thailand’s economic growth: a fifty-years perspective...
TRANSCRIPT
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Draft: Not for Citation
Thailand’s Economic Growth: A Fifty-Years Perspective (1950-2000)
Somchai Jitsuchon♣
The financial crisis that broke off in Thailand in 1997 has not only brought on
the need to understand the immediate genesis and possible cures of the crisis, but also
a more fundamental question as to what had gone wrong with the growth process
leading to the crisis. Was it some of the subtle imbalances in macroeconomic
management, or was it inadequate technological advancements in the right directions?
Could it be flaws in the design and operation of some of the political/economic/social
systems or institutions, rendering the overall economic system vulnerable to major
economic shocks?
Final answers to the above questions are difficult to obtained, or agreed upon.
However, one can begin to pursue the answers by first trying to understand the
historical aspects of the growth process of Thai economy. The probability of getting
the right answers can also be enhanced substantially by comparing its experiences
with those Asian economies that have gone through the similar path of growth and
crisis, and also with those that were much less hit by the crisis.
Studies on sources of economic growth of East and South East Asian countries
are numerous1. On the more recent account, Hahn and Kim (2000) argue that
macroeconomic policies, trade policies and, especially, institutional quality, are
♣ Research Director (Macroeconomic Development and Income Distribution), the Thailand Development Research Institute Foundation
1 See, for example, Young (1995), Rodrik (1998).
2
important in ‘explaining’ East Asian high economic growth during 1960-1990. These
factors are helpful when considered together with results from growth accounting
studies.
The purpose of this paper is to provide detailed accounts in the past fifty years,
from 1950-2000, of changes in policies and environments in Thailand that are
potentially crucial to the understanding of the growth process. It will do so by
dividing Thai economic history into four sub-periods, namely,
I) 1950-1973, which is the period that Thailand laid foundations for the
subsequent high and stable economic growth.
II) 1974-1985, which is the period of macroeconomic uncertainty, hardship
and difficult adjustments.
III) 1986-1996, which is the decade of extraordinary high growth.
IV) 1997-2000, which is time of economic crisis.
The paper is organized as follows. Section 1 gives a brief account of growth
experience of the past fifty year, followed by growth accounting for the period 1981-
1995 in Section 2. Section 3 describes the economic changes and turning events of
each sub-period classified above. For each sub-period, attention will be paid to the
major changes in environment and policies that are likely to affect growth
performance. Specifically, four categories of factors that pose defining influences are
considered. They are (a) political environments, (b) external environments, (c)
macroeconomic environments and policies, and (d) microeconomic or institutional
environment and policies. Since accumulation of capital stocks has played a mjor role
in determining the country’s growth performance, Section 4 discusses possible
explanations of the accumulation process. Comparisons with other countries in the
region are in Section 5. Section 6 contains final remarks.
1. Growth Experiences
Overall, Thailand can be regarded as one of the fastest growing economies
among developing countries. The average annual growth rate between 1952 and 2000
is a respectable 6.6 percent. Figure 1 shows the yearly growth rate since 1952.
3
Of course, high growth rates were not achieved year in year out, and were not
identical between sector of production. Table 1 summarizes the economic growths of
Thailand, divided into four sub-periods, and by major economic sectors (agriculture,
industry, manufacturing, and service).
The sub-period III (1986-1996) is clearly the time Thailand enjoyed its highest
economic growths, averaging 9.1 percent per annum. These high growths were led by
the growths in manufacturing sector. It also is the most stable period, having the
coefficient of variation of growth rates of only 0.27 (see also Table 1). On the other
hand, the sub-period IV (1997-2000) is no doubt the most difficult time in Thai
economic history, growing on average of –0.9 percent with bulging standard deviation
of 7.1 percent. Thailand has quickly turned from its most prosperous time into the
most difficult one.
The reverse, but to a much lesser degree, can be said about the growth path
within the sub-period I (1950-1973). The early part of this period (1950-1958) saw a
relatively low growth (4.4 percent) with high variation (0.97 coefficient of variation),
which were in contrast with the later part of the period (1959-1973).
Source: National Economic and Social Development Board (NESDB). Note: Dotted lines indicate the average growth level for each sub-period.
Figure 1Annual Growth Rate, 1952-2000
-15
-10
-5
0
5
10
15
1952
195 4
1956
1958
196 0
1 962
1964
196 6
1 968
197 0
1972
1974
197 6
1 978
198 0
1982
1984
198 6
1 988
1990
199 2
1 994
199 6
1998
2000
4
Table 1 Thailand’s Growth Structure 1952-2000 (percentages)
1952-1973 (I)
1952-1973(I)
1952-1958(Ia)
1959-1973(Ib)
1974-1985 (II)
1986-1996
(III) 1997-2000
(IV)
GDP Growth Agriculture 5.1 3.1 6.0 3.8 3.5 0.3 Industry 9.3 7.4 10.2 7.7 11.8 0.2 Manufacturing 9.0 5.9 10.5 7.2 12.5 2.0 Services 6.9 4.2 8.2 6.4 8.3 -2.6 Total 6.9 4.4 8.1 6.3 9.1 -0.9GDP Share Agriculture 30.5 34.8 28.5 21.4 13.7 10.9 Industry 28.6 24.3 30.6 36.6 45.7 49.4 Manufacturing 16.4 15.0 17.1 22.7 28.2 33.9 Services 40.9 40.9 41.0 42.0 40.6 39.7 Total 100.0 100.0 100.0 100.0 100.0 100.0Contributions to Growth Agriculture 1.5 1.1 1.7 0.8 0.5 0.0 Industry 2.7 1.7 3.1 2.8 5.3 0.1 Manufacturing 1.5 0.9 1.8 1.6 3.5 0.8 Services 2.9 1.7 3.4 2.7 3.4 -0.9 Total 6.9 4.4 8.1 6.3 9.1 -0.9Standard Deviation of Growth
Agriculture 5.9 7.9 4.8 3.1 4.7 2.7 Industry 5.3 6.9 4.4 3.9 3.2 9.6 Manufacturing 6.0 7.4 4.8 4.8 3.4 9.9 Services 3.8 3.8 3.1 2.1 2.6 5.8 Total 3.5 4.3 2.4 2.1 2.4 7.1Coefficient of Variation Agriculture 1.17 2.55 0.80 0.80 1.35 10.22 Industry 0.57 0.93 0.43 0.51 0.27 60.63 Manufacturing 0.66 1.25 0.45 0.67 0.28 5.00 Services 0.54 0.91 0.38 0.33 0.32 -2.26 Total 0.51 0.97 0.30 0.33 0.27 -7.69
Source: National Economic and Social Development Board, Thailand
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2. Growth Accounting
Table 2 and Figure 2 show growth accounting for the period 1981-1995. The
overall growths are decomposed into those contributed by increases in input uses and
that by increases in total factor productivity or TFP.
Table 2 Sources of Growth by Sectors, 1981-1995 (percentages)
Labor TFP
Land CapitalUnadjusted
Quality-
AdjustedUnadjusted
Quality-
Adjusted
1981-1985 2.9 62.2 20.7 25.1 14.1 9.7
Agriculture 4.0 11.7 21.6 41.8 62.7 42.5
Industry 86.2 28.0 42.7 -14.2 -28.9
Manufacturing 68.3 31.9 57.1 -0.2 -25.5
Services 74.9 34.0 52.3 -8.8 -27.2
1986-1995 -0.3 61.6 9.3 21.4 29.4 17.3
Agriculture -0.9 90.6 -7.1 -4.2 17.4 14.5
Industry 64.1 27.3 36.5 8.6 -0.5
Manufacturing 59.4 28.1 37.1 12.5 3.5
Services 65.7 24.6 33.0 9.7 1.3
Of which: 1986-1990 -0.2 47.6 13.1 21.3 39.6 31.3
Agriculture -0.9 59.3 23.3 35.6 18.3 6.0
Industry 49.0 24.3 26.6 26.7 24.4
Manufacturing 47.6 27.0 26.0 25.4 26.4
Services 52.1 18.9 32.6 29.0 15.3
Of which: 1991-1995 -0.5 78.6 4.8 21.5 17.1 0.4
Agriculture -0.8 117.3 -33.2 -38.3 16.7 21.8
Industry 84.5 31.5 49.9 -15.9 -34.4
Manufacturing 75.6 29.7 52.4 -5.3 -28.0
Services 82.3 31.7 33.5 -14.0 -15.8Source: calculated from Tinakorn and Sussangkarn (1998), table 8,13, 14, 15, 16.
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Source: Table 2.
As in most studies of growth accounting of East Asian (and also countries in
other regions), capital accumulation accounted for the lion share of growth
contributions, rising to as high as about 80% during 1991-1995.
The contributions from labor were rapidly superseded by the increases in
quality. Standing at only 4.4 percent contribution during 1981-19852 the labor quality
increased to 8.2 percent during 1986-1990. It further increased to 16.7 percent during
1991-1995, well surpassing the contribution from the increase in labor alone (4.8
percent).
The growth of TFP was more pronounced during 1986-1990, and was almost
negligible in the subsequent period of 1991-1995.
2 Equals the quality-adjusted labor contribution (25.1) minus quality-unadjusted labor contribution (20.7).
1981-1985 1986-1990 1991-1995-20%
0%
20%
40%
60%
80%
100%
F ig u r e 2G r o w th A c c o u n t in g , 1 9 8 1 -1 9 9 5
"TFP Growth"
Labor Quality
Labor
Capital
Land
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3. Explaining Growths
This section explains factors that are most likely capable of explaining
growths in each sub-period. As mentioned earlier, the explaining factors are
classified into political, external, macroeconomic environments and policies, and
microeconomic and instituional factors. Table 3 to 6 maps out the timeframe when
these factors took place and how long they lasted.
I) 1950-1973: A period of Institutionalization leading to High and Stable Growth
Macroeconomic Management, Politics and Institutions
In 1950, Thai economy found itself in the state of recovering from damages
left over from the Second World War.
The economic management during the most part of the 1950s decade was
probably best described as eccentrically diverse, trying to serve many goals that did
not seem to add up. The multiple exchange rate system was used to both generate
revenue for the government and to subsidize urban population via unfavorable rate for
rice export, which suppressed domestic price of rice.
The nationalism that arose after the triumph of the communists in China in
1949 had also played a significant role. The military government at the time put
forward the anti-Chinese policies that limited the Chinese entrepreneurs from doing
various ‘key’ businesses. In these businesses, the government set up many public or
quasi-public enterprises that enjoyed monopoly rights3. The Chinese commercial
communities adapted to the situation by forming business alliances with military top
men. These alliances laid the foundation for business-bureaucrat relationship that
exists throughout Thailand’s economic development history.
The economic mismanagement and the repression against Chinese businesses
resulted in poor macroeconomic performance. The GDP grew only at 3.9 percent per
annum during 1951-1958.
3 The setting up of monopoly entities was a means that military used to acquire wealth, which was lost substantially because of the hyper-inflation after the War.
8
The turbulence prevailing in 1950s was put to an end in 1958, when Field
Marshall Sarit Thanarat took complete control of the power through a coup d’etat.
Sarit brought with his premiership a vision to run the country according to the
international standard, comprehensively prescribed in a World Bank report (IBRD,
1959)4. He also presided over a period of rapid institutionalization of various public
units that proved to be vital to the later economic development. Two new units were
established, the Budget Bureau (1959) and the Fiscal Policy Office (1961), and one
revamped, the National Economic Development Board (1959)5. These three units and
the Bank of Thailand jointly determined the annual budget, which in those days gave
high priorities to development projects, primarily infrastructure constructions. The
goal and means of economic development engineered by Sarit government were
officially declared in the country’s first National Economic and Social Development
Plan.
Business activities were also enhanced by the policy shift toward a more
investment-friendly to domestic private and foreign investors.
The role of military-founded monopolies was greatly diminished and a
comprehensive investment promotion policy was launched with the pass of the new
Industrial Investment Promotion Act in 1959. Compared to the previous act, this law
gave more genuine projections to investors and numerous domestic and foreign firms
sprung up to take up these protective benefits.
Despite the more favorable atmosphere, the commercial sector and investment
demand were not the major contributors to the high economic expansion, which
recorded at 7.2 percent per annum between 1958 and 1973. It was the agriculture
sector that proved to be the primary engine of growth for the period. Helped by the
government expenditure on road building, the farmers rapidly opened up land further
away from rivers and railway lines, which they had been using for transporting their
4 The influence of the World Bank did not begin with the 1959 report. In fact, Thailand was the first country in East Asia that borrowed from the World Bank (Faculty of Economics, Thammasat University, 1996, page 38). The 1959 report itself was also a result of a World Bank mission that came to Thailand before Sarit’s time. What Sarit did was putting the scheme into action.
5 Its name was changed to the National Economic and Social Development Board in 1972.
9
products to the markets before the road network was built6. Equally important was the
building of large-scale irrigation system that facilitated the dry season cultivation of
rice, most notably in the central region.
The dynamics of agricultural production in this period is perhaps a good
example of how economic growth in Thailand has been driven by increasing uses of
inputs instead of advancing technology. When corrected for land expansion and
irrigation provision, one would find that there was no real gain in production yields.7
Linkages between growths in agricultural sector and the industrial sector are
worth noting. Agriculture growths were driven mainly by accelerated export demand.
The foreign and government revenue derived from the expansion in agricultural
export and production in 1960s provided necessary resources for early
industrialization that was primarily aimed at substituting imports.
In summary, the key to success of Thailand’s early modern economic
development owed much to the combination of (a) a vision to promote economic
growth through macroeconomic management, favorable business environment, and
institutional strengthening, and (b) a strong sense of fiscal discipline. The fiscal
discipline, exhibited mainly by the curb on public debt creation, was an indispensable
ingredient to the uninterrupted process of high and stable economic growth during one
and a half decades that followed. In this regard, Thailand was lucky to be able to build
such vital fiscal discipline under the corrupt military rulings.
6 The clearing of the forests, promoted by the government’s giving out concessions, also explains the rapid expansion of agricultural land.
7 Saimwala (1997)
Table 3 Factors Influencing Thailand’s Growth, 1950-1973
Yea
r
‘50 ‘51 ‘52 ‘53 ‘54 ‘55 ‘56 ‘57 ‘58 ‘59 ‘60 ‘61 ‘62 ‘63 ‘64 ‘65 ‘66 ‘67 ‘68 ‘69 ‘70 ‘71 ‘72 ‘73
Gro
wth
5.5 11.0 -0.8 8.7 1.7 1.1 3.6 12.0 12.1 5.2 7.8 8.1 6.8 8.0 11.3 8.4 8.2 7.8 6.5 4.8 4.2 10.0
Political/Economic Nationalism
Coup
Military Ruling
Up- rising
Polit
ical
Eve
nts
Stable economies in most developed countries
Major currencies floated
Food prices boom
Oil Shock
Exte
rnal
Influ
ence
s
Public Enterprises Monopolies
Investment Promotion 1st National Plan
2nd National Plan
Mac
ro P
olic
y &
En
viro
nmen
t
3rd Plan
Economic Institution Setup
Basic Infrastructure Buildup (Road, Irrigations)
Agricultural Land Expansion
Mic
ro &
Inst
itutio
ns
Table 4 Factors Influencing Thailand’s Growth, 1974-1985
Yea
r
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
Gro
wth
4.5 4.9 9.2 9.9 9.9 5.2 4.6 5.9 5.4 5.6 5.8 4.6
Political confrontation Coup ‘semi-democratic’ government, led by Gen. Prem T. Military-backed governments
Polit
ical
E
vent
s
Fear of ‘domino’ theory Relatively stable politics (despite two coup attempts)
2nd oil shock Plaza
Accord World recession High world interest rates
High agricultural product prices Low world commodity prices (from over supply)
Exte
rnal
Influ
ence
s
Appreciated U.S. dollar against other major currencies
Politically motivated expansionary fiscal policies
Tight fiscal policy
Introduction of export-led growth policy, 1977 Investment Act enacted
15% Devalued Basket
exchange
Mac
ro P
olic
y &
En
viro
nmen
t
Lending
rate ceiling lifted
Setup SET Setup
FIDF
New
Forest Act
Financial Inst. crisis Financial Inst. crisis Mic
ro &
In
stitu
tions
Table 5 Factors Influencing Thailand’s Growth, 1986-1996
Yea
r
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gro
wth
5.5 9.5 13.3 12.2 11.2 8.6 8.1 8.4 9.0 9.3 5.9
Stable politics
Coup Black Monday
Polit
ical
E
vent
s
Currencies realignment (stronger Yen, weaker dollar)
Gulf War
Relocation of FDI to Southeast Asia
Japanese economy slowdown Weak oil prices
Exte
rnal
Influ
ence
s
Low agricultural prices Export slump
Conservative fiscal policy
Investment Boom
Deposit
rate ceiling lifted
Setup BIBF
Capital Inflows, Bubble IMF article 8
Mac
ro P
olic
y &
En
viro
nmen
t
Gradual liberalization of financial sector
Setup BIBF
Real estate boom and speculation
Stock prices boom and speculation Mic
ro &
In
stitu
tions
Table 6 Factors Influencing Thailand’s Growth, 1997-2000
Yea
r
1997 1998 1999 2000
Gro
wth
-1.4 -10.8 4.2 4.3 New
constitution
Polit
ical
E
vent
s
Currency
crises
Commodity price boom
Exte
rnal
In
fluen
ces
Managed
floated exchange
Tight fiscal policy
Expansionary fiscal policy
Inflation targeting
policy Mac
ro P
olic
y &
En
viro
nmen
t
Slow economic recovery
Financial crisis
Closer of 56 FIs
Mic
ro &
In
stitu
tions
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II) 1974-1985: Political Uncertainty and Economic Turbulence
Quite coincidentally, the economic and political stability Thailand could be
said to end on the very same week in October 1973. Domestically, the military
Thanom government resigned amidst the massive protestation from the general public
and, internationally, the six-day war broke out in the Middle East, which marked the
beginning of the first oil shock. The outburst of political freedom, long suppressed
under the military power, was unfortunately coincided with the triumph of
communists in Indo-chines neighbors. The fear of the so-called ‘domino theory’, that
Thailand would soon follow suit to be taken over by the communism movement, led
to one of the most vigorous confrontations in Thai history, most notably between the
lefts and the rights. The confrontation ended tragically in 1976, when the right-wing
military once again took over the power.
However it ended, the seed of political awareness following the 1973 uprising
has permanent implications on Thailand’s economic and policy arena. All the
governments since then could not, as they had been able to before, be totally ignorant
to the needs of people, even during the right-wing political suppression of 1976-1979.
One of the consequences of this development was the soaring government budget
deficit, arising from the increased government expenditure, which eventually led to
the serious public debt problem during the first half of 1980s.
Not only was the increasing government expenditure explained by the
changing political structure, but also by the need for the government to counter the
economic slumps that followed the two sharp oil price hikes (the first and the second
oil shocks) and the world recession of early 1980s. The difficulties associated with the
two oil shocks were however different in magnitude. Helped by the commodity prices
boom during 1972-1974 during the first oil crisis, Thailand was not as fortunate when
the second oil crisis hit in 1979-1980, as the mounting problem of budget deficit/debt
and the tumbling of world commodity prices coincided during 1980-1985.
The economic hardship caused changes in politics. In 1980, General Prem
Tinnasulanon took the office of Thailand’s premiership, where he stayed for the next
eight years. His term is considered one of the most stable political in Thai history, in
spite of a number of coup de’tat attempts. This is a remarkable achievement,
considering the rapidly changing economic conditions during the period. On
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economic achievements, his governments managed to restore fiscal discipline during
1982 to 1985.
Thai economy was also greatly affected by the rapid movements in some of
the world major currencies, an experience the country had not been prepared to deal
with before. After the collapse of the Bretton-Wood system, Thailand chose to
continue pegging its currency with the U.S. dollar. This decision proved to be costly
when the U.S. currency appreciated against other major currencies between 1978 and
1985. As a result, the Thai baht was therefore de factor appreciated, which
contaminated the country’s competitiveness. Thai government was forced to devalue
the currency by 15% in 1981, and went on to abandon the single-currency fixed
exchange rate to the basket system in 1984, which amounted to an effective
devaluation against the U.S. dollar by another 15%.
This sub-period also witnessed a major structural change in production.
Agriculture sector, which expanded rapidly in 1960s into the late 1970s, now faced
with two major obstacles to further growths: the declining world prices since 1980
and the rapidly dwindling of forest areas suitable for agricultural production. The
average agricultural growth during 1974-1985 was a mere 3.8% compared to 6.0%
during 1959-1973. In the meantime, the attempt to shift the country’s industrial
policy from import-substitution to export-promotion began to gain momentum. The
hallmark of this policy shift was the enactment of the 1977 Investment Promotion
Act. However, the success of the new industrial policy was limited by at least three
factors, namely,
(a) the unfavorable world economy at the time,
(b) the over-valuation of the baht during 1981-1984, and
(c) the tight fiscal policy since 1982.
One of the symptoms of the economic difficulties manifested itself in the
crises of the financial institutions. Between 1979 and 1986, there were episodes of
financial institution problems spreading all over the period. But generally speaking,
the problems can be clustered into two separate waves, those beginning in 1979 and
those beginning in 1983. The second wave was more serious than the first, with the
closures of 20 finance companies and one commercial bank, and 25 finance and
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companies and 2 commercial banks were put under rescue package from the central
bank8
Thailand during this sub-period was thus facing an unprecedented rise in both
political and economic uncertainties. Economic hardship was felt most in the latter
part of this sub-period (1979-1985), where the windfalls from commodity price boom
in 1970s was over. The period can however be considered a period of transition,
where many of the adjustments were necessary for the new economic structure of the
next sub-period.
III) 1986-1996: Economic Boom, Speculation and Bubble
In contrast with the previous period, the 1986-1996 can be considered the most
prosperous time of Thai economy, if one is to pay attention only on aggregate
numbers.
The good time was most probably triggered by the external events. The first
event was the 1985 Plaza accords that had effectively realigned major currencies,
where dollar began to depreciate. Thai baht therefore depreciated likewise, as the U.S.
dollar represented high weight in the basket system. In fact, the government even
tacitly increased the U.S. dollar weight from about half to 90 percent9, to reap more
benefits from this welcome turn of event. The second external factor was the sharp
decrease in petroleum products since 1986, which remained low until the invasion of
Kuwait by the Iraq in 1991.
Both accounts on the external front greatly benefited Thai exports, especially
the manufactured ones. Weak currency together with reviving world economy from
lowered oil prices accelerated the manufactured exports. Another important by-
product of the exchange rate realignment was the re-location of industrial productions
from Japan, Taiwan and Hong Kong, whose currencies had been rising and needed to
find new locations that were more cost-effective. Thus, investment capital in the form
of FDI flooded into Thailand at an unprecedented magnitude.
8 Siamwala (2001, p.8). 9 Siamwala (1997, p.17)
17
The manufactured productions surged in response to growing export and
investment demands. This was helped by the government’s investment policy put in
place a few years back, and also by the sluggish agricultural production (which grew
at only 0.4 and 0.1 percent in 1986 and 1987), which released bulks of young and
energetic unskilled labor suitable for light industries. The transition from agrarian
economy was thus completed.
Political atmosphere had also been inducing to high growth. The relatively
stable political scene associated with Prem government was followed by smooth
transition to the Chatchai government in 1988. Although the Chatchai government
was thrown out in the 1990 coup, the new government led by Anand Panyarachun was
did not have problem getting acceptance from the public. In fact, some viewed the
1990 coup with positive eyes, citing the highly corrupt ministers and scandals in
Chatchai government as the justifiable pretext. Such approval was short-lived, when
in 1992 the military top men attempted to have direct control of the government,
which led to another strong opposition and board demonstration among urbanites10.
When the military finally receded, all the governments since 1992 all gained their
power through parliamentary process. Although each government did not stay in
office very long, one can reasonably concluded that Thailand had moderate political
stability between late 1992 and 1997.
Thailand was sufficiently fortunate that despite the tendency among politicians
and military rulers to engage in big-scaled corruption, the fiscal discipline remained
largely intact during this period. There are possible three reasons for this remarkable
achievement. First, the hardship associated with tight fiscal policy in the first half of
1980s, which was the result of lax fiscal policy during 1970s, was perhaps still a fresh
memory. Second, governments of the time regarded turning the fiscal budget into
balance and surplus a political achievement. Third, and perhaps the most important,
reason was that the foundation of budgetary process that was put in place since early
1960s prevented systemic imprudent fiscal spending11
10 These demonstrators are sometimes called “mobile phone mob”, reflecting their general economic status as middle and higher middle classes.
11 World Bank (2000) mentioned this fiscal inertia to be an obstacle to the use of stimulating fiscal policy after the 1997 crisis.
18
One interesting thing worth nothing in this period is the shift in infrastructure
buildup policy. Unlike in the 1960s when the governments were mainly and entirely
responsible for providing basic infrastructure (road, irrigation) to the economy, the
policy in 1980s and 1990s was to give private companies concessions to build, and
sometimes operate, these infrastructures. Telecommunications and expressways stood
out as good examples of such policy. In principle, the positive side of this policy is the
reduced burden on public spending, increased efficiency, and more timely
constructions. Not all of these potentials were realized. The negotiations between
public personals and private companies often resulted in the marriage between the
worst of both worlds, namely, the inefficiency and delays of the public sector and the
greed of the private sector. At any rate, the process has created fortunes for some of
the private entrepreneurs.
While financial prudence in the public sector was evident, it was missing in
private sector. Speculation in real estate was taking place at an alarming rate,
beginning at around 1988 and ended possibly at 1991. The same phenomenon was
observed in the stock market, where both domestic and foreign investors rushed in
without proper analysis of risks involved. The overoptimistic views arising from the
double-digit growth rates and the rapidly expanding investment opportunities
eventually pushed up the SET index to sour more than twelve-fold between 1985 and
1993, when the index topped at 1,682. The volume rose by more than a hundred-fold
during the same period. Although the bubble in the stock market lasted longer than
that in the real estate market, it finally softened rapidly since 1994.
From the supply-side growth accounting, the major source of growth during
this period was clearly from the accumulation of capital stocks (see Figure1),
accounting for almost 80 percent of the contribution to growth during 1991-1995.
There are however considerable differences of growth accounting between 1986-1990
and 1990-1995. The rapid capital accumulation of the earlier time of this sub-period
was also accompanied by an efficient use of the accumulated capital. The contribution
of TFP growth was admirable at 31.3 percent12. In contrast, during the 1990-1995
the capital, as well as other factors of production, were put to used so inefficiently by
12 A part of this TFP growth could come from higher yield on land used for agriculture. See Section 4 for more discussion.
19
the speculation, suppressing the TFP growth, adjusted for changes in human capital,
to a mere 0.4 percent.
IV) 1997-present: Structural Crisis
The crisis of 1997 has been analyzed extensively in various dimensions in the
last few years. In term of the origin or the causes of the crisis, the following factors
have been mentioned:
• reduced competitiveness, most obviously shown by the almost frozen
export growths in 1996,
• the maturity and currency mismatches of the external debts,
• the failure of the Thai monetary authorities to review and adjust its
exchange policy in a timely fashion, including the overoptimistic view
they took when assessing the probability of successfully counter-
attacking the speculative attacks on Thai baht during the first half of
1997,
• the lax and inefficient supervision of financial institutions, resulting in
non-transparent credit operations of the latter.
• What happened to economic growth after the crisis broke were more or
less the results of the responses to the crisis by the government itself.
The very tight monetary and fiscal policy stance, guided by the IMF,
immediately adopted has shrunk the economy to the point that, together
with the ballooning debt burdens from the rapid devaluation of baht, the
quality of most private companies’ balance sheets deteriorated quickly
and severely. This problem is reflected most notably by the figures of the
non-performing loans (NPLs) appearing on the asset side of the
commercial banks’ financial balance sheets.
The subsequent lax fiscal policy, resulting from decreased revenue projection
rather than deliberate public spending, was only put in place in November 1998, more
than one year after the crisis began (Figure 3). This arguably helped the moderate
output growth in 1999 and 2000.
20
Figure 3 A Chronology of Fiscal Policy during the Crisis (July 1997-Oct 1998)
Source: World Bank (2000).
If one were to perform growth accounting after the crisis, it would be found
that the drops of GDP in 1997 and 1998 were primarily corresponded with lowered
uses of capital stock (capital utilization rates), and to a lesser extent the lowered uses
of labor input (unemployment and underemployment). From demand side, the
shrinking investment demand was the primary downward force toward recession of
1997-1998.
The recovery in 1999 and 2000 has been on a shaky basis. The strong export
growths (especially in 2000), has worked its marvel among the backdrop of resumed
stability in exchange market and financial market. The situation in 2001 is
considerably worse than 2000. Growth has almost stagnated and unemployment
shows a rising trend again. Apart from the rapidly rising unfavorable external
development, the internal obstacles to higher growth was most likely the
malfunctioning of financial market. Banks have been, and still are, reluctant to lend to
for the fear of not getting back repayments due mainly to the borrowers’ under-
capitalized balance sheet and also to the still gloomy macroeconomic outlooks. Some
big firms bypassed the banks by issuing their own debt papers.
21
4. Factors Accumulation
Except during 1997-2000, all the sub-periods considered in this paper are
characterized by high level of factor accumulation. This section depicts in more
detials the accumulation of the three major factors; labor and human capital, land, and
capital, which is followed by a discussion that attempts to explain the high level of
accumulation.
4.1 Population, Labor, and Human Capital
Thailand is a medium-sized country with population slightly over 60 millions
at present. In spite of its relatively large population base, especially when compared
to the countries in the same region with similar level of development, Thailand has
not relied much on the increase of population (and thus the labor force) in producing
economic growth. This is even more so in the 1980s and 1990s. In fact, except for
Japan, population and labor force growths in Thailand rank among the lowest in the
Asia and Pacific region during the 1990s, standing at only 0.9 and 1.5 percent per
year, respectively (World Development Indicators 2000/2001).
Source: National Statistics Office and Labor Force Surveys, various years
Figure 4 reveals another important feature of Thai economy in relation to how
the labor is used. The modern economic sectors, defined roughly as those activities
operated in the urban areas, depend even less on labor utilization. The resulting is the
F igur e 4P opulation G r owth and R ur al P opulation
0 .0%
0.5%
1.0%
1.5%
2.0%
2.5%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
6 4 .0%
66 .0%
68 .0%
70 .0%
72 .0%
74 .0%
76 .0%
P opul ati on G row th % R ural P opul ati on
22
high proportion of rural population, which was persistently high at over 70% until the
early 1990s when some significant drops are observed. Even at the present, the rural
population still makes up 68% of total population.
The success of family planning seems to be the most important explanation of
low population and labor force growth. The fertility rates of Thai women declines
steadily and rapidly over the past 40 years, reach to level of 1.9 births per women in
1999 (Table 7). The other success of Thailand is in the improvement of basic
elements of human capital. The illiteracy rate declines from 68 out of 100 persons in
1960 to only 4.7 in 1999.
Table 7 Fertility and Illiteracy Rates
1960 1970 1975 1980 1985 1990 1995 1999
Fertility Rate
(Births per women)
6.4 5.4 4.5 3.5 2.8 2.3 2.0 1.9
Illiteracy Rate (per 100) 68.0 19.7 15.5 12.4 9.7 7.6 5.8 4.7 Source: World Development Report 2000/2001, except the illiteracy rate for 1960 which is
taken from Sussangkarn (1992).
Obviously, the role of human capital in generating economic growth can not
be underestimated. However, one needs to distinguish between the accumulation of
human capital at the basic level and at the more advanced level. Although Thailand
seems to be performing well in providing its population with basic human capital,
both in the education and health provisions, the country is obviously lagging behind in
equipping Thai workers with more advanced human capital. And unless this
shortcoming is overcome, the country will face difficulty in promoting further
economic growth in the ever more competitive world markets.
4.2 Land
Lands are used primarily for agricultural production. Before mid 1980s, the
amount of land increased steadily due mainly to deforestation. The lax of forest laws
together with rising agricultural economic opportunity with more integration to the
world economy are the two major reasons for deforestation. During that period, one
can conclude that agricultural land expansion played an undeniable role in raising per
23
capita economic growth. However, since mid 1980s, the total area of agricultural land
has ceased to expand (Figure 5), which are caused by three factors. The first factor is
the new government policy to close the forest in early 1980s. Secondly, the economic
boom in non-agriculture since mid 1980s drew workers from agricultural sector into
the urban areas. The third factor is the rapid mechanization of agricultural production.
While the first factor curbed the supply of land, the latter two factors reduced the
demand.
The role of land in generating agricultural growth can be enhanced through
irrigation. Figure 5 shows that the percentage of land being irrigated doubled, from
14.5% to 30.5%, between 1970 and 2000.
Source: Agricultural Statistics of Thailand
4.3 Capital
Of all factors of productions, capital accumulation has clearly been the most
important machine driving economic growth in Thailand. Capital stocks grew
particularly quickly during the two decades from mid 1970s to mid 1990s (Table 8),
with capital stocks in manufactured sector growing most rapidly. In the first 15 years
of this period, the growths in capital stocks were mostly accommodative to the GDP
growths, since there was no significant change in the capital-output ratio. However in
Figure 5 Agricultural Land
-2468
101214161820
1970
1972
1 974
1976
1 978
198 0
1982
198 4
1986
1 988
1990
1 992
199 4
1996
199 8
2000
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Total Land (mil. Hectars) % Irrigated
24
the early 1990s, capitals were accumulated faster than the national products, and the
capital-output ratio declined very notably between 1990 and 1998 (Figure 6).
Table 8 Capital Stock (1988 price) Growth Structure 1971-1999
1971-1973 (I’)
1974-1985 (II)
1986-1996
(III) 1997-1999
(IV’)
Capital Stock Growth (%)
Agriculture 0.0 1.2 5.6 -2.3
Industry 4.8 6.4 11.7 7.7
Manufacturing 8.1 6.7 14.0 11.6
Services 2.4 5.6 9.9 0.2
Total 2.8 5.3 10.3 3.6 Source: National Economic and Social Development Board, Thailand. Note: Capital Stocks are measured as weighted average of gross capital stocks (75%) and net capital
stocks (25%).
Source: Office of National Economic and Social Development Board
Capitals were accumulated through imports. Share of imported capital in total
imports of goods and services doubled between 1980 and 1998 (Figure 7), which is
the rate of increase higher than that of the capital-output ratio. This indicates that
both the international and domestic companies tend to use impoted capitals more than
the capital goods domestically produced. Thailand’s economic growth is thus
dependent to its integration to the world market in yet another channel, apart from its
reliance on export demands.
Figure 6 Capital-Output Ratio by Sector
0
1
2
3
4
5
1970
197 2
197 4
197 6
1978
198 0
1982
1984
1986
1988
1990
1992
1994
1996
1998
Agriculture Industry Service Overall
25
Source: Bank of Thailand
Agricultural sector also accumulated capitals rapidly. Figure 8 below shows
how quickly the agricultural sector has been mechanized in only the past decades. For
a period of about 15 years from 1984 to1998, the uses of big tractors and water pumps
increased more than 6 times. This is consistent with the much slower land expansion
and the emigration of agricultureal labor into non-agriculture activities and to the
urban areas.
Source: Agricultural Statistics of Thailand
F igur e 8U se o f A gr ic ultur a l M a c hines
(a r ea s ser ved in hec ta r e per unit)
-
100
200
300
400
500
600
700
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-
5
10
15
20
25
30
35
T ra c to r W a te r P u m p
F ig u r e 7S h a r e o f C a p ita l I m p o r ts in T o ta l G o o d s & S e r v ic e s
I m p o r ts
0 %
1 0 %
2 0 %
3 0 %
4 0 %
5 0 %19
80
1982
1984
1986
1988
1990
1992
1 994
199 6
199 8
2000
26
4.4 Socio-Economic-Politics Explanation of High Accumulation
While the discussions of factors explaining growth in each sub-period have
implication as to why such accumulation take place in this country, one can also draw
a more general explanations relevant to Thailand’s fifty experiences. The following
factors are proposed to be responsible for the past success13.
Openness. The openness of Thai economy dates back to very early days. In
the early history, the international trades were limited to the hands of the royals and
the government officials. But the general public has participated in trades very
actively as early as around 200 years ago. Thailand certainly benefits from its
location advantage since it locates on many major international trade paths, as well as
its long borders, both land and sea, with many neighboring countries. The rulers, be
they the monarchs or the subsequent democratic governments, always encourage
international trades partly because of the taxes income generated from, or related to,
trades.
Why trades are associated mainly with factor accumulation but not the
improvement in productivity needs further explanation. Until recently, the
international trades of Thailand mostly involve exploitation of natural resources,
which are quite abundant when compared to many countries in the region. Simply
commercializing these natural resources with minimal processing, all parties involved
(the traders, the domestic middlemen, the local producers, and the governments) could
make handsome profits without the need to venture into uncertain investments aimed
at increasing productivity.
Stability
As demonstrated in the discussions of the growth explanation, stability plays a
very important role in promoting growth. Despite some interruptions, Thailand has
enjoyed a reasonable degree of macroeconomic stability in many critical aspects
during the most part of the past five decades, namely, price stability, exchange rate
stability, and budget and current account stability. The economic stability can be
attributed to sound macroeconomic management in both fiscal and monetary policies.
13 Most of these explanations are taken from Sussangkarn (1992).
27
When faced with economic difficulties that called for extraordinary policy prudence,
Thai officials could normally adopt and comply with the strenuously standards and
practices. One interesting aspect of Thai economy is its ability, at least until very
recently, to more or less shield macroeconomic management from political
interventions. Politicians tended to be passive when it comes to managing board
macroeconomic policies, letting the jobs to be in the hands of technocrats. Also,
many governments were weak, and primarily played the role of compromising interest
of many groups, leading to peaceful continuation of economic devlopment.
The stability in economic climate gives the investors strong incentive to
accumulate capitals, by reducing risk premia they would have to pay otherwise.
Moreover, the continuation of development strategy over the past several decades
ensures the investors of the direction Thailand is moving toward, making the decision
to invest easier and less costly. In fact, as Sussangkarn (1992) points out, the
development path has been so continuous that some critics voice their concern over
how difficult it is to change the course of development.
Human Quality
By no mean that Thailand can be on par with some other countries like Japan,
South Korea, Taiwan and Singapore in term of success in developing human capital
over the past few decades. However, there are some distinct features of Thai human
quality that can explain the accumulation process. These features include the
followings.
• Good Basic Education. Thailand is among the countries in the region
with the highest literacy rate. The basic education seems to be helpful in
traditional agriculture, and is also instrument in the early stage of industrial
development. Another quality of Thai workers is their ability to adapt and
learn new basic skills, which make them quite attractive to potential
investors.
• Highly Educated Elites. On the other end, Thailand also possesses a
handful of highly educated elites, who are trained in good universities or
get educated abroad. If educated abroad, these people usually came back
and serve the country as government officials, technocrats, entrepreneurs,
and academics.
28
• Female Labor. Thailand has very high female labor force participation rate. For
example, the female labor force participation in 1987 was as high as 80 percent
which, as will be seen later in the section on regional comparison, is among the
highest in the region. These female workers are generally preferred employees of
labor-intensive export industry.
• Entrepreneurs. Thais in general have risk-taking characteristic, which is a
prerequisite for being entrepreneurs. Thai entrepreneurs range from the farmers
themselves, who take risks with every crops they plants, and those who engages in
informal trades and services industries. This explains why social mobility in Thai
society is quite high, and many families have been able to escape poverty in the
past decades.
Friendship
Thais are generally known to be friendly people. More importantly perhaps, is
the fact that Thai people are tolerant, compromising, and prefer to avoid escalated
conflicts whenever possible. Very few have rigid dogmatic beliefs that can not be
compromised. Obviously, this kind of attitude is conducive to assets accumulation
because the fears for disruption are minimized. Moreover, Thailand also has a long
history of friendship with foreigners, which is true at all classes of Thai society.
There is no hard feeling of being colonized, since Thailand does not have that
experience. Ordinary Thais also welcome foreigners and usually treat them equally.
29
5. Regional Comparisons
This section compares Thai growth experiences, as well as factors underlying
growth, with some selected countries in Asia and Pacific region. The countries in the
region are categorized into three broad groups and Japan and China. The first broad
groups are the three ASEAN countries of Malaysia, Indonesia, and the Philippine
(ASEAN3). This country group is more or less similar to Thailand in terms of
economic structure as well as economic history. The second broad group is the
Indochina, which consists of Vietnam, Lao PDR, and Cambodia (Indochina3). These
ex-communist countries are late comers in term of growth momentum. The third
board group is the three so-called Newly Industrialized Economies, consisting of
Korea Republic, Singapore and Hong Kong, China (NIE3). Japan and China are
separated out since they have many characteristics uncommon to other countries in
the region. Japan is well ahead of other countries in economic development while
China is a big country successfully embracing the market mechanism under the
socialism ideology.
Table 9 compares Thailand’s average growths and the degree of openness with
these selected Asian countries in the past three decades from 1970s to 1990s.
Thailand did well in term of growth in both 1970s and 1980s, about the same average
with the ASEAN3 and the NIE3, but fell significantly behind China and Indochina in
1990s. The degree of openness in both trade and capital accounts is similar to the
ASEAN3 (especially to Malaysia), more open than Indochina3 and China, and less
open than NIE3 and Japan.
30
Table 9 Economic Growth and Openness of Selected Asian Countries
1971-1980 1981-1990 1991-1999
Economic Growth (per capita GDP measured in PPP) Thailand 12.5 10.1 4.5ASEAN3 12.0 6.0 4.6Indochina3 n.a. 6.1 12.2NIE3 14.5 9.4 4.2Japan 10.3 7.1 1.9China 11.2 11.8 9.9Trade as % of Non-Service GDP Thailand n.a. 99.7 144.5ASEAN3 n.a. 99.2 165.3Indochina3 n.a. 37.7 62.2NIE3 n.a. 496.0 638.2China n.a. 50.8 44.2Capital Flows (In & Out) as % of GDP (measured in PPP) Thailand 2.4 2.8 6.0ASEAN3 4.0 2.9 4.6Indochina3 n.a. 0.7 1.7NIE3 16.2 20.5 47.9Japan 4.0 7.0 17.2China n.a. 0.7 1.8
Source: World Development Indicators 2000/2001 Countries: ASEAN3: Malaysia, Indonesia, Philippine. Indochina3: Vietname, Lao PDR,
Cambodia. NIE3: Korea Rep., Singapore, Hong Kong China. Notes: group numbers are simple averages of figures for member countries.
On macroeconomic stability, Thailand’s relative performance is mixed when
compared to countries in the region (see Table 10). Except for Japan, inflation rates
in Thailand over the four decades of 1960s to 1990s are somewhat the lowest, most
comparable to the NIE3. On budget balances, Thailand tended to run medium sized
budget deficits around 3 percent of GDP or less, significantly higher than NIE3 and
China, but comparable to the figures for ASEAN3. The least stability for Thailand
has been the external balance. As a percentage of GDP, Thailand’s current account
recorded high deficits of around 4 to 5 percent in the 1970s and 1980s, which were the
highest among the countries in the region except for the Indochina3 group. Although
the country had lower deficits in the 1990s, mostly due to the economic crisis of the
late 1990s, the deficits were still higher than most other countries.
31
Table 10 Economic Stability Variables of Selected Asian Countries
1961-1970 1971-1980 1981-1990 1991-1999Price Stability (CPI Inflation) Thailand 2.3 10.0 4.4 4.9ASEAN3 72.4 12.8 8.5 9.4Indochina3 n.a. n.a. 48.5 21.2NIE3 3.4 11.6 4.3 4.5Japan 5.8 9.1 2.1 1.0China n.a. n.a. 11.8 8.3Public Sector Stability (Government Budget Balance as % of GDP) Thailand n.a. -3.1 -2.1 -0.4ASEAN3 n.a. -3.3 -3.9 -0.1Indochina3 n.a. n.a. n.a. -0.9NIE3 n.a. -0.3 1.5 5.9Japan n.a. -4.4 -4.6 0.2China n.a. n.a. -1.9 -1.9External Sector Stability (Current Account Balance as % of GDP) Thailand n.a. -5.2 -4.1 -2.2ASEAN3 n.a. -1.7 -3.2 -1.4Indochina3 n.a. n.a. -6.3 -5.9NIE3 n.a. -2.7 2.4 6.6Japan n.a. 0.4 2.4 2.5China n.a. n.a. 0.0 1.5
Source: World Development Indicators 2000/2001 Countries:ASEAN3: Malaysia, Indonesia, Philippine. Indochina3: Vietname, Lao PDR,
Cambodia. NIE3: Korea Rep., Singapore, Hong Kong China. Notes: group numbers are simple averages of figures for member countries.
Table 11 compares some aspects of basic human capital, measured by adult
literacy rates, female labor forces, and urbanization of Thailand with the selected
Asian countries. Thailand has clearly done superbly in providing its population with
basic education, having the lowest illiteracy rates among its adult population than all
other countries in the region since the 1960s. In fact, the rates were even lower than
those in the NIE3 countries. On female labor forces, Thailand has the second highest
percent of female in the total labor forces, next only to the Indochina3 group of
countries. However, the rate of urbanization in Thailand is much lower than other
countries, to the levels that are comparable to the Indochina3 despite the country’s
much higher per capita income.
32
Table 11 Adult Literacy, Female Labor Forces and Urbanization of Selected Asian Countries
1961-1970 1971-1980 1981-1990 1991-1999Adult Illiteracy Rates Thailand 19.7 15.4 9.5 5.9
ASEAN3 33.9 27.9 18.9 12.7Indochina3 61.8 58.3 51.2 43.7NIE3 20.5 16.1 10.4 6.8China 48.7 40.9 27.7 19.3Female Labor Force (% of Total Labor Force) Thailand 47.9 47.8 47.0 46.4ASEAN3 30.1 33.2 35.9 37.9Indochina3 48.4 50.4 51.7 50.8NIE3 27.6 33.6 37.2 38.7Japan 39.0 38.4 38.9 40.7China 41.1 42.5 44.1 45.1% Urban Population Thailand 12.9 15.3 18.0 20.1ASEAN3 25.8 31.2 38.9 47.7Indochina3 12.1 13.9 16.0 18.2NIE3 73.3 79.7 86.9 92.7Japan 66.9 75.0 76.8 78.1China 17.1 18.1 23.6 29.7
Source: World Development Indicators 2000/2001 Countries:ASEAN3: Malaysia, Indonesia, Philippine. Indochina3: Vietname, Lao PDR,
Cambodia. NIE3: Korea Rep., Singapore, Hong Kong China. Notes: group numbers are simple averages of figures for member countries.
7. Economic Growth and People Welfare
The high economic growth over 7 percent per annum on average of the past
four to five decades undoubtedly raised the well-being of the Thai population. This
can be very clearly demonstrated by the substantial decline of the income poverty
incidence (Table 12 and Figure 9), which reached its lowest level of 12.7% (head-
count ratio) in 1996 from 57% in early 1960s, before increasing slightly to 15.6% in
the year 2000 due to the economic crisis.
33
Table 12 Poverty Incidence (head-count ratio), 1962 to 2000
Year Urban Area Rural Area Whole
Kingdom
1962/63* 38.0- 61.0 57.0 1968/69* 16.0- 43.0 39.0 1975/76 22.5 44.5 38.5 1981 18.2 39.1 33.7 1986 22.5 53.2 45.1 1988 19.3 42.6 36.2 1990 17.0 36.8 31.4 1992 10.0 32.1 26.2 1994 8.3 23.5 19.0 1996 5.0 16.1 12.7 1998 4.7 16.0 12.5 1999 5.7 19.9 15.4 2000 5.8 20.1 15.6
Source: National Economic and Social Development Board (2000) for 1962/63-1968/69 figures. The 1974/75-2000 figures are calculated by the author.
Note: * Sanitary district areas were classified as rural in 1962/63 and 1968/79 but urban thereafter. Also, the comparison of poverty incidence over years may suffer from additional differences in definition of incomes, and the methods used to construct poverty lines.
Source: Author’s calculation.
Figure 9Poverty Incidences (head-count ratio)
1962-2000
0
10
20
30
40
50
60
70
196 2
/63
1 968
/69
1975
/76
1 98 1
1986
198 8
1 990
1992
1 99 4
1996
199 8
1 999
2000
Whole Kingdom Rural Areas
34
Much less impressive is the distributional aspects of the past growth
experience. With only few interruptions, the income inequality in Thailand has been
worsening overtime since the 1960s. The promotion of non-agricultural manufactored
industries (most notably through tax incentives) has widened the gap of well-being of
those living in Bangkok and the vicinities and those living in other parts of the
countries. Table 13 shows that the average real per capita income of people living in
Bangkok and the surrounding provinces was three times of the country average, and
almost ten times of those living in the poorest region, the Northeast.
Table 13 Real Per Capita GDP By Region and Relative Real Per Capita GDP
Real Per Capita GDP By Region (Deflated by CPI, 1975 Prices)
Kingdom North Northeast Central South BMR E-S Prov*
1975 7,221 5,388 3,527 8,426 5,899 18,827 14,230
1980 9,210 6,271 4,113 9,789 8,221 25,557 18,671
1985 10,000 6,778 4,299 11,085 7,877 27,663 20,170
1988 12,728 7,743 4,634 12,821 9,853 38,616 25,161
Average Annual Growth
1975-1980 5.0% 3.1% 3.1% 3.0% 6.9% 6.3% 5.6%
1980-1985 1.7% 1.6% 0.9% 2.5% -0.9% 1.6% 1.6%
1985-1988 8.4% 4.5% 2.5% 5.0% 7.7% 11.8% 7.6%
1975-1988 4.5% 2.8% 2.1% 3.3% 4.0% 5.7% 4.5%
Relative Real Per Capita GDP By Region (Kingdom = 100)
Kingdom North Northeast Central South BMR E-S Prov*
1975 100 75 49 117 82 261 197
1980 100 68 45 106 89 277 203
1985 100 68 43 111 79 277 202
1988 100 61 36 101 77 303 198
Source: Sussangkarn (1992), table 3.5. Note*: E-S Prov represents the Eastern Seaboard provinces of Chon Buri and Rayong.
35
One can view the failure to distribute more evenly the benefits of growth as an
unfortunate consequence of the past growth strategy and concentrates on finding the
ways to improve the situation, resorting to some sorts of quality of growth
considerations. On the other hand, trying to remedy the present skewed distribution
of income, and assets, can also be viewed as a sustainable solution to the long-term
growth itself. Literature is growing in finding the causality that more equal
distribution stimulate growth in the long run14. There is no trade-off between growth
and income distribution in that context.
6. Obstruction to Further Growth: The Structural Weakness of the Financial Sector
There are concerns after the 1997 economic crisis that Thai economy may
have reached its potential for growing as fast as in the past. The cause of the concerns
is in the financial sector. In fact, one can easily argue that the ineffective functioning
of the Thai financial sector was the fundamental factor leading to crisis. It is true that
the production sector did share the fault by failing to improve the competitiveness that
could keep up with the rapid growth of the latter 1980s and early 1990s. But less
damage would have been done had the financial sector be able to allocate the funds to
the right sectors and the right kind of spending. Speculative spending would have
been curbed, for instance, had the financial sector properly evaluated the risks
involved. The lax and incompetent supervisory authority was to also share the blame,
given that the herding behavior could be viewed as a form of market failure, namely,
the coordination failure, and the prudent action of the authority is called for. There
has been structural weakness in the Thai financial sector, both before and after the
1997 crisis.
The financial sector in Thailand is predominantly the banking system, for
commercial banks accounts for the lion’s share of financial intermediation activities.
Within the banks themselves, only a handful of them controlled the market. The Bank
of Thailand (BOT has been only half-heartedly promoting more competition among
14 See, for example, Deininger and Squire (1996, 1997, 1998), Persson and Tabellini (1994), Alesina and Rodrik (1994), and Benebou (1996).
36
the banks, but most of the time without resorting to allowing the open-up of new
banks. Since 1980, the interest rate ceilings were lifted, starting with loan interest rate,
long-term time deposit, short-term time deposit, and finally the saving deposit rate in
1992 (see Table A1 of the Appendix for the chronology of the major financial reforms
during 1980-1998). Other measures include the allowance to the banks broader
activities, as well as the initial steps in letting the smaller ‘finance companies’ to
perform activities more and more similar to the banks. The last attempt died out
completely after the financial crisis.
At least in principle, the proper and timely deregulation of financial sector
should benefit the sector and the economy at large. However, the critical turn of
events was when the government decided to deregulate the exchange controls which,
many argue, have been done without sufficient preparation for the possible negative
consequences. Beginning in 1990, the Thai government accepted the obligations
under Article VIII of the IMF’s Articles of Agreement, which demands the complete
deregulation of the current account transactions and fewer restrictions on capital
account. A series of further liberalization measures was taken during the next four
years (1990-1994) resulting in much less controls over the flows of foreign currencies
into and out of the countries (Table A1). The volume of private foreign capital inflow
to the country surged steady since. Compared to the 1988/89 value in US dollar, the
private capital inflows doubled in 1990
The capital inflows increased further during 1994-1996, arguably due to the
establishment of the Bangkok International Banking Facilities (BIBF) in 1993. The
BIBF has three major functions: banking to non-residents in foreign currencies and
baht (the so-called ‘out-out’ transactions), banking to domestic residents in foreign
currencies (the so-called ‘out-in’ transactions), and international financial and
investment banking services. Since its establishment, funds flew in through this
channel with an alarming rate until 1996 (Figure 9), before making a swift reverse
after the 1997 crisis.
37
Source: Bank of Thailand.
Huge and hasty foreign capitals flow in through BIBF without justifiable
investment opportunities (a large chuck of these funds was to finance the
constructions of the already over-supplied real estates) affected the capability to earn
and profitability of Thai corporate sector. See Table 14. Rates of return on
investment stumbled in the first quarter of 1997, shortly before the crisis. The
EBITDA only accounted for 8 percent of the debt in the second quarter of 1997, well
below the 13-14 percent interest rate they had to pay at that moment. The debt/equity
ratios inevitably soared, reaching as high as 4.6 times two quarters after the crisis
broke.
From this perspective, the 1997 financial crisis was almost a natural
consequence. Comparing to other countries, Thailand’s debt/equity ratio stood quite
high before the crisis (Table 15). Although South Korea also had similar level of
debt/equity ratio in 1996, it had not been experiencing the rapid deterioration like
Thailand had, more than doubling the ratio from 71 percent to 155 percent in only
four years. The officials clearly failed to oversee this worrisome development. On the
contrary, the Thai officials implicitly, though possibly inadvertently, encouraged the
foreign capital inflows by providing foreign exchange risks insurance to the private
sector through the fixed (basket) exchange rate system. As a result, Thai economy
suffered most severely from the moral hazard problem in its history.
Figure 9 Channels of Capital Inflows into Thailand 1988-2000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
1988
198 9
199 0
199 1
1992
1993
1994
1 995
1 996
1 997
1998
1999
2000
miil
ioin
US
dolla
r
Through Banks (of which: BIBF) Through Non-Banks
38
Table 14 Thai Corporates’ Balance Sheet Quality
Quarter/Year Debt/Equity Ratio Rate of Return on
Investment (%)
EBITDA/Debt
(%)
1994 1.5 29.0 25.01995 1.6 24.0 20.01996 1.9 22.0 16.0
1/1997 2.0 5.0 14.02/1997 2.1 11.0 8.03/1997 3.1 10.0 7.04/1997 4.6 4.0 8.01/1998 3.7 6.0 9.82/1998 3.7 3.0 8.53/1998 3.3 4.0 9.04/1998 2.8 3.0 9.51/1999 2.8 5.0 12.52/1999 2.8 6.0 14.1
Source: Supavud and Thanomsri (2000), parts of table 2
Table 15 Debt-Equity Ratios of Selected Countries (percent)
1992 19993 1994 1995 1996
Hong Kong 26 23 33 36 39Indonesia 59 54 58 81 92South Korea 123 129 127 132 n.a.Malaysia 31 29 38 45 62Singapore 37 34 33 45 58Germany 61 67 61 59 58United States 106 102 97 94 90Thailand 71 81 103 135 155
Source: Supavud and Thanomsri (2000), table 3.
The growth slumped sharply also from the government decision to hastily shut
down 56 financial companies without having clear plan of separating good debts from
bad debts. Much of the good debts thus turned bad, further suppressing the growth.
The excessive burden from the bailouts is now threatening the government’s capacity
to use fiscal policy to stimulate the economy.
39
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Quarterly Journal of Economics, 109, pp. 465-489.
Benabou, R., 1996, “Inequality and Growth,” in Bernanke, B. and J. Rotemberg (eds.), NBER Macro Annual 1996, MIT Press, Cambridge, MA.
Christensen, S., Siamwalla, A., Vichyanond, P., 1992, “Institutional and Political Bases of Growth-Inducing Policies in Thailand”.
Deininger, Klaus, and Lyn Squire, 1996, “A New Data Set Measuring Income Inequality,“ World Bank Economic Review , Vol. 10, no.3, pp. 565-591
_______, 1997, “Economic Growth and income Inequality: Reexamining the Links,“ Finance and Development, Vol.34, No.1 (March), pp. 38-41.
_______, 1998, “New Ways of Looking at Old Issues: inequality and growth,“ Journal of Development Economics, Vol. 57, pp. 259-287
Faculty of Economics, Thammasat University, 1996, Puey Ungphakorn: Life and Work.
Hahn, Chin Hee, and Jong-Il Kim, 2000, Sources of East Asian Growth: Some Evidence from Cross-country Studies, paper prepared for the Global Research Project “Explaining Growth”.
Ingram, James, 1971, Economic Change in Thailand 1850-1970, Oxford University Press.
IBRD (International Bank for Reconstruction and Development), 1959, A Public Development Program for Thailand, Baltimore MD, John Hopkins University Press.
Jitsuchon, Somchai, 1989; "Alleviation of Rural Poverty in Thailand," Paper prepared for ILO-ARTEP, Thailand Development Research Institute, Bangkok, December.
Jitsuchon, Somchai, 2001, “What is Poverty, and How to Measure it?” paper presented at the 2001 TDRI Year-end Conference, 23-24 November 2001, Jom Tien, Pataya, Thailand.
Kakwani, N. and Pothong J., 1999, “Impact of Economic Crisis on the Standard of Living in Thailand,” Asian Development Bank and the Development Evaluation Division, National Economic and Social Development Board.
Krongkaew, M., 1999, “The Political Economy of Growth in Developing East Asia: A Thematic Paper”, paper presented at the Third Global Development Network (GDN) conference in Prague, the Czech Republic, June 9-10.
Kuncoro, Ari, 2000, “Macroeconomic Determinants of Economic Growth in East Asia,” paper prepared for the Global Development Network.
Little, I.M.D., R.N. Cooper, W.M. Corden, and S. Rajapatirana, 1993, Boom, Crisis, and Adjustment, The Macroeconomic Experience of Developing Countries, Oxford University Press.
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National Economic and Social Development Board, 2000, “Poverty and Income Distribution in 1999”, in Indicators of Well-Being and Policy Analysis Newsletter, 4(1).
Persson, Torsten, and Guido Tabellini, 1994, “Is Inequality Harmful for Growth,” American Economic Review, Vol. 84, pp. 600-621.
Rodrik, Dani, 1998, “TFPG Controversies, Institutions and Economic Performance in East Asia,” in Institutional Foundations of Economic Development in East Asia, Y. Hayami and M. Aoki (editors), London, Macmillan.
Siamwalla, Ammar, 1997, “The Thai Economy: Fifty Years of Expansion,” in A. Siamwala (editor), Thailand’s Boom and Bust, Thailand Development Research Institute.
Siamwalla, Ammar, 2000, “Market and Economic Growth in Thailand,” paper prepared for the Global Development Network.
Siamwalla, Ammar, 2001, “Picking up the Pieces: Bank and Corporate Restructuring in Post-1997 Thailand,” paper presented at the Subregional Seminar on Financial and Corporate Sectors Restructuring in East and South-East Asia, Seoul, Korea, 30 May-1 June 2001.
Sussangkarn, Chalongphob, 1992, Towards Balanced Development: Sectoral, Spatial And Other Dimensions, A synthesis report for the 1992 TDRI Year-end Conference, Jom Tian Pattay.
Suehiro, Akira, 1989, Capital Accumulation in Thailand: 1855-1985, The Centre for East Asian Cultural Studies.
Supavud Saicheua and Thamomsri Fongarunrung, 2000, “Economic Crisis and its Impacts on the Financial Sector,” a paper presented at the 2000 Symposium on Thailand under New Economic Order, organized by the Faculty of Economics, Thammasat University, 4 May, 2000.
Tinnakorn, Pranee, and Chalongphob Sussangkarn, 1996, Productivity Growth in Thailand, Thailand Development Research Monograph No. 15.
Tinnakorn, Pranee, and Chalongphob Sussangkarn, 1998, Total Factor Productivity Growth in Thailand: 1980-1995, Thailand Research Development Institute.
Vichyanond, Pakorn, 2000, Financial Reforms in Thailand, Thailand Development Research Institute.
Warr, P, 1993, The Thai Economy in Transition, Cambridge University.
Warr, P. and B. Nidhiprabha, 1996, Thailand’s Macroeconomic Miracle, The World Bank, Washington D.C.
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41
Appendix
Regional Comparison Figures (All figures use information from the World Development Indicators 2000/2001)
A Chronology of Finanncial Reform Measures
42
Figure A1 Regional Comparison: per capita GDP Growth (PPP)
-20
-10
0
10
20
30
40
50
60
7019
75
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1 987
1988
1989
1 990
1991
1992
1 993
1 994
1995
1 996
1 997
1998
1 999
Thailand ASEAN3 Indochina NIE3 Japan China
Figure A2 Regional Comparison:Trade as % of Non-Service GDP
0
100
200
300
400
500
600
700
800
1980
1981
1982
1983
1 984
198 5
1986
1987
1988
1989
199 0
1991
1992
1993
1 994
1 995
1996
1997
1998
1999
Thailand ASEAN3 Indochina NIE3 Japan China
43
Figure A3 Regional Comparison: Capital Flows (In & Out), % of PPP GDP
0
5
10
15
20
25
30
35
1975
1976
1977
1978
1 979
1980
1981
1982
1983
198 4
1985
1986
1 987
198 8
1989
1990
1991
1 992
199 3
1994
1995
1996
1997
1998
1999
0102030405060708090
Thailand ASEAN3 IndochinaJapan China NIE3 (right scale)
Figure A4 Regional Comparison: Illiteracy Rates
0
10
20
30
40
50
60
70
1970
1971
1972
1973
1 974
1975
1976
1977
197 8
197 9
1 980
1981
1982
1983
198 4
198 5
1 986
1987
1988
1989
199 0
199 1
1992
1993
1994
1995
1996
1997
1998
1999
Thailand ASEAN3 Indochina NIE3 Japan China
44
Figure A5 Regional Comparison: % Female Labor Force
0
10
20
30
40
50
60
1960
1962
1964
196 6
1968
1970
1972
1 974
197 6
1978
1980
1982
1 984
1986
1988
1990
1992
199 4
199 6
1998
Thailand ASEAN3 Indochina NIE3 Japan China
Figure A6 Regional Comparison: % Urban Population
010203040506070
8090
100
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1 990
1 992
1994
1996
1998
Thailand ASEAN3 Indochina NIE3 Japan China
45
Figure A7 Regional Comparison: Inflation Rates
-10
0
10
20
30
40
50
60
70
1970
1971
197 2
1973
1 974
1975
1976
1977
1978
197 9
1980
1 981
1982
1 983
1984
1985
198 6
1987
1988
1989
1990
1991
1 992
1993
1994
1995
1996
199 7
1998
1 999
Thailand ASEAN3 Indochina NIE3 Japan China
Figure A8 Regional Comparison: Government Budget Balance, % of GDP
-15
-10
-5
0
5
10
1972
1973
1974
197 5
1976
1977
1 978
197 9
1980
1981
1982
1983
1984
198 5
1986
1987
1 988
1989
1990
1991
1992
1993
1994
199 5
1996
1997
1 998
1999
Thailand ASEAN3 Indochina NIE3 Japan China
46
Figure A9 Regional Comparison: Current Account Balance, % of GDP
-15
-10
-5
0
5
10
1519
77
197 8
1 979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
199 1
1 992
1993
1994
1995
199 6
1997
1998
1999
Thailand ASEAN3 Indochina NIE3 Japan China
47
Table A1 Chronology of Major Financial Reform Measures in Thailand 1980-1998
1980 Ceilings on lending interest rates charged by commercial banks and finance companies were lifted.
1984 The official exchange rate regime was changed from fixed (with U.S. dollar) to a basket of major currencies. Thai baht effectively devalued by 15 percent against the U.S. dollar.
1985
Nov.
The Financial Institution Development Fund (FIDF) was established within the BOT to gain more flexibility in providing assistance to ailing financial institutions.
1989
Jun.
Interest rate ceiling on commercial banks’ time deposits of 1 year and over was lifted
Jul. Prior approval from the BOT was no longer needed for transfer of capital outflows regarding dividend repatriation and interest/principal payments on foreign debts.
1990
Mar.
Abolishing interest rate ceiling on commercial banks’ time deposits of less than 1 year.
May Phase I of exchange control liberalization began when Thailand formally accepted obligations under Article VIII of the IMF’s Articles of Agreement, which resulted in complete liberalization of current account transactions and fewer restrictions on capital outflows.
1991
Apr.
Phase II of exchange control liberalization began, allowing freer outflows of capital for overseas investment, repatriation of dividends and proceeds from sale of stocks by foreigners. Resident individuals or juristic entities were allowed to open foreign currency accounts, subject to certain conditions, for example, the funds must have originated from overseas (e.g., export receipts).
May Increasing the minimum amount of assets which each foreign bank branch must maintain in Thailand from 5 million baht to 125 million baht.
Expanding the list of securities to be maintained by foreign bank branches to include debt securities guaranteed by the Ministry of Finance, debentures, bonds and debt instruments issued by state organizations or state enterprises established under special laws, or other state enterprises as approved by the BOT on a case-by-case basis.
1992
Feb.
Abolishing interest rate ceiling on commercial banks’ saving deposits.
May Further liberalization of exchange controls which included:
1. Allowing exporters to be paid in baht from non-resident baht accounts without prior approval from the BOT.
48
2. Allowing exporters to use foreign currencies from exports to repay foreign debts without prior approval from the BOT, or to pay for imports without having to transfer foreign currencies into the country, as previously required.
3. Allowing the use of foreign currency accounts to settle foreign debts of depositors’ affiliates.
4. Allowing government and state agencies to deposit unlimited amount of foreign currencies into their foreign currency accounts.
5. Allowing non-residents to deposit foreign currencies received from Thai residents into their foreign currency accounts.
Establishing the Securities and Exchange Commission (SEC) of Thailand to oversee capital market regulations and development.
Jun. Abolishing ceiling on commercial banks’ lending rates, finance companies’ promissory note rates and lending rates, and credit foncier companies’ lending rates.
Sep. Further relaxation of foreign exchange controls. Commercial banks located in Vietnam and countries bordering Thailand were allowed to withdraw the baht from their accounts at commercial banks in Thailand freely up to the maximum outstanding balance, excluding borrowed funds.
1993
Jan.
Imposing the BIS capital adequacy standard on commercial banks. Initially, the minimum capital-to-risk-asset ratio was 7 percent for domestic banks, and 6 percent for foreign banks.
Mar. Establishing the Bangkok International Banking Facilities (BIBF) which may provide three types of services: banking to nonresidents in foreign currencies and baht (“out-out” transactions), banking to domestic residents in foreign currencies only (“out-in” transactions), and international financial and investment banking services. The 46 off-shore banking licenses were issued to domestic banks, foreign bank branches in Thailand, and other financial institutions from overseas. The BIBF units must mobilize funds from overseas and extend credits only in foreign currencies.
Dec. Increasing the minimum capital-to-risk-asset ratio from 7 percent to 7.5 percent for domestic banks, and 6 percent to 6.5 percent for foreign banks. Imposing the 7 percent minimum capital-to-risk-asset ratio on finance companies, with grace period up to July 1, 1994.
1994
Feb.
Further liberalization of foreign exchange controls. 1. Increasing the maximum amount of the baht an individual may
carry to Vietnam or countries bordering Thailand from 250,000 baht to 500,000 baht.
2. Abolishing the limit on the maximum amount of foreign currencies that may be taken out of the country when traveling abroad.
49
3. Increasing the maximum amount of foreign investment by Thai residents without having to seek prior approval from the BOT from US$5 million to US$10 million per year.
4. Allowing Thai residents to use foreign currencies received from abroad to settle foreign obligations without having to surrender them to commercial banks in Thailand first.
Jun. Imposing net foreign exchange position limit on finance companies (25% of first-tier capital on the overbought side and 20% of first-tier capital on the oversold side).
Increasing commercial banks’ minimum reserve for doubtful debts from 50 percent to 75 percent by June 30, 1994, and to 100 percent by December 31, 1995.
Aug. Allowing existing BIBF units to apply for licenses to operate Provincial International Banking Facilities (PIBF) in areas outside Bangkok. The PIBF’s funding must be from overseas as in the case of the BIBF. However, the PIBF can extend credits both in baht and in foreign currencies, while the BIBF can extend credits only in foreign currencies.
Nov. Reducing the ceiling of commercial banks’ net position of foreign assets and liabilities to capital to 20 percent and 15 percent, respectively, or US$5 million, whichever is greater.
1995
Apr.
Increasing the minimum amount of each withdrawal transaction of the out-in BIBF loans from US$ 500,000 to US$ 2,000,000, effective October 18, 1995.
Oct. Increasing the minimum amount of each withdrawal from the BIBF from US$ 500,000 to US$ 2,000,000. Adjusting the measurement of net foreign exchange exposure of foreign bank branches, with the exception of trade credits.
1996
May
Adopting the provision against doubtful debt ratio of 100 percent for finance companies, finance and securities companies, and credit foncier companies.
Jul. Issuing guidelines for the application of second-round BIBF licenses.
Aug. Issuing the Financial Institutions Development Fund (FIDF) bonds. Allowing bonds issued by the FIDF to be part of liquid assets.
Sep. Adjusting the definition of the capital funds of commercial banks and finance companies: income form cumulative preferred stocks will be counted as second-tier capital instead of first-tier capital.
Oct. Increasing the first-tier capital funds to risk asset ratio of commercial banks from 5.5 to 6 percent, and the overall capital-to-risk-asset ratio of finance companies from 7.0 to 7.5 percent. (From January 1, 1998, the overall capital to risk asset ratio will increase to 8%, with the ratio for the first-tier capital remaining at 5.5%.)
1997 Requiring commercial banks to submit monthly reports on real estate credits for those projects with outstanding credits or approved capital
50
Jan. exceeding 100 million baht.
Announcing the approval for the 3 groups of applicants to set up new domestic banks.
Jun. BOT requested commercial banks not to sell Thai baht in offshore markets.
Ordered 16 finance companies to suspend their operations for 30 days and to submit rehabilitation plans to the authorities (starting June 27, 1997, and on July 25, 1997, the period was extended to September 29, 1997). In the meantime, finance companies resume a limited type of operations.
Jul. Thailand’s exchange rate system will, from July 2, 1997 onward, be switched from basket peg to a managed float whereby the value of the baht will be determined by market forces to reflect economic fundamentals.
Increasing the BOT’s discount rate or the so-called bank rate from 10.5 percent to 12.5 percent.
Raising the interest rate ceiling of finance companies from 11 percent to 13 percent for at-call-borrowing, and from 14 percent to 17 percent for time-borrowing, and commercial banks from 12 percent to 14 percent for over 3 months time-deposit account.
Aug. Ordered 42 finance companies to suspend their operations for 60 days (allowed to continue some business as necessary) and submit the rehabilitation plan to the Committee on Supervision of Merger and Acquisition within the same timeframe.
Oct. Enactment emergency decrees to remove the obstacles, including legal, procedural, tax rigidities and infrastructural bottlenecks to the normal resolution of business and financial institutions as follows:
Establishment of the Financial Restructuring Authority (FRA) to review the financial rehabilitation plans for the closed finance companies
Establishment of the Asset Management Corporation (AMC) to ensure the orderly sale of assets of companies taken over by the FRA
Empowering the BOT to undertake prompt corrective actions in situations of financial distress in both commercial banks and finance companies by changing management and expediting the process of recapitalization
Amendment of the BOT Act to entrust the FIDF to guarantee depositors and creditors of all financial institutions
Tightening loan classification rules and issuing the guideline on the standard for monitoring financial institutions as follows:
Prohibit recognition of interest income for nonperforming loans more than six months overdue, effective January 1, 1998
For sub-standard assets as of end-June 1997, financial institutions have
51
to set aside provision not less than 50 percent of their capital funds by the second half of 1997, and not less than 75 percent within the first half of 1998
Require provisioning for all loans more than six months overdue, effective December 31, 1997
Dec. Announcement of the FRA’s decision on the 58 suspended finance companies, of which only 2 rehabilitation plans were approved, and the remaining 56 companies were to be permanently closed.
1998
Jan.
Amending exchange control regulations as follows: (1) export proceeds must be brought into the country immediately upon receipt of payments or no longer than 120 days (previously 180 days) ; and (2) shortening the period of surrender requirement (i.e., foreign currencies must be converted into baht) from 15 days to 7 days.
Lifting of two-tier foreign exchange market. Financial institutions are now able to engage freely in spot foreign exchange transactions involving Thai baht with non-residents. All restrictions pertaining to transfer of Thai baht from the sale by non-residents of domestic securities have also been lifted.
Mar Provisioning requirements for classified loans are as follows: pass 1 percent, special mention 2 percent, substandard 20 percent, doubtful 50 percent, and loss 100 percent or write off. The provisioning requirement will be phased in; starting from the second accounting period of 1998, and will be fully maintained by the second accounting period of 2000.
Apr. Modifications of the BIBF businesses are as follows:
1. Reduction of the minimum loan disbursement from US$2,000,000 to US$ 500,000 for credits extended to exporters or customers whose income from exports is twice the amount of their entire income
2. Allowing the BIBF to purchase export-related foreign currency dominated instruments at discount from Thai exporters only
3. Allowing BIBF to underwrite or aval loans denominated in foreign currencies from financial institutions by limiting the amount to US$2,000,000 for customers and US$500,000 for exporters as defined in (1)
4. Increase the baht asset which the BIBF need to reserve for their operating expenses in Thailand from 100 million baht to 200 million baht.
Source: Vichyanond (2000)