Thai Economic Crisis

On June 27, 1997, the finance ministry of Thailand, along with the Bank of Thailand, that nation's central bank, announced that activities of sixteen financial and securities firms were to be suspended for thirty days, and directed the troubled firms to find merger partners. Five days later a further and dramatic step was taken: Finance Minister Tanong Bhidaya declared that the Thai central bank would no longer support the baht, the Thai currency, at its fixed exchange rate of 24.45 bahts to the dollar.

The initial reaction of international financial observers was positive. On July 10, the respected Far Eastern Economic Review reported these developments under the headline "Free at Last," with a subtitle reporting that "Thailand floats the baht, begins financial-sector clean-up" (Vatikiotis, 1997a, 70). According to the article, "now that the currency is afloat, confidence is indeed on the rise," that the baht would reflect Thailand's actual economic situation; and a senior executive at a Thai bank was quoted as saying "finally we have decisive action" (Vatikiotis, 1997a, 71). No one doubted that Thailand had substantial economic problems. Early in June, another article in the Far Eastern Economic Review had discussed Thailand's economic difficulties (Let this be a lesson, 1997, 73). Cheap foreign capital in the form of low-interest, short-term loans had flooded the country in the mid-1990s, even as its export sector weakened. Yet actual productive uses for this

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building sector hurts all the firms that were supplying the industry, as well as laid-off construction workers. Just as the boom artificially fueled the whole economy, so the slowdown spreads through the economy. In the extreme case, the result may be a prolonged depression like that of the 1930s. In the case of Thailand, the boom had its initial roots in several years of rapid and solid economic growth in that country. However, the rate of growth, that of a country just entering "takeoff," could only be sustained for a limited time. Had this been realized, investors would have been more cautious, and the Thai boom would have cooled off into a "soft landing." Instead, a number of factors combined to accelerate the boom into a bubble. The individual factors will be examined below, but underlying them was a pervasive if largely unspoken belief that Thailand and its Southeast Asian neighbors were "naturally" going to be the next group of Asian economic tigers, joining the ranks of the newly industrialized countries alongside East Asian centers like Taiwan and South Korea. This attitude was shared by the Thais themselves and by the East Asians, who felt a cultural affinity to Thailand they did not feel to other parts of

Category: Economics - T