Trade liberalization and government finances in Thailand: A computable general equilibrium analysis

This dissertation examines the effects of trade liberalization and government finance on the Thai economy and income distribution. To sustain economic growth, the Thai government has taken an active role in international trade relations. Since income distribution in Thailand is related to industrial protection, trade liberalization would be expected to have a dual effect on the economy. First, free trade is expected to promote higher economic performance, with these benefits tricking down to the low-income groups. Second, changes in the relative prices of imports, exports and import competing goods and services will affect the distribution of benefits with the country. Additionally, some household groups might be better off and others might be worse off due to the need for the government to compensate for the loss of tariffs by taxation.;Most studies reveal favorable results of free trade when the government budget is balanced by income tax. From previous studies, the benefits of free trade also depend on investment behavior. Since investment is the key factor for expanding economic activity, the lack of investment may cause free trade to be unfavorable. This means that the impact of free trade would be affected by not only the government tax schemes, but also the other economic variables.;In this study, a static computable general equilibrium model for the Thai economy is applied and is calibrated with the Social Accounting Matrix in 1998. Based on the specified parameter values, counterfactual simulations of free trade in which the government decides whether to compensate for the loss of tariffs or runs a budget deficit under the fluctuation of investment.;The simulation results show that free trade enhances economic performance and improves income distribution. The expansion of economic activities and the income distribution are dominated by investment. However, Thailand would gain more benefits from free trade in terms of the more expansion of economic activities and exports, and the improvement of income inequality if the economy were successfully transformed into a higher level of production (i.e., capital-intensive) and relied more on domestic savings. Also, when the country lacks investment, the balanced budget is necessary to avoid the crowding-out effect. Conversely, the government can run the budget deficit when investment is sufficient for the expansion of economic activities.