Growing into Trouble: Institutions and Politics in the Thai Sugar Industry

By Doner, Richard F.; Ramsay, Ansil | Journal of East Asian Studies, January-April 2004 | Go to article overview

Growing into Trouble: Institutions and Politics in the Thai Sugar Industry


Doner, Richard F., Ramsay, Ansil, Journal of East Asian Studies


Why do some economies grow for several years and then stall? One obvious answer is that these economies have "overheated." Another is that foreign demand for their products has dried up. This article explores a longer-term explanation--namely, that the institutions favorable for one stage of economic growth are less suitable for a subsequent stage. This idea of "growing into trouble" is consistent with Dani Rodrik's argument that the institutions required to stimulate growth may not be sufficient to sustain growth. (1) We push this idea further by exploring the different requirements of structural change versus upgrading. Structural change connotes an economy's diversification through new investments, often producing real income growth. But economies can diversify without being more efficient, or their initial competitiveness can be based largely on transient factor endowment advantages. Upgrading refers to the competitiveness of these diverse activities achieved through locally based productivity improvements. (2)

Our approach builds on a growing institutionalist literature whose core proposition is that "to get prices fight and to get policies right, it is also necessary to 'get institutions right.'" (3) However, two weaknesses characterize much of this literature: (1) underspecification of the functions of institutions in relation to particular developmental tasks; and (2) lack of clarity as to the political factors influencing institutional creation. We seek to go beyond these limitations by combining the functionalist and historical-political elements of the institutionalist tradition into an analysis of institutional demand and supply.

On the demand side, we address "institutional goodness of fit." That is, we specify the challenges of particular development tasks and link those challenges to particular institutional capacities or functions. We make no judgment as to the specific forms such capacities take. (4) But specifying the kinds of capacities required for different kinds of growth says nothing about why actors create certain kinds of institutions. Market arrangements are instead imposed by political elites, within a preexisting set of institutions, as mechanisms through which "agents can extract involuntary transfers of resources." (5) The supply-side challenge is thus to specify the preferences of state elites and the political mechanisms through which these preferences are implemented. We suggest that elite preferences for upgrading-related economic institutions are a function of three factors that, taken together, constitute a politically salient kind of vulnerability: (1) pressures from popular sectors for welfare improvements; (2) the heightened need for foreign exchange and war materiel induced by national insecurity; and (3) the hard budget constraints imposed by a scarcity of easy revenue sources.

Thailand's economic growth, and more particularly the country's sugar industry, constitutes a useful case through which to examine the utility of this approach. Thai economic development illustrates the challenges of upgrading. Thai growth rates, successful diversification, and relatively market-friendly policies made it one of the World Bank's high-performing Asian economies and an example to be emulated by other developing countries. (6) At the same time, the Thai economy has consistently exhibited weaknesses in the technological and productivity levels of its own firms and workers. These problems have intensified in the 1990s. As gross domestic product (GDP) and exports slumped in the late 1990s, evidence emerged that much of Thailand's export boom relied on cheap, inefficient labor and imported inputs. Thai labor productivity stagnated in the second half of the 1990s, with productivity growth rates lagging even Indonesia, Malaysia, the Philippines, and Vietnam. (7) Low productivity and technology even characterized areas, such as agriculture, that did not require high-end scientific and technical skills. …

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