Fallen Tiger: The Story of Thailand's Currency Devaluation in 1997
Cunningham, Kristen, Houston Journal of International Law
According to the Chinese calendar, 1998 was the year of the Tiger.(1) However, the prospects of a successful 1998 remained in doubt for the "Tiger" economies of Southeast Asia(2) in light of the economic turmoil unleashed in 1997 that began with Thailand's devaluation of its currency.(3) To many investors and economists the trouble in Thailand came as a complete surprise. Due to strong economic growth during the late 1980s, Thailand became known as the Fifth Tiger, following the rapid growth of Taiwan, Korea, Singapore, and Hong Kong, the four other so-called Tigers.(4) This region has also been dubbed the `"East Asian Miracle'" by economists and investors, again due to the rapid economic growth they achieved.(5) Between 1985 and 1995, Thailand experienced an annual growth rate averaging 9.8%, while simultaneously experiencing low inflation, averaging around 4.4% per year.(6) But 1996 marked the beginning of an economic downturn, when exports began to stagnate and growth began to slow.(7) In July of 1997, Thailand was forced to devalue its national currency, the baht, which sent the country into an economic tailspin.(8) Thailand's currency devaluation had a domino effect on the other Southeast Asian nations, which had only months before seemed economically strong,(9) and eventually led to instability in U.S. markets.(10) Because of the amount of foreign capital invested in Thailand and the other Tiger countries, the economic health of the region in the Year of the Tiger had a dramatic impact on the rest of the world's major economies.
This Comment will analyze the events leading up to the devaluation of the baht, as well as evaluate Thailand's hope for economic recovery in the future. Part II of this Comment will examine the history of Southeast Asia's growth into a free trade area through the creation of the Association of Southeast Asian Nations (ASEAN) and the Asian Free Trade Area (AFTA), and the relative success of each group. Part III will highlight the rise and fall of Thailand's substantial economy in the 1980s and 1990s, including the political factors that fueled Thailand's substantial growth, the linkage of the baht with the U.S. dollar, and the effect of the flood of foreign investment into the region. It will then analyze the circumstances surrounding the devaluation of the baht in July of 1997. Part III will also discuss the economic measures put in place by the Thai government since the fall of the baht to help regain economic stability, as well as the impact of the billion-dollar International Money Fund (IMF)(11) bailout put in place in mid-1997 to help Thailand recover from the strain of significant debt obligations.(12) Part IV of this Comment will discuss the effect of Thailand's instability on other Southeast Asian countries in 1997. Finally, Part V will evaluate Thailand's chances for recovery in the future, and will discuss the merits of the IMF's position as a world bailout organization.
II. THE HISTORY OF FREE TRADE IN THAILAND--ASEAN AND AFTA
ASEAN was formed in 1967.(13) The original agreement between Thailand, the Philippines, Malaysia, Singapore, Brunei, and Indonesia was one of the few regional arrangements that originated in the 1960s still in force today.(14) ASEAN was formed primarily to defend against communist inroads in to Southeast Asia.(15) From the outset, ASEAN's focus was more on political stability than economic growth.(16) Because of its loose organization, ASEAN accomplished little in the way of progress toward meaningful economic cooperation during its first eight years of existence.(17) Instead, its major achievements centered on security and political considerations.(18)
ASEAN's first foray into attempting to create a free trade area came in 1977 with the emergence of Preferential Trading Agreements (PTAs).(19) PTAs allowed favorable treatment of ASEAN products within the region by granting tariff preferences for legitimate ASEAN-made products. …