# _Extensive Growth and Reallocation_

Growth accounting provides another perspective on the nature of Thailand’s growth performance. To what extent did Thailand’s growth rely on the accumulation of factor inputs rather than the more efficient usage of available factors? Extensive growth would support the notion that Thailand’s competitiveness hinges foremost on the availability of natural resources and labor force, while intensive growth would indicate that technological progress through innovation and competition plays an important role. The main idea of this line of research is to decompose growth in output into the contributions of higher quantities of factor inputs and a residual which is interpreted as improvements in total factor productivity (TFP). While conceptually straightforward, growth accounting is difficult to implement. Since TFP is set equal to whatever is left unexplained by the identified factors, its measurement is highly sensitive to the precise method of constructing capital, labor and land. In a review of growth accounting studies on Thailand, Bosworth (2005) argues that most discrepancies in the findings link back to two sources: how labor inputs are adjusted to account for rising education standards; and how income of self-employed, roughly half of the Thai labor force, is attributed to labor and capital.<sup>4</sup> In addition, lack of data typically restricts the analysis to a fairly aggregated level. Finally, the framework assumes that output is primarily supply-constraint, which makes it difficult to accommodate episodes such as the Asian crisis or the subsequent recovery process (where capacity utilization is increasing).

While point estimates vary across studies, the results tend to point to two main drivers of Thailand’s growth miracle. First, economic growth is foremost due to increases in capital and labor rather than TFP as a result of heavy investment in physical and human capital (Figure 8.B and Figure 8.C). For example, the growth in the net capital stock slowed from 9.9 percent during 1984 to 1997 to 1.5 percent during 1998 to 2004 (Figure 8.C). Bosworth (2005) calculates that only 1.6 percent of the real output growth of 7.7 percent during 1977 to 1996 is due to TFP increases (Figure 8.A).<sup>5</sup> Second, whatever gains in TFP are observed, they come to a large extent from a reallocation of factors from agriculture to industry and services whereas within-sector TFP contributions are low. As workers leave farms and enter peri-urban and urban areas, industrial and service-sector participation rates increase (Figure 8.B). Since labor productivity is about 10 times higher in manufacturing and close to five times higher in services than in agriculture, such transformation boosts TFP and economic growth (Figure 8.D).

This analysis suggests that Thailand’s economic future will depend on tree issues: whether investment rates will recover from the slump after the Asian crisis (in light of falling capital-output and capital-labor ratios outside of agriculture (Figure 8.E and Figure 8.F); whether labor force participation in services and especially industry will continue to increase; and whether the rate of innovation and technological advancement at home will improve to make up for any shortfall in factor accumulation.

> 4 As capital grows faster than labor, attributing self-employed income to capital lowers the TFP estimate.

> 5 Similarly, using a growth accounting framework, Jonsson (2001) finds that capital accumulation, more than total factor productivity growth, accounted for the high pre-crisis growth rates.

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