What Happened to Thailand?

Abstract

Thailand's performance was often described as an example others might emulate and its principal economic institutions, particularly its central bank, the Bank of Thailand, were cited as examples of competent and stable management. The crisis of 1997 changed all that. Domestically, the economy was in disarray. Output and investment were contracting; poverty incidence was rising; the exchange rate had collapsed, following the decision to float the currency in July 1997; the government has been compelled to accept a humiliating IMF bailout package; and confidence in the country's economic institutions, including the Bank of Thailand, was shattered. Internationally, Thailand was now castigated as the initiator of a 'contagion effect' in Asian financial markets, undermining economic and political stability and bringing hardship to millions of people. Countries as far away as Europe and the United States nervously anticipated the inevitable negative effects on their exports. Japanese banks dreaded the prospect of massive non-repayment of loans. Many of the very commentators who had previously been so impressed by the Thai experience now called it an example to be avoided. What had happened? The structure of this paper is as follows. The core of the discussion is an analysis of the long-term factors that made Thailand vulnerable to a financial crisis. This is contained in Section 2. Section 3 identifies the short-term trigger which led to the expectation of a devaluation which in turn produced the crisis. Section 4 describes the crisis itself and the final section reviews the prospects for the Thai economy in the wake of the crisis.