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Thailand: Growth, Poverty, and Income Distribution: An Economic Report

Thailand FY97 PA

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Poverty Profile

Thailand's longer-term record in poverty reduction until the end of the 1980s had been impressive. Poverty incidence had fallen from over 57 percent in the early-1960s to about 22 percent in 1988. And significant complementary gains had been made in most social indicators including infant mortality, primary school completion, and life expectancy. Despite this secular improvement, there were concerns because the reduction in poverty had slowed during the 1980s with the number of poor actually rising between 1981 and 1988. This slowing pace of poverty reduction, especially in the poorest regions, raised concerns that the link between poverty reduction and economic growth had weakened.

Recent analysis of data from the Socio-Economic Surveys (SES) show that the slowdown in poverty reduction during the 1981-88 was a temporary lull in the longer-term decline of poverty in Thailand. Using official poverty lines, poverty incidence fell sharply during 1988-92 from over 22 percent to about 13 percent. The dramatic reduction in the number of poor was matched by declines also in the depth and severity of poverty.

Although the reduction in poverty incidence and its severity occurred across the country, the decline was not uniform across regions. By 1992, while poverty incidence was very low in and around Bangkok (just over 1 percent), more than a fifth of the population in the Northeast and a seventh of those in the North remained poor. The most distinctive characteristic of the poor in Thailand, therefore, remains where they live. In 1992, over three-quarters of the poor lived in the Northeast and the North, significantly more than the population shares of these regions. The other notable locational feature is the concentration of poverty in rural areas. Almost 85 percent of the poor lived in rural areas in 1992, and this proportion had risen since 1988.

Educational attainment is a second attribute that differed significantly between the poor and non-poor. While about 85 percent of household heads in 1992 had a primary education or less, almost all the poor were in this category. Occupational status of the household head also differed between the poor and non-poor: almost three-quarters of the heads of poor households in 1992 were involved in agriculture, compared to half those in the overall population. The link between poverty and agriculture is further illustrated by the relationship between the household's socioeconomic status and income level. While about a third of the population in 1992 was in households that owned and operated land, almost 58 percent of the poor were in such households. The poor also differ from the non-poor in terms of certain aspects of demographic structure. Poor households are larger — on average, they have almost one additional person — and have higher dependency ratios than the non-poor.

Two demographic features, however, that do not appear to distinguish poor and non-poor households are age of the household head and gender. With regard to age, the structure of poor households is almost the same as that for the non-poor with the only emerging exception being that a larger proportion of poor households are headed by individuals over 60. The association between gender and poverty is even weaker. The proportion of poor households headed by women is roughly the same as that for the non-poor. This finding contrasts with that in many other developing countries where female-headed households are over-represented among the poor.

Trends in Inequality

While the overall reduction in poverty during 1988-92 is encouraging, the increase in income inequality is less reassuring. Just as consistently as poverty fell, income distribution in all regions became more skewed. For the Kingdom as a whole, the Gini coefficient rose from 0.485 to 0.536; the ratio of income received by the richest fifth of the population to that received by the poorest fifth increased from 12 to 15; and, the relative income share of the richest tenth of the population to that of the poorest tenth rose from about 21 to 28.

One reason for concern about this increase in income inequality is its negative impact on poverty reduction. Had inequality not risen, the reduction in poverty during 1988-92 would have been even greater. The sharp decrease in poverty that occurred despite the distributional shift only shows the strength of the effect of income growth. This increase in inequality also distinguishes Thailand from its middle-income neighbors in East Asia, and if inequality were to continue rising, it could hamper the prospects for sustained medium-term growth.

Among the various components of income, wages and salaries and entrepreneurial income contributed most to higher inequality. Although wage earnings, unlike entrepreneurial income, were distributed more equally, their overall effect was disequalizing because the expansion of formal-sector employment occurred more among better-off households. The increase in inequality was also not uniform across the Kingdom. Wider income differentials between households in different locations (both rural/urban and by region) accounted significantly for the increase in overall income inequality. Hence, differences between regions became more prominent as sources of higher inequality.

Safety Net

These programs provide cash and in-kind transfers; and, assist through employment generation. The cash transfer programs include: direct cash assistance to needy families in poverty; monthly payments to the elderly who lack other means of support; and, village community funds for assisting poor residents. The major in-kind transfers targeted to the poor are the low-income card program, which provides free medical services to the poor, and the school lunch program for poor school-age children. The main income generation program is the Poverty Alleviation Project, which provides interest-free loans to poor households as seed money for investments in income-generating activities. Apart from these targeted programs, there are developmental programs, part of whose rationale is their beneficial impact on the poor. Examples include an infrastructure development program that includes a public works component aimed at providing rural infrastructure and employment generation, and a program of cash transfers that assists women and children.

The level of spending on these safety net programs (including some non-targeted programs that benefit the poor) has remained modest (about 1.6 percent of total government expenditures) between fiscal years, 1990-95. Hence, the perceptions that a considerable amount of resources are being devoted to assisting the poor and that these levels have risen substantially, are misplaced.

These modest levels of public spending make it more critical that individual programs be well targeted and improve welfare. However, the analysis of each of the major safety net programs shows problems both with their efficiency in reaching the poor and effectiveness in raising the welfare of the poor. There is a proliferation of schemes that involve multiple agencies. Coordination between these agencies is poor with each using its own criteria to identify the target poor. Many of the programs have multiple goals besides that of helping to reduce poverty. And, there is little emphasis on ex post evaluation to guide the design of existing or new programs.

Poverty Strategy

These trends show that the rapid growth in Thailand during 1988-92 contributed to substantial and widespread reductions in the incidence and severity of poverty. In particular, economic growth has benefited workers in the formal and informal sectors. Real labor earnings rose on average and their distribution both across individual workers and households has become less unequal. However, wages and salaries have contributed to aggregate income inequality for two reasons. With structural change, formal-sector employment has grown rapidly, thereby increasing the share of wages in total incomes. And, these increased formal-sector jobs have not been allocated equitably across households. Therefore, the emphasis for policy should be on removing the main supply-side constraint to participation in wage employment, which remains the lack of adequate education for almost half the population that who leave school without a junior secondary education. Expanding access to secondary education for those from poorer households and in lagging regions not only would help sustain growth, but would also promote equity across income groups and regions. In contrast, direct wage or employment regulation of labor markets in order to achieve redistributional goals is likely to be ineffective and could hurt the poor by slowing the growth of formal-sector employment.

Another important policy goal related to the goal of poverty reduction is the reduction of child employment. Although the incidence of child labor fell sharply as growth accelerated in the early-1990, there remains a compelling case for government intervention to deal with child labor. About 1.6 million children (below age 15) remain out of school, and many of these working children are employed under conditions that are harsh. The counterpart of child labor is non-completion of primary and junior secondary school, and this should be one target for policy. Since the main constraint appears to be the ability of households to finance education, a promising measure would be a direct subsidy for junior secondary school attendance targeted to the hard-core rural and urban poor. This should be supplemented with more vigorous enforcement of regulations to improve employment conditions for child labor and prohibit its use in certain areas, and specific project interventions whereby communities and NGOs work with government agencies in targeting particular activities or areas in which child workers face persistent problems.

To improve the efficiency and effectiveness of safety net programs, the main schemes by which the poor are to be assisted should be delineated and clear poverty-oriented goals for these should be articulated. Budgetary resources for these programs should be allocated across districts and provinces to those where the levels and severity of poverty are the greatest. Specific design changes in programs are also needed to improve their efficiency in targeting the poor and enhancing their effectiveness in raising the welfare of the target groups. Finally, it is necessary that systematic and periodic evaluations of these anti-poverty programs be undertaken so that those that are ineffective can be discontinued while more promising initiatives could be expanded and funded more generously.

Statistical System

To make the SES more useful for policymaking two issues need to be addressed. The reasons for the long delays in the compilation and dissemination of the SES results and data should be identified and addressed to ensure that the considerable expenditures in undertaking these biennial surveys are not dissipated. And, to make the SES more useful for policymaking, relatively minor changes in the questionnaires and data collection would help in providing valuable information on the role of public transfers in reducing poverty and their distributional impacts as well as in allowing a comparison of their significance with private transfers for various income classes. It is also necessary to establish a framework for systematic and periodic evaluations of safety net programs. Specifically, information concerning beneficiary characteristics should be collected systematically for all programs; in addition, data concerning loan repayments should be compiled for all income-generation programs based on the provision of credit; and, comprehensive program data should be maintained for rural-works type programs.