
Industrial Policy
Should the government maintain a policy of central bank independence and stick unswervingly to its inflation targeting and long-term control of inflation?
Or should it pursue an industrial policy in the manner of Japan and South Korea's export-driven growth?
Dani Rodrick of Harvard's John F. Kennedy School of Government has written a paper Industrial Development: Stylized Facts and Policies (August, 2006). Several of the paper's conclusions have relevance to Thailand's current baht appreciation predicament.
Industrial policy might protect established export industries like the garment industry while at the same time nurturing new export industries higher up the value chain like automobile parts manufacturing. Rodrick finds that:
"...governments that have placed large weight on competitiveness in their conduct of monetary and exchange rate policies have indeed managed the real exchange rate at reasonably competitive levels...China and India are a key exhibit in this respect." (Rodrick, 2006, 23)
Furthermore, Rodrick finds that:
"...a strict inflation targeting regime of the type that many countries have adopted (e.g. Chile, Brazil, Peru, South Africa, Turkey) is not particularly suited to the needs of industrial development and growth..." (Rodrick, 2006, 23)
Finally, he suggests a "two-pronged" strategy that both helps traditional exporters and nurtures new exportables:
"The preceding discussion points to a two-pronged strategy in support of industrial development. What is needed is both a robust industrial policy targeted at new exportables, and a supportive exchange-rate policy that promotes production of tradables across the board. Without a relatively stable and competitive exchange rate, it is practically impossible to induce investment and entrepreneurship in tradables of any kind. But without more directly targeted industrial policies, exchange rate policies alone cannot be a very powerful tool for promoting diversification. A cheap domestic currency helps both traditional exporters and non-traditional ones. The secret of the success of high-growth economies lies in a combination of these two types of policies." (Rodrick, 2006, 24)
For further reading, don't forget the work of Michael Porter [Five Forces] on the competitiveness of countries.
During the Thaksin administration Michael Porter was hired as a consultant on Thailand's national competitiveness. Initiatives like this were certainly one of Thaksin's positive legacies to Thai economic development.
Michael Porter's presentation slides on Thailand and miscellaneous reports contain much information relevant to Thai industrial policy.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. How many jobs do clothing exporters claim could be lost from baht appreciation?
2. What percentage would these job losses be of total employment in the garment and related sectors?
3. What are some industries upstream from the garment industry?
4. How many workers lost their jobs as a result of Thai Silp's factory closure?
5. What does Thai Silp blame the plant closure on?
6. How could baht appreciation lead to "shrinking revenues and rising costs" for the company?
7. How many factories have closed during the last year, according to industry estimates? How large were these factories?
8. Why did the Thai Silp factory close?
9. Which industries have been negatively affected by the baht appreciation?
10. Which industries have maintained rising sales in the face of baht appreciation?
11. Do the problems that the garment sector faces date to before the recent baht appreciation?
12. Does an industry's dependence on domestic inputs into production make it more vulnerable to baht appreciation?
13. Is Thai Silp blaming the factory closure on baht appreciation just PR purposes for its own gain? Or is the baht appreciation really at the heart of the company's problems? (Express your opinion)
Bangkok Post Article July 13, 2007
INDUSTRY & EXPORTS / PRESSURE FROM STRONG BAHT'300,000 garment jobs could be lost'
Exporters must lift competitivenessPHUSADEE ARUNMAS & DARANA CHUDASRI
Up to 300,000 jobs in the apparel industry could be lost if Thailand's currency continues to strengthen, according to local exporters. Phongsak Assakul, president of the Thai Textile Manufacturing Association, said the apparel industry was facing a genuine crisis that would affect the 1.06 million people who work in the weaving, textile and garment sectors.
"The impact [of a stronger baht] could spread to working families as well as upstream industries like yarn and dyeing," said Mr Phongsak, who is also a vice-chairman of the Thai Chamber of Commerce.
The garment exporter Thai Silp South East Asia Import Export Co closed its doors on Tuesday, with executives blaming the stronger baht for its growing business woes. Some 5,000 workers at the Samut Prakan factory have rallied to protest against the closure.
Mr Phongsak said the textile and garment industries had been under pressure from the stronger baht since last year. Many firms face shrinking revenues and rising costs.
The baht has gained 7% to the US dollar this year and 18% since 2006.
Wallop Witanakorn, secretary-general of the Thai Garment Manufacturers Association, said smaller firms would face greater difficulty in coping with the stronger baht due to limited financial support and resources.
He cited a report by the Thailand Textile Institute, which said that 109 small textile factories had closed since last year.
But policymakers said the burden was on businesses to improve operations and boost competitiveness to survive.
Finance Minister Chalongphob Sussangkarn said the closure of the Thai Silp factory was not due to the baht.
"The reality is that the factory closed because it failed to recognise that we can no longer depend on cheap labour to compete overseas," he said.
Tarisa Watanagase, the governor of the Bank of Thailand, echoed those comments. "[Thai Silp] lost its overseas market to competitors in Thailand, not to competitors in other countries," she said.
Still, exporters are facing financial pressure due to the stronger baht.
Dusit Nontanakorn, another chamber vice-chairman, said the 18.8% growth in exports recorded in the first five months stemmed mostly from the automobile, electronics and electrical appliance sectors, all of which were dominated by foreign investors.
Local firms in the garment, cement, poultry and fisheries sectors had all reported flat or declining sales, he said.
The Thai Chamber of Commerce estimates that for every one-baht appreciation against the dollar, export revenues will decline by 10 to 15 billion baht, or 0.2% to 0.3% of gross domestic product.
Charl Kengchon, an economist at Kasikorn Research Institute, said labour-intensive industries dependent on domestic materials such as agriculture, fisheries and textiles had been hardest hit by the stronger baht.
He agreed that sectors such as textiles and garments had been facing growing pressure to become more competitive for some time.
Export earnings from the textile sector, however, have fallen steadily over the past several years, with growth of just 1.4% in 2006 from 4.2% in 2005.
Textile exports declined 0.3% in the first five months of this year from last year. Garment exports declined 5.7% year-on-year in the same period, compared with growth of 2.1% for all of 2006 and 1.9% for 2005.
"The numbers suggest that the garment sector has been facing problems for some time. Companies haven't raised their competitiveness, and the baht is now complicating the issue," he said.
Exporters with heavy import content have been relatively less affected by the appreciation of the currency as the stronger baht means lower costs for imported materials.
Dr Charl said the agriculture sector, which was wholly reliant on domestic materials, had been less affected by the baht than many believed, with growth in the first five months of 15.3% in dollar terms and 4% in baht terms.
"Thai agricultural exporters have been lucky that world demand has remained strong and key competitors in the region have had problems with their own crops."
Vocabulary (in discussion above)
apparel - (formal) clothing
apparel industry - the clothing industry
upstream - up the river, towards the source of the river
upstream industries - industries that supply inputs to production, a whole "supply chain" of industries producing parts of greater complexity, for for example, going backwards up the chain from the car to the car door to the steel, glass, and electronics in the car door, etc....
Thai Chamber of Commerce - a non-profit institution to promote trade, industry, agriculture, finance and economy in Thailand and to assist members in "solving business operational problems in order to protect benefits of the country as a whole," founded in 1933.(Source; See website)
Thai Silp, Thai Silp South East Asia Import Export Co - (See website, about page, both pages cached by google)
coping with - dealing with a problem
Thailand Textile Institute - organisation founded in 1996 with the goal of developing Thailand's Textile Industry for competitiveness in the global textile market (Source; See website)
Kasikorn Research Institute - Kasikorn Bank's research arm that provides business intelligence and economics information to paid subscribers (See website)
labour-intensive industries - industries where production uses more labour compared to capital (See The Economist)
exporters with heavy import content - exporters whose products contain a lot of imported parts (for example, an automobile assembled in Thailand contains a lot of sophiticated parts from Japan)
rely on - need, depend on
wholly reliant on - need and can't function without, completely dependent on
Answer Key:
1. How many jobs do clothing exporters claim could be lost from baht appreciation?
300,000 jobs, they claim.
2. What percentage would these job losses be of total employment in the garment and related sectors?
29%. There are 1.06 million employees in sectors related to the clothing sector: the weaving, textile and garment sectors, so (300,000/1.06 million) is about 29%.
3. What are some industries upstream from the garment industry?
Yarn and dyeing are cited, but textile and weaving would also seem to be located upstream to the garment industry since they supply inputs that are used to produce garments.
4. How many workers lost their jobs as a result of Thai Silp's factory closure?
5,000 workers.
5. What does Thai Silp blame the plant closure on?
Baht Appreciation.
6. How could baht appreciation lead to "shrinking revenues and rising costs" for the company?
a. Exchange rate appreciation ( a more expensive baht) makes Thai exports more expensive and less competititive on international markets, reducing exports and "shrinking revenues," at least in theory, but this varies from industry to industry. There are other factors besides the exchange rate including: 1. world trends in demand in each sector, 2. productive capacity of other competing countries, and 3. whether the exchange rates of competing countries such as China, India, and the Phillipines have also appreciated.
b. Even though exports measured in dollars have jumped, they may not have jumped in the apparel sector which has long been uncompetitive.
c. Imported machinery replacements in factories might have caused "rising costs" for the company. Without specific details, it's hard to know what exactly he's talking about or whether his claim is valid or not.
Export_Revenue(in baht) = Export_Sales(+Exchange_Rate) X Dollar_Price X Exchange_Rate
Export_Revenue(in dollars) = Export_Sales(+Exchange_Rate) X Baht_Price X (1 / Exchange_Rate)
Baht appreciation means that (1 / Exchange_Rate) is increasing while Export_Sales(+Exchange_Rate) is decreasing.
Exchange_Rate = Baht / Dollar (= 33 baht/dollar, for example)
Exchange rate appreciation means Exchange_Rate decreases (means, for example, the baht moves from 40 to 38 to 36 to 34...)
7. How many factories have closed during the last year, according to industry estimates? How large were these factories?
109 small factories have closed, according to industry estimates, but the article does not say how small these factories were. They could employ a few people like many factories do. (Read a previous article about such a factory)
8. Why did the Thai Silp factory close?
The company and the industry argue that the factory closed because of baht appreciation, but Finance Minister Chalongphob claims that the factory closure was not due to baht appreciation, but rather a failure "to recognise that we can no longer depend on cheap labour to compete overseas." The garment industry has long been uncompetitive and vulnerable.
9. Which industries have been negatively affected by the baht appreciation?
a. The garment, cement, poultry and fishery industries have all experienced "flat" or "declining sales."
b. Labour-intensive industries that depend on domestic materials such as agriculture, fisheries and textiles are the industries "hardest hit by the stronger baht."
10. Which industries have maintained rising sales in the face of baht appreciation?
Sectors "dominated by foreign investors" such as the automobile, electronics and electrical appliance sectors.
11. Do the problems that the garment sector faces date to before the recent baht appreciation?
Yes, the textiles and garment sectors have long faced "pressure to become more competitive."
("The numbers suggest that the garment sector has been facing problems for some time. Companies haven't raised their competitiveness, and the baht is now complicating the issue")
12. Does an industry's dependence on domestic inputs into production make it more vulnerable to baht appreciation?
Yes and no, dependence on domestic materials seems to have negatively affected the agriculture, fisheries and textiles industries. Industries with lots of Foreign Direct Investment such as the automobile, electronics and electrical appliance sectors, often rely on imported inputs into the production process, the automobile industry is a good example of this with only final assembly of vehicles taking place in Thailand. (Recent increases in local part content would be a good research project. 100% locally produced part content was an objective that South Korea set and then over several years of hard work proudly met.)
("Exporters with heavy import content have been relatively less affected by the appreciation of the currency as the stronger baht means lower costs for imported materials.")
Despite being heavily reliant on domestic inputs to production ("domestic materials") the agriculture sector hasn't been that affected by baht appreciation because "world demand has remained strong and key competitors in the region have had problems with their own crops."
13. Is Thai Silp blaming the factory closure on baht appreciation just PR purposes for its own gain? Or is the baht appreciation really at the heart of the company's problems? (Express your opinion)
If domestic owned sectors suffered while foreign owned sectors flourished during baht appreciation, should the sheltering or protection of domestically owned sectors be pursued as a national security measure? (Express your opinion)
