The year 1997 marked the Asian financial crisis, the focal point of which was the 1997 Thailand crisis. The context of Thailand and Vietnam now has many similarities. Tipeas will present the Thai crisis so that we can have a broader perspective and draw lessons for ourselves.
Origin of Thailand's economic development.
Before floating about the crisis, let's take a look at Thailand's economy before the crisis. The pre-crisis period from 1960 to 1990 was Thailand's golden growth period. Thai economy at that time was hailed by the media as Asia's new tiger. Before the crisis, no one doubted the growth rate of the Thai economy. This is true before any crisis. Thailand's economic boom is mainly due to the war of the US and its allies in Vietnam. Indeed, the capital that the US has invested in facilities, military systems and bases serving the Vietnam war, has become a direct impetus for Thailand to develop industrial production and tourism. (including legal prostitution for US soldiers). Next is the advantage of the cheapest labor, large land resources, available natural resources. All these factors attract industrial manufacturers, especially the American and Japanese motorcycle and automobile manufacturing industries. All create a picture of industrial exports and rapid economic development.
Crisis happened.
The Thai baht depreciated. From 26 Bath to 1 USD, the Thai currency has depreciated to 56 Bath for 1 USD. Lose more than 100% value. The unemployment rate increased to an unprecedented high, exports decreased, the balance of imports and exports was negative for many years.
The cause of the crisis.
The Thai crisis is very specific and it includes many interacting factors. We will present the most complete and intuitive. Consists of two causes: coming from outside and internal within Thailand.
1. External causes:
The first is the emergence of China and India in industrial production. These two countries quickly emerged as manufacturing and export hubs in the global supply chain due to the advantage of cheaper labor. This is also the period when China devalued the yuan to gain export advantage. Meanwhile, the labor cost of Thailand has increased significantly. This makes the price of Thai exports more expensive and less competitive. Along with that, the profit/labor productivity ratio of foreign capitalist companies in Thailand decreased.
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| Percentage of increase in labor productivity and wages, 1990-1995. Source: UNIDO Database (2000). |
Second, the nature of capital companies will fall into a crisis of excess and then recession. Capitalist companies tend to find a developing country (periphery) to produce in order to take advantage of cheap labor and high profit rates. This is the first stage in the development of a capitalist company. Increase production and generate revenue very quickly. Labor productivity increases because of the use of high-tech machinery. Very quickly production will peak and start to be redundant. The result is production cuts, layoffs. To solve this problem, the capitalist state and company will take the second step. That is to create a consumer fund and invest in the development of the environment and infrastructure. They began to raise wages for workers so that workers could use that money to spend on the products that the company created. This happens to some extent, going against the interests of the company, as it reduces profit margins. If infrastructure development is appropriate and effective. The industry in the host country will be expanded and create more jobs.
In Thailand, labor-intensive (labour-intensive) industries such as apparel and footwear, quickly lost their edge to China, India and other emerging Asian nations. As for high-tech industries, with large FDI capital, capital-intensive as well as: automobiles, motorcycles, mechanical engineering, there is no connection with the local industry. Instead, it is closely related to its parent country or the output countries of the product. Effective use of capital and rational investment in infrastructure development is difficult in developing countries. The usual evidence is traffic congestion and the pitted skyline of unfinished skyscrapers. In Thailand is no exception, the step of capital accumulation and infrastructure development has not been successful. So the third step: technology research and development also did not take place. The proof is in the statistics. There are only 0.2 development researchers for every 1000 Thais. It was 0.3 lower than Vietnam at that time. And significantly lower than Singapore and China. The truth is that it is the largest FDI companies in Thailand that devote very little attention to R&D in the country.
When the competitive environment is fierce, the advantage of cheap labor is lost, and there is a shortage of highly qualified human resources. Domestic industry did not expand. This has consequences: exports fall, unemployment rises, and domestic demand is low. Thailand quickly faced an economic downturn.
When the Thai economy stood on the brink. Foreign organizations have carried out many attacks on the baht (speculative estimates up to 10 billion USD) to seriously devalue the baht. In most articles, they identified this as the cause and the spur that caused the crisis to occur. However, our view is: the depreciation of the baht is a sign of instability, an inevitable consequence.
2. Internal causes.
The Thai government has liberalized the economy while lacking measures to control and secure it. The central bank of Thailand has lost its self-control and has been manipulated by politicians to introduce unreasonable monetary policy. First, the state deregulates domestic finance and removes constraints on portfolio management, including easing regulations on capital adequacy requirements and allowing commercial banks to Commercial and financial institutions expand their fields of activity (financial institutions can participate in activities that are owned by banks: foreign exchange trading, borrowing and lending). Second, the state lifted most of its foreign exchange controls and opened the Bangkok International Bank Facility, allowing foreign borrowing in foreign currency and conversion to Thai baht, thereby increasing capital inflows. Thailand from countries with lower interest rates. This is further facilitated by the third policy, which is to keep the baht pegged to a basket of currencies (USD, Japanese Yen, German Mark) in which USD has the highest weight, thus making dollar loans become artificially cheap as the dollar appreciates against the yen. Fourth, the state keeps interest rates high and always stabilizes the exchange rate to attract foreign capital. This led to a corollary: USD loans became very attractive and accompanied by high-risk investments.
Foreign investors can get 10-11% interest on such short-term loans. Domestic borrowers are also eager to borrow abroad because the source of money is cheaper and the fixed exchange rate regime makes people think there is no currency risk. Thai businesses that borrow money have found that they can borrow at 5-8% interest rates instead of paying more than 13% when borrowing domestically. They can even make money simply by borrowing abroad and depositing baht in Thailand. As a result, Thailand has borrowed too much abroad. External debt increased from nearly $40 billion in 1992 to $80 billion in March 1997.
Three decades of industrial development have accumulated capital, combined with a flood of USD-denominated investment loans. It all flowed into real estate and stocks. Blow up a giant asset bubble. When the bubble burst, a series of commercial banks and financial institutions collapsed. The central bank raised interest rates on the one hand, and on the other hand pumped money out to rescue these institutions. This further aggravated inflation.
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| Increasing Value Added, By Sector, 1987-1995. Source: NESDB (1987-95) |
Final consequences.
Thailand has to borrow up to a bailout of about 17 billion USD under the protection of the IMF (of which the IMF 4 billion, Japan 4 billion, China 1 billion, the World Bank and the Asian Development Bank 2.3 billion, the United States does not pay the fee contribute even a little) to support the economy and with it comes a myriad of strict austerity terms. 56/58 financial institutions closed for liquidation. Nationalized four mid-sized banks to sell them to foreign financial institutions namely Bangkok Metropolitan Bank, First City Bank, Siam City Bank and Bangkok Commercial Bank.
Thailand's economy declined rapidly, the import-export balance was negative for many years. However, devaluation of the baht is beneficial for exports. But it is accompanied by the high cost of importing input materials. This leads to higher export prices and low profit margins. Finally, unemployment increased, mainly in the financial sector, real estate, construction and manufacturing industries with high import content. It is estimated that in 1998, about 600,000 people lost their jobs. More specifically, 20000-30000 workers lost their jobs in the financial sector and 300000-40000 construction workers lost their jobs. The car industry has reported nearly 29,000 layoffs. Furthermore, it is estimated that small businesses have lost about 70000 workers, with another 500,000 expected to be unemployed next year.
Comment:
The financial and economic crisis of Thailand is a very typical crisis of a developing country. Thailand receives foreign FDI to develop hot manufacturing. However, the policy of capital utilization and reinvestment is not effective. The number of domestic industrial companies is too low. The economy depends on exports. Failing to grasp and develop technology. Leading to a crisis of overcapacity and reduced competitiveness. Capital flows to the wrong place causing waste and asset bubbles. Finally, the wrong economic policy creates more risks and weakens the economic situation. When a crisis begins, weak responses and late interventions lead to severe crises and long-lasting consequences.
The article references material from:
Financial Crisis in Thailand: Causes, Procedures and Consequences. LAURIDS S. LAURIDSEN Roskilde University, Denmark.
Economic crisis in Asia: The case of Thailand. Jim Glassman, Department of Geography, Syracuse University, Syracuse, New York.