# _Worsening Governance Yet Moderate Regulation_

Indicators developed by Kaufmann, Kraay and Mastruzzi (2005) allow an international comparison of Thailand in terms of governance.<sup>7</sup> Clearly, given the difficulties of quantifying this dimension, these measures have to be interpreted with care. Figure 11.A shows the changes over time in Thailand’s governance indicators. With the exception of corruption, they suggest a general decline between 1996 and 2004, although it is only significant for the rule of law index. Possible explanations are the ineffective implementation of provisions of the new constitution, concerns about the violence in Thailand’s southernmost provinces,<sup>8</sup> and handling of the nationwide drug crackdown.

A good business climate provides firms with the incentives to invest, innovate, and grow, and individuals with incentives to invest in skills valued by dynamic and growing firms. A recent World Bank investment climate assessment (World Bank 2005a) finds that Thailand investment climate is favorable by international standards. Thailand investment climate is better than that of China, India, Brazil, and most neighboring countries, although it is not as good as that of Malaysia. Figure 11.B and Figure 11.C show that Thai firms face the lowest average number of days to clear customs for exports and the second lowest for imports. Such efficacy of customs contributes to a competitive edge of Thai traders in world markets. Figure 11.D and Figure 11.E indicate that Thai firms suffer from a lower burden of inspections and required meetings with officials than firms in China, India, Malaysia and the Philippines. Thai managers spend the smallest percentage of working time dealing with bureaucracy and regulations, accounting for visits by inspectors from all types of government agencies. About half of the time spent by firms in inspections and visits is spent with officials from the revenue department, and the second most time with officials from the industrial works department. One possible area of concern is contract enforcement. According to the 2004 Doing Business database, solving a payment dispute in Thailand takes on average 390 days, compared to 300 days in Malaysia and 241 days in China. However, the Thailand Investment Climate Survey (WB 2005a) suggests that about one-fifth of payment disputes are successfully settled in court, a similar number to Malaysia, compared to only 5 percent in China.

Overall, regulation remains an important longer-term issue, as Thailand has to keep up with the improvements in the investment climate of its competitors. Governance appears to have worsened recently, as the influence of old institutions has weakened and new institutions have failed to be empowered, leading to a greater politicization of the allocation of public resources and regulation of economic activity.

> 7 This section draws on Chapter 1 of the Thailand Investment Climate Assessment, drafted by Ana Fernandes. The cross-country indicators of governance compiled by Kaufmann, Kraay and Mastruzzi (2005) are composite indexes based on a large number of data sources reflecting the perceptions of governance across and within countries: surveys of firms and individuals, assessments of commercial risk rating agencies, non-governmental organizations, and multilateral aid agencies.

> 8 Most of Thailand's six million Muslims live in the south of predominantly Buddhist Thailand. In September 2005, the death toll from clashes between Thai authorities and Muslim students and separatists surpassed 1,000 with more than 1,500 wounded since January last year.

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