Thailand

• Author: Reza Baqir
• Pages: 8-9

Page 8

In the last four years, growth in Thailand averaged about 4 percent-half the average of the 15 years preceding the 1997 crisis. A key question for policymakers and academics alike is whether Thailand can regenerate the economic momentum of the precrisis years. Griffiths (2000) highlights the role of an investment boom, especially in nontradable sectors, in driving the growth acceleration of the mid-1990s and sowing some of the seeds of the subsequent instability. As the crisis developed, private investment collapsed-in 1998 it was a third of its 1996 level. Using a growth accounting framework, Jonsson (2001) found that capital accumulation, more than total factor productivity growth, accounted for the high precrisis growth rates. With capital accumulation expected to remain modest in the medium term, he argued that economic growth will need to be driven primarily by higher total factor productivity growth.

Some of the decline in investment and its subsequent sluggish recovery in the postcrisis period reflects the excess capacity from the investment boom of the early 1990s. However, some researchers attributed the decline to a "credit crunch" in the aftermath of the crisis. Greene (2002) finds a strong correlation in the precrisis years between net private capital inflows, bank credit to the private sector, and real private investment and suggests that the sudden reversal of net capital flows during the crisis choked credit and investment. However, using a disequilibrium econometric framework to study the determinants of international capital flows, Mody and Taylor (2002) find that an "international capital crunch" likely lasted only until mid-1998 in Thailand. Schwartz (2000) notes that a slowdown in credit growth is not, by itself, evidence of a credit crunch: it is difficult to make a definitive statement regarding the existence or extent of a credit crunch, as both supply- and demand- side effects were at play. As it turned out, credit continued to languish, even as the economy began to grow. Baqir and Zanello (2003) examine the causes of "growth without credit" and compare Thailand's experience to that of other postcrisis countries.

One of the lessons learned from the Asian crisis is that exchange-rate pegs and open capital accounts do not mix well. After the July 2, 1997, devaluation of the baht, Thailand has maintained flexibility in its exchange rate and its regime is currently classified by the IMF as...