On July 2, 1997, an economic shock in Thailand was felt around the world. Both the event itself and its causes confirm the interconnected nature of the global economy that Thomas Friedman described in his book The Lexus and the Olive Tree. The decision by the Thai government to float the Thai baht caused a freefall in both the value of the currency and the stock market—in weeks, the baht lost approximately half its value. Prior to this economic crisis, the Thai government had tried to sustain the value of the baht by using its US dollar exchange reserves to buy baht. This rapidly depleted and squandered Thai foreign exchange reserves since the baht was pegged to the US dollar, which was rising in value thanks to the US economic boom of the late 1990s. The economic crisis quickly spread to other Asian countries, such as South Korea, Indonesia, Malaysia, and the Philippines, and then elswewhere, including Brazil, Russia, and Turkey.

The Asia-Pacific economies known as Asian “tigers” and “dragons” were the most affected. Three of the countries—Thailand, South Korea, and Indonesia—had to seek special bailout assistance from the International Monetary Fund (IMF) because of the desperate balance of payments associated with the crisis. This was especially humiliating for Thailand and South Korea, as both countries had taken pride in their “graduation” from the ranks of poor nations. For Thailand, the only country among the 11 nations of Southeast Asia never to have been colonized, the loss of economic sovereignty resulting from the imposition of IMF conditionalities was particularly painful.
Thailand’s Economic History
Prior to 1939, Thailand was known as Siam. Through the visionary leadership of the early kings of the Chakri Dynasty, which was established in 1782, Siam opened its borders to both Chinese immigrants and Western missionaries. Such visionary decisions helped Siam avoid colonialism and significantly influenced the nature of the contemporary Thai political economy. King Chulalongkorn, who reigned from 1868 to 1910, was a major reformer who initiated the policy of sending academically-promising Siamese abroad for study. This educational endeavor by Chulalongkorn contributed to unanticipated consequences, namely the overthrow of the absolutist monarchy in June 1932. Since that time, Thailand has been a constitutional monarchy. During World War II, the country demonstrated its skillful “bamboo diplomacy” by simultaneously collaborating with both Japan and the Allies. Consequently, Thailand suffered less than virtually any country in the Asian region during the war. During the Vietnam War, Thailand became a staunch ally of the United States and a land-based “aircraft carrier” for the intensive US bombing of Vietnam, Cambodia, and Laos. Such foreign policy contributed to the beginning of the Thai economic boom, which fully blossomed in the 1980s and early 1990s.
Causes of the Economic Crisis
The causes of the economic crisis in Thailand were complex. Prior to 1997, Thailand had been one of the world’s hottest economies. From 1984 to 1995, its economic growth averaged an impressively high 8.5 percent, with a peak growth rate of 13.2 percent in 1988. Interestingly, in an influential article in Foreign Affairs in 1994, Princeton economist Paul Krugman questioned the sustainability of such high economic growth rates among the Asian economic tigers, though he did not predict the crisis as such.

The liberalization of Thai capital markets, encouraged by the West and Japan in the late 1980s, planted the seeds for the subsequent crisis. Japanese and Western banks offered relatively low interest rates and relaxed capital and foreign exchange controls so that the Thai private sector could borrow abroad and to invest in the booming Thai economy. The result can be termed, drawing on human ecology researcher Garrett Hardin’s ecological concept, an economic tragedy of the commons. While it may have been rational for individuals to engage in such economic behavior, collectively such actions resulted in huge private borrowing from overseas. By 1996, Thailand had a staggering US$120 billion foreign debt. Thai borrowers also perceived no foreign exchange risk, since the baht vis-à-vis the dollar was probably the most stable in the world between 1960 and 1997. During that period, the baht-dollar exchange rate was stable within the narrow band between 20:1 and 25:1. With the rapid devaluation of the baht after the crisis, the value of overseas loans to be repaid doubled.

Another factor to the economic crisis was the nature of the investments undertaken by Thai borrowers. Many loans were invested in activities that did not generate foreign exchange, and investors participated in property speculation that resulted in many non-performing loans. In one concrete example, a huge new complex of Hong Kong-style high rise apartment buildings, Muang Thong Thani (Golden City), was built west of the current Bangkok International Airport. Many apartments in one area of the complex are still vacant. Such “investors” failed to recognize the perils of excessive land and property speculation, long ago observed by the late-19th-century populist economist Henry George.



With capital liberalization, funds from abroad could easily flow into and out of the Thai stock market. During the boom years of the 1980s and early 1990s most investment was direct and real in factories, plants, and equipment. During the late 1980s, a new Japanese factory came on line every three days. However, this pattern changed in the early 1990s. In subsequently analyzing the Thai financial crisis, Thai economist Sirilaksana Khoman noted that in 1991, direct investment was 10 times greater than portfolio investment. In just two years, with the rapidly rising value of the Thai stock market, portfolio investment was nearly three times that of direct investments. Portfolio funds in the new globalized economy can flow in and out of countries in nanoseconds. As a result, the Thai economy became increasingly vulnerable to external influences and factors.

Despite an excellent reputation for professional and technocratic independence in the 1970s and 1980s, the Bank of Thailand failed to regulate excessive private sector borrowing in the 1990s and fell under the undue influence of politicians with vested economic interests, who tried to save economic face by protecting the overvalued baht. The root causes of the Thai economic crisis were excessive private overseas borrowing and inadequate regulation of the financial sector by the government and Bank of Thailand. This pattern was frequently termed “crony capitalism,” and some politicians and their associates took advantage of the weak and ineffectual loan regulations.
Crisis as Opportunity: The Emergence of Reform
Interestingly, the Chinese and Japanese word for crisis is comprised of two Chinese characters that demonstrate two different elements. The upper character means great peril or danger, while the lower character means opportunity. Thus, within every crisis there is embedded opportunity. Influential Thai policy makers, technocrats, and intellectuals quickly realized that the crisis provided a chance to introduce critically needed reforms. Despite its many painful dimensions, the crisis was indeed a “wake-up call,” and Thailand began a major process of reform. Leading this reform movement were many Thais educated in the West under the country’s active program to send many of its best and brightest abroad for advanced graduate training. The current prime minister, Dr. Thaksin Shinawatra, has a doctorate from a US university and was previously an entrepreneur in information technology and telecommunications. Several influential intellectuals in the Thai reform movement, such as Dr. Prawes Wasi, a physician and persistent outspoken advocate for reform, Dr. Sippanondha Ketudat, the Harvard-educated former Minister of Education and Minister of Industry, and Dr. Wichit Srisa-an, a University of Minnesota-educated higher education innovator, emphasized that reform must be comprehensive to be effective. Inadequately integrated piecemeal reforms could have adverse unintended consequences.
Political Reform
Within months of the outbreak of the crisis, Thailand began a series of integrated political, administrative, financial, economic, and educational reforms. On October 11, 1997, Thailand promulgated its 15th constitution in 65 years. As James Klein, the Asia Foundation’s representative in Thailand, pointed out in a thorough analysis of the Constitution, this is the most democratic and progressive constitution in the country’s history. For example, it puts in place new structures such as the National Counter Corruption Commission (NCCC) and the Constitutional Court to promote accountability and transparency facilitates the impeachment of Thai officials. For the first time in Thai political history, senators are popularly elected rather than appointed. The Constitution also calls for decentralization and educational reform. Reflecting on the potential impact of the new Constitution, Klein comments that “the 1997 Constitution is far from business as usual,” establishing as it does “the ground rules for transforming Thailand from a bureaucratic polity prone to abuse of citizen rights and corruption, to a participatory democracy in which citizens will have greater opportunities to chart their destinies.” Klein concludes that “for the first time in Thai history, this charter establishes constitutional mechanism to secure accountability of politicians and bureaucrats to the public.”

The new Constitution mandates that politicians declare their assets and liabilities prior to and after leaving office to see if they have become “unusually wealthy.” If found guilty of financial wrongdoing, an individual can be expelled from politics for five years. Under this new provision, Shinawatra was accused of concealing assets—an alleged violation of Article 295 of the new Constitution. The prime minister was tried by the newly established Constitutional Court, which found him guilty, 8 to 7, even though he entered office in a landslide election in 2001. Shinawatra is a former business tycoon who became rich through his highly successful transnational telecommunications conglomerate. There was no allegation that the politician had gained unusual wealth through political office; in fact, he had lost money. He was instead accused of not accurately declaring his initial assets.



Decentralization and reform of the administrative structure are two other major reforms in the political arena. For decades, Thailand has been a bureaucratic polity with a highly centralized administrative system with over two million civil servants. With assistance from the World Bank and the involvement of the Thai Civil Service Commission, major administrative restructuring occurred with an emphasis on reducing the size of the bureaucracy. No draconian measures were adopted; instead an early retirement scheme was put in place, appropriate for a country with a significant aging population.
Economic and Financial Reforms
Reforms have also occurred in the financial sector, the origin of the economic crisis. These have been succinctly described by scholars at the Institute of Developing Economies in Tokyo. In October, 1997, two new institutions were created to take responsibility for restructuring and consolidating financial institutions: the Financial Restructuring Authority (FRA) and the Asset Management Corporation (AMC). Of 58 finance companies, 56 were closed and liquidated. In August 1998, the Bank of Thailand and the Ministry of Finance began restructuring the banking system. Some banks were taken over by international investors. Other banks were merged, and some sold major stakes to international investors in the Netherlands and Singapore, among other countries. The Bangkok Bank of Commerce was closed, and financially viable banks such as Bangkok Bank and the Siam Commercial Bank were more tightly and closely regulated. As a result of these reforms, the percentage of non-performing loans has decreased to a current level of 15.1 percent for Thailand’s financial sector.

Interestingly, some Thai skeptics and conspiracy theorists decried the government for “selling out” to the IMF and the World Bank, for allowing international investors to take advantage of the economic crisis to acquire many Thai assets at bargain prices. Others, particularly some non-governmental organizations and “rice roots” groups, were highly critical of the social costs of austerity measures imposed by IMF conditional ties.

On December 5, 1997, just several months after the outbreak of the economic crisis, King Bhumipol Adulyadej called for a new system of setakit popieng, or educational self-sufficiency, in his annual birthday address to the country. A rapid growth in materialism and luxury consumption were clearly symptoms of the economic crisis, as well as being contrary to Buddhist ideals of modesty and simplicity promoted by the state. The King thus asked the nation to rethink its approach to economic development. As Bhumipol is universally loved by the Thai people, his message for a new economic mindset was widely heard and influential.
Educational Reform
The new 1997 Constitution also mandated educational reform. Prior to the crisis of 1997, Thailand’s social development had lagged behind its economic development. Thailand fared poorly on various international indicators of competitiveness despite spending a remarkably high 25 percent of its government budget on education. The new Constitution required that a new Education Law be passed by August 1999, providing for 12 years of free education, nine years of compulsory education, and a decentralized system of educational administration. The new National Education Act became law on August 19, 1999, and was amended on December 19, 2002. Grants from the Asian Development Bank (ADB) provided funding for applied research and pilot projects in support of educational reform. Also, the Thai government and the ADB collaborated on an extensive student loan fund that helped students and private schools, both at the secondary and university levels, cope with the economic crisis. An Office of Education Reform (OER) was established with a three-year tenure to implement the new National Education Act. Another element of the reform was a shift away from traditional teacher-centered to more active student-centered learning to help develop problem-solving abilities and creativity.

The educational administrative structure has also been transformed. Previously, there was a lack of unity in policy as three ministries were involved in education. For example, both the Ministry of University Affairs and the Ministry of Education were producing teachers in an uncoordinated fashion, causing a gross overproduction of teachers. Since October 2003, there has been a single Ministry of Education with five key commissions and 175 newly established Educational Service Areas (ESAs) around the country. There are one or more ESAs for each of Thailands 76 provinces, depending on the province’s size. Before, there were over 900 district education offices, each with a full complement of staff. Under the new model, the Ministry is to provide the role of leadership and vision, with basic management of schools left to the ESAs and schools themselves, with much greater local community involvement.

The new Constitution and National Education Act places more emphasis on the promotion and utilization of local knowledge and wisdom as an integral part of a more decentralized curriculum. In October 2000, a new independent public organization, the Office for National Education Standards and Quality Assessment (ONESQA),was created to ensure quality assurance in education. This new office will assess the quality of educational institutions, both public and private, at all levels. Each institution must be assessed at least once every five years.



The Ministry is also reforming higher education with public universities being granted more autonomy and responsibility for their own funding. Basically, this means a greater privatization of higher education, which has greatly grown in recent years. Reflective of this trend is the new campus of Assumption University, which is linked to the Jesuit order with which Notre Dame and Georgetown Universities are also associated, near the site of the new International Airport is being built.
Economic Recovery
Thailand is now in its seventh year of its reform process. Data on the performance of the Thai economy clearly indicate that taking reform seriously can have dramatic pay-offs. Even the most optimistic observers back in 1997 would not have foreseen the recovery now happening in Thailand. During the heart of the crisis in 1997 and 1998, real GDP per capita declined 11.4 percent. GDP growth was 6.4 percent in 2003 and could go as high as 8.6 percent in 2004. In 2003, Thailand had the world’s top performing stock market with an increase of 123 percent. Of 54 closed-end world equity funds traded on the major US stock exchanges, the Thailand Fund was second only to China in terms of level of premium, selling for 15.4 percent over its net asset value, reflecting the confidence of international investors in Thailand and its economic future. Based on the most recent data (2003) from the World Economic Forum in Switzerland, among larger sized economies (those of over 20 million people), Thailand ranked 10th in the world in terms of economic competitiveness, surprisingly ahead of its Asian neighbors, Japan, China, and South Korea. Due to the overvalued baht, Thai export growth had dropped to close to zero in 1996. Export growth for Thailand in 2003 was up 12.1 percent to a record level of US$77 billion, second in the region only to China. Based on comparative purchasing power indices developed by The Economist, the Thai currency was found to be the most undervalued in the world (31 to 46 percent) ,even though it increased approximately 7.5 percent vis-à-vis the dollar during the first 11 months of 2003.
Innovative Economic Policies: “Thaksinomics”
The innovative but controversial fiscal policies introduced by Thaksin Shinawatra has also contributed to Thailand’s recent economic success. These policies built upon the stability and recovery provided by the reforms initiated under the prior government of Chuan Leekpai, which was in power soon after the outbreak of the 1997 crisis. These policies have been termed “Thaksinomics.” In an insightful December 2, 2003, article for the Center for Contemporary Conflict, Robert Looney describes “Thaksinomics” as an amalgam of Keynesianism, supply side economics, entrepreneurial development (Schumpeterism), local empowerment (de Sotoism), and state led growth (a la Albert Hirschman). As Shinawatra himself states: “We must accept that the global economic landscape in the new millennium is much different than in preceding decades.” Critics accuse Thaksin of engaging in a dangerous form of populist economics. Clearly “Thaksinomics” is a creative new paradigm and the key question will be the viability of its long-term effectiveness and sustainability.

Another important factor in Thailand’s recovery and success has been various innovations. As part of the program of decentralization, the government introduced a project called OTOP (One Tambol [sub-district], One Product). Each local sub-district, of which there are over 7,000 in Thailand, was directed to develop an innovative product reflecting the special comparative advantage of the locality. The product might be a particular kind of herbal wine, a distinct flavor of honey, or a special type of textile. In late December 2003, an exhibition of these products was held at IMPACT, a major exhibition center and former venue for the 1998 Asian Games. Approximately 1.2 million people attended the exhibition, causing enormous traffic congestion and parking problems. Over two billion baht, (US$1.2 million) worth of products were sold.
The Culture of Reform: Thailand as a Case Study
The Thai case of recovery through reform and its current economic experiment are worthy of close critical scrutiny. Paper reforms and idealistic statements are easy to make, but the actual implementation of genuine reforms demands dedicated commitment, energy, perseverance, and sacrifice. Initially, there was serious concern in the international community about the possibility of reform fatigue once the worst part of the Asian economic crisis was over. Instead of reform fatigue, the Thai case has been characterized by reform energy and is an inspiring realization of the theme “Culture Matters,” as phrased by Tufts University’s Lawrence Harrison and Harvard University’s Samuel Huntington in their 2000 editorial collaboration, Culture Matters: How Values Shape Human Progress. Indeed, the culture of reform does matter.