Thailand after 1997

• Author: Siamwalla AMMAR
• Published date: 01 June 2011
• Date: 01 June 2011
• DOI: http://doi.org/10.1111/j.1748-3131.2011.01181.x

Thailand after 1997

AMMAR Siamwalla†

Thailand Development Research Institute

The years following 1997 divide themselves into three roughly equal periods. The first was the

painful period of deleveraging from the excesses of the bubble before the crisis, from which the

economy emerged with more dependence on exports. The second period covered the government

under Thaksin Shinawatra, who faced a mostly favorable external environment, and was therefore

able to pursue many populist policies. Eventually, he was brought down by the military. The brief

military government was followed by a number of short-lived governments, the last one of which

was left to tackle the consequences of the global financial crisis, which led to a very deep downturn

butaquickrecovery.

Key words: Asian economic crisis, deleveraging, global financial crisis, Thailand, Thaksin

Shinawatra

JEL code: O53

1. Before Thaksin

1.1 Background

In 1958, Field Marshal Sarit Thanarat embarked on a course to develop Thailand after

toppling an earlier prime minister who was pursuing policies based on a muddled

version of economic nationalism. In the next 5 years, he modernized the economic

management of the country, more or less along the lines proposed by a World Bank

economic mission, as well as pursuing a pro-private business policy in contrast to the

earlier policies that targeted local Chinese enterprises. Over the next three decades, Thai-

land’s government was dominated by the military, and its macroeconomic management

was under the guidance of technocrats who pursued policies that stressed prudence and

stability, with a fixed exchangerate regime as an inflation anchor. High savings rates were

achieved, which were collected by the commercial banks which grew up to a preeminent

position in the economy as the main allocators of capital, and, to some extent, as invest-

ment coordinators.aepr_118168..85

The long period of military (and technocratic) dominance came to an end in 1988.

Under this regime, Thailand managed to grow rapidly at the average rate of 6.8%. Such a

long period of consistently high economic growth cannot but leave a deep imprint on the

structure of the economy. Thailand moved from being a primary goods exporter to an

exporter of manufactured goods. The level of poverty declined steadily and significantly

throughout the period, despite a marked increase in income inequality.

There was a brief period when the military and their technocratic allies returned to

power in 1991–1992, when the technocrats,in charge of thegovernment headed by Anand

†Correspondence: Ammar Siamwalla, Thailand Development Research Institute, 565 Ramkham-

haeng Road, Wangthonglang, Bangkok 10310, Thailand. Email: ammar@tdri.or.th

doi: 10.1111/j.1748-3131.2011.01181.x Asian Economic Policy Review (2011) 6, 68–85

© 2011 The Author

Asian Economic Policy Review © 2011 Japan Center for Economic Research

68

Panyarachun, proposed a whole slew of reform legislation, most notably introducing a

value-added tax, and generally liberalizing the economy in very many areas, ranging from

taxis to tariffs, and launching the Association of Southeast Asian Nations (ASEAN) Free

Trade Area. In a sense, this period marked the technocrats’ high point. Afterward, their

influence declined steadily.(In 2006–2007, there was another bout of militar y-technocrat

government with a later generation of technocrats, but their impact was less than the

Anand government’s, as will be discussed below.)

After the departure of the Anand government and the return of a parliamentary

regime, growth resumed, and indeed accelerated,until it merged into the precrisis bubble.

1.2 The crisis of 1996–1997

The series of policy decisions that eventually led to the bubble and then the collapse of

the baht and of almost the entire Thai financial system is well documented (Warr, 2005;

pp. 3–104), so only a summary account will be given here.

The key policy misstep was to liberalize the capital account without giving up the fixed

exchange rate regime. Not only were the controls on interest rates lifted, but the banks

were allowed to open their own International Banking Facility whose main effect was to

reduce the transaction costs of borrowing abroad. Thai firms, seeing a substantial differ-

ence between domestic and international interest rates, began to borrow dollars heavily

either directly overseas (if they were big firms), or alternatively from the local banks

through the Bangkok International Banking Facility. A significant proportion of these

loans were invested in the local property market, and bubbles developedin that mar ketas

well as in the local stock exchange. By the end of 1996, Thailand’s total externaldebt rose

to US$109 billion, of which $92 billion was owed by the private sector, split roughly

equally between commercial banks and nonbank businesses.

The ability of the central bank to maintain the fixed exchange rate began to be

questioned in 1996, when Thailand saw its export growth rate which had been coasting

along at the annual rate of 18.8% between 1991 and 1995, collapse to a rate of -0.4%

between 1995 and 1996. In the same year, the bubble in the local property market also

began to subside, putting pressure on the smaller banks and the finance companies

(entities that function similarly to the banks, except that they are not allowed to open

checking accounts) that had invested heavily in that market, using dollar funds for the

purpose. With such weak fundamentals,hedge funds and foreign investment banks began

to attack the baht in three waves starting in November 1996. The central bank fended off

these attacks by drawing down its net reserves – it kept its (publicly announced) gross

reserves intact only by selling dollars forward in the swap market. After nearly exhausting

its net reserves, the Bank of Thailand floated the baht on July 2, 1997, and thereby

launched the Asian financial crisis.

While the Bank was busy fending off the attacks on the baht, it also had toattend to the

pressure on the financial institutions, at this stage confined mostly to the finance compa-

nies, but also beginning to affect the smaller commercial banks. Afterordering 10 finance

companies to increase their capital in March, which met with little success, the Bank of

Thailand suspended the operations of these companies plus six more finance companies

Ammar Siamwalla Thailand after 1997

© 2011 The Author

Asian Economic Policy Review © 2011 Japan Center for Economic Research 69