Until its crash in 1997, the Thai economy had performed exceptionally well. Economic growth had averaged 7.6 percent from 1977 to 1996. The basis of the boom until about 1993 was sound, with rapid investments in manufacturing capacity brought about by the relocation of industry from East Asia following the appreciation of the yen.
On the domestic front, all ceilings on interest rates in Thailand were removed in 1992. Additionally, the requirement for banks to direct a certain proportion of their loans to the agricultural sector was gradually loosened. Lenders collaborated closely in fueling the property boom.
The Bank of Thailand’s data indicates that the banks’ share of real estate lending in their overall portfolio increased from 6.3% at the end of 1988 to 14.8% at the end of 1996. During the same period, the share of real estate in the portfolios of finance companies rose from 9.1% to 24.3% (cited in Renaud, Zhang, and Koeberle, 1998).
The flotation of the baht on July 2, 1997, is now referred to as the start of the Thai and broader Asian crisis. The Bank of Thailand, as the supervisor of these institutions, began to take action on some of the worst cases. They first asked ten finance companies to increase their capital on March 3, 1997, and encouraged them to merge.
The decades of continuous growth before 1997 meant that the problems posed by the bankruptcy of firms were never serious enough to warrant a close examination of Thai bankruptcy laws. Its total foreign debt at the end of 1995 was US$90.5 billion, which was just under 50 percent of the GDP at the then-current exchange rate. The downside of this operation, of course, was that the speculators were able to continuously obtain fresh supplies of baht from the spot sales by the Bank during the swap transaction (Nukul Commission 1998: paras. 105-117).
The results of the Thai economic crisis had some impacts initially on Thai labor. Between August 1997 and August 1998, male employment in agriculture went up by less than a quarter of a million, from 8.31 to 8.54 million, but female employment fell by half a million, from 7.23 to 6.74 million. This increase was particularly severe in the Northeast, the traditional exporter of labor within Thailand, with the unemployment rate there rising as high as 8.1 percent (Ammar and Orapin 1998). Overall employment has not yet regained its pre-crisis level as of August 1999.
Resulting from the economic crisis, the Fund demanded tax increases and reductions in state enterprise investments in order to achieve a surplus of 1 percent in the consolidated public sector account. Mundell (1963) points out that when the two conditions are met, any fiscal stimulus will lead to an influx of foreign capital, triggering an appreciation of the home currency.
It is evident that the Thai economic crisis had its origin in the private sector. Nearly four decades of relatively stable growth had lulled everyone into complacency regarding the risks that they were running. Current figures (as of April 2000) indicate that the flow variables are all showing clear signs of recovery. At the very least, the resources that have been and will be put up by the taxpayers to cushion the blow to investors and lenders in misconceived investments have been out of all proportion to the safety net provided to the poor.
