Thailand's Economic Crisis

"Triangle of Impossibility" Economic Model

The "Triangle of Impossibility" economic model theorizes that it is dangerous, if not impossible for a small economy to maintain three desirable (politically) yet contradictory national goals. When it does, the end result is a macroeconomic crisis like the one currently going on in Thailand today (Na Thalang, 1997, 14). The three paths that Thailand is pursuing, suggests Na Thalang, are a fixed foreign exchange regime, free capital movement, and an independent monetary policy. After a brief economic snapshot of Thailand, these three divergent paths will be explored to determine if: A) the theory is valid, and B) if it serves as a rational basis for understanding the economic crisis in Thailand.

Until this year, when most people heard the name Thailand, they had to be reminded it was once Siam. That usually triggered a mental connection to the musical comedy, "The King and I" which is an unfortunate homogenization of a thoughtful book by British teacher Anna Leuenowens, who was hired in the 1860s by Siam's forceful and Western-leaning king, Mongkut, to teach his royal children about the Western world. This, remember, was at a time when Siam's neighbors (Japan, China, Korea) had shut the doors to the outside world. Mongkut and his son who succeeded him were quick to open the nation to Western technology which helped develop an industrial base that

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. Although the BOT attempted to curb inflation by keeping interest rates high since 1994, "it could not prevent foreign capital from flooding the Thai market to arbitrage for interest rate differentials" (Na Thalang, 1997, 15). The influx of currency speculators usually has an affect on a nation's currency supply since these speculators invest in short-and-long term changes in the currency markets and make the money supply increase; "as a result, money supply grew by more than 20 per cent a year, an indication that an anti-inflationary policy was doomed to fail" (Limthammahisorn, 1997). Triangle Leg 3: Thailand's Independent Monetary Policy As the Bangkok Bank White Paper points out, what basically has happened is that the government, seeking political advantage, created an independent monetary policy that was based on excessive official spending; one in which the government encouraged the country's banks to lend generously for private real estate and other spending, following patterns of Japan, Korea, and Malaysia. Limthammahisorn notes: The result has been a building boom. Given internal migration toward population centers where jobs are plentiful, the pressure to build infrastructure added to other, bank-financed speculati

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