Gerald W. Fry is Visiting Professor at the International Institute for Asian Studies of Leiden University in the Netherlands. He is also Professor at the University of Minnesota. Professor Fry has been doing research on Thailand over the past five decades and has spent around a total of ten years working there with diverse organizations such as the Peace Corps, the Ford Foundation, and the Asian Development Bank.
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.
