The crisis that Thailand suffered in 1997 changed its economic status. What once was a thriving country in the pre-crisis years became poverty stricken. Thailand is in a state of economic crisis.
Thailand had a long period of booms, with high levels of demand, inflation increases, unemployment decreases, and growth of national income. “Thailand’s crisis was the culmination of a long period of economic boom, unprecedented in its rate and duration not only for Thailand, but for almost any country.” (Warr, 2000)
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The economic boom can be explained by the incoming foreign investments. Starting in 1987, foreign investments increased. “From annual rates of inflow varying between $100 and $400 million USD over 15 years, the annual rate of inflow increased more than five fold, to over $2 million USD per year and remained at roughly these levels over the next eight years.” (Warr, 2000)
The longer the boom continued, amounts of mobile funds became greater. From the years before 1997, there was a serious increase in crisis vulnerability. “From 1994 onwards, the stock of short-term foreign capital exceeded the value of reserves and the discrepancy between them increased steadily. By early 1997, the stock of short-term, foreign-owned capital exceeded reserves by 80 per cent.” (Warr, 2000)
The key to Thailand’s crisis vulnerability to a financial crisis lies in the fact that before the crisis, absolute values of reserves and the number of months of imports that were financed were increasing. The growth of volatile foreign capital exceeded the growth or reserves immensely.
In the years before the crisis, the economy of Thailand became that of a bubble economy. “The classic bubble economy is one which real estates prices continue to rise well beyond levels justified by the productivity of the assets, but so long as the prices continue to rise existing investors are rewarded and collateral is created for new loans to finance further investments, and so on – until the inevitable crash.” (Warr, 2000)
In 1996, export growth collapsed. “Export growth declined from over 20 per cent per year in previous years…to around zero in 1996.” (Warr, 2000) This was not the cause of the crisis.
All through the end of 1996 and into 1997, the Bank of Thailand “struggled to maintain the stability of the baht/US dollar exchange rate against the speculative attacks. Foreign exchange reserves declined from $40 billion USD in January 1997 to well under 30 billion six months later.” (Warr, 2000) In July 1997 the Bank of Thailand had announced it was going to float the currency. The exchange rate then went from 25 baht per USD to 30. by January 1998 it was 55, and by February 1997 it was 45.
The political casualties of the crisis caused a change in the government of Thailand. This gave Thailand a political advantage in responding to the crisis. “The new government did not need to defend itself against blame for the crisis itself.” (Warr, 2000)
The crisis produced a large reduction in private spending. The government felt obligated to use the IMF package. The IMF package required the problematic institutions to be closed.
IMF officials stated that the Thai government was properly warned of the impending crisis. The developing crisis apparently was not seen early enough to avert it. Any IMF documents made during the pre-crisis period that said the Thai government was aware of the upcoming dangers could not be verified.
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