AN UNEASY TRANSITION TO CAPITALISM
Post-war austerity, baht devaluations and financial crises have all been obstacles to Thailand’s economic development, writes Busrin Treerapongpichit
Thailand has faced a series of economic problems since entering the capitalist era, with several turning into crises. Thailand backed Japan in World War II and had to pay the price when peace returned in 1945. It had to supply millions of tonnes of free rice to Western countries, hindering its economic recovery. A shortage of consumer goods and high inflation also hurt the economy.
The post-war period saw the establishment of many state enterprises, while currency exchange rate management was introduced as part of an economic recovery plan.
Vulnerable Thai banks were in the early stages of development, yet the steady growth in the economy created a small capitalist class. This group was mostly in the financial sector, which then established links to political and military leaders. Economist Ammar Siamwalla labelled this “bureaucratic capitalism”.
Post-war hardship ended in 1958 when Field Marshal Sarit Thanarath took over as prime minister after a coup.
His tenure brought the country’s first economic development plan as well as the key Fiscal Policy Office and Budget Bureau. There was also an overhaul of the National Economic Development Board.
Most of Thailand’s economic problems were caused by external factors including decreasing US investment and spiking oil prices. The economy had a budget deficit and high inflation, not helped by an unstable political situation.
The first real economic crisis i n Thailand occurred in 1983-86, triggered by huge losses in finance company Raja Finance and its affiliates in 1979. Other finance companies also expanded too rapidly through mergers and acquisitions.
The Raja Finance case resulted in a liquidity drain in Thailand’s banking system. The country’s second-largest financial institution’s executives faced criminal charges for chronic mismanagement and tax evasion. Loans to subsidiaries later became bad debts.
From 1981-84, the government led by Gen Prem Tinsulanonda devalued the baht three times. In 1981, the baht was depreciated by 1.25% to 21 to the US dollar. It was later devalued by 8.7% to 23 baht and by 15% to 27 against the greenback.
The government also changed the country’s fixed exchange rate. After being pegged only to the dollar, the baht became part of a multiple currency basket peg system in which the dollar bore 80% of the weight and other major currencies 20%.
The damage from the financial crisis in 1983-86 adversely affected one-third of all financial institutions with a value accounting for one-quarter of financial assets.
In January 1984, the stock market crashed
under pressure from the financial sector’s liquid- ity problems. The central bank was blamed for not tackling these problems.
The World Bank lent a hand to Thailand by providing two structural adjustment loans in 1982 and 1983. They came with conditions relating to many areas of reform and policy changes.
The Raja Finance case in 1979 led to tougher banking regulations and the first formal controls of finance companies through the 1979 Commercial Banking Act.
The more serious 1983-86 financial crisis even led to further state initiatives. One was the establishment of a Fund for the Rehabilitation and Development of Financial Institutions that received interest-free contributions from all financial institutions.
On June 9, 1984, promissory note holders of the bankrupt Yawaraj Finance Company were shocked when the company stopped making payments. Its licence was later revoked.
As other companies sank into trouble, a crisis of confidence spread across the financial system.
The Bangkok Post’s business section reported on June 15, 1984, that the Bank of Thailand and the Finance Ministry were being blamed by supreme commander Gen Arthit Kamlang-ek for a delay in implementing measures to shore up public confidence in financial institutions.
“We must accept that executives of some ailing finance companies are very cunning. They have several financial statements. So we have to make sure that it will not cause damage to the GSB (Government Savings Bank) if we take over these firms,” Dusadee Svasti-Xuto, director-general of the GSB, told the Post.
Politician Boonchu Rojanasathien blamed greedy commercial banks’ cunning marketing techniques for causing the mess in the financial market.
While yielding high returns in the short run, these strategies would harm the entire economy and damage the banks’ long-term interests, he said.
As people were pointing fingers at banks, an amendment to the Commercial Banking Act in 1985 empowered the Bank of Thailand to regulate commercial banks.
The first crisis brought up the idea of promoting industrial products for export in order to survive at a time of global economic volatility.
Nukul Prachuabmoh, central bank governor at that time, introduced a measure to solve the problems of finance companies by setting up a “deposit insurance institute”, the first of its kind in the country.
Several measures to stabilise the economy had substantial success. Reform of the agriculture sector incentive system included a cut on export tax on rice and the abolition of the minimum price guarantee programme for farmers and millers.
In 1986-87, Thailand’s recession turned into an impressive export-driven economic boom as the cheapening of exports due to devaluation was succeeded by an appreciation of East Asian currencies, leading to a massive flow of direct investments from Japan, Taiwan and South Korea to Southeast Asia including Thailand.