Between June 1997 and January 1998 a financial crisis engulfed some of the fast-growing countries economies of Asia---Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea---and sent their economies crashing like a shower of meteors. Starting with Thailand, the currency, stock markets and per capita incomes of these countries plummeted one by one. Before the crisis ended 1.1 million Thais fell below the poverty line, and the perplexed and humiliated leader of South Korea left office before his term was up. In Indonesia the rupiah plunged by 86 per cent against the US dollar and 19 million people fell below the poverty line. President Suharto was forced to step down in May 1998, and Jakarta exploded in violence, leaving about 1,200 people dead and 5,000 buildings burnt.

Charles W.L.Hill of the University of Washington wrote: “Over the previous decade the Southeast Asian states of Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea, had registered some of the most impressive economic growth rates in the world. Their economies had expanded by 6 percent to 9 percent per year. This Asian miracle, however, appeared to come to an abrupt end in late 1997. When the dust started to settle in January 1998 the stock markets in many of these states had lost over 70 percent of their value, their currencies had depreciated against the US dollar by a similar amount, and the once proud leaders of these nations had been forced to go cap in hand to the International Monetary Fund (IMF) to beg for a massive financial assistance.

Janet L. Yellen wrote in Global Economic Viewpoint,”The Asian financial meltdown spread from country to country, there was deep concern about how big the impact would be on the global economy. The markets certainly were jittery. In October 1997, the Dow Jones Industrial Average plunged over 500 points. For the five Asian nations most associated with the crisis---Thailand, South Korea, Indonesia, the Philippines and Malaysia---the toll in both human and economic terms was enormous. In 1998, these countries saw their economies shrink by an average of 7.7 percent and many millions of their people lost their jobs. More broadly, there was concern that the crisis had revealed new sources of risk in the international financial system. [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

Book: Asia’s Boom, Bust and Beyond by Mark Clifford and Pete Engardio (Prentice Hall Press, 2000)

Background Behind the Asian Financial Crisis in 1997-98

Charles W.L. Hill of the University of Washington wrote: “The seeds of the 1997-98 Asian financial crisis were sown during the previous decade when these countries were experiencing unprecedented economic growth. Although there were and remain important differences between the individual countries, a number of elements were common too most. Exports had long been the engine of economic growth in these countries. A combination of inexpensive and relatively well educated labor, export oriented economies, falling barriers to international trade, and in some cases such as Malaysia, heavy inward investment by foreign companies, had combined during the previous quarter of a century to transform many Asian states into export powerhouses. Over the 1990-1996 period, for example, the value of exports from Malaysia had grown by 18 percent per year, Thai exports had grown by 16 percent per year, Singapore’s by 15 percent per year, Hong Kong’s by 14 percent per year, and those of South Korea and Indonesia by 12 percent per year. The nature of these exports had also shifted in recent years from basic materials and products such as textiles to complex and increasingly high technology products, such as automobiles, semi-conductors, and consumer electronics.

Janet L. Yellen wrote in Global Economic Viewpoint: “The financial crisis in Asia was in many ways very different from others. For example, earlier in the 1990s, both Mexico and Argentina suffered financial crises, largely stemming from their unsustainably high budget deficits and soaring inflation. By contrast, in most of the affected Asian countries, during the years leading up to the crisis, growth in economic activity was strong, inflation was relatively tame, investment was robust, and, with their budgets in surplus, their fiscal houses appeared to be in order. [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

“Indeed, these countries had enjoyed extraordinarily fast growth for decades. As their success grew, the international community encouraged them to open their economies to foreign capital and to liberalize their financial sectors, and there was movement in that direction beginning in the late 1980s. With freer capital markets and fewer distortions in the financial sector, foreign capital flooded in, typically as short-term loans to banks; by 1996, capital inflows had grown to $93 billion. In 1997, it all came to a “sudden stop” in East Asia. Foreign investors not only stopped flooding these countries with capital, but, in fact, reversed course and pulled capital out, in a dramatic way, as $93 billion of inflows became over $12 billion of outflows.” [Ibid]

Reasons for the Asian Financial Crisis in 1997-98

Reasons for the Asian Financial Crisis in 1997-98: included: 1) stiff competition from China on the cheap labor front especially after the Chinese currency was devalued in 1994. 2) Crony relationships between banks, politicians and business. 3) Over optimistic, greedy, wasteful, arrogant policies.

In 1994, China devalued the yuan against the dollar by 33 percent, making Chinese labor considerably cheaper than Southeast Asian labor and making Chinese products considerable cheaper than those in Asia. In 1994 and 1995, the dollar strengthened against the yen and countries that had pegged their currency the dollar began to suffer as companies in search of cheap labor began look to China instead of Southeast Asia. The devaluation of the Chinese currency and the increase in value of the dollar also caused exports in United States to plummet. The cost of imports started to outstrip revenue brought in by exports and "the current accounts deficit rose unhealthy levels." In the case of Thailand overseas debts rose to 43 percent of GNP.

In the 1990s capital markets in Asia were liberalized while supervision of the banks and other financial institutions was woefully inadequate. Many short term loans from abroad found their way into real estate ventures and other speculative endeavors. If the currencies had been floated, their values would have shrunk gradually instead of collapsing.

The giant hedge fund Long-Term Capital Management was blamed for suddenly pulling large amounts of money out of Asia. It and George Soros and was singled out by Malaysian Prime Minister Mahathir bin Mohammed for blame.

“Hot money,” which moves easily across borders and can be quickly withdrawn if investors get spooked, was also blamed. Foreign investors invested heavily to take advantage of construction and industrial booms but got spooked when they saw a glut of factories, shopping malls and luxury apartments. The money quickly evaporated, leaving property valued a fraction of what it was, banks hold billion in bad load and hundreds of thousand of people out of work.

Janadas Devan wrote in The Strait Times: In the five crisis countries---Indonesia, Malaysia, the Philippines, South Korea and Thailand---foreign borrowing in 1995-1996 reached an annual rate of US$43 billion, with two-thirds having maturity dates of less than a year.According to the International Monetary Fund (IMF), short-term loans to Thailand soared to an astonishing 7-10 per cent of GDP in the three years preceding 1997, while foreign direct investment languished at 1 per cent of GDP.When the crisis hit, these short-term funds disappeared as rapidly as they had materialised. [Janadas Devan, The Strait Times, July 3, 2007]

Janet L. Yellen wrote in Global Economic Viewpoint: There are several views on what happened. The first view is that this was a classic “liquidity” crisis---much like a banking panic, where depositors’ fears about insolvency, well-grounded or not, become a self-fulfilling prophecy as their withdrawals en masse bring the bank to ruin. The second view focuses more on the vulnerabilities that existed in these nations’ economic fundamentals, which threatened to lead to solvency difficulties. One such vulnerability was the pursuit of risky lending practices by financial intermediaries. In part this was due to problems with the quality of supervision and regulation of the financial sector. But the problem also lay with the long tradition of so-called “relationship lending.” Rather than basing lending decisions on sound information about the fundamental economic value of specific investment projects, banks and other financial intermediaries based them on personal, business or governmental connections. As a result, bank loan portfolios became particularly risky. And these risks became grim realities when economic conditions slowed in these countries in early 1997. [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

“In spite of the risky lending practices that prevailed before the crisis, foreign investors poured money into these countries at record rates. Their willingness to do so appears to have stemmed in part from a perception that the governments of these nations stood ready to intervene to forestall bank failures. This led to another vulnerability---explicitly or implicitly pegged exchange-rate regimes, which are subject to speculative attacks if the markets perceive that the true value of the currency is misaligned with its pegged value. One explanation for the attacks that drove currency values down in Asia is tied to concerns about possible big government bailouts of the strained banking sector. If foreign investors expected that the bailouts would lead to high fiscal deficits, that expectation, in turn, would raise concerns that the governments might force their central banks to monetize their deficits, resulting in higher inflation and depressed currency values.” [Ibid]

Derivatives and Wasteful Spending and the 1997-1998 Asian Financial Crisis

Some of the blame for the crises was placed on derivatives, "powerful and highly complicated agreements designed to offset certain financial risks." Under stable conditions they worked well but in times of uncertainty they can be disastrous and make a bad situation worse.

According to Time: "A product of sophisticated math and computer software, derivative contacts are designed to help banks, corporations and countries hedge against financial uncertainties, such as changes in interest rates. But banks found they could make a killing by concocting more exotic derivatives that effectively bet on the direction of interest rates, foreign exchange, commodities and stock indexes...The alchemy of derivatives rests on complex mathematical models that predict how markets and derivatives will behave under ceratin conditions. The computer models use past performance to portend the future, but they can’t account for the unaccountable." Accounting rules enabled derivatives to avoid appearing on bank balance sheets so how they were was often unknown to everyone except those using them.

The large amounts of money floating around encouraged imprudent investments and speculation. Janadas Devan wrote in The Strait Times, “Loosely supervised banking systems in the years preceding 1997 had led to an excessive expansion of credit in the crisis countries. This in turn had fuelled over-investment in some sectors. Excessive credit growth had also led to wasteful boondoggles. These fed delusions of grandeur ('the world's tallest building', for example), but did not make sense otherwise. Worse still, excessive credit had fed a real estate bubble, which in turn led to a further expansion of credit, as banks lent more as the value of their collateral rose. The result was that when the bubble burst, banks were dangerously exposed, and their non-performing loans shot up. [Janadas Devan, The Strait Times, July 3, 2007]

“Poorly supervised banking systems had also allowed banks to function with inadequate capital or liquid asset ratios. Bank for International Settlements (BIS) figures for 1997 show that these ratios were significantly higher than the minimum international standard only in the Philippines (17 per cent), Hong Kong (18 per cent) and Singapore (19 per cent). [Ibid]

“The Asian crisis was not due solely to the fecklessness of Asians. The crisis was caused in large part by changes in the pattern of international financial intermediation. Firstly, the remarkable expansion of global liquidity in the 1990s increased competition in the financial services industry worldwide. Financial managers were thus predisposed to seek higher yields through risky investments, to offset declining rates of return on high-quality assets. Secondly, the macroeconomic policies of major economic powers contributed significantly to the expansion of global liquidity.

It was not surprising that capital inflows into Asia surged as a result. Asian rates of returns seemed higher. And Asians found it cheaper to borrow in dollar- or yen-denominated instruments rather than in their own local currencies. But such imbalances could not last. The surge of funds led to upward pressures on exchange rates, which in turn worsened trade deficits. And when markets forced currency depreciations, the downward pressures were worsened by the sudden outflow of short-term funds. Greed turned into fear; events took on the classic dimensions of a "bank run"; markets panicked and overshot; trade credit dried up.

Asian Financial Crisis in 1997-98 and Thailand

In February and March 1997, the Thailand government took out $23 billion in forward contracts (80 percent of which were purchased by speculators) to defend the baht and pay for imports. In May, economist in Thailand realized the forward contracts were undermining the baht and they suddenly canceled them. The speculators responded to these moves by flooding the market with orders to sell baht. The Thai government raised interest rates and tried other tactics to defend the baht but these measures only delayed the inevitable by a few months.

On July 2 1997, Thailand shifted from a dollar-pegged fixed currency policy to a floating exchange system which resulted in the devaluation of the baht. The Thai economy melted down after the shock floating of the baht, a move that sent the currency spiraling downward by 30 percent as currency speculators attacked. As one currency speculator late told Time magazine, "We were like wolves on the ridge line looking down on a herd of elk. By culling the weak and infirm, we help maintain the herd." There was talk of a military coup.

The baht went from 25 to the dollar to 50 to the dollar before stabilizing at around 40 to the dollar. The Thai government spent $10 billion of its $38 billion foreign reserves futilely trying to save the Thai currency with the belief the currency would rebound and the loses would be recouped. But the currency didn't recoup and the Thai government needed foreign currency to make $50 billion import and loan payments, which ate into reserves further.

By the end of 1997, the Thai stock market had declined by 41 percent, the currency had depreciated by 56 percent, and percent, Thailand's 15 banks and 91 finance institutions, many holding large non-performing real estate loans, teetered on the edge of solvency. There were worries that the Thai government would default. In the meantime speculators collected on their forward contracts in dollars, not devalued baht, and walk away with an estimated $3 billion in profits. By January 1998 the baht had fallen to 53.10 against the dollar and crisis had spread beyond Thailand.

The effect of the crisis was worse in the cities and on big business. The countryside and mom and pop businesses were relatively untouched. Poor people survived on rice they grew themselves, mangos and mango leaves picked from trees, and fish paste made from fish they caught in the river.

Thanong Bidaya was the finance minister of Thailand who decided to devalue the baht, triggering the 1997-1998 Asian financial crisis. On that legacy Somjai Phagaphasvivat of Thammasat University in Bangkok told Reuters, “He just happened to be in a position that required him to take the decision then due to enormous pressure on the Thai economy.

Causes of Asian Financial Crisis in 1997-98 in Thailand

Before the crisis there was a massive borrowing in dollars. Asian banks owed more in dollars than they held in reserves. Most of the debt was short term and financed a spending binge. Money was foolishly invested speculative real estate. Thailand was filled with excess phone lines, petrochemical plants and cement factories. More than $1 billion was spent on the Muang Thing residential and commercial development project.

A weak real estate sector was created through speculation. Businesses were unable to pay the high interest rates. The weakened banking sector further undermined the system as it could no longer provide sufficient loans. By 1996, unsold properties around Bangkok began to accumulate and investors worried about defaults began taking their money out of Thailand. As of August 1997, there were 350,000 vacant housing units in Bangkok and many unfinished offices and empty hotels. Many businesses were "sunset industries" in which companies churned out the same products year after year with less profit instead of reinvesting in more modern equipment. Thailand tried to enter the memory chip business against powerful competitors like South Korea and Taiwan. It was hit hard when the price of these chips crashed.

Individuals also amassed debt. People earning $350 a month were charging many time that amount with easy-to-get credit cards and amassing huge debts buying expensive clothes and pure-bred puppies. Interest rates had been higher in Thailand than in the U.S. Because the baht was tied to the dollar many Thais borrowed as many dollars as they could, exchanged them from baht and profited the difference. This worked fine until the baht collapse.

The Thai government wasn’t much help. There were three different administrations between 1993 and 1996. None of them wanted to be the one to rain on Thailand’s parade and take measures to reign in Thailand’s bubble. The Prime Minster in the mid 1990s, Banharn Silpa-archa, was known as the "walking ATM." He emptied the government treasury of $39 billion to prop up the economy and keep companies and banks in business even though they had accumulated massive debts.

The disgraced Thai financier Pin Chakkaphak told the Independent, “In Thailand, the regulations for financial executives and stock trading is very loose. In the old school of Thai cronysim, inside information is everything....Thailand is a country of pure traders, not builders or people who plan. The attitude was “I have a piece of land, I want to be a rich man. If I can get a bank loan I will build a high rise on this land. And the banks were stupid enough to give out the money...Thai corporations were the worst abusers of borrowing funds, and kept putting up more buildings and dealing with nor transparency.”

Before the Asian Economic Crisis in 1997-98 in Thailand

Thanong Bidaya, the finance minister of Thailand who decided to devalue the baht, triggering the 1997-1998 Asian financial crisis, told the Yomiuri Shimbun: “I could sense that once the Mexican crisis started in ‘94, there was some warning in Thailand that we had a very similar situation—very high GDP. But no one paid interest.”

In 1993 the Thai government introduced the Bangkok International Banking Facility (BIBF) allowing the private sector in Thailand to borrow foreign exchange for domestic use. Before the crisis interest rates were very high in Thailand, ranging from 8 to 12 percent, compared to about 5 percent in the United States. This led to an overborrowing in Thailand.

At the time the system appeared to work well for Thailand. Thanong said: “they needed foreign exchange to pay back the chronic deficit. So by borrowing money you add into the balance of payments and the chronic deficit would be drawn from the balance of payment so it evens out.” But in reality doom was right around the corner. “Everything was so overspeculated....and the booming real estate, the high interest rates, the booming stock exchange were the causes for the overspeculation.

Businessmen skimmed profits. As they became richer they became more corrupt and skimmed more money. Lack of strong financial institutions and regulatory agencies didn’t help matters. One farmer from the Chiang Mai area told Time, "We should have known better than to put a bunch of monkeys in a cage full of bananas.” Singapore patriarch Lee Kuan Yew said, "Many Thai leaders in the government and opposition have personal interest in the fate of finance companies and banks, hence a natural reluctance to disciple them. So warning signs were ignored and remedies postponed."

Banking Crook at the Center of the 1997-1998 Asian Financial Crisis

Rakesh Saxena was a financial adviser to a Thai bank whose failure caused a crisis of confidence that helped spark the 1997 Asian financial meltdown. He made millions of dollars from fraudulent loans to cronies of the bank’s management. The bank’s failure exposed the weaknesses of the Thai financial system, which had expanded meteorically with little oversight during Thailand's boom years, and helped trigger the devastating 1997 Asian financial crisis. [Source: Ambika Ahuja , Associated Press, October 30, 2009]

In October 2009, Saxena was extradited from Canada to Thailand. AP reported: “Rakesh Saxena, 57, had staged one of the longest extradition battles in Canadian history to avoid being sent back to face charges he helped embezzle $88 million from the Bangkok Bank of Commerce, which collapsed in 1995. The bank had about $3 billion in bad debt when it was shut down. The case continues to hold potential for causing trouble, because those who received dodgy loans include several still-prominent politicians.

A spokesman for Thailand's Attorney General said Saxena, an Indian national, has over 20 cases pending against him under the Securities Exchange Act. Thailand's statute of limitations on charges under the law will run out in July 2010. "He is facing serious charges (for actions) which led to a crisis of confidence in Thailand," the spokesman told AP. "Everything will be done according to the law, but we already consider it a success that he was sent back to face justice."

A colorful wheeler-dealer who pioneered the aggressive use of mergers and acquisitions in Thailand, Saxena counted among his associates Saudi arms dealer Adnan Khashoggi, who was involved in some of his Thai business deals. Thai authorities originally charged Saxena in 1996. But he fled Thailand, and was arrested later that year in the British Columbia ski resort town of Whistler. He fought tenaciously against extradition, claiming he would be in danger if returned to Thailand because he could expose the wrongdoing of influential people.

His lawyers early during his stay in Canada negotiated a deal under which he was allowed to stay in his own luxury apartment with guards that he was responsible for paying. He continued to carry out business deals around the globe during his detention, allegedly including the financing of an attempted coup in the African nation of Sierra Leone. However, he was later transferred to jail from house arrest. In 2003, then-Canadian Justice Minister Martin Cauchon ordered Saxena deported to Thailand, but the fugitive financier continued to appeal the deportation order. The Supreme Court of Canada turned down his final appeal against the order in October 2009, setting his extradition in motion.

Politicians whose names were tied to the banking scandal include Newin Chidchob, influential head of a political faction in Thailand's coalition government in 2009, and Pairote Suwannachawee, husband of Information and Communications Technology Minister Ranongrak Suwannachawee.

Results of Asian Financial Crisis in 1997-98 in Thailand

The Asian Financial Crisis in 1997-98 produced the worst economic slump in Thailand since World War II. The financial sector was left holding $31 billion in bad debts, unemployment increased by 23 percent to 1.3 million people, stocks fell to their lowest levels in recent memory, banks collapsed, construction stopped, offices buildings were empty, hotels lacked guests. There were suicides. Metal health hotlines were opened.

One financial analyst told Time that among foreign investors Thailand went from being the "flavor-of-the-month" to the "stink-of-the-month." In 1998, the economy shrunk by 10.5 percent, 46 percent of all loans were non-performing, and unemployment rose to 8.5 percent (2 million workers). The economy shrunk by 2 percent in 1999 and unemployment rose to 9.5 percent (3 million workers). Large auctions were held for repossessed cars and houses picked up after foreclosures.

Many of Thailand’s biggest corporations went bankrupt. The biggest corporate debt defaulter, Thai Petrocical Industry (TPI), had massed $3.75 billion in debts. The Australian accountant who handled creditors claims on the company traveled around in a bullet-proof Mercedes accompanied by gun-toting bodyguards. One nosy Australian auditor who delved too deeply into the accounts of a trouble bank was gunned on a busy highway in Bangkok. The net worth of the rich Lamsams and Sophoinpaniches families shrunk by 60 percent.

Suicides and Affects of the Asian Financial Crisis on Ordinary Thais

During the "Thai Help Thai" campaign people turned in gold and dollars as part of an effort to get the country out of economic trouble. People hoarded food; mothers told their children to have a big breakfast s there would be less likely be snacks available during the day; hospitals desperate for cash offered discounts on Caesareans births and open heart surgery.

Middle class families than had been planning to send their children abroad to school or buy a beach houses were suddenly broke; yuppies canceled their wedding plans; cars were repossessed at stop lights. Car and motorcycle sales plummeted 30 percent. In 1997, the sales of Mercedes dropped 45 percent. In 1999, only 2,500 were sold. The sale of wine dropped 22 percent.

Worker showed up at the their jobs to find factory doors padlocked shut. Construction workers weren't paid for work they had already done. Many were owed back wages for weeks or months. Increased poverty in the countryside caused rural people to flee to the cities. Burmese laborers hid from police in half-constructed buildings. Some laid off workers turned to prostitution to earn money to help make ends meet. Demonstrators in Bangkok carried signs that read: “Poor people pay off the debt while the evil capitalists sell off the country.”

After the Asian Financial Crisis in 1997-98, the suicide rate in Thailand doubled. Many of the suicide victims were yuppies. Stress levels were particularly high among real estate developers. According to a survey in December 1997, 17 percent of the Bangkok resident's said they contemplated suicide. In another survey 5.8 percent of the people in the real estate business and 2.3 percent of the people in the finance sector seriously contemplated suicide. One health official told AFP, “Many Thais who killed themselves have been facing economic pressure for some time and the flotation of the baht was the last straw."

Some Thais turned to religion for solace. Buddhist monks reported that temple visits tripled. Buddhist leaders led nationwide chants at the Temple of the Emerald Buddha in Bangkok to dispel bad karma and promote positive energy. There was also a an increase in demand for psychological counseling and mental relaxation classes.

The New York Times described one family with a young boy who died because it could no longer afford his medicine. The son had a lung disease that could be treated with medicine that cost $50 a month and was paid for with the help of relatives who worked at construction jobs in Bangkok. After the crisis the cost of the medicine shot up to $120 a month (because of the depreciation of the baht) and relatives lost their job and could no longer help pay for the medicine. [Source: New York Times, June 8, 1998]

Thailand’s IMF Bailout

Thailand received $17.2 billion from the International Monetary Fund. It was the largest rescue plan since Mexico received $40 billion from the IMF in 1995. The IMF demanded an end to the political patronage system in Thailand and reforms to system that encouraged cronyism and corruption.

Followed IMF rules, the baht stabilized, interest rates were lowered, some financial restructuring was done and services were increased because there were few imports. Thailand was net food exporter, and didn't have to worry about food shortages. Thailand and South Korea followed IMF advise and rebounded much quicker after the Asian financial crisis than countries like Indonesia that did not quickly follow the advice. Thailand paid back its IMF loan two years ahead of schedule.

Asian Financial Crisis Spreads from Thailand to Southeast Asia

The economies of Southeast Asia are closely tied. The melt down in Thailand set off a chain reaction throughout the region. After the currency crashed it in Thailand, it also crashed in Malaysia, the Philippines and Indonesia.

Investors took a look around Southeast Asia and saw Thailand-like problems in Malaysia, the Philippines and Indonesia and pulled out their money, and the stock markets and currencies plummeted there as well.

Charles W.L.Hill of the University of Washington wrote: Following the devaluation of the Thai baht, wave after wave of speculation hit other Asian currencies. One after another in a period of weeks the Malaysian ringgit, Indonesian rupiah and the Singapore dollar were all marked sharply lower. With its foreign exchange reserves down to $28 billion, Malaysia let its currency, the ringgit, float on July 14th, 1997. Prior to the devaluation, the ringgit was trading at $1=2.525 ringgit. Six months later it had declined to $1=4.15 ringgit. Singapore followed on July 17th, and the Singapore dollar (S$) quickly dropped in value from $1=S$1.495 prior to the devaluation to $1=S$2.68 a few days later. Next up was Indonesia, whose currency, the Rupiah, was allowed to float on August 14th. For Indonesia, this was the beginning of a precipitous decline in the value of its currency, which was to fall from $1=2,4000 Rupiah in August 1997 to $1=10,000 on January 6th, 1998, a loss of 75 percent.

“With the exception of Singapore, whose economy is probably the most stable in the region, these devaluations were driven by similar factors to those that underlay the earlier devaluation of the Thai baht. A combination of excess investment, high borrowings, much of it in dollar denominated debt, and a deteriorating balance of payments position. The leaders of these countries, however, were not always quick to acknowledge the home grown nature of their problems. [Ibid]

Reforms after the Asian Financial Crisis in 1997-98 in Thailand

After the 1997-1998 Asian financial crisis in Thailand the currency floated freely, reserves of foreign currency increased, mostly by exporting to the United States, and the practice of borrowing from abroad in the short term has been curtailed. The government closed or seized two thirds of Thailand’s financial houses and seized or forced the sale of most of its 15 major commercial banks. Thailand created bankruptcy court in 1999. The process was slowed by politicians who also headed some of Thailand's largest companies.

The decline in the value of the baht increased exports, deterred foreign spending, attracted foreign investors and tourists. Among those who found new business opportunities created by the crisis were debt collectors. Overall there was less damage to the economy than in Indonesia and the Philippines.

In 1999, exports were flat as a result of the Asia-wide recession. The government was slow to developed a strategy to revive the economy. Cronyism continued to live on in Thailand. The number of non-performing loans was still high (46 percent) in 2000. The recovery was delayed in the early 2000s by the crash, September 11th, and SARS.

After the Asian Financial Crisis in 1997-98 in Thailand

Many Thais felt the whole crisis was created by foreigner to get their hands on valuable Thai assets at cheap prices. In March 1999, Peter Brimble, a longtime analyst in Bangkok, told the New York Times, "There is a new feeling out there that foreigners are trying to take over Thailand on the cheap." American fiancier George Soros canceled a speech in Bangkok after business people there threatened to pelt him with rotten eggs and fruit.

Thailand was unable to compete on the cheap labor front against countries like China, Vietnam and India. Matsushita was one company that cut its production facilities in Thailand and shifted jobs to China.

Rather than following the Japanese, Korean and Chinese models of developing mass production and acting as a subcontractor for more developed nations, Thailand began focusing on developing promising home grown sectors such as processed food, textiles with the intent of nurturing domestic demands as well as imports. There was also an effort to decentralize and move more jobs to the countryside.

Thailand has not demanded technology transfers as has been the case in China and South Korea. Local companies burden by debt were not anxious invest in improved technology and research and development. A plan was introduced to form a Southeast Asia wide fund---with each country contributing about 1 percent of their foreign exchange reserves---to avoid a financial crisis like the one in 1997. This became the Chiang Mai Initiative (See Below).

By the early 2000s Thailand’s developing, free-enterprise had largely recovered from the Asian financial crisis. By 2002 Thailand’s standard of living had returned to the level prevailing before the financial crisis. The recovery reflected the benefit of reform measures tied to assistance by the International Monetary Fund, direct investment from Japan, the United States, Singapore, and other nations, and surging exports. During 2001–4 the economy grew at a moderate rate, but the rate of growth was slower than in the booming 1980s and the first half of the 1990s. A long-term shift from agriculture to manufacturing and services continued.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Tourist Authority of Thailand, Thailand Foreign Office, The Government Public Relations Department, CIA World Factbook, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated May 2014

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