Recovery through Reform: Culture Matters in the Thai Turnaround
Fry, Gerald W., Harvard International Review
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 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. …