The effects of Government intervention and the Multi-Fibre Arrangement on the Thai clothing and textiles industry

Thailand has transformed its agarian economy to become a semi-industrialized country in the last two decades. It is among the fastest growing developing countries in the world. . The manufacturing sector, particularly labour intensive industries such as clothing and textiles, has become increasingly important to the country. The industry has grown so rapidly that it is now the highest foreign exchange earner, having replaced rice in 1985. Clothing and textile exports have grown by about 40 per cent a year since 1980. The objective of this study is to explain the rapid growth in the industry, by looking mainly at the effects of government intervention and the Multi-Fibre Arrangement (MFA). Government intervention in the industry has been considerable but policies toward the industry have been confusing. There has been promotion, protection w~d attempts to restrict the industry's capacity. In addition the export market has been restricted by the Multi-Fibre Arrangement (MFA). The MFA has had both positive and negative effects on the Thai clothing and textile sector. In the early stages, the MFA created opportunities for Thailand to export to the MFA countries by restricting the exports of the major exporting countries such as Hong Kong, the Republic of Korea and Taiwan. However when the quotas were filled the MFA had a negative effect because the expansion of export volumes has been limited. This study suggests that the Thai clothing industry has grown rapidly for various reasons. The competitive environment in both clothing and textiles is an important factor. Government tried to control the textile industry's capacity, because of the slump in foreign demand in 1978 prohibited expansion or establishment of new textile capacity. Restrictions created monopoly rents to existing textile firms from 1978-86 even though the policy was never effectively implemented. A large number of textile capacities have subsequently been installed without registering with the Ministry of Industry to capture the rent. The high competition among textile firms has nullified the effectiveness of protection given to the textile industry in which, at times, prices of textiles in Thailand have fallen below the world market price. This benefits down stream industries, especially clothing. Consequently effective rates of assistance on both clothing and textile industries are close to zero. Moreover it was found that the effective rates of assistance on exports are slightly higher than those on domestic sales, corresponding with export-oriented strategy since the Third National Economic and Social Development Plan. A sharp increase in supply and an increase in profitability of exports compared with production for domes tic sales are also responsible for the export growth. In addition Thailand has become competitive in labour intensive industries as a result of a decline in competitiveness of the Asian NICs which have experienced increases in real wages as well as appreciation of local currencies. Finally Thailand has implemented a sound macro-economic policy through conservative fiscal and monetary policies, which has kept inflation low and maintained exchange rates close to the equilibrium level allowing Thailand to expand its exports when market opportunities opened. Although the MFA could cause some concern to Thailand's export growth in the future, clothing exports will continue to grow rapidly for some time. The export value of clothing to the MFA markets can be increased by upgrading because Thailand is still exporting low quality products. Diversification of export markets has been extensive since the export quota to the MFA markets filled in the mid 1980s. The important markets outside the MFA are the Middle- Eastern countries, Japan and some other Asian NICs such as Singapore. Market opportunities are opening up particularly in Japan as well as in the NICs because of a decline in competitiveness of the Asian NICs in clothing. However Thailand is losing if the welfare effects of MFA and the free trade situation are compared