Report No. 6801-TH Thail"and: Agro-Industrial Diversification: Issues and Prospects October 21, 1987 Country Operations Division Country Department 2 Asia Region FOR OFFICIAL USL ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the p eformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS As of May 1987 Baht = US$0.0390 Baht 25,618 = US$1.00 Fiscal Year October 1 to September 3 Weights and Measures 1 hectare (ha) = 2.47 acres 6.25 rai List of Acronyms BAAC Bank for Agriculture and Agricultural Cooperatives BOI - Board of Investment BOT Bank of Thailand DCP - Department of Cooperative Promotion DOA - Department of Agriculture DOAE - Department of Agricultural Extension FPO - Fiscal Policy Office (in MOF) IFCT - Industrial Finance Corporation of Thailand KTB - Krung Thai Bank LNO - Lam Nam Oon MBK - Mah Boonkrong Group of Companies MOAC - Ministry of Agriculture and Cooperatives MOF - Ministry of Finance NESDB - National Economic and Social Development Board OAE - Office of Agricultural Economics O&M - Operation and Maintenance RID - Royal Irrigation Department Thai-JACC - Joint Agricultural Consultative Corporation WUG - Water User Group WUO - Water User Organization FOR OFmFCIAL USE ONLY THAILAND AGRO-IITDUSTRIAL DIVERSIFICATION ISSUES AND PROSPECTS Table of Contents Page No. EXECUTIVE SUMMARY . i - viii It INTRODUCTION ... o ................. 1 II. OVERVIEW OF THE DIVERSIFICATION ISSUES .............. 5 A. The Challenge Facing Tb-'iland's Agro-Industrial Sector *b... ..- .... ......'... .-.. .... ... 5 Options for Increasing Agricultural Incomes #.. 7 B. Agro-Industrial Diversification ..-.............. 8 Government Role in Agro-Industrial Diversification ... ............ .............. 19 C. Intensification of Agricultural Production ...... 21 Policies for Yield Intensification ............ 24 D. Commodity Diversification and Labor Migration ... 27 III. GOVERNMENT INVESTMENT AND SUPPORT SERVICES FOR AGRIBUSINESS DIVERSIFICATION .......... ......., 31 A. Promotion Framework ..... ............. ........... 31 B. Agricultural Research and Extension Services .... 37 Agricultural Research ......................... 37 Agricultural Extension Services ......o......... 41 C. Irrigation Command Areas ........................ 43 D. Management of Raw Material Supplies ............. 50 Models of Supply Management ................... 50 Potential for Managed Production Programs for Commodity Groups ft ft ft ft ft ft f ft ft ft ft ft ft t ft.ft.ft.ft.ft.ft. 54 Promotion of Contract Farming ftftftftftftftftftftftftftftftftft 57 IV. MACROECONOMIC POLICIES AND INCENTIVES FOR AGRO- 59 INDUSTRIAL INVESTMENT ................ A. Changes in the Demand for Food .................. 59 B. Macroeconomic, Trade and Investment Policies .... 62 The System of Protection ..... ................. 63 Export Promotion Measures .................... 71 BOI Investment Iklcentives .................,... 74 C. Marketing Policies . ................. ft ft ft 81 Limited International Markets and Trade Restrictions ......... .......... .............. 82 Improvements in Domestic Market Reliability ... 84 Commodity Exchange ......... ........ . .... 0 84 Domestic Quality Control ...................... 89 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2- Page No. D. Issues in Finance and Credit . ................... 92 Role of Lending Institutions ...........,**** 93 Capital Market Development .................... 100 Recommendations ...... ......................... 101 ANNEXES 1. Production Potential and Market Prospects for Traditional Agro-Industrial Commodities ............. 105 2. Production and Markets for Nontraditional Agro-industrial Products ****........................ 114 3. Announcement by the Ministry of Agriculture and Cooperatives (translation) . ......................... 121 4. Public Sector Initiative - Lan Nam Oon Model ........ 14] TABLES IN TEXT 2.1 Rates of Growth of Agricultural GDP and Agricultural Income in Real Terms, 1960-85 ...... 6 2.2 Shares of Agricultural Commodities in Agricultural GDP ............................ . 9 2.3 Net Returns of Crops to Farmers .............. . 11 2.4 Gross domestic Product Originating from Manufacturing .... ................. ....... 13 2.5 Selected Principal Agro-Industrial Exports ...... 16 2.6 Market Sizes of Selected Nontraditional Agricultural Commodities, 1984 ................... 17 2.7 Evolution of Land and Labor Productivity in Crops and Livestock, 1960-85 ...... .................... 22 2.8 Costs and Prices of Seeds, 1983 .............. ... 26 2.9 Employment by Sector, 1960-85 , ................. 28 2.10 Rates of Growth of Value Added per Worker . by Sector .......... .............................. 29 3.1 Government Research Expenditures by Commodity and Commodity Shares in Agricultural GDP, 1984 ...... 38 3.2 Planted and Irrigated Areas in Selected Irrigation Proiects: Crop Year 1984/85 .................... 46 4.1 Income Elasticities of the Demand for Cereals, 1968-80 ....a¢... ... ........ 61 4.2 Indicators of Nominal Protection at the Input- Outpuit Sector Level - 1981-85 ...... 64 4.3 ECfective Rates of Protection - 1981-86 ......... 67 4.4 Number of BOI-Promoted Projects by Type of Activity, 1980-85 ............................. 76 4.5 Selected Ratios of BOI-Promoted Firms ..,....., 77 4.6 Commercial Banks: Agro-Industrial Credit ..,,.... 94 4.7 Total Agro-Industrial Credit from Commercial Banks and BAAC . 97 4.8 Resources of BAAC ...*,*.........,,,,,,,. 98 -3- Page No. TABtE IN ANNEX I I Trends in the Dollar Prices of Traditional Agricultural Exports ........................... 106 TABLES IN AN'EX 2 1 Commodity Price Indices for Selected Non- traditional Agro-industrial Products, 1975-85 .... 115 2 Production, Planted Areas and Trade for Selected Nontraditional Crops, 1984/85 ..... 116 3 Seed Requirements and Production, 1984 ........e*. 121 STATISTICAL ANNEX TABLES 1 Gross Domestic Product at 1972 Prices by Sector of Origin - 1960-85 143 2 Manufacturing GDP - 1970-85: Values, Shares and Growth Rates ....... .. 144 3 Value Added of Food, Beverage and Tobacco at Current Prices 145 4 Gross Domestic Product Originating from Agriculture at 1972 Prices 146 5 Selected Principal Exports - 1970-85 ............. 147 6 Selected Principal Exports - 1970-85: Shares and Growth Rates in Current Prices ......,......... 148 7 Average Yields for Major Crops 149 8 Nominal Tariff Rates and Trade Values - Agricultural and Agro-processing Products 1SO 9 Nominal Tariff Rates - Selected Agro-Industry Inputs 155 10 Numbers of Agro-Industry Firms Granted Promotion ' Certificates and Starting Operations - 1960 to November 1986 156 MAP IBRD 17371 R ..................................... 158 FIGURES 1 Shares of Manufacturing GDP ...................... 14 FOREWORD The preparation of this report benefitted greatly from the assist- ance provided by the Royal Thai Government. In particular, the authors would like to thank officials in the NESDB, the Ministry of Agriculture and Coopera- tives, the Ministry of Finance, the Ministry of Commerce, the Ministry of Industry and the Bank of Thailand for their help in providing data and expla- nations concerning agro-industry. The report was prepared by a Bank Mission which visited Thailand from September 8 to September 27, 1986. The mission led by Mr. R. Bonnel comprised of Mrs. Lazarus (IFC); Messrs. M. Joshi, C. Lewis, C. Teng, S. Thada-Thamrongvech (World Bank); and P. Brimble and A. Zola (Consultants). The report was discussed with the Government of Thailand in August 1987. EXECUTIVE SUMMARY 1. Compared to other developing countries, Thailand's agro-industry is a remarkable success story. This is all the more impressive given the background of depressed world export markets and growing protectionism. There are four reasons for past success. First, Thai farmers have demonstrated an ability to respond quickly to changes in market conditions. Second, Thai farmers, processors and merchants have provided the capital, technical and marketing expertise required to turn market potential into real economic achievement. Third, government investment was focussed on infrastructure development, particularly road and irrigation facilities, and the breeding of improved crop varieties (especially irrigated rice and corn). And fourth, the Government has largely avoided counter-productive efforts to displace private initiative. 2. This policy framework has made it possible for Thailand's agro- industrial sector to evolve rapidly in response to changes in world demand. This is reflected in the rapid growth of Thailand's nontraditional exports, and particularly seafood and fish products, which in 1986 became Thailand's main agro-industrial exports. The Challenge for the Future 3. ThaMland's agricultural growth has been severely affected by the 1980-86 sharp decline in world agricultural prices and the increased import barriers affecting some of the agricultural exports. Nevertheless, Thailand's recent successes in "nontraditional" export markets indicate that Thailand has the potential to increase its agricultural growth by better exploiting existing market opportunities for nontraditional commodities. But how to achieve this objective is a matter of considerable debate. This report attempts to contribute to the current debate by focusing mainly on the potential for increasing the production of agro-industrial crops. As a consequence, the Report discisses the main problems encountered by agrobusiness in research, production, processing and marketing with a view to identifying government's role in addressing them. 4. Based upon a review of 21 nontraditional commodities that were selected for investigation in collaboration with the National Economic and Social Development Board, the Report's main conclusion is that Thailand has as excellent potential for increasing the production of several nontraditional agro-industrial commodities in irrigation command areas. For this reason, most of the Report's recommendations are directed towards improving the use of existing irrigation command areas. Since irrigation areas currently cover only a small percentage of the total agricultural land, there is also a need to improve the income of farmers in rainfed areas. Although the Report does not address explicitly this issue, some of the report's recommendations would lead to increase farmers' income in non-irrigated areas. The most important one concerns the livestock sector where there is a need to remove current restrictions on private sector activ:tie4 and develop farming systems which would be integrated with livestock. - ii - 5. Since opportunities also exist for Thailand to increase the production of traditional and nontraditional crops by capturing new markets and increasing domestic processing, it would be highly beneficial for farmers' income to implement policies that have neutral effects among commodities rather than policies that would only promote new commodities at the expense of traditional ones. Moreover, experience in Thailand and elsewhere shows that government decision-make.-s are rarely successful at picking "winners" in terms of new products with particularly high potential or old products lines which should be preserved. A promising approach would thereby consist of removing current market constraints and establishing with the private sector the policy framework and infrastructure needed to increase agro-industrial growth and thereby farmers' income. Agro-industrial Diversification 6. Currently, besides external market constraints affecting exports, the most important domestic constraints are: (a) the lack of crop varieties that are adapted to the specific requirements of export markets and processors; (b) the irrigation infrastructure which is not well suited to the cultivation of non-rice crops; (c) the low level of agricultural yields which often result in high production costs; and (d) limited incentives for domestic processing and production of several commodities due to government restrictions on private investment. 7. To address, these constraints the Report identifies five areas where government measures would be crucial for increasing the range and amount of nontraditional commodities produced in Thailand. These measures concern institutional changes; investment in research, extension and irrigation, agricultural intensification; and the system of incentives. They are discussed in the following paragraphs. 8. Institutional Changes. The objective of these changes would be to improve government support services in order to facilitate private sector initiatives to cultivate agro-industrial crops. Specific measures would include: (;) increasing the coordination among government agencies as well as between government agencies and the private sector; and (ii) strengthening linkages between farmers and processors by promoting contract farming for the cultivation of high value crops. These measures would mainly concern agricultural research and extension and irrigated areas as discussed below. 9. Agricultural Research and Extension. To develop the varieties needed for export markets and domestic processing, pri.'ate and government research will have to increase. However, it will take time before the recommended increase in government expenditures on new commodities produces results that would be useful to farmers. To compensate for this lag, the Government may want to diffuse the agronomic knowledge being generated by - iii - succesful farmers and private firms to other farmers. This policy, which is being applied by the Department of Agricultural Extension (DOAE), would make it possible for DOAE to accelerate the iden%ification and selection process of new crop varieties. Key measures would be to set up demonstration plots for new commodities, carry out applied research in farmers' fields, and closely associate private firms which would be processing the new commodities to field tests and trials. 10. Irrigation Infrastructure. In order to increase the supply of nontraditional crops, the amount and consistency of water delivery in irrigation command areas will have to improve. This would require an increase in government investment to modernize thc main canals, and if economically justified, to install a tertiary irrigation network for non-rice crops in selected parts of a given irrigation project area. For equity reasons and to recover the investment and maintenance costs of the modernization program, the Government may want to levy water charges. 11. As a complementary measure the Report recommends that institutional changes be carried out in the irrigation project areas. To initiate such changes, the Report suggests that a policy statement outlining the role of each government agency operating in irrigation command azea be prepared at the ministerial level. Such an exercise would involve the Ministry of Agriculture and Cooperatives, the National Economic and Social Development Board, and the Joint Public-Private Sector Consultative Committee. The objectives of this policy statement would be to indicate the respective roles of the various ministerial departments involved in irrigation areas and the support services they could provide to the private sector. As discussed in greater detail in the Report, these services should be differentiated according to the regional level of economic development. As a first step, the Report recommends to clarify the current situation of Water User Associations and Water User Groups by assigning to the Royal Irrigation Department (RID) the task of setting-up Water User Organizations (WUOs) in irrigation command areas and providing a clear link between WUOs and the management of water. A second area which would continue to require government assistance is farmers' training concerning in-field and on-farm water management, which could be organized by the Department of Agricultural Extension through the Community Development Department. Finally, a close working relaEionship would have to be established between the private sector and RID engineers. Its objectives would be to determine which sites would be chosen for the production of specific crops and guarantee water delivery to selected areas within project sites. As argued in the Report, the implementation of these measures would result in the effective promotion of contract farming and would strengthen linkages between farmers and processors. 12. Agricultural Intensification. Removing constraints that are hindering a shift in production to higher value crops would help improve farmers' income. EqualLy important would be the implementation of measures that wotuld lead to higher yields and increase the competitiveness of these new commodities in world markets. To achieve this, there is a need not only to increase the availabiliLy of high-y-alding seeds and develop technology packages adapted to Thailand's soil and climate, but also to increase the incentives for farmers to adopt the resulting yield-increasing technology. In - iv - the past such incentives were lacking due to the lack of a consistent supply of irrigation water during the dry season, the high cost of fertilizer, farmers' limited access to institutional credit, the structure and level of tariffs on exports and imports, and specific constraints on private sector investment. Besides the modernization of selected irrigation command areas, measures for increasing agricultural yields would, therefore, have to be focussed on (i) increasing the availability and reducing the cost of modern inputs, (ii) improving the system of incentives; and (iii) removing investment constraints. 13. Improving the availability and/or reducing the cost of modern inputs would result in greater incentives to increase yields and greater competitiveness of nontraditional commodities. The relevant measures concerning the main inputs are discussed below. (a) Seeds. To increase the availability of high quality seeds, there is a need to clarify the respective roles of the Department of Agricultural Extension and the private sector. Since the late 1970s Thailand's private sector has played an increasingly important role in the production and multiplication of improved seeds for maize and sorghum, and more recently for sunflower, vegetables and fruits. In order to exploit the private sector's potential for seed production, the Government may want to (i) give to the private sector the main responsibility for seed miiultiplication and distribution with adequate certification and government regulation to ensure that quality standards are maintained; and (ii) set the price of seeds produced by the Department of Agricultural Extension (DOAE) at a level which will not discourage the private sector from 'roducing seeds. For the immediate future the Government may want to review the role of the 21 seed multiplication centers which are being created by DOAE since their planned output would appear to be quite high. In specific cases such as the Chiang Mai vegetable seed senter, the Government may want to rent out part of the facilities-- which would otherwise remain unused--to the private sector. (b) Fertilizers. Thailand's low level of fertilizer consumption is primarily due to the high cost of fertilizer vis-a-vis the value of incremental production. To induce farmers to adopt a higher input management system which will allow the yield of improved seeds to increase up to their full potential, the cost of fertilizers will have to be lowered. To achieve this, the Report recommends the promotion of single nutrient fertilizers whiLh are cheaper and more cost-effective than the compound fertilizers currently used. (c) Rhizobium. The rhizobium bacteria is a critical input needed for the cultivation of soybeans in new areas; but the supply of rhizobium from the Department of Agriculture in Bangkok is often limited, critically affecting output in some areas. To address this constraint, the Report recommends that consideration be given to having the private sector produce the rhizobium bacteria. (d) Agro-industrial credit. Improved access to credit is required for the financing of processing plants and the purchase of modern inputs by farmers. So far, access to credit has been limited by: (i) ceilings on lending interest rates which have resulted in credit rationing and the exclusion of high-risk borrowers, such as far'ners without land collateral; and (ii) the specialization of financial institutions which has limited interwediation. To address these constraints, the Report recommends first eliminating ceilings on lending interest rates; this would afford less creditworthy borrowers access to commercial banks instead of having to borrow from the informal sector at much higher interest rates! and second, enlarging the role of the Bank for Agriculture and Agricultural Cooperatives (BAAC) so that BAAC would mobilize rural savings and lend to the whole agro-industrial sector rather than to agriculture only. 14. Incentive Policy Changes. In the past, export taxation on rice and rubber lowered domestic prices and farmers' incentives to adopt yield- increasing technology. In recent years, partly to offset the decline in world market prices, the Government has greatly reduced these taxes, which was a significant step towards raising farmers' income. To further increase their income, the Government has allowed the private sector to create a commodity exchange through which corward contracts in maize would be traded. This would generate daily market clearing prices which farmers could use as a reference for selling their crops, and which banks would apply for valuing stocks held as collateral for lending. This latter consequence would lead to increased commodity-based lending by commercial banks, and would make it possible for farmers to hold stocks rather than having to seli their crops at a low price after harvest as is frequently the case. In terms of priority, the Government has supported the creation of a commodity exchange for maize, because forward contracts in maize are already traded informally among some Thai exporters. At a later stage the Government may want to include rice and cassava pellets among the commodities traded on the exchange. 15. While the proposed creation of a commodity exchange would be important for facilitating exports of traditional commodities, there is a need to address market constraints which are specific to nontraditional commodities. Thev include: (i) the small domestic market size for most commodities; and (ii) the structure of incentives for exports and imports. 16. Due to the currently small domestic demand for nontraditional commodities, the implementation oW a systematic import substitution policy for new 'ield crops does not appear promising as it would lead to the imposition of high tariff rates and a relatively small increase in output. For these reasons, the main thrust of the required policy changes would be to increase incentives for export. To achieve this, there is a need to reduce the level and variability of effective protection rates across the whole agricultural and manufacturing sector in order to decrease the bias towards production for the domestic market. - vi - 17. Pending a general tariff reform, ther, are a number of measures the Go'rernment may want to implement. First, it is recommended that the Ministry of Commerce continues to reduce the reliance on quantitative restrictions on imports--such as on soybean meal and palm oil--and replacing them within ad valorem tariffs when some protection is still desired. Second, steps should be taken to reduce the number of specific rates that exist either on their own or in tandem with ad valorem rates. In some cases, the ad valorem rates resulting from the specific rates are very high and impact more on low value than high value products, which often accounts for high negative rates of protection. And third, there is a need to increase the uniformity of nominal tariffs so as to harmonize levels of effective protection rates. 18. Constraints on Private Sector Investment. Among the new commodities that could be produced in Thailand, tivestock (pork and beef) would seem to have excellent prospects. However, in order for Thailand to better exploit its potential the Government may want to remove current restrictions preventing private sector investment in slaughterhouses, and develop an integrated livestock-farming model adapted to small farmholders. As had happened in other countries, expansion of livestock activities (pork and cattle) would lead to an increase in the demand for feed grains, which may be sufficient to offset the current decline in Thailand's per capita consumption of rice which has sowed to lower farm incomes. Improved Access to International Markets 19. Removing constraints to diversification and implementing policy changes to raise agricultural yields would lead to increased agro-industrial production. Given the currently limited domestic market for several non- traditional commodities, the extent to which output will rise will, however, be largely determined by the growth of exports. To increase exports govern- ment measures are needed to improve Thailand's competitiveness in interna- tional markets and access to these markets. These measures would also be important for traditional commodities such as rice, maize and cassava. They would be focussed on: (i) increasing Thailand's access to limited interna- tional markets; (ii) improving quality cnntrol; and (iii) export promotion. 20. Limited International Markets. A specific area in which the Government may want to work more actively to increase Thailand's access to world markets is in response to the reality of protectionism in world markets, especially for rice and cassava. This is a legitimate role of Government in light of the clear market distortions which protectionism imposes. The Government may want to formulate a strategy to improve Thailand's bargaining position on agricultural protectionism with its trading partr rs. This strategy vould be important for participating in the forthcoming GATT round. Key measures would include: (a) the development of an "early-warning" information system that would protect Government from being caught unaware by new protectionist measures; (b) the promulgation Qf clear-cut regulations for counter-trade transactions and state trading. Experience in other countries - vii - indicates that this is not an area where Government should play a direct role given its lack of marketing experience, but Government could develop with the private sector a strategy for selling to countries who prefer to buy through monopoly state trading companies; and (c) a review of the import prohibitions affecting Thai agro-industrial products. This would particularly concern Japan--where imports of a number of fruits from Thailand are prohibited under the Japanese Quarantine Act--and the US where imports of Thai fresh fruits and vegetables are prohibited due to USDA regulations. 21. Quality Control. Due to insufficient incentives for quality control and the lack of quality standards, Thailand has lost several export markets. These losses can be attributed to the lack of effective mechanisms for enforcing trade contracts and the resulting failure of domestic markets to fully transmit existing price differentials for quality products from exporters and processors to farmers. In order to improve the transmission of such incentives, the Report recommends strengthening linkages samong farmers, processors and exporters. Specifically, in the case of rice, maize and tapioca pellets, this would be achieved through the recommended creation of a commodity exchange so that contracts can be enforced. Thint would result in increased incentives to invest in post-harvest technology such as maize-drying equipment and adequate warehouses in order to meet the stipulated product quality. In the case of nontraditional high-value commodities, the recommended promotion of contract farming would also result in increased incentives for farmers to meet the product quality needed by processors. 22. For high-value commodities and other nontraditional commodities, the Report also recommends modernizing the domestic produce marketing chain. This would be important given the linkages between the modernization of retailing and better organization of rural production and quality control. To this end, foreign investors with needed marketing, managerial and technical expertise should be encouraged to invest in food retailing, rather than prevented from doing so under the Alien Business Act. This would provide exporters with an access to well packaged and good quality produce. 23. Another means of improving the quality of nontraditional commodities would be to establish quality standards. While standards for several products are prepared by the Thai Industrial Standards Institute and other goveinment agencies, they do not seem well adhered to. This is an area where the Government could play a role by establishing export standards for major nontraditional exports, provided these standards are agreed upon in cooperation with domestic producers and the countries to which the products are to be exported. Export Promotion Measures 24. While measures directed at improving Thailand's access to interna- tional markets should go far towards increasing exports, there is also a need to improve export competitiveness by increasing access to duty-free inputs and the range of financial and trade services available to exporters. - viii - 25. In order to increase the access of direct and "indirect" exporters to duty-free inputs, the Report recommends improvement in the drawback procedure and the initroduction of a domestic letter of credit (DLC). Implementation of the former would require the calculation of physical input coefficients (PHICs) to estimate the inputs used directly and indirectly in the manufacturing of exports. To maximize the benefits that could be obtained from the implementation of the PHIC system, the Report reco.mmends that it be implemented jointly with the DLC system. This could be carried out in a pilot project which would provide refunds of import duties, exemption from indirect taxes, and export credit. In addition, to facilitate new exporters' access to preshipment export finance, the Government may want to set up a Preshipment Export Finance Guarantee Fund (PEFG). 26. In view of the difficulty and cost of obtaining access to foreign markets, the Government may also want to facilitate the operations of foreign trading companies in Thailand as well as the expansion of domestic trading companies. At present, the 1972 Alien Business Law prohibits foreign companies from doing business in Thailand on a commission basis. This prevents Thailand's products from being sold through buying offices set up by foreign companies. Increased Income from Off-Farm Activities 27. rhe implementation of the aforementioned recommendations would help increase farmers' agricultural income. Nevertheless, and despite agro-indus- trial diversification, it is inevitable that agriculture's share in employment will continue to fall. For this reason, a complementary policy to increase sources of off-farm income which already account for about 50% of farmers' income is important. One means of achieving this would be to implement policies which would lead to greater employment in industry. A second one would be to give agricultural workers, and particularly the children of current farmers, the skills they need for alternative employment since they are the ones most likely to leave the agricultural sector. This means that human resource investments in rural areas are a top priority. THAILAND AGRO-INDUSTRIAL DIVERSIFICATION: ISSUES AND PROSPECTS I. INTRODUCTION 1.1 In recent policy statements, especially those related to the prepa- ration and issuance of the Sixth National Development Plan (1987-91), consi- derable emphasis has been given to the potential of nontraditional agricul- tural and food processing activities. In addition to soaking up resources left unused as a result of the weakening situation of traditional agricultural products, these activities are seen as a way of simultaneously alleviating di- verse problems such as unemployment, balance of payments deficits (both via export activities and the increased use of domestic versus imported inputs), and overcrowding in the urban areas of Bangkok. 1.2 The importance placed by the National Economic and Social Develop- ment Board (NESDB) on the agro-industry sector was reflected in the fact that a special working group was established to prepare more detailed guidelines for promotion of the agro-industry sector. The main problems were seen to involve inefficiencies in market mechanisms or supply networks, inadequacies in the levels of technology and relevant research and development, protec- tionism in export markets and limitations of market size for many products, and weaknesses in coordination between the various agencies involved in the agro-industry sector. In order to structure the development of work programs, agro-industries were divided into three main groups: (a) existing agro- industries such as canned pineapples, canned meat and seafood, and wood products; (b) those agro-industries with a currently limited industrial pro- cessing in Thailand such as rice, rubber, and tapioca; and (c) agro-industries with a development potential such as processed and canned vegetables and fruits (exluding pineapple), herbs and spices, certain vegetable oils, and fibre from fast growing trees. 1.3 Specific work plans were prepared for the three groups of products mentioned above. Virtually all the product specific work plans identify two main problem areas, one related to the supply of raw materials in terms of quality, suitability, and availability, and the other related to the quality and suitability of the final product either for domestic or export markets. In order to address the former, the main recommendations involve the promotion of R&D to identify new and better species, and improved raw material produc- tion techniques; the encouragement of farmer groups and cooperatives; and the improvement of lines of communication between farmers and agribusinesses to ensure better planning and production according to needs. To address the latter, recommendations are made to promote the development of improve packag- ing techniques; to stimulate the expansion of entrepreneurship among small and medium scale producers; and to encourage marketing research. For the second group of products, those with limited agro-processing, specific attention is given to promoting R&D to identify new and alternative uses for the basic raw materials. For the third group of products, those with high development potential and mostly concentrated in processed food products, considerable emphasis is given to the importance of identifying and promoting products for which export markels exist. 1.4 While the detailed studies and numerous recommendations appear to be very comprehensive and address most of the crucial constraints facing the agro-industry sector, there is still a need to further define the respective role of Government and the private sector in the agro-industrial diversifica- tion process. There exist considerable differences of opinion about this issue among Thai policy makers and industrialists, ranging from those advocat- ing very interventionist and protectionist policies to those proposing a more supportive, yet essentially hands-off approach. 1.5 The purpose of this report is to contribute to the current debate concerning government role in agro-industry. While the coverage of the report is very broad, the report does not intend to offer a complete analysis of the agro-industrial sector. The primary focus of the report is to analyze how agro-industrial growth could be increased, and to indicate what role, if any, the Government should play in this process. As a consequence, the report discusses the main problems encountered by agribusiness in research, produc- tion, processing and marketing only to the extent that the Government has a role to play in adQressing them. 1.6 Outline of the Report. The main issues concerning agro-industrial diversification and the recommended government strategy are outlined in Chapter II. The main theme of that chapter is that despite current appear- ances stemming from a low growth rate, Thailand agro-industrial sector is a remarkable success story. For this reason, the Government would have to tread a difficult path to ensure that government intervention to promote commodity diversification does not destrcy an already efficient system. In the past the main role of the Government has been to provide the basic infrastructure such as roads and irrigation, whereas the private sector has been the key agent for the identification and cultivation of nontraditional crops. Since this system has worked quite well, efforts should be made to strengthen it and build upon the impressive capability of the Thai agro-industrial sector. 1.7 A promising strategy would be for Government to identify the under- lying causes for the problems facing the agro-industry sector, and design a general policy approach to specifically address these causes rather than a set of agro-industry specific policies that imply to some exten that Government has an advantage in "picking the winners." The former approach is consistent with the idea of the Government creating a generally favorable economic envir- onment within which private sector entrepreneurs will be more clearly able to identify profitable opportunities, regardless of the sector. In the event that more det3iled, sector specific policies are required, either due to the inherent nature of the activities or to considerations of political economy (i.e., income distribution and regional development), such policies should be carefully substantiated and designed in the least interventionist way possible to take maximum advantage of the private sector's comparative advantage in identifying profitable activities. 1.8 The implementation of this strategy will require Government to implement three broad sets of policies. The first one would be to carry out - 3 - institutional changes so as to better clarify the responsibility of each government agency currently involved in agro-industrial diversification and improve the coordination between the public and the private sector. Key areas of action would concern (a) strengthening government support services operating in irrigation command areas; (b) increasing agricultural research on nontraditional commodities; and (c) clarifying the roLe of Government and private sector in seed production. The second policy would be directed at removing the key physical constraint on diversification, namely the current design deficiencies of existing irrigation command areas. Since most of Thailand's irrigation infrastructure is operated by the Royal Irrigation Department, the responsibility for modernizing the current system lies with the Government. These two sets of policy actions concerning institutional changes and investment are discussed in Chapter III. The last set of policy reforms is focussed on removing general constraints to agro-industrial growth and improving Thailand's access to international markets, taking into account increased protectionism. These reforms are analyzed in Chapter IV. They concern the structure of incentives (exchange rate, trade and investment incentives), and marketing and financial policies. In vw of the high supply price elasticity of Thailand's agro-industrial products,- improvements in trade, investment incentives, marketing and financial policies affecting the private sector would seem to have a high pay-off. 1.9 Finally, an analysis of Thailand's production and marketing potential for selecLed traditional and nontraditional commodities is included in Annexes 1 and 2. This analysis was carried out at the request of the National Economic and Social Development Board in order to identify current constraints and define a government program to promote commodity diversifica- tion in order to increase agro-industrial growth. The list of new commodities analyzed in Annex 2 does not intend to be exhaustive and to include all commodities that seem promising for Thailand. Rather, it is meanc to complement the already large list of marketing and production studies prepared for the implementation of the Sixth National Development Plan. 1.10 Despite their importance the report does not address two issues, namely fertilizers and income distribution. Fertilizer is obviously a key input for agricultural production, but in view of the complexity of the current issues it was felt that fertilizer could not be adequately discussed in this report. The second issue--namely income distribution--arises from the recent decline in agricultural income and the promotion of diversification as a way of improving rural incomes. The general thread of the report is that although diversification will increase farmers' income, there is no guarantee that it would improve the relative income distribution. And in fact, as ar- gued in Chapter II, diversification may well lead to increased agricultural labor migration. For this reason, any program to support agro-industrial diversification would have to take into account that labor has to be trans- 1/ An example of this price response is shown by the high percentage volume increase in exports of frozen chicken (71%) and canned seafood products (55.3X) in 1986 following the appreciation of the yen with respect to the baht. - 4 - ferred out of agriculture as development proceeds. Hence, policies will have to be designed so as to give the agricultural labor force the skills needed for alternative employment either in rural or urban activities, and to promote efficient industrial growth since a large part of the agricultural labor force will have ultimately to be employed in the industrial sector. Since such policies would exceed the scope of the present report, they are not explicitly discussed in this report. - 5 - Ii. OVERVIEW OF THE DIVERSIFICATION ISSUES 2.1 As outlined in Section A, the current challenge facing Thailand is how in the present context of generally depressed agricultural prices and increased protectionism to increase farmers' income. In order to answer that question and define the role of Government in agro-industry, it is useful to summarize past agro-industrial trends. Since the historical evolution of the sector has been analyzed in greater detail for the preparation of the Sixth Development Plan (1987-91), only the main trends are outlined in this chapter with a view to identifying the issues that need to be addressed by Govern- ment. The recommended government strategy for addressing these issues is discussed in Sections B, C and D. As indicated in these sections, rural income could increase as a result of (a) a shift in production towards high value crops and livestock activities; (b) increased agricultural yields for traditional and nontraditional crops; (c) improved access to export markets; and (d) increased industrial growth to create off-farm activities and facili- tate agricultural labor migration. A. The Challenge facing Thailand's Agro-Industrial Sector 2.2 The Thai economy experienced rapid growth during the decade of the 1970s, with real CDP increasing at a rate of 6.2% from 1970 to 1975 and 7.5% from 1975 to 1980 (see Table 1, Statistical Annex). This growth was largely accounted for by the exceptional performance of the manufacturing sector which grew at a rate in excess of 10% during the period. As a result of this rapid growth, the structure of the Thai economy changed considerably, with the manu- facturing sector's share in GDP increasing from 15.5% in 1970 to 20.7% in 1980, largely at the expense of the agricultural sector, the share of which fell from 32.1% to 24.9% over the same period. As the economy moved into the 1980s, however, overall GDP growth fell substantially to an annual average rate of 5.3%. This largely resulted from a marked slowdown in the industrial sector growth averaging only 5.4% annually from 1980 to 1985. This immediate- ly halted the significant structural change towards manufacturing with the manufacturing share of GDP remaining at its 1980 leve' of around 21%. 2.3 By comparison with the agricultural growth achieved in 1965-73 (5.2% p.a. in constant prices), Thailand's agriculture performed poorly in 1973-84 (3.7% p.a. in constant prices). Howev , since a similar decline was also recorded for other middle income LDCs,_ it would appear that worldwide causes rather than purely domestic factors account for the fall in Thailand's agri- cultural growth rate. Indeed, compared to a sample of some 80 countries Thailand has done exceedingly well: during both the 1965-73 and 1973-84 2/ The real agricultural growth rate of middle income LDCs dropped from 3.6% in 1965-73 to 2.7% p.a. in 1973-84 in constant prices. See World Development Report, 1986, Table 2, p. 182. - 6 - periods Thailand has remained among the top one sixth of 3erformers. No other country has managed to consistently remain in this group.- 2.4 Despite this good international performance Thailand's agriculture faces a difficult challenge, the nature of which is indicated by comparing the first to the second column of Table 2.1. As shown by the first column, the growth rate of agricultural GDP in constant prices rose slightly in 1980-85 compared to 1975-80, but was 1.7 percentage points below that of the sixties. The second column of Table 243 reveals a more pessimistic story. It shows that the real income of farmers,- which grew in the sixties by 4.3% p.a. in real terms, actually declined by 2.7Z p.a. in 1980-85. This suggests that the current challenge faced by Thailand's agriculture is not so much how to increase the growth rate of output, but how to raise the real income of farmers. Table 2.1: RATES OF GROWTH OF AGRICULTURAL GDP AND AGRICULTURAL INCOME IN REAL TERMS, 1960-85 (Percent per annum) Doomestic terms of trade Agricultural GDP between agriculture and Agricultural Income in constant prices other sectors /a in real term-s /b 1960-70 5.5 -1.2 4.3 1970-75 5.2 +4.7 9.9 1975-80 3.2 -0.3 2.9 1980-85 3.8 -6.5 -2.7 /a Deflator of agricultural value added divided by the deflator of value added of nonagricultural sectors. /b Agricultural GDP in constant prices plus the annual percentage rate of change in the domestic terms of trade between agriculture and other sectors. Source: Mission estimates. 3/ During the 1965-73 period ten countries out of a total sample of eighty countries (including developed countries) experienced a higher growth rate than Thailand. In 1973-84, the corresponding ratio was 15 out of 91 countries. However, no country among the ten best performers in 1965-73 was included among the fifteen best performers in 1973-84. This data was computed from World Development Report, Table 2, pp. 182-83, World Bank, 1986. 4/ Defined as the agricultural GDP in current terrs deflated by the nonagri- cultural implicit price deflator calculated from GDP series. Deflating by the consumer price index gives similar results. - 7 - Options for Increasing Agricultural Incomes 2.5 Options for increasing farmers' incomes would consist of (a) increasing domestic agricultural prices; (b) removing constraints to agro- industrial diversification; (c) implementing policy changes and investments that would lead to higher agricultural yields; and (d) creating off-farm activities. The corresponding government policies are outlined in the following paragraphs. 2.6 In recent years, partly to offset the decline in world ma 0 et prices, the Government has reduced export taxes on rice and rubber.- Since these taxes depressed domestic prices and lowered farmers' incentives to adopt yield-increasing technology, the yeduction of these taxes was a significant welfare-improving policy change.6 In the case of rice various price support schemes have been implemented by Government in 1981-86. So far these schemes have had little impact on domestic prices due to limited budgetary and financial resources and they have not seriously disrupted rice exports.7 This is certainly a positive aspect of government policy, but Thailand as a major exporter of rice will have little alternative but to let the new, lower, international prices be fully reflected in domestic prices. Attempting to maintain domestic prices above border prices would hinder the natural diversification process that is already well advanced and lower the real income of Thailand for the following reasons. First, resources which would have produced commodities with a higher value in terms of border prices would remain in their current activities. Second, by maintaining the domestic price of rice above the world price the cost of food consumption would increase. For a country such as Thailand where food accounts for a large share of consumers' budgets, this policy would result in a substantial. welfare loss, particularly for the poorest consumers. And finally, attempting to raise farmers' income by increasing rice prices would result in high fiscal cost and limited benefit to farmers. This would be so because the price support would 5/ In 1985-86, the Government suspended the export duty on rice and the rice export premium. 6/ This reflects the greater impact of export taxes on domestic prices. For an analysis of this point, see Thailand: Pricing and Marketing Policy for Intensification of Rice Agriculture, pp. 17-18, Report No. 4963-TH, September 1984. 7/ In 1984-85 paddy purchased under the market intervention scheme of MOAC amounted to 67,000 tons and paddy bought under the paddy pledging program launched by BAAC amounted to 91,000 tons. By comparison total paddy output was 20 million tons. In 1985-86 the sums involved were increased, but actual paddy purchase was small. In 1986, export licensing requirements for rice were lifted. This made it possible for Thailand exporters to adjust the composition of exports towards lower quality rice in response to world market demand (see Annex 1, paras. 7-8). This adjustment indicates that export licensing and the requirement to hold a certain amount of stocks had a depressing effect on rice exports. - 8 - induce farmers to increase output, which in turn would depress prices unless offset by larger government outlays. At the same time, the net benefit per farmer would decline since proportionately more inputs would be used to increase output on marginal land. The net result of the two trends would be a declining benefit-cost ratio over time. 2.7 For these various reasons attempting to increase the domestic price of paddy through price support schemes is unlikely to be a successful policy. However, there are alternative measures that would increase farmers' income. First, the Government may want to establish a commodity exchange through which forward contracts in maize, rice and tapioca pellets would be traded (see Chapter IV, Section C). This would help increase the efficiency of domestic markets in transmitting price information from foreign markets and domestic processors to farmers, and would enable farmers to hold stocks after harvest rather than selling them at a low price. As a result, farmers' income would be higher. 2.8 Another policy to increase farmers' income would be to facilitate the on-going diversification process towards higher value commodities. This would enable Thailand's farmers to take advantage of favorable world price and market prospects for nontraditional commodities. Thailand's diversification process and the role of Government in facilitating such a process are discussed below. B. Agro-Industrial Diversification 2.9 Agricultural Diversification. Overall, agricultural growth in Thailand has resulted in a well diversified production structure with some 23 commodities accounting from 1 to 5% of agricultural value added (Table 2.2). The main trend illustrated by Table 2.2 has been rice's declining share in agricultural value added from 30.6% in 1970-74 to 22.3% in 1984-85. Most other crops' shares have not increased much, with the exception of sugarcane, and to a lesser extent, fruits and vegetables. The key characteristic of the past diversification process has been that it was a natural adjustment process by the private sector in response to market forces. - 9 - Table 2.2s SHARES OF AGRICULTURAL COMMODITIES IN AGRICULTURAL GDP (as Z of agricultural value added in current prices) 1970-74 1980-81 1984-85 Crop /a 72.2 74.5 73.0 Paddy 30.6 26.2 22.3 Rubber 3.9 4.3 5.1 Coconut 0.8 0.8 0.8 Sugarcane 3.0 8.7 9.3 Maize and sorghum 4.7 4.2 4.6 Groundn\xt 1.0 1.0 0.7 Mung bean 1.2 0.9 1.4 Castor bean 0.2 0.7 0.1 Soy bean 0.7 0.4 0.6 Cassava 2.9 4.8 3.5 Tobacco 1.7 3.4 2.1 Cotton 0.7 1.0 0.5 Kenaf, jute and ramie 1.9 0.5 0.8 Kapok 0.4 0.2 0.2 Sesame 0.2 0.2 0.1 Garlic, onion, shallot, chilli 5.0 2.0 2.6 Vegetables 2.4 2.7 4.1 Fruits 10.4 12.7 13.7 Other crops 0.4 0.5 0.5 Livestock 11.8 12.8 13.4 Cattle and buffaloes 3.4 3.3 4.1 Swine 2.7 3.5 3.4 Hens, duck and other poultry 3.3 3.0 2.6 Eggs 2.3 2.9 3.0 Others 0.1 0.1 0.3 Fisheries 10.0 7.0 6.9 Marine fish 7.7 4.6 4.6 Freshwater fish 2.3 2.4 2.3 Forestry 6.0 5.7 6.7 Total Value Added /a 100.0 100.0 100.0 /a Totals may not add up due to rounding-up errors. Source: NESDB. - 10 - 2.10 Among the factors promoting diversification, the heavy taxation of rice in the seventies has played a major role by lower gg the domestic price of rice relative to that of other crops by nearly 35%._ Such a structure of prices provided incentives to farmers to increase nonrice output relative to rice, which is what happened. In addition, the taxation of rice output lowered the incentives for farmers to adopt input-intensive techniques of cultivation and high yielding varieties; and despite the high social rate of return to rice research, much of the resulp$ generated by Thailand's rice research centers were not used by farmers.- This is in contrast to maize where the domestic price was close to the world price and where research and extension played a key role. The contrast between rice and maize highlights the importance of price incentives in inducing farmers to adopt the worthwhile output of agricultural research. In recent years, however, the Government has reduced the export taxation of rice and rubber. 2.11 Among the positive elements responsible for commodity diversi- fication, the high profitability of nonrice crops (Table 2.3) and the efficiency of the agricultural marketing systet Tohave been crucial. As has been widely documented in a number of studies, ° domestic producer prices were regularly adjusted on the basis of Bangkok FOB prices by middlemen-- weekly in the case of rice--and profit margins were quite small. In addition, direct market intervention by Government was limited as the Government did not have an effective institutional mechanism to directly support farmgate prices. As a result, the domestic structure of agricultural production generally sflected Thailand's comparative advantage, and evolved accordingly overt ime# 2.12 In the livestock sector the situation has been different, however. High expansion rates were recorded for poultry, eggs and diary products, but the swine and cattle subsectors Ilperienced one of the lowest rates of growth among agricultural commodities.1 An important factor accounting for this 8/ Since World War II and until 1982 rice export taxation has averaged 35Z of FOB value. See: Gerald O'Hara and Vinh Le-se, The Supply and Welfare Effects of Rice-Pricing Policy in Thailand, World Bank Staff Working Paper No. 714, 1985. 9/ This is indicated by a recent studv which shows that research and exten- sion activities were statistically insignificant in explaining rice output growth, but highly significant in accounting for the growth of maize output. See: R.E. Evenson and Suthad Setboonsarng, Research, Extension, Literacy and Productivity Growth in the Agricultural Sector in Thailand, 1986. 10/ See, for example, Peter K. Pollak, Agricultural Markets and Marketing in Thailand, IBRD 1980 and the NESDB Pricing and Marketing Study, 1981. 11/ This is indicated by the high growth rates of value added recorded for agricultural commodities, and by their sharp variations over time (see Table 4, Statistical Annex). - 11 - Table 2.3: NET RETURNS OF CROPS TO FARMERS (Average 1984/85) Gross Produc- Net Yield Price returns tion cost return (kg/rai) (B/kg) (B/rai) (B/rai) (B/rai) Traditional Crops /a Rice 346 2.89 999 927 23 Cassava 2,504 0.57 1,427 986 441 Rubber /b 66 14.11 926 - - Maize 370 2.27 840 642 198 Sugarcane 7,255 0.40 2,902 1,689 !,213 Kenaf 177 4.94 876 855 21 Tobacco (Virginia) 174 43.11 7,518 - - Nontraditional Crops Pineapple 3,753 1.50 5,630 3,961 1,668 Mungbeans 105 6.45 679 588 90 Sorghum 181 2.54 460 387 73 Kapok 150 8.28 1,244 - - Groundnuts 204 6.19 1,261 1,176 85 Soybeans 178 6.26 1,112 977 135 Cotton 191 10.63 2,026 1,940 36 Sesame 103 11.31 1,169 780 389 Oil palm 1,555 1.39 2,161 - - Coconut 567 2.77 1,670 - Chilli 1,989 10.53 20,942 11,380 9,561 Shallot/onions 1,371 8.98 12,313 - - Garlic 652 24.02 15,366 9,653 5,713 Tomato 2,086 1.25 2,60W 1,938 1,444 Cucumber 15,000 1.00 15,000 7,598 11,765 Mustard 2,946 5.97 17,590 4,438 13,152 Cabbage 1,937 3.00 5,811 5,357 455 Longbean 569 8.02 4,566 3,729 837 Cashew nut 350 14.00 4,893 1,476 3,417 Sunflower /c 300 6.68 2,004 1,000 1,004 Strawberries /d 2,500 6.68 2,004 1,000 7-20,000 /a The distinction between traditional and nontraditional crops is the one used by NESDB. /b Includes senile rubber area of which only 40X is actually tapped and immature rubber area. /c 1981/82 data. 7d Mission estimates. Source: Ministry of Agriculture and Cooperatives. - 12 - result was that the private sector has been allowed to operate freely and to profit from the introduction of hybrid chicken in Thailand, whereas the operations of the private sector in the cattle and swine subsector have been controlled and restricted, mainly by the 1959 Animal Slaughtering and Meat Sale Control Act. Yet, the pr,m.otion of livestock activities (pork and cattle) probably offers the be3t potential for increasing Thai farmer's -ncome (see Annex 2, paras. 62-68). 2.13 Agro-processing Diversification. The contribution of agro- processing to manufacturing growth is shown in TLble 2.4 and Graph 1. Accord- ing to both a narrow definition of agro-processing (food, beverages and tobacco), and a broader one which includes leather, wood, furniture, paper and rubber products, agro-processing grew consistently slower than the manufactur- ing sector. This was reflected in a quasi-general decline of each subsector's share in manufacturing value added from 1970-74 to 1984-85. Overall, the share of agro-industrial products, defined broadly, fell from 45.7% of manu- facturing value added in 1970-74 to 34.2% in 1984-85 (Table 2.4). Since 1980, the structural decline of the agro-processing sector leveled off somewhat, but this was due more to the much weaker performance of other manufacturing subsectors, notably heavy industry, than to an improved performance of agro- industrial activities. It is also evident from Table 2 (Statistical Annex) that the agro-processing sector, and all its components, exhibited growth rates which fluctuated tremendously from year to year, perhaps reflecting the inherently risky nature of such activities and their vulnerability to shifts in world commodity prices. 2.14 Although the above scenario does not paint an altogether rosy picture of the contribution of the food prccessing sector in terms of overall growth rates, there is evidence that Thailand has a comparativel 2vantage in the food processing sector. Indeed, Nishimizu and Page (1986) - show that food processing, as well as textiles, printing and publishing, and other resource-based activities such as footwear, leather products, furniture, and rubber products, experienced total factor productivity growth that was higher than "world" rates and exhibited competitive domestic resource costs of less than unity. This implies that Thailand's food processing sector improved its competitive position relative to the world during the period covered by the study (1963 to 1970). Furthermore, the more recent successes in world markets of a number of Thai agro-products suggest that Thailand continues to be an efficient producer of agro-industrial products. 2.15 Export Markets. Thai agricultural export successes of the 1960s and 12/ Over the 1970-85 period the respective growth rates of value added in constant prices were 6.8% p.a. for poultry, 10.3% p.a. for eggs and 14.8% p.a. for dairy products, but only 2.0% for the swine and cattle subsector. 13/ Nishimizu, M. and Page, J.M. Jr., Productivity change and dynamic comparative advantage, Review of Economics and Statiatics, Vol. 68, No. 2, May 1986, pp. 241-247. - 13 - Table 2.4: GROSS DOMESTIC PRODUCT ORIGINATING FROM MANUFACTURING Growth rates in X p.a. Shares as X of in 1972 prices current value added 1970-75 1975-80 1980-85 1970-74 1980181 19-8485 Food 5.7 6.4 6.8 20.5 15.0 13.0 Bev-rages 2.0 12.0 3.6 9.1 7.4 9.3 Tobacco and snuff 7.5 6.0 -0.7 8.8 6.1 6.1 Subtotal agro-industrial products (narrow defi- nition) 5.1 7.8 4.2 38.4 28.6 28.4 Leather, leather products and footwear 6.9 -0.6 10.9 0.7 0.4 0.5 Wood and cork 5.2 -2.6 4.3 2.7 2.3 1.7 Furniture and fixtures -2.7 5.7 9.2 1.2 0.9 0.9 Paper and paper products 13.3 24.6 4.2 0.8 1.2 1.1 Rubber and rubber products 19.3 12.3 -2.7 1.9 2.1 1.6 Total Agro-Industrial Products (Broad Defini- tion) 5.7 7.9 3.6 45.7 35.5 34.2 Nonagro-industrial products 13.2 12.3 6.2 54.3 64.5 65.8 Total Manufacturing Value Added 9.6 10.5 5.4 100.0 100.0 100.0 Source: NESDB. Graph 1 Shares of Manufacturing GDP (ot 1972 prices) 42%- 41XS - \ 40%- 39-. & 34-_ 3y5- 32% /-\ T 99 279% 209 - 27X -/ 19701971 1972197319741975197619771978197919801981198219831 841985 O Agroprocessing + Ught Ind. 0 Heavy Ind. (iood, Deverages, tobacco) - 15 - 19709 have been concentrated in "commodity" products where importers buy on the basis of price and where standardized quality controls are easily met. Examples include the grains, shrimps and canned pineapples. For these sorts of products, Thai exports hinge on price competitiveness and the size of the overall international market. But Thailand has been less successful in specialty-product markets which are individually small but large in aggre- gate. However, these products are likely to become much more important in the *future as indicated by the recent evolution of agro-industrial exports which highlights two contrasting trends: the first one is the stagnation of traditional agro-industrial exports from $2,852 million in 1980 to $2,760 million in 1986; and the second one is the increasing value of nontraditional agro-industrial exports from $828 million in 1980 to $1,720 million in 1986 (Table 2.5). The difference between these two trends is not new: in the seventies exports of nontraditional agro-products were also increasing at a faster rate than traditional agro-products. What is new is the decline in the dollar value of tradi Wnal agro-industrial exports--which is mainly due to falling export prices_ --and the sharp increase in fishery and seafood exports, which in 1986 became Thailand's first agro-industrial export, largely because of a rapid increase in exports to Japan. By order of importance, the main items were: canned seafood ($416 million), frozen and dried squids ($186 million), frozen shrimp ($167 million) and frozen fish ($83 million). 2.16 To a large extent, Thailand's diversification process is the result of the generally better price performance of nontraditional commodities relative to the evolution of the world market prices of traditional commodities. This can be seen by comparing Table 1 in Annex 1 to Table 1 in Annex 2. Domestically, this structure of prices was reflected in the low farm incomes generated by the cultivation of most traditional crops compared to nontraditional commodities (as defined by NESDB, see Table 2.3). 14/ The exception is cassava exports which are subject to EEC's quota. The fact that Thailand's share in world's exports of food and nonfood agriculture increased in 1980-84 does not suggest that trade barriers were increasingly discrimin^7ting against Thailand. For more details on protectionism, see: Thailand: Growth with Stability, A Challenge for the Sixth Plan Period, A Country Economic Report, Vol. II, pp. 18-28, World Bank report, June 1986. - 16 - Table 2.5: SELECTED PRINCIPAL AGRO-INDUSTRIAL EXPORTS (US$ Millions) 1980 1982 1985 1986 Traditional Agro- Industrial Products 2,852 3,286 2,452 2,760 Rice 953 979 829 773 Tapioca products 727 859 551 727 Rubber 603 413 500 575 Maize 357 362 284 352 Sugar 145 562 230 276 Tobacco leaves 67 111 58 57 Nontraditional Agro- Industrial Prcducts 828 1,G58 1,295 1,720 Crops, fruits and vegetables 262 343 364 367 Fishery and Seafood products 321 421 587 875 Animal products 39 76 68 137 Other agro-processed products 206 218 276 341 Source: Table 5, Statistical Annex. 2.17 Thailand's past export successes and the high level of financial returns offered by nontraditional commodities are important elements in assessing the desirability of further promoting agro-industrial diversification. Another key consideration is the size of world markets for nontraditional coamodities. The reason for this is that due to currently limited domestic demand (see Table 2, Annex 2), the increase in Thailand's production of nontraditional commodities would mainly depend on export growth. 2.18 Information on the potential market sizes of some of Thailand's nontraditional agro-industrial products is provided in Table 2.6. This table shows that world exports of nontraditional commodities are large when aggregated by product categories such as: fishery products ($16 billion), fresh and processed vegetables ($7.1 billion), and processed fruits and juices ($7.1 billion). These are also large exports when compared to the world export market for rice ($3.8 billion), Thailand's main traditional export. However, a crucial characteristic is that markets for a specific commodity (within a larger product category) are rather small. This indicates that dynamic promotion of nontraditional commodities could result in excess supply and sharp fall in export price. This risk is particularly important for - 17 - Table 2.6: MARKET SIZES OF SELECTED NONTRADITIONAL AGRICULTURAL COMMODITTES, 1984 (Amounts in US$ million) Thailand Developing 7. of World countries Exports world Mungbeans ... 75 ... Soybeans 7,144 1,646 0.8 0.0 Coarse grains /a 14,221 2,219 400/b 2.8 Sesame seeds 246 244 9 3.6 Sunflower seeds 792 58 0.0 0.0 Spices excluding pepper 409 335 12 2.9 Pimento 130 90 2 1.6 Cocoa, brazil and cashew nuts 564 493 0.6 0.1 Coconut oil 1,009 926 3.8 0.4 Palm oil 2,624 2,510 6.2 0.2 Groundnuts 578 336 2 0.4 Orchids *.. ... 21 too Vegetables 7 118 2 192 25.4 0.4 Fresh vegetables excluding tomatoes 27,136 67 Fresh tomatoes 999 329 0.5 0.05 Prepared and preserved vegetables 2,579 872 17 0.7 Dried vegetables 811 346 1 0.1 Fruits 197 Fr-esh fruits of which: ... ... Bananas 1,476 1,377 0.9 0.0 Mangoes ... ... 1.3 Papayas ... ... 2.9 Longan ... ... 9.0 Fresh berries 293 19 0.0 0.0 Prepared and preserved fruits 4,534 2,709 149 3.3 Fruits or vegetable juices 2,560 1,693 11 0.4 Fisheries 15,955 7,118 633 4.0 Ut which: Fish, fresh, chilled or frozen 5,621 1,743 44.5 0.8 Fish dried, salted or smoked 900 757 5.2 0.6 Crustaceans and mollusks (fresh, 5,272 1,682 256 4.9 frozen, dried) Fish products and preparations 2,004 1,305 159 7.9 Crustacean and mollusk products 794 431 103 13.2 and preparations Meals 1,034 504 63 6.1 Meat Products 14,626 2,036 61 0.4 Of which: Boneless chicken ... ... Swine (meat) 3,453 349 ... /a 1983 data. 7F Mainly maize ($365 million) and sorghum ($34 million). Source: FAO data. - 18 - speciality items such as asparagus, strawberries, gherkins, etc... Neverthe- less, it can be avoided provided domestic production of new crops would be initiated only once a market for them has been established. This requirement will in general dictate a strong private sector involvement in the promotion of nontraditional commodities. 2.19 As shown by Table 2.6, Thailand's exports of nontraditional commodities consist of a large variety of different items. This reflects Thailand's success in finding small market niches for nontraditional products. In the past these niches were found through private sector initia- tives in identifying markets and selecting the type of crops to be grown. Usually the cultivation techniques were traditional and involved low cost inputs. An example of this is provided by the exports of so-called minor commodities YO ch amounted to about $100 million in 1984 (excluding fruits and vegetables),- or mungbean exports ($56 million in 1986). Recently a second type of commodity has become quite successful in Thailand. Unlike the tradi- tional minor crops, these new commodities require more modern production techniques and are the result of prior agro-industrial research and continued adaptive research by private firms in collaboration with farmers. 2.20 Prospects for the production, marketing an. processing of new agro-indygtrial commodities in Thailand are analyzed in more detail in Annex 2.- The general conclusion is that although presently unexploited market opportunities are rare, Thailand has the potential to expand its world market share for several commodities, particularly in view of the already noticeable changes in Thailand's comparative advantage, rising labor costs in Thailand's main competitors such as Taiwan and recent world-wide exchange rate adjustments in 1986. Among the commodities investigated for this report, the most promising ones include some field crops, seeds, processed fruits and vegetables, and particularly aquaculture and seafood products, and pork. 2.21 The outlook for continued growth of nontraditional commodities will be determined, however, by Thailand's ability to overcome constraints currently encountered. They include: (a) The lack of varieties adapted to the requirements of exporters and domestic processors. The required varieties, particularly in the case of fruits and vegetables, are different from the ones currently 15/ These were: Job's tears, ricebean, blackbean, dried beans, castor oil, kapok, ginger, chilis, tamarind, seedlac and sticklac, stellac, cotton seed meal, cotton seed, orchids and unworked feathers. 16/ This summary is based on a more detailed report prepared by Hawaian Agro- nomics covering twenty one commodities which were selected for investiga- tion out of a list of 199 commodities, in consultation with NESDB. Criteria used in the selection of these commodities included: (a) poten- tial for export and/or import substitution; (b) potential for value added processing; (c) linkages to the agro-industrial sector; and (d) availa- bility of data. - 19 - produced for local consumption. (b) The irrigation infrastructure of the irrigation command areas which is not well suited to meet the irrigation requirements of nonrice crops during the dry season. (c) The lack of an adequate supply of raw agricultural material of consistent quality. To develop such a supply would generally require the strengthening of linkages among farmers, processors and exporters. (d) Low produce quality due to poor post-harvest technology and inadequate storage facilities. This makes it difficult for exporters to meet the quality standards demanded by foreign markets. (e) High domestic prices. Currently, Thailand's domestic prices of several nontraditional commodities are above world market prices, partly due to high protection. To increase Thailand's competitiveness in these markets will require the achievement of higher yields and a change in the structure of incentives for imports and exports. (f) Difficult access to institutional credit, partly because of farmers' lack of the collateral (land title) required by banks. This makes it difficult for farmers to buy the modern inputs required for increasing yields and Thailand's competitiveness in export markets. (g) The high risk of investing in agro-industry as indicated by the business failures of several agri-businesses during the last decade. Government Role in Agro-Industrial Diversification 2.22 Recommendations: Given the proven dynamism of Thailand's entrepreneurs in identifying market niches abroad and of Thailand's farmers in responding to market incentives, the private sector will have to play the ma- jor role in the selection, production and marketing of nontraditional commodi- ties. This indicates that Government has only a limited role to play in identifying and promoting the nontraditional crops. 2.23 These considerations are particularly relevant to the current government diversification program concerning rice and cassava. Although diversification towards nonrice crops in the North and Northeast during the dry season would seem to be economically justified, such evidence is lacking in the case of the Chao Phya river basin in the central plains (see Annex 1 para. 5). For this reason, the decision to diversify production in the Chao Phya should be left to the private sector and should not be encouraged through subsidies on seeds and credit. In the case of cassava, a similar recommendation also applies. At present tapioca prices, profitable substitution possibilities may be non-existent and the likelihood of success of the current government cassava substitution program is slim (see Annex 1, paras. 14-17). A more promising policy would be to auction off the export quota rights for cassava at the beginning of the season. The proceeds - 20 - generated by the sale of the rights to export to the EEC could in turn be used to finance the recommended increase in government research on nontraditional commodities. 2.24 Despite the above-mentioned limitations on the direct role of Government in identifying and promoting specific nontraditional crops, the Government has a role to play. This role would be to remove current distor- tions and constraints which prevent an efficient growth of nontraditional commodities. To address these constraints, the government strategy would consist of: (a) implementing institutional changes to better assign specific functions to government agencies operating in irrigation command areas and clarify the respective role of the Government and the private sector in research and seed production (see Chapter III, Sections A and B); (b) increasing government investment in irrigation and agricultural research on selected nontraditional commodities. The availability of a modern irrigation system would increase the supply of nontraditional crops, while government research on nontraditional crops would help develop new varieties required for export markets (See Chapter III, Sections B and C); (c) strengthening farmer-processor linkages through the promotion cf contract farming for high value crops in irrigated areas. This would facilitate the transfer of technology from firms to farmers, lead to the cultivation of improved varieties adapted to the needs of processors, and ensure a more efficient sharing of agro- industrial risks (See Chapter III, Section D); (d) implementing policy changes to remove existing distortions. Such changes particularly concern the livestock sector, exports and agro- industrial credit (See Chapter IV, Sections A, B, and D); and (e) improving Thailand's access to highly competitive and often protected international markets (See Chapter IV, Section C). 2.25 Facilitating the shift in production to higher value crops would help improve farmers' income. A complementary policy would be for Government to implement measures that would result in higher agricultural yields. The resulting agricultural intensification process and government role are described below. - 21 - C. Intensification of Agricultural Production 2.26 Agricultural Labor Productivity Growth (defined here as the growth of agricultural value added per worker) can be broken down into two components as shown in Table 2.7: the percentage change in t7nd productivity and the percentage change in cultivated areas per worker.- These indicators point out that in the 1960s the main source of labor productivity growth was the expansi in cultivated areas per worKer rather than land productivity growth.y_/ Since land could be occupied without any other cost than labor for clearing the land, expansion in output to meet increased external demand could be achieved by putting additional land into cultivation using traditional cul- tivation techniques. As a result, the generation and the use of yield- increasing technology w not essential and was rather unattractive from the farmers' point of view, By using relatively inexpensive inputs and factors of production, farmers have minimized the adjustment costs involved in shifting from one crop to another and have been able to meet changes in foreign demand with great flexibility. 17/ By definition, value added per worker is equal to value added divided by cultivated areas multiplied by cultivated areas per worker. By total differentiation, the percentage change in labor productivity can be expressed as the sum of the percentage change in land productivity plus the percentage change in the land-labor ratio. 18/ Labor productivity in Table 2.6 is calculated as value added by major crops and livestock divided by total agricultural employment. The defi- nition of value added excludes the value added by minor crops and the definition of employment includes the labor force engaged in fishery activities. However, using different definition for land, labor and value added did not significantly alter the nature of the trends illustrated in Table 2.6. 19/ Among twelve Asian and Pacific countries Thailand had the lowest average nutrient consumption in kg/ha of N, P 0 and K20 in 1983-84. See: Agro- chemicals News in Brief, ESCAP/FAO/UNIDO, p. 9, September 1986. - 22 - Table 2.7: EVOLUTION OF LAND AND LABOR PRODUCTIVITY IN CROPS AND LIVESTOCK, 1960-85 (Average annual percentage rates in constant prices) 1960-70 1970-80 1980-85 Labor productivity /a 2.9 2.1 2.9 Land productivity /b 0.5 1.3 1.5 Land per worker /c 2.4 0.8 1.4 /a Value added in crops and livestock divided by total employment in agri- culture. By definition the percentages indicated on this line are equal to the sum of the percentages on lines b and c. /b Value added in crops and livestock divided by cultivated areas for the major crops. /c Cultivated areas for the major crops -ided by employment in agricul- ture. Source: Mission estimates. 2.27 The Transition Process. Recently, however, the pattern of growth has started to change. The first change occurred in the 1970s when the rapid expansion in cultivated areas (3.2% p.a.) was accompanied by a shortage of labor during the rainfed cropping season. This led to a rapid growth in agricultural machinery, and particularly small single-farm tractors and large 70 hp tractors performing contract plowing services in upland areas. 20 key element in this process was the dominant role of the private seW2r., Local producers successfully manufactured new agricultural machinery,- and farmers financed their acquisition through hire-purchase schemes reflecting commercial interest rates rather than government subsidies as in some other countries. This process was reflected in the rapid expansion of the private capital stock 20/ See Hans P. Binswanger, Agricultural mechanization: A Comparative His- torical Perspective, World Bank, Operational Policy Staff, Report No. ARU 1, October 1982. 21/ Simple locally-designed two-wheel power tillers became available in the mid-1960s and were manufactured locally with great success. By contrast the Ministry of Agriculture devoted considerable resources to the inven- tion of a locally-adapted power tiller, the iron buffalo, which went into production, but failed commercially. - 23 - in agriculture by 5.2% p.a. in constant prices in the 1970s.L2/ It is particularly noteworthy that such a growth occurred despite capital market distortions affecting agricultural credit and the high taxation of the agri- cultural sector which discriminated against investment in agriculture. How- ever, such a process was made possible by the rapid increase in agricultural income that occurred in the early 1970s. To a large extent, this was due to rises in agricultural prices as well as commodity diversification. 2.28 Somewhat surprisingly diversification and the associated shift from low to higher value added crops were not always accompanied by a parallel change from traditional to more modern cultivation techniques. In most cases the expansion in the output of new crops was carried out using low cost inputs and fairly traditional techniques. This indicates that the low yields recorded for nearly all crops in Thailand were not the result of a lack of innovation or dynamism on the part of the Thai farmers; on the contrary, they reflected the farmers' response to the low price 2$ land and the relatively high price of modern inputs such as fertilizers.-' 2.29 The second change is more recent and gradual. It is due basically to the s j0down in the expansion of cultivated areas to 2.6% p.a. in 1980-85,t Although the continued increase in cultivated areas implies that contrary to what is often assumed, Thailand has not reached its land frontier, it also indicates that expansion in cultivated areas is no longer a widely available option for increasing output. As a consequence, yield-enhancing technology such as fertilizers and improved seeds is becoming a critical factor for agricultural production. To some extent the increased demand for modern inputs is shown by the acceleration in the rate of growth of fertilizer consumption from 10.9Z p.a. in the seventies to 12.2% in 1980-84 at the same time that the growth rate of agricultural value added fell. Another indication is the expansion of the commercial production and distribution of seeds by private firms since the late 1970s (see Annex 2 para. 14). At an 22/ Private capital stock in agriculture grew by 1.7% p.a. in real terms in the sixties and by 5.2% in the seventies according to unpublished Bank of Thailand estimates. 23/ Among twelve Asian and Pacific countries, Thailand had the lowest paddy to fertilizer (N) nutrient price ratio and the lowest average nutrient consumption in kg/ha. See: Agrochemicals News in Brief, September 1986. The role played by the relative prices of the factors of produc- tion in influencing the pattern of technological innovation has been documented for a number of countries and is not unique to Thailand. See: Yujiro Hayami and Vernon Ruttan, "Agricultural Development, an International Perspective." The John Hopkins University Press: Baltimore, 1985. 24/ Cultivated areas for the major crops grew by 3.9% p.a. in the sixties, 3.2% in the seventies and 2.6% in the 1980-85. However, these estimates do not include cultivated areas for other crops which may give an overall different result. - 24 - aggregate level the effect of yield-increasing technology is shown by the increase in the rate of growth of land productivity from 0.5% p.a. in the sixties to 1.5% p.a. in 1980-85, and the general rise in yields that occurred for ne1j)y all commodities between the 1970s and the first half of the 1980s._ These results suggest that technological progress, in addition to commodity diversification, has become an important factor accounting for land productivity growth. Policies for Yield Intensification 2.30 The intensification of agricultural production is now emerging as the key issue for Thailand's agricultural sector. This follows for two rea- sons. First, the world market prices for Thailand's traditional commodities (with the exception of rubber and sugar) are expected to remain in real terms below their 1985 levels. Hence without substantial productivity improvements to reduce costs, agricultural real incomes are unlikely to rise. And second, the domestic prices of several of the new nontraditional commodities produced in Thailand are above world market prices (see Annex 2). This implies that the pace at which technological innovation will be applied will largely determine Thailand's competitiveness in world markets. 2.31 Key elements in the achievement of productivity increases will be (a) the modernization of Thailand's irrigation infrastructure; (b) the availability of single nutrient fertilizers at world market prices; (c) the adaptation of improved seeds to Thailand's soils and climate; (d) increased agro-industrial research; (e) improved access to institutional credit; and (f) better sharing of agro-industrial risks. Provided the corresponding action program would be implemented by Government, farmers would have higher incentives to intensify production. This would lead to a fall in the production costs of nontraditional commodities, and increase Thailand's competitivenigv in world markets and the elasticity of supply of agricultural commod, ies, 2.32 Irrigation Infrastructure. A key reason for the past successes of Thailand's agriculture is that farmers have been able to respond quickly to new changes in international demand by bringing new land into cultivation. However, this source of growth will be reduced in the future as inexpensive new land (encroached forest reserves) will no longer be readily available for the cultivation of new crops. As a result, expansion of new crops would, unlike in the 1970s, have to take place on already cultivated land. But due 25/ See Table 7, Statistical Annex. 26/ This occurs because the underlying constraint on output expansion (namely the low elasticity of traditional inputs such as land) is alleviated by the use of modern inputs which have a high elasticity of supply. An example of this effect is provided by the rapid increase in the produc- tion of hybrid chicken and the 71% volume increase in frozen chicker. exports in 1986 following a change in the baht/yen exchange rate. By contrast, production of native chicken has increased much more slowly. - 25 - to the irrigation requirements of nontraditional crops, increased cultivation of nonrice crops in irrigation command areas will require a modernization of the irrigation infrastructure (see Chapter III, Section C). 2.33 Fertilizers. As indicated by the analysis of constraints affecting agricultural production (see Annex 2), agro-industrial diversification in Thailand will greatly depend on the increased use of improved seeds for increasing farm yields and production. But the relatively high cost of complementary inputs (fertilizers and credit) has not induced farmers to adopt a higher input management system which would have allowed the yield of improved varieties to increase up to their full potential. 2.34 While partly attributable to the small proportion of reliably irrigated areas, Thailand's low level of fertilizer consumption is primarily due to the high cost of fertilizer vis-a-vis the value of incremental production. On the cost side, compound fertilizers have been promoted at the expense of less costly single-nutrient fertilizers, and there has been an unnecessary proliferation of brand name fertilizers which may result in high profit levels at the wholesale/importation level and high prices at the farmgate. Government policy changes to address these issues are not discussed in this report, given their complexity, but they are certainly crucial to the intensification of agricultural production. 2.35 Seeds. Government role in improved seed breeding and multiplication has been rapidly expanding since 1975. Currently, the Department of Agricul- tural Extension (DOAE) is concentrating on seven types of seeds, namely rice, maize, sorghum, mungbean, groundnut, soybean and cotton, which are produced either directly by DOAE or by farmers recruited by DOAE to produce seeds under contract. So far over B 2 billion have been invested in the construction of twenty seed multiplication centers managed by DOAE, which may turn out to be one of the largest government seed networks in the world. Two more centers are planned at Sukhothai for soybean, cotton, legumes and vegetable seeds, and at Pattalu.ag for rice, maize and legumes. This expansion raises important issues concerning the respective role of the private and public sectors in seed distribution, seed pricing and the regulation of the seed industry. 2.36 Recommendations. In order to better exploit Thailand's private sector potential for seed production (see Annex 2, paras. 14-15), the respec- tive roles of DOAE, DOA and private firms should be clarified. Although it is likely that DOA and DOAE will continue to play the most important role in the research and production of improved stock seed, the long-term objective would be to give to the private sector the main responsibility for seed multiplica- tion and distribution with adequate certification and government regulation to ensure that quality standards are maintained. 2.37 A measure which would facilitate the expansion of the private seed industry would be to improve the seed pricing policy of DOAE. At present, the cost of seeds produced by farmers unier contract with DOAE is on average twice as high as the commercial cost of seeds produced by private firms, and most DOAE sezds are sold at prices well below production cost (Table 2.8). It i:, therefore, essential to implement a full and accurate costing of seeds pro- duced by DOAE, and to set the price of DOAE seeds at a level which will not - 26 - discourage the private sector from expanding its participation in the seed producing industry. For the immediate future there is a need to review the role of the twenty one seed multiplication centers which are being created by DOAE since their planned output would appear to be quite high. In specific cases such as the Chiang Mai vegetable seed center, the Government may want to rent out part of the facilities--which would otherwise remain unused--to the private sector. Table 2.8: COSTS AND PRICES OF SEEDS, 1983 (in baht per kg) Cost of seeds Price of seeds DOAE Private firms DOAE Commercial Rice 6.9 4.04 5.5 5.5 Corn 6.55 3.12 6.5 12 (42 /a) Sorghum 6.88 3.5 5.0 42.5 /a Soybean 12.72 7.73 15 16 Mungbean 15.78 7.52 15 16 Peanuts 16.55 8.47 15 16 Note: /a Hybrids. Source: Chiang Mai University and Chulalongkorn University, Agricultural Employment Creation and the Improvement of the Quality of Agricul- tural Commodities for Increasing Income and Export Earnings (Northern Region), Vol II, p. 6.51, November 1985. 2.38 Agro-industrial Research. At the research level, improved varieties apparently exist for a number of nontraditional field crops and vegetables, but there is a need to develop relevant technology packages for these nontraditional crops (see Annex 2). The fact that this is a key issue for agro-industrial diversification is shown by the experience of Thailand's agro- industrial firms. In nearly every case firms that were successful were the ones which had built up their own agronomic knowledge and carried ou' pre- production trials over an extended period of time. Failure to do so by investing in adaptive research prior to starting production on the firm's own plantation or through contract farming with farmers has frequently, if not always, resulted in the firm's bankruptcy. This indicates that an important issue for commodity diversification is the generation of a relevant technology package. 2.39 To achieve this objective, there are several measures the Government could implement. They include: (a) improving the coordination of ag'o-industrial research between the private and public sector. This would include establishing - 27 - demonstration plots for nontraditional commodities in response to private sector needs, and better linking field research conducted by DOA/DOAE to market demand (see Chapter III, Section B); (b) implementing the recommended seed policy. This would induce Thai private firms to expand their agro-industrial research and develop a technology package for improved high yielding seeds; and (c) promoting contract farming for high value crops in irrigation command areas. This would lead private firms to develop a technology package and transfer it to farmers. 2.40 Agricultural Credit. An important consequence from the required yield intensification is that the greater use of modern inputs will involve greater cash outlays by farmers. This is to be expected not only as a general consequence of yield intensification, but also because nontraditional commodities tend to be intensive in their use of modern inputs. This is particularly the case for fish and shrimp farming, poultry and swine raising for which commercial inputs can amount up to 80% of production cost. In the past the farm sector has been able to finance a rapid increase in agricultural investment but this was accomplished in the context of rapidly rising agricul- tural prices in real terms, which is not likely to occur in the near future. This indicates that if modern inputs are to be purchased in greater quantity, the access to formal agricultural credit must be improved (see Chapter IV, Section D). Among several other measures, this would require improvements in the current land titling programs so that farmers can meet the legal requirements insisted upon by commercial banks for lending to them. 2.41 Agro-industrial Risks. Relatively large annual price variations usually accompany commodity diversification towards specialty-products with limited world markets. For the new, nontraditional commodities, the greater use of cash inputs by farmers in the context of fluctuating prices would result in increased risk at the farm level. As indicated by the experience of several African countries, fixing minimum producer prices in'ord'er to reduce farmers' risk would involve high costs and, inevitably, prevent the establish- ment of efficient linkages between farmers and agro-processing plants. More efficient alternatives would be to (a) establish a conmodity exchange through which forward contracts in rice, maize and cassava pellets would be traded (see Chapter IV, Section C); and (b) promote contract farming for high value speciality crops (see Chapter III, Section D). Both policies would result in a more efficient sharing of the high risks inherent to agro-industry. D. Commodity Diversification and Labor Migration 2.42 Increased agro-industrial diversification and agricultural intensification will help improve farmers' income derived from agricultural activities. But as indicated by the high share of non-farm income (about 50%) iu total farm cash income, increasing off-farm activities and industrial growth would also be highly beneficial for farmers' income. The importance of these latter policies for farmers' income is discussed below. - 28 - 2.43 Labor Productivity Growth. Agricultural labor migration is a normal consequence of economic growth, and in conjunction with industrial growth it has been one of the major factors accounting for the growth of labor productivity in agriculture. This can be seen by comparing the evolution of agriculture's share in employment to that of labor productivity. As indicated by Table 2.6, the share of agriculture in total employment fell sharply from 82.4% in 1960 to 73.0% in 1975, but since then it has declined much more slowly reaching 69.7% in 1984. Over the same period, the evolution of labor productivity in agriculture followed a similar pattern, i.e. it increased rapidly in 1960-75 at a rate even faster than that of industry and services, but it failed to rise in 1975-80. The apparent correlation between the growth rate of agricultural labor productivity and the evolution of agriculture's share in employment suggests that agricultural labor migration plays a major role in determining the growth of agricultural labor productivity. Since ultimately agricultural labor migration is linked to the extent to which jobs are created in industry and services, the stagnation of agricultural labor productivity in 1976-84 would appear to be strongly related to insufficient job creation in nonagricultural sectors. Table 2.9: EMPLOYMENT BY SECTOR, 1960-85 (in %) 1960 1975 1984 Agriculture 82.4 73.0 69.7 Industry 4.3 9.0 10.7 Services 13.3 18.0 19.6 Total 100.0 100.0 100.0 Source: Missionvcstimates. - 29 - Table 2.10: RATES OF GROWTH OF VALUE ADDED PER WORKER BY SECTOR (Percent per annum in constant prices) 1960-75 1975-84 Agriculture 4.2 0.0 Industry 2.6 2.4 Services 3.8 2.3 Source: Mission estimates. Note: Estimates of growth rate of value added per worker should be considered with caution as the definition of labor force in agriculture has changed over the years. 2.44 The importance of industrial growth in influencing agricultural growth is revealed by a cross-sectional analysis of developing countries. In Thailand as in Indonesia, Malaysia and the Philippines, both industry and agriculture have grown at a high rate. This contrasts with the low-growth complementarity of industry and agriculture observed in some other countries. For the world as a whole, some countries have managed to have high industrial growth and low agricultural growth, but very few countries have achieved high agricultural growth with low industrial growth. This result suggests that although specific agro-industrial policies can be expected to increase agri- cultural income, it is only through the implementation vf overall sound indus- trial and financial policies that a high agricultural growth rate would be achieved. In the case of Thailand, the most important macroeconomic policy instruments that have a strong impact on agro-industrial growth include the exchange rate, the structure of the protection system (and the related issue of export oriented vs. import substitution policies), investment incentives and credit policies (see Chapter IV). 2.45 Diversification and Labor Migration. In contemplating the formulation of sp -ific agro-industrial policies it is useful to bear in mind that the long-run historical perspective points to further decreases in the share of agriculture in income and employment. This long-run trend is the consequence on the one hand of a fall in the share of food consumption in GDP as per capita income rises, and on the other hand of increases in agricultural labor productivity. As a result, continued labor migration from agriculture will continue to be an inescapable feature of Thailand's economic develop- ment. But contrary to what seems to be one of the underlying rationales of the current agro-industrial diversification policy, crop diversification is unlikely to significantly slow down labor migration for two reasons. - 30 - 2.46 The first reason is that due to the decline in the price of Thailand's traditional commodities during the first half of the eighties, farmers have suffered a substantial loss in earnings. Although farmers' income could be increased by cultivating new agricultural commodities instead of traditional crops, this option remains limited to a minority of Thailand's farmers. This conclusion follows from the current stucture of employment in agriculture. In 1980 the labor force employed in rice, maize, rubber and cassava amounted to about 13.8 million. By contrast, the labor force engaged in the cultivation of fruits, vegetables, livestock, fisheries and other field crops amounted to only 1.6 million. Such numbere indicate that the additional amount of labor likely to be employed through the expansion of nontraditional commodities would be small, and smaller than the number of rice farmers who may decide to change activities in view of the low return to rice cultivation. In addition, since the most promising commodities are items such as fisheries, aquaculture, poultry and livestock, farmers who could benefit from an expansion of these activities may not be the same ones who are currently affected by the fall in the prices of traditional commodities. For these farmers, relevant alternatives would be to engage in off-farm activities or migrate. 2.47 The second rea.on which would lead commodity diversification to result in increased labor migration is technologic4l progress. As indicated by the analysis of the production potential of some new commodities in Annex 2, crucial requirements for increased agricultural diversification are that: (i) a relevant technological package for the cultivation of new seeds be developed; and (ii) the production costs of new commodities be lower. Basi- cally, these requirements point to the need for greater technological progress in agriculture. But depending on the underlying characteristics of market demand for these new agro-industrial products, greater technological progress may lead to reduced agricultural employment (although farmers' income would rise). This is particularly likely to happen for commodities the exports of which are a small proportion of output and whose price elasticity of domestic demand is low. These conditions may apply to fruits and vegetables, and some feedgrains crops. 2.48 For these various reasons it is quite likely that agricultural labor migration will continue in the future, and may even be accelerated by commodi- ty diversification. This, of course, does not mean that agricultural diversi- fication should not be facilitated (since it would result in increased farmers' income); but this implies that an important complementary policy of agricultural diversification would be to increase possible sources of off-farm income. One means of achieving this is to implement policies which would lead to greater employment in industry. Generally, such policies tend to be export-oriented. A second means would be to give agricultural workers, and particularly the children of current farmers, the skills they need for alter- native employment since they are the ones most likely to leave the agricul- tural sector. This would require improving education and training in rural areast the level of which is generally much below urban areas. Such emphasis is also important for agro-industrial diversification. As previously me.n- tioned, greater diversification will require increased technological progress in agriculture, but this will be facilitated if formal education and training in rural areas are improved. - 31 - III. GOVERNMENT INVESTMENT AND SUPPORT SERVICES FOR AGROBUSINESS DIVERSIFICATION 3.1 Low commodity prices for Thailand's traditional conuaodities in international markets and their impact on farmgate prices have caused the Thai Government to search for alternative nontraditional commodities. As indicated in Chapter II, the Thai agricultural sector has already undergone a substantial diversification process. Notwithstanding the success of certain Thai products, several agro-industrial ventures have failed and the impact of the nontraditional commodities on employment and value added has been limited. To increase the importance of new commodities for the agricultural sector will require (i) improvement of government support services and programs to bring about increased agricultural yields and investment by the private sector; (ii) increased government investment in irrigation and agri- cultural research to increase the supply of new commodities; (iii) a strengthening of linkages among farmers, processors and exporters to improve technology transfer and consistency in product quality; and (iv) the reversal of policies which prevent the adoption of yield-improving technologies and private sector investment in agro-processing. 3.2 These measures do not imply a radical change in the manner agro- industrial development takes place in Thailand. Nevertheless, the corresponding government initiatives cannot be pursued on a broad front. Focussed attention is needed to implement first the reforms that are most likely to have the greatest impact. For this reason, the measures discussed in Sections A and B of this chapter concern only a subset of a more general program to improve government support services, i.e. those that are important for the new nontraditional commodities. Similarly, Section C of this chapter is focussed on irrigation command areas because (i) the potential for diversification appears to be the best in these areas; and (ii) Government intervention would have the greatest impact on diversification in these areas. Section D discusses the various institutional arrangements possible for the cultivation of new crops, but is focussed on contract farming because it would best lead to a strengthening of linkages among farmers, processors and exporters for some of the new crops. Finally, general policy changes which affect the adoption of yield-improving technology and private investment in agro-industry are discussed in Chapter IV rather than in this chapter because they would also be quite important for traditional commodities. A. Promotion Framework 3.3 Although the preparation of specific work plans for agro-industrial products by Government has led to the formulation of comprehensive recommendations in the Sixth National Development Plan (see Chapter 1), there is still a need to further define the respective role of Government and the private sector in the agro-industrial diversification process. As indicated in Chapter II, Thailand's agro-industrial successes were due to the fact that (a) the Government has largely avoided counter-productive efforts to displace private initiative; (b) Thai merchants and investors have provided the capital, technical and marketing expertise required to turn market potential into real economic achievement; and (c) there were no major constraints - 32 - affecting the most important factors of production (land and labor). To some extent, the challenge now facing Thailand is to ensure that the same principles continue to apply for the nontraditional commodities. 3.4 MOAC Policy Statement. The most clear-cut policy statement to date related to agribusiness promotion in irrigation projects has come from the Ministry of Agriculture and Cooperatives (MOAC). Its origin was in the need to establish a framework within which a Thai multinational firm (Charoen Pokphand) would operate a high technology rice production program in the Mae Klong irrigation project. The MOAC policy statement was drafted by NESDB, MOAC and RID in January 1985 with a revised announcement issued in April 1985 (See English translation in Annex 3). This is the only known statement linking production and agro-industrial investment issued by the Thai Government. 3.5 The MOAC statement is a significant first step toward raising public sector awareness of the need to define government role in irrigation command areas (defined as areas where the irrigation infrastructure is managed by the Royal Irrigation Department (RID)), and identify specific support services which would be provided to private firms. As listed in the MOAC statement, government role would be to: (a) provide assistance so that the necessary facilities for crop production e.g., credit, fertilizer and insecticides are available; (b) provide technical officers for the training of participating farmers; (c) provide research plots in collaboration with private enterprises; (d) provide an irrigation system which is appropriate for the project Area; (e) select farmers for the project and establish water user groups, and/or other agricultural organizations; (f) provide publicity to the project and collect-data. This includes preparation of report on production and marketing situations, the irrigation system and the appropriate area for the cultivation of each crop in the project area; and (g) coordination of signing of contract agreements between farmers and private enterprises. 3.6 The MOAC policy statement had, however, a limited impact partly because it was not widely distributed to RID project directors in irrigation command areas and to other government agencies involved in agro-industries. In addition, the policy statement failed to assign specific agro-industrial tasks to identifiable government agencies. Instead, a more comprehensive document could have been issued providing detailed assignments to specific agencies which would have ensured that the tasks outlined in the policy statement would have been carried out. - 33 - 3.7 As a result of these shortcomings RID was left to contend with the implementation of that policy statement. Howaver, RID has traditionally viewed its role as that of constructing and managing irrigation infrastructure, and felt that the promotion of agribusiness was best left to other government agencies. As a result, RID has not so far played a major role in the promotion of agro-industrial crops in irrigation command areas. Yet, the role of RID will have to evolve as the increased cultivation of nonrice crops in irrigation command areas will require improved coordination among government agencies as well as between the private sector and government agencies involved in irrigation command areas. 3.8 There are six agricultural service agencies responsible for supporting crop production in irrigation projects, namely the Office of Agricultural Economics (OAE), the Department of Agriculture (DOA), the Department of Agricultural Extension (DOAE), the Royal Irrigation Department (RID), the Department of Cooperative Promotion (DCP), and the Land Consolida- tion Office (LCO). Each of these agencies is responsible for one or more aspects of irrigated agriculture production support. The policies of each agency have tended to stress independence, rather than interdependence; action, rather than interaction; and policy implementation rather than program responsiveness to local conditions. The result has been a duplicity of efforts and lack of focus on solving problems which need to be addressed. 3.9 To improve coordination among these government agencies, a policy framework for government intervention in agro-industry should be developed at the ministerial level. Such an exercise would involve various agricultural agencies, the National Economic and Social Economic Development Board, and the Joint Public-Private Sector Consultative Committee. 3.10 Role of the Joint Public-Private Sector Consultative Committee. The Joint-Public Sector Consultative Committee (Joint Committee) was established in June 1981 for the purpose of addressing urgent economic problems facing Thailand. The original Committee consisted of Thailand's three major private sector institutions: the Board of Trade; the Association of Thai Industries; and, the Thai Bankers Association. The public sector was eventually included in the grouping to form the Joint Committee with the Prime Minister serving as chairman of the Joint Committee, and NESDB acting as the secretariat. This structure is paralleled at the provincial level with the governor servirng as the chairman of the Provincial Joint Committee, and the provincial planning office providing secretariat services. 3.11 The Joint Committee has taken several actions to promote the devel- opment of agro-industries in irrigated areas since its creation in 1981. The most important ones have included the following: (a) The establishment of Thai-JACC (Joint Agricultural Consultative Corporation) with assistance from USAID for the purpose of promoting joint venture operations between Thai and American companies. The most significant achievement of Thai-JACC has been to arrange for two firms to produce and process tomatoes on a pilot basis at the Lam Nam Oon Irrigation Project in Northeast Thailand. The pilot project was operated by Heinz (U.S.) and a Thai registered firm - 34 - called Chung-Ching Holdings Co., Ltd. Other inint ventures being promoted by Thai-JACC include the processing of dairy products; seafood for freezing; and cultivation of temperate climate crops. (b) The Joint Committee has instructed the Ministry of Agriculture and Cooperatives (MOAC) to prepare a framework for having private sector investors operate in irrigation command areas. The announcement outlined the responsibilities of government agencies and private enterprises investing in irrigation command areas. It has resulted in private firms' interver-ions in the Mae Klong and Lam Nam Oon irrigation projects and the Sukhothai groundwater project. In all cases, the approach used was a comprehensive production-marketing program as prescribed in the MOAC announcement. 3.12 The issues considered and the actions taken by the Joint Committee demonstrate the importanc-' attached by the members of the Committee to the agro-industrial sub-sector. Furthermore, the responses of the agencies instructed to take action to alleviate specific problems have been relatively quick and positive, which suggests that the Joint Committee cou"ld play a useful role in the formulation of government policies towards agro-industry. Areas where the Joint Committee could exercise such a role include: (a) Sponsoring the holding of commodity-specific workshops, whereby Government and private sector representatives concerned with specific agro-industries could meet and work toward establishing private sector cooperation. Separate half or whole day workshops could be held for food processors, oil extractors, sugar refiners, rice millers, and others. (b) The national level Joint Committee could consider instructing con- cerned government agencies to prepare area development plans for selected irrigation command areas. An important aspect of these plans would be a package of services which would support irrigated agricultural production and agro-industrial development (see Section B). These plans would specify which agro-industrial tasks would be assigned to government agencies. Agencies with principal roles in preparing an area development plan and operating promotional activities include: the Bank for Agriculture and Agricultural Cooperatives (BAAC), the Royal Irrigation Department, the Department of Agriculture, the Department of Agricultural Extension, the Ministry of Commerce, and the Community Development Department. (c) The Joint Committee could take an active role in promoting the development potential of selected irrigation command areas by high- lighting those areas. Workshops and committee meetings could be organized at irrigation project sites with facilities available for such gatherings. The publicity and media coverage generated by Joint Committee activities would expose the host site to the public and provide an opportunity for private sector participants to visit different irrigation projects, and make them more aware of their production potential. - 35 - 3.13 In developing a promotion framework for agribusinesses in irrigation command areas, it is crucial to bear in mind that there is no universal model that can be applied to all irrigation projects. This is particularly the case in view of the unequal level of agro-industrial diversification achieved in various irrigation command areas. Since the purpose of government interven- tion in agro-industry is to elicit greater private sector investment, the Government would have to ensure that the objective of promoting agro- industrial diversification does not lead government agencies to displace private sector initiatives. This consideration indicates that the support services provided by government agencies in irrigation command areas to promote agribusiness should be differentiated according to the regional level of economic development. 3.14 Recommendations. As discussed in greater detail in the following sections, the key role of Government in irrigation command areas where a diversified agro-processing base exists would consist in (i) providing a m-Aern irrigation infrastructure; (ii) creating Water User Organizations; and (iii) promoting contract farming for high value crops. In other irrigated areas, mainly in the least developed regions of the North and the Northeast, the Government may want to provide more intensive support services in addition to the three functions just mentioned above. These services would be made avaiiable to private firms and farmers during a temporary period (three to five years) in order to promote private sector investment in irrigation command areas. These support services would consist in: (i) providing research plots where research on new agro-industrial commodities would be conducted by DOA/DOAE in collaboration with the private firms involved in irrigation command areas; (ii) providing agricultural extension services, and particularly technical officers for the training of farmers participating in a production program organized by private firms; (iii) providing credit to farmers to support the adoption of new technology, particularly through BAAC lending; and (iv) assisting rirms in the selection of farmers, for example through BAAC. In view of the difficulty of implementing the recommended institutional changes and investment, the Government may want to proceed gradually by first inj)iating changes in a few pilot irrigated areas, as is its stated intention.- 3.15 Although the promotion framework discussed in this section has so far only concerned irrigation command areas, a number of recommendations made throughout the report would lead to diversification outside irrigation command area. 3.16 The first and most important measure would be to promote livestock activities (pork and cattle) (see Annex 2, paras. 62-68). This would result in the expansion of the domestic feed industry, and therefore in increased 1/ Consideration was being given to replicate the Lan Nam Oon model (see Annex 4) in the following irrigation projects: Yam Lai Hoy Kong; Songkhla in the South; Mae Wang-Kew Lom/Lampang in the North; and Khok Kratiem/Lopburi in the Center. - 36 - cultivation of new feed grains such as red hybrid sorghum. As indicated by the experience of other countries (see Chapter IV, Section A), such indirect effects may be quite important for increasing total cereal production. Cattle expansion would be particularly attractive for the Northeast which has few diversification options, and for small farmers provided a farming system incorporating livestock could be developed. This is an area where the Livestock Department of MOAC could play a useful role. 3.17 To achieve this, a number of constraints must be addressed. First, there is a need to launch a program to prevent and eradicate foot-and-mouth disease. This would require a sharp increase in the production of vaccines by the Department of Livest2ok, since the current vaccine production is too low to vaccinate all cattle.- Second, as indicated by the rapid development of the poultry sector and its successful control of potential health problems, a key ingredient for improvements in the livestock sector would be to facilitate investments by private firms in modern slaughterhouses and development of contract farming. Key measures to that effect would be to (i) repeal the Animal Slaughter and Meat Trade control Act of 1959; (ii) allow free domestic trade in livestock and remove current zonal restrictions on meat trade; and (iii) remove current restrictions (prohibitions or licensing) on exports of swine and/or meat. Under this new framework, there would still be a need for veterinary inspections for animal diseases and sanitary inspections of slaughterhouse, but they would be carried out respectively by the Department of Livestock and the Ministry of Health. To protect against animal disease epidemics, controls on the meat trade would be imposed only upon evidence of an animal disease epidemic in a specific area. These controls would be decided by the Livestock Department. Finally, there is a need to improve forage during the dry season. One possible solution would be for farmers to set aside a small piece of land for animal feed production and to supplement this with appropriate animal feed stuff. This approach has been successfully applied in a livestock cooperative in Northeast Thailand, but its commercial viability (without subsidies) would have to be further investigated. In addi- tion, the use of processing byproducts such as molasses in foodstuff would also have to be explored. In view of the importance of these constraints for small farmholders, the Government may want to further examine these issues. 3.18 The second measure relevant for agro-industrial diversification would be to further promote fish and shrimp farming. These are areas where the Department of Fisheries is already quite active and where markets exist (see Annex 2, paras. 54-60). 2/ At present, the Livestock Development Department can produce only 10-12 million doses annually for the prevention of the foot-and-mouth disease. It has approved a project to increase production up to 40 million doses, but this would be sufficient to vaccinate only 70% of the animals. - 37 - B. Agricultural Research and Extension Services 3.19 As analyzed in Annex 2 there are few cases where production of nontraditional agro-industrial commodities could be rapidly increased in the short run without any change in the current profitability and risk of produc- tion. Increased cultivation and domestic processing of new commodities would therefore require either lower product price and/or higher product quality so as to stimulate market demand. But this in turn can be achieved only through a series of "mini green revolutions" for the new agricultural commodities, which would require increased agricultural research. Agricultural research expenditures in Thailand have in fact increased from 0.5% of agricultural GDP in 1975 to 0.75% in 1984, which would seem justified in view of the high soci rate of return on agricultural research in Thailand (72% in 1974- 79),2' Important issues that remain to be addressed are: (a) the allocation of government funds among commodities; and (b) the role of the private and public sectors in agricultural research. Agricultural Research 3.20 Since accumulated knowledge plays in determining where additional research effort could have the greatest pay-off, it is difficult to define a universally valid rule for the optimal commodity allocation of resources in agricultural research. Nevertheless, there are reasons to expect that iv the long-run the percentage allocation of research expenditures should be roughly similar to the relative economic importance of agricultural commodities. This implies that theoretically the share of resefch expenditures in the value of output would be the same for each commodity." 3.21 To provide a comparison between the implications of the model outlined above and actual allocation of research expenditures, one would need an estimate of government and private sector expenditures. In the absence of data on total research expenditures, Table 3.1 shows the comparison between the percentage allocation of government research expenditures by commodity. This table shows that several commodities of large economic importance are receiving minimal government research attention. Excluding the traditional export crops where the private sector would be expected to play a role (sugar- cane, tobacco, rubber and cassava), government research would seem to be par- ticularly low for vegetables, fruits and livestock. However, it should be 3/ The social rate of return on agricultural research was estimated to be 72% in 1974-79. See Robert E. Evenson and Suthad Setboonsarng, op. cit. 4/ Such a result is obtained if (a) output is produced under constant returns to scale and research is a separable production input; and (b) the probability of discovery is a function of research and is the same for each crop. It then follows that research expenditures are proportional to the value of output and the proportionality factor is the same for all commodities. This rule, however, remains indicative as it does not take into account other factors affecting the profitability of research such as the elasticity of demand for agricultural commodities. - 38 - Table 3.1: GOVERNMENT RESEARCH EXPENDITURES BY COMMODITY, AND COMMODITY SHARES IN AGRICULTURAL GDP, 1984 Agricultural research/a Share of Research % allocation commodity as % of Million of commodity in agricul- agricul- baht research tural GDP tural GDP Commodity Research Crop 497.2 51.4 73.2 0.35 Rice 96.4 10.0 23.0 0.22 Cotton - - 0.4 - Corn/sorghum 24.8 2.6 4.4 0.29 Sugarcane 20.9 2.2 9.8 0.11 Tobacco 5.0 0.5 2.0 0.13 Kenaf n.a. n.a. 0.4 n.a. Rubber 75.1 7.8 4.9 0.79 Mulberry 20.1 2.1 n.a. n.a. Vegetables 2.7 0.2 5.8 0.02 Ornamental 0.7 0.0 n.a. n.a. Oil crops /b n.a. n.a. 0.6 1.40/c Root crops /d 6.4 0.7 4.2 0.08 Other field crops /e 104.2 10.8 3.1 1.60 Other tree /f 64.9 6.7 15.2 0.22 Other research /g 76.0 7.8 - - Livestock 30.8 3.2 13.6 0.11 Fisheries 308.8 31.9 .6.8 2.35 Marine fish 64.0 6.6 } 4.7 1.80 Coastal 100.7 10.4 } } Freshwater 144.1 14.9 2.1 3.6 Forestry 13.0 13.5 6.3 0.10 Commodity Total 966.8 100.0 100.0 0.50 Noncommodity Research /h 510.2 - - 0.26 Total Agricultural Research 1,477.0 0.76 /a Research expenditures from Rungruang Isarangkura, Thailand and the CGIAR Centers, a Study of Their Collaboration in Agricultural Research, p. 40, 1986, World Bank. /b Mainly field beans. 7-c 1981 data. 7W_ Mainly cassava. We Various field crops which cannot be separated. 7T Includes cocoa, coffee and fruits. E Pathology, entomology and chemistry. /h Includes research on farming systems, agro-economics, agro-industries and environment. - 39 - taken into account that private research is quite important for some new nontraditional agro-industrial commodities. Overall, the apparent lack of research for these commodities may thus be less than implied by Table 3.1. By contrast, fishery research expenditures are high as a percentage of value added (2.35%). But this is a recent phenomenon (in 1979 research expenditures amounted to 0.9% of value added in fisheries) due to a rapid increase of research on coastal fisheries. Since during the 1980-86 period seafood exports rose rapidly, the expansion of fishery research would seem to be in response to market demand. 3.22 In contemplating the role of government research, it is important to take into account that although the public good attributes of research makes public support of agricultural research socially desirable, it does not follow that all research should be conducted in government institutions. This conclusion follows from the composition of the social benefits derived from agricultural research. If the benefits consist mainly of an increase in producer's surpltus, producers will have a financial interest in carrying out their own research program or financing the activities of a research institute. The conditions for this to happen are that the price elasticity of demand be high 5nd the number of firms involved in processing a particular crop be small. These characteristics apply to some of Thailand's traditional export crops such as tobacco and sugar but they do not apply to most grain crops which are cultivated by a large number of farmers and processed by a large number of firms. Under these conditions, the Government would have to play the major role in financing and carrying out research. 3.23 The respective role of the Government and the private sector is more complex for the nontraditional crops. First, in the case of commodities which are mainly consumed at home, one would expect that most of the benefits of technological progress would be transmitted to consumers through lower prices so that private firms may not find it profitable to engage in research or varietal imp;^'!ement. This would argue in favour of increased government research for fruits and vegetables. For the other crops which would mainly be exported, the export market may be too small to justify a private firm's research, but this is not always the case since several Thai agro-industrial firms have their own research plots and programs. As a general rule, greater involvement of private firms in research concerning the new agro-industrial commodities is beneficial because firms are in contact with market demand and can identify research areas which look promising. In order to improve linkages between research and market demand, the Government may want to improve effective information linkages among university research centers, DOA and private firms. 5/ Reasons for these conditions are the following: if the price elasticity of demand is high, technological progress will result in a moderate decline of commodity prices and firms will capture most of the benefits of research; and if there are a large number of firms involved in processing, the contracting costs of setting up a cooperative research program would be high and research may not take place. - 40 - 3.24 Implications of biotechnology. In the past Thailand's private firms have tended to concentrate their research effort in the development of improved agricultural machinery because there was a strong market .emand for it. But as indicated by the growing size of the commercial corn seed industry in Thailand (see Annex 2, paras. 14-15) there is an emerging demand for com- mercial seeds and hybrid seeds. In this context new developments stemming from recent advances in biotechnology--mainly improved plant genetics--have stimulated large private investment in plant-related biotechnology in the US and other industrial countries. Although it is still early to judge the implications of this trend, a new agricultural revolution may emerge from biotechnology because it offers techniques that promise to be faster and more precise than traditional plant breeding techniques. 3.25 Research results derived from biotechnology could be important in three areas: livestock, industrial or plantation crops, cereal grains and legumes, and roots and tubers. Livestock applications are the more advanced and are b 'ng made in the form of growth hormones, and particularly new vaccines.- The second area of application concerns industrial and plantation crops. This is an area where the private sector could play a major role as hybridization makes it possible for private firms to capture a share of the profits from varietal improvement. It is thus a natural area for private sector involvement. Access to this technology could be acheved by Thailand through joint ventures and promotion of foreign investment.- The third area of application--cereal grains and legumes--faces severe technical problems as the development of hybrids is complicated and cos ,y. Nevertheless, research is advancing rapidly for corn, rice and tomatoes.- 3.26 Recommendations. There are currently about ten private seed companies which carry out active varietal improvement programs, and about the same number of seed companies which do not have any programs, but may have one in the future. This potential could be used by the Government to develop agronomic knowledge and technology transfer to farmers. At present private firms can obtain the breeding materials developed by DOA, and this policy should be pursued as this will help the local seed companies establish their own breeding programs. 6/ For example new vaccines have been produced at ILRAD in Kenya, and they could lead to major improvements in animal health. 7/ An example of this is provided by Unilever which is cooperating with the Malaysian palm oil industry to produce a high yielding plam oil using tissue culture. 8/ A tomato high in solids (DNAP-9) was developed by DNA Plant technology, a US firm, for the Campbell Soup Company. By manipulating leaf cell from an existing variety through cell culture, the DNAP-9 was developed 'n three years rather than the usual seven years. - 41 - 3.27 As discussed in Chapter II, Section B, expectations are that the commercial production of nontraditional crops, especially fruits and vege- tables, will continue to expand throughout the next decade. But any effort to modernize the production, processing, packaging, and marketing of non- traditional commodities, in particular fruits and vegetables, requires that the Government begin with upgrading basic agricultural research. Among the targets of the agricultural research program operated by the Department of Agriculture (DOA), the development and introduction of improved vegetable seed varieties and accelerated fruit breeding techniques should receive increased attention. In order to improve linkages with market demand, this research program should be in direct response to the needs of private sector processors and exporters. In irrigation command areas, this could be achieved by setting up test plots and demonstration fields in cooperation with private firms planning to introduce new crops. More generally, in order to improve information linkages with the private sector and promote closer working relationship, DOA may want to organize crop specific public-private workshops. 3.28 For reasons discussed in Annex 2 (paras. 22-45), the Government may also want to give special attention to both the Farming Systems Research Institute and the Post-Harvest Technology Institute. Key action would include accelerating the work of the Farming Systems Research Institute in irrigation command areas in order to identify cropping patterns and farm management systems most appropriate to the cultivation of high value horticulture crops for export. In order to derive full benefits from such a program, the research of the Farming Systems Research Institute would need to be closely coordinated with that of the Post-Harvest Institute. Of special importance is research on technologies of post-harvest handling which play major roles in determining the marketability of commodities. A post-harvest management program might include the following items: (i) identification of fruits and vegetables to be harvested; (ii) methods of detaching, collecting and cleaning; and (iii) field grading and packing of fruits. It would also be important to introduce economic appraisal to the techniques found to be appropriate by DOA, in order to ensure financial and economic viability of recommended technologies. Overall, the target of the agro-economic research would be the establishment of quality standards and control procedures to insure increased fresh and processed fruit and vegetable exports. Ag icultural Extension Services 3.29 A national agricultural extension system has been in operation in Thailand employing the training and visit approach for less than ten years. This system is a significant improvement on its predecessor, which was under- staffed, underfinanced, and lacked any identifiable priorities. The system now operating is linked, however, too closely to guidelines established in Bangkok. Frequently the result is an inflexibility on the part of local extension staff, and a lack of response to local needs. Until now, most of DOAE's resources have been allocated to the control of pests and diseases affecting rice. This emphasis was justified by the importance of rice for Thailand's agricultural sector. But exports of nontraditional products have increased rapidly and fish and seafood products have now become Thailand's main agro-industrial export. This raises the issue of whether more attention to nontraditional commodities should be given by DOAE in their extension services. - 42 - 3.30 As previously mentioned, one of the key issues for the further development of Thailand's nontraditional agro-industrial commodities is the organization of a consistent supply of raw materials that would meet the needs of processors and consumers. These are areas where the private sector would have to play a leading role because markets would have first to be identified before production can begin. In addition, since government research on fruits and vegetables has been relatively small (see Table 3.1), it would take some time before the recommended increase in government expenditures would produce worthwhile research results which could be transmitted by DOAE to farmers. To offset this lag, one solution might be for DOAE to transmit the research results generated by successful farmers and firms to other farmers. This policy--which is now being applied by DOAE--would be quite relevant to the fruits and vegetables sector where private firms and farmers have already conducted their own adaptive research program. 3.31 As indicated by the rapidity with which Thai farmers have increased the output of new, profitable commodities, risk aversion or lack of informa- tion about market demand do not seem to be important constraints. But lack of agronomic knowledge concerning the cultivation of new crops may be a more general phenomenon. In this area DOA and DOAE could play a role. The under- lying rationale for this role comes from the notion that in agriculture like in industry there is a learning-by-doing process with significant production externalities and social benefits not fully captured by private producers. In industry this process leads to a fall in production costs as output and pro- ductive experience accumulates overtime. In agriculture, the learning-by- doing process is different because the accumulation of productive experience is a function of the time passed since the initiation of production. As a consequence, since elapsed tine rather than accumulated output determines agronomic knowledge, efficient government policy would entail the earliest possible establishment of demonstration plots and not a subsidy to produc- tion. For this reason, policies such as subsidizing the use of improved seeds or providing agricultural credit at a subsidized rate to stimulate the pro- duction of new agro-industrial commodities would not seem to be first-best policies in Thailand's case. 3.32 Recommendations. Key measures to increase the production of nontraditional commodities would be to: (a) set up demonstration plots for new commodities; (b) carry out applied research in farmers' fields; field tests and trials should also include water applications so that recommend- ations include minimum water requirements; and (c) closely associate private firms which would be processing the new commodities to field tests and trials. 3.33 In view of the difficulty of correctly assessing market demand before starting any substantial production program, it is important that any production targets set by DOAE for the new crops it intends to promote remain modest. Since most new agro-industrial crops tend to have rather small mar- kets, there is a clear risk that excessive DOAE promotion could result in - 43 - oversupply and farmers' income losses. Current examples of this possibility may include sunflower which is being promoted by DOAE on a large scale. 3.34 To increase the relevance of the extension advice provided in irri- gated areas, training for DOAE field staff assigned to irrigated areas may be needed to re-orient them to the potentials of irrigated agriculture. Staff training is especially important in areas which have been predominantly rainfed (the Northeast) or mono-cropped (sugar cane in Mae Klong and rice in Phitsanulok). The most important aspects of training for agricultural exten- sion officers are (i) in-field and on-farm water management; (ii) the DOAE's strategy in meeting local private sector raw material needs; and (iii) quality control and proper post-harvest handling at the farm level. These subjects are basic to agricultural extension operations in irrigation command areas and could easily be adapted to the fortnightly training program of the Department of Agricultural Extension. C. Irrigation Command Areas 3.35 Although some new minor crops could be cultivated outside irrigation command areas, production of most new agro-industrial crops is likely to be concentrated in irrigation command areas for three reasons. The first one is that probpects for wet season diversification are very limited since farmers prefer to grow rice in the wet season to guarantee their food supply, and wet season water is excessive for upland crops in most irrigated areas. Second, although upland crops need less water than rice, they also require good water control. As a result, the potential for crop diversification is generally confined to areas with access to water during the dry season, which are generally located in irrigation command areas. The second reason is that new agro-industrial crops that look promising for Thailand are quite technology and input intensive; but the full potential of the new inputs required for their cultivation can only be achieved if water availability is sufficient and controlled. 3.36 Regions where new agro-indilstrial crops could be grown are areas where there are adequate water supply and ready access to agro-industrial processing facilities. These conditions apply to the North, particularly the Phitsanulok irrigation command area, irrigated areas of the Northeast, and the Mae Klong irrigation command area. The Northern region with favorable climatic and agronomic conditions, and with farmers already familiar with cultivating many of the nontraditional crops under both rainfed and irrigated conditions, offers promising opportunities for increased nontraditional cr
LAO PEOPLE'S DEM. REPUBLIC| _,
L | lChiangMj maa Ng ( ~ n i
>> E W ( vc;z k ~~~~~~~~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~MALAYSIA4
88- \ S~~~ar,nf De 18 E''htA ,':Z._- ( SINAPORE
< X ~~~~~~~~~~~~~~~~ono N-. 1, -V t~ I t-.
>,prfiphaen;1 Ph_ Ph?>*chabu30 / _f / 4 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7" r /.\;sh , fae sor-l
B U R M A~~~T oe Klolg/ h---,lu gth/< .-ra
3 Ja , i t ,, j . A o 7 ) ; 1 l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~lln I~11tll
t~~~~~~~~~~~~~~~~~~~~~~~~~~~bhh f-c >; 4\whpho m tvs>tt
% Wha ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t ' ,.i-%
O'Ghg P Ptchobur >anuZeX7 en-oc P' m.k
j~~~ ~~ \_/ ru o??h?? hnbt
"~~~~~ U R M APeei? ohAST
l7U lvl $hLtA *mo H1
X C E N ~~Xi 0 * S>e
16 ' p%e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~e ~~~~~~~~~~~~~~~+ ~ ~ ~ 6
tJ.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Fl
S.~~~~~~~~~~~~~A
\ "b.: azon S A ;u r %Bon
S SYe~~~~tchob-r 5 T E R \
DEMOCRATIC KAMPUCHEA
jf PrxhsopKh-r )