IMPACTS AND LESSONS FOR VIETNAM FROM THE ECONOMIC CRISIS IN THAILAND
IMPACTS AND LESSONS FOR VIETNAM FROM THE ECONOMIC CRISIS IN THAILAND Key Notes This case paper investigates the impacts of Thailand’s economic crisis on Vietnam, and highlights the induced lessons for Vietnam in the process of its economic development. It is also noted that these adverse impacts on Vietnam are not only affected by the crisis in Thailand, but also from the domestic environment of Vietnam including the obstructive rules and regulations. ... Conceptual issues “The crisis has happened so quickly that it has left us confused, puzzled and let down” is what a community leader in Khon Kaen said when the economic crisis occurred in Thailand in 1997. ... To speak of ‘crisis’ rather than ‘problem’ normally suggests that a non-conventional solution is called for, i. ... Stemming from that preoccupied point of view, the 1997 economic crisis in the Southeast Asia in general and in Thailand in particular, through the critical lens, is not the collapse of whole system, but rather a social phenomenon induced by the ‘unavoidable contradictions’ among factors of the economy. ... The crisis also serves to uncover serious structural flaws including weaknesses in the financial sector, delays in vital transformations in the industrial structure, and defects in corporate governance. Thus leading to further consensus on the solutions adopted for the economic survival at all levels - sectorally, nationally, regionally and globally. ... Introduction: Thailand as the engine of regional growth The open economy of Thailand has traditionally been maintained by careful macro-management by promotion of agrarian exports. ... Low inflation, a stable exchange rate, a healthy balance of payment, low wages, cheap food, and limited political disruption kept Thailand competitive in world markets, attracted foreign investors, and fostered the expansion of domestic capital. ... They cooperated and pooled resources to acquire the political strength and the economic power to compete. ... In the early 1990s, they took up the opportunities to buy technologies, skills and capital from the increasingly free markets of the world. ... Thailand’s capitalists became by nature outward-looking and cosmopolitan. Thailand is among the growing number of developing countries moving on the growth-oriented agenda over the past two decades, and being identified member of the group of ‘strong globalizers’ (the top one-third of developing countries in terms of increased participation in international trade). ... These countries have experienced an acceleration of their growth rates, from 1. ... And the developing countries not in the ‘globalizing group’ declined in the average growth rate from 3. ... From the above-mentioned introduction, the paper will start with an overview of the economic context of Thailand, which also imply a deeper critical analysis on the essence and causes of the economic crisis. ... ESSENCE AND CAUSES OF THE ECONOMIC CRISIS IN THAILAND 2. ... Financial and monetary policies In the mid-1980s, the local economy began to grow rapidly, and Thailand began the process of liberalizing its financial system. ... Starting in 1990, as part of this process, Thailand lifted capital controls so funds could freely flow in and out of the country. In 1993, the Bangkok International Banking Facilities (BIBF) were established to permit local and foreign commercial banks in Thailand to take deposits or borrowings in foreign currencies from abroad, and lend them both here and abroad. ... The fact that the interest rates in Thailand were much higher than in many other countries caused large private firms to borrow from abroad to finance their projects. Prior to the crisis, there appeared an unanticipated boom in assets markets, especially stock and real estate markets. ... The developed stock markets system in Thailand prior to the crisis was the main means to savings, capital mobilization and accumulation. ... Especially in 1996, rapid expansion of housing and office supply led to an alarm of over supply, with high vacancy rate (which signaled from 1994). ... The long-standing overvaluation of the baht meant that the Bank of Thailand had essentially eliminated the exchange rate risk of an economic “bubble” waiting to burst. Problems arouse when the loans from abroad were misallocated to be channeled to sectors of low productivity, while loans were unhedged against currency fluctuations. Fast growth tended to hide mistakes and illegal operations of banks in terms of management and implementation of accounting standards and regulations, which turned out to be noteworthy elements to endanger the crisis. ... But it was a matter of fact that the vested interests in BOI and among big investors generating from tax exemption hindered all-important reforms. ... All these created an extremely unfavourable economic situation - a disaster waiting to happen. ... Import substitution and outward trade/industrial policies Thailand failed to stand against the pressure of domestic industry protection, resulting in the increase of the cost for the local subsidiary industries, and checking the integral process of self-reliant industries. ... The crisis Thailand, a country once described by the World Bank as a “model for economic development” was plagued by an economic crisis characterized by massive foreign debts, unemployment, inflation and a depreciated currency. In the eyes of the investors, the crisis has turned their ‘investment dreams’ to be the investment nightmares. In a radically changing economic environment, the impact of the crisis to people and their livelihoods is difficult to capture. Most analysts agree that the 1997 economic crisis is Thailand’s worst since the World War II. Among other Asian countries, the crisis revealed first in Thailand with good reasons. After a decade of great economic success, aided by a strong record of prudent macro-economic policies, Thailand’s economic situation deteriorated progressively in recent years, and became increasingly vulnerable since 1993, with high external debt burden of 50% of GDP, of which some 40% was short-term. ... Important Thai exports such as textiles and canned goods were losing their share in the world market, as a result of competition from countries with cheaper labour costs like China and Vietnam. ... Selling pressure from speculators gave the last blow: before long, local investors started to sell baht for dollar in an attempt to hedge against the depreciation of the baht. ... In an unsuccessful attempt to defend the baht, the Bank of Thailand used the foreign reserves to buy up the excess supply. ... The economic crisis came to the utmost tension with the closure of 16 financial firms in a day, after the running out of the state foreign exchange reserves. ... With the declaration of the managed float system, the Bank of Thailand failed in defending the baht any longer, and put an end to the 13-year-old pegged exchange rate system where the baht’s value was pegged at around 25 to the dollar. ... The reform programmes After two decades of rapid economic growth, Thailand is now facing serious economic and financial problems. With an economy left with virtually no foreign reserves and a weak private sector weighed down with foreign debts, Thailand decided to work out a serious reform programme and seek for foreign aid to help revive its economy. Before the crisis, the country had to face with serious financial problems as described. ... As a result, the problems became more serious with deeper impacts. ... The Thai government’s 1997-2000 policy framework was designed to restore confidence and economic stability at an early stage and lay the foundation for sound growth over the medium-term. Additional structural measures to reinforce the outward orientation of the economy are an important part of the package to bring about a recovery of the economy to Thailand’s annual growth potential of 6-7% over the medium-term.