Sources of Thailands Economic Growth: A Fifty-Years Perspective - - PDF document

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Draft, Do Not Quote

Sources of 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).

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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 begins with a brief account of growth experience of the past fifty year, followed by the discussions of the economic changes and turning events of each sub-period. 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. The paper then turns to discuss some other aspects of Thai economic growth.

• 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. Of course, high growth rates were not achieved year in year out, and were not identical between sector of production. Table 1 and Table 2 summarize the economic growths of Thailand, divided into four sub-periods, and by major economic sectors (agriculture, industry, manufacturing, and service).

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3 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 (last panel of Table 2). On the

• ther 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

• f 7.1 percent. Thailand has quickly turned from its most prosperous time into the

most difficult one. 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

• 0.9

GDP 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 100.0 100.0 100.0 100.0 100.0 100.0 Contributions 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

• 0.9

Source: National Economic and Social Development Board, Thailand

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4 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). Table 2 Variations of GDP Growth Rates 1952-2000

1952-1973 (I) 1952-1973 (I) 1952-1958 (Ia) 1959-1973 (Ib) 1974-1985 (II) 1986-1997 (III) 1998-2000 (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

• 0.9

Standard 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 7.1 Coefficient 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 3 shows 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 3 Sources of Growth by Sectors, 1981-1995 (percentages)

Labor TFP Land Capital

Unadjusted Quality- Adjusted Unadjusted 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
• 15.8

Source: calculated from Tinakorn and Sussangkarn (1998), table 8,13, 14, 15, 16.

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6 As in most studies of growth accounting of East Asian (and also countries in

• ther 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). See also Figure 2. The growth of TFP was more pronounced during 1986-1990, and was almost negligible in the subsequent period of 1991-1995. The following sections discuss the changing events during the four sub- periods.

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

2 Equals the quality-adjusted labor contribution (25.1) minus quality-unadjusted labor contribution

(20.7).

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7 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. 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

• fficially 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

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.

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.

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8 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 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)

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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 when, 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 t 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

• il 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 period in Thai

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10 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 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 sectorial

• 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. Figure 2 shows that since around 1978/79, the total area of agricultural

land has ceased to expand, and the agricultural production did not experienced a growth rate higher than 5% in almost the entire decade that followed. By about the same time that the rapid growth in agriculture could not be counted as reliably as in the past, the idea of shifting the country’s industrial policy from import-substitution to export-promotion began to gain momentum. The hallmark

• f 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.

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11 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 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

8 Siamwala (2001, p.8). 9 Siamwala (1997, p.17)

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12 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

• f FDI flooded into Thailand at an unprecedented magnitude.

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

• ffice 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

10 These demonstrators are sometimes called “mobile phone mob”, reflecting their general economic

status as middle and higher middle classes.

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13 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 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

• ut as good examples of such policy. In principle, the positive side of this policy is the

reduced burden

• n

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

• bserved 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, increasing at an average of 10.3 percent per annum during 1986-1996 (Table A1 in the Annex). It accounted for almost 80 percent of the contribution to growth during 1991-1995 (Table 3 and Figure 2). This is of course a spectacular turn of event. It is however

11 World Bank (2000) mentioned this fiscal inertia to be an obstacle to the use of stimulating fiscal

policy after the 1997 crisis.

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14 equally spectacular how these accumulations of capitals were put to used so inefficiently by the speculation. As Table 3 shows, the contribution of TFP growth during1991-1995, adjusted for changes in human capital, was merely 0.4 percent, compared to 31.3 percent during 1981-1986.

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

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15 than one year after the crisis began (Figure 5). This arguably helped the moderate

• utput growth in 1999 and 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

• f 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

• bstacles

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.

• 3. The Structural Weakness of the Financial Sector

One can easily argue that the ineffective functioning of the Thai financial sector was at the core of the problem 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.

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16 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

• f Thailand (BOT has been only half-heartedly promoting more competition among

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 A3 of the Annex 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

• 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 A3). 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 6), before making a swift reverse after the 1997 crisis.

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17 Huge and hasty foreign capital inflow through BIBF without justifiable investment opportunities (a large chuck of these funds were to finance the constructions of the already over-supplied real estates) affected the capability to earn and profitability of Thai corporate sector. See Table 4. Rate 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. Table 4 Thai Corporates’ Balance Sheet Quality Quarter/Year Debt/Equity Ratio Rate of Return on Investment (%) EBITDA/Debt

(%)

1994 1.5 29.0 25.0 1995 1.6 24.0 20.0 1996 1.9 22.0 16.0 1/1997 2.0 5.0 14.0 2/1997 2.1 11.0 8.0 3/1997 3.1 10.0 7.0 4/1997 4.6 4.0 8.0 1/1998 3.7 6.0 9.8 2/1998 3.7 3.0 8.5 3/1998 3.3 4.0 9.0 4/1998 2.8 3.0 9.5 1/1999 2.8 5.0 12.5 2/1999 2.8 6.0 14.1

Source: Supavud and Thanomsri (2000), parts of table 2

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 5). 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

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18 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. Table 5 Debt-Equity Ratios of Selected Countries (percent) 1992 19993 1994 1995 1996 Hong Kong 26 23 33 36 39 Indonesia 59 54 58 81 92 South Korea 123 129 127 132 n.a. Malaysia 31 29 38 45 62 Singapore 37 34 33 45 58 Germany 61 67 61 59 58 United States 106 102 97 94 90 Thailand 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.

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• 4. Aspects of Economic Growth and its Long-Term

Implications

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 6), which reached its lowest level of 11.2% (head-count ratio) in 1996 from 57% in early 1960s, before increasing slightly to 14.2% in the year 2000. Table 6 Poverty Incidence (head-count ratio), 1962 to 2000 Urban Area Year

Municipal Area Sanitary District

Rural Area Whole Kingdom 1962/63 38.0

• 61.0

57.0 1968/69 16.0

• 43.0

39.0 1975/76 14.0

• 35.0

31.0 1981 7.5 13.5 27.3 23.0 1986 5.9 18.6 25.8 29.5 1988 8.0 21.8 40.3 32.6 1990 6.9 18.2 33.8 27.2 1992 6.6 29.7 23.5 1994 5.5 22.1 17.1 1996 3.1 14.9 11.2 1998 3.6 17.2 12.9 1999 3.4 19.7 14.6 2000 3. 19.0 14.2

Source: National Economic and Social Development Board (2000) for 1962/63-1990 figures Jitsuchon (2001) for 1992-2000 figures Note: The comparison of poverty incidence over years may suffer from the differences in definition of incomes, and the methods used to construct poverty lines.

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

SLIDE 20

20 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 7 shows that the average real income per capita of the people of

Bangkok and surrounding provinces was three times of the country average, and almost ten times of those living in the poorest region, the Northeast. Table 7 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.

SLIDE 21

21 One can view the failure to distribute more evenly the benefits of growth as an unfortunate consequence of the past growth strategy and concentrate 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
• f 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 run12. There is no trade-off between growth and income distribution in that context.

12 See, for example, Deininger and Squire (1996, 1997, 1998), Persson and Tabellini (1994), Alesina

and Rodrik (1994), and Benebou (1996).

SLIDE 22

22

References

Alesina, Alberto, and D. Rodrik, 1994, “Distributive Politics and Economic Growth,” 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. National Economic and Social Development Board, 2000, “Poverty and Income Distribution in 1999”, in Indicators of Well-Being and Policy Analysis Newsletter, 4(1).

SLIDE 23

23 Persson, Torsten, and Guido Tabellini, 1994, “Is Inequality Harmful for Growth,” American Economic Review, Vol. 84, pp. 600-621. Ritchie, Bryan K., 2001a, “Innovation Systems, Collective Dilemmas, and the Formation of Technical Intellectual Capital in Malaysis, Singapore, and Thailand,” paper presented at Thailand Development Research Institute. Ritchie, Bryan K., 2001b, “Political Preferences and Increasing Returns: the Boon and Bane of Technological Development in Southeast Asia,” paper presented at Thailand Development Research Institute. 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

• n 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. World Bank, 2000, Thailand Public Finance in Transition, by the Poverty Reduction and Economic Management Unit, East Asia and Pacific Region. Young, Alwyn, 1995, “The Tyranny of Numbers: Confronting the Statistical Realities

• f the East Asian Growth Experience,” Quarterly Journal of Economics, 110, pp.

641-680.

SLIDE 24

24

F i g u r e 1 A n n u a l G r

• w

t h R a t e , 1 9 5 2

• 2
• 1

5 .0

• 1

.0

• 5

.0 .0 5 .0 1 .0 1 5 .0

1 9 5 2 1 9 5 3 1 9 5 4 1 9 5 5 1 9 5 6 1 9 5 7 1 9 5 8 1 9 5 9 1 9 6 1 9 6 1 1 9 6 2 1 9 6 3 1 9 6 4 1 9 6 5 1 9 6 6 1 9 6 7 1 9 6 8 1 9 6 9 1 9 7 1 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2

SLIDE 25

25

1 9 8 1

• 1

9 8 5 1 9 8 6

• 1

9 9 1 9 9 1

• 1

9 9 5

• 2

% % 2 % 4 % 6 % 8 % 1 %

Figure 2 Growth Accounting, 1981 - 1995

" T F P G r

• w

th " La bo r Q u a lity La bo r Ca pita l La n d

Figure 3 Agricultural Land Areas

5 1 1 5

1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995

Million Rais Jitsuchon's Series Tinakorn & Sussangkarn's Series

SLIDE 26

26

Figure 5 A Chronology of Fiscal Policy during the Crisis (July 1997-Oct 1998)

Figure 4 Poverty Incidences, 1962-1999 (head-count ratio)

2 4 6 8

1962/63 1968/69 1975/76 1981 1986 1988 1990 1992 1994 1996 1998 1999

%

Whole Kingdom Rural Areas

SLIDE 27

27

Figure 6 Private Sector’s Foreign Capital Inflows

• 15,000
• 10,000
• 5,000

5,000 10,000 15,000 20,000 1 9 8 8 1 9 8 9 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2

miilioin US dollar

ThroughBanks (of which: BIBF) ThroughNon-Banks

SLIDE 28

28

Annex

Table A1 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 Capital Stock Share (%) Agriculture 17.6 14.1 8.2 5.8 Industry 34.5 37.6 41.9 49.6 Manufacturing 9.3 11.0 14.6 19.7 Services 48.0 48.3 50.0 44.6 Total 100.0 100.0 100.0 100.0 Contribution to Growth (%) Agriculture 0.0 0.2 0.4

• 0.1

Industry 1.6 2.4 4.9 3.8 Manufacturing 0.8 0.7 2.1 2.2 Services 1.1 2.7 4.9 0.1 Total 2.8 5.3 10.3 3.6

Source: National Development and Social Board, Thailand. Note: Capital Stocks are measured as weighted average of gross capital stocks (75%) and net capital stocks (25%).

SLIDE 29

29 Table A2 Variation of Capital Stock Growth 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 Standard Deviation of Growth Agriculture 0.5 1.7 2.8 2.0 Industry 0.2 1.9 3.4 4.0 Manufacturing 2.1 1.7 3.1 6.1 Services 0.6 1.6 2.1 2.2 Total 0.3 1.3 2.5 2.8 Coefficient of Variation Agriculture

• 16.3

1.4 0.5

• 0.9

Industry 0.0 0.3 0.3 0.5 Manufacturing 0.3 0.3 0.2 0.5 Services 0.3 0.3 0.2 9.3 Total 0.1 0.2 0.2 0.8 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%).

SLIDE 30

30 Table A3 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

• utflows 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. 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.

SLIDE 31

31

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

• versee 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

• ff-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

• nly 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.

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

SLIDE 32

32 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

• versold 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

• ut-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

• f 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 Jan.

Requiring commercial banks to submit monthly reports on real estate credits for those projects with outstanding credits or approved capital exceeding 100 million baht. Announcing the approval for the 3 groups of applicants to set up new domestic banks.

SLIDE 33

33 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

• rderly 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 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

Amending exchange control regulations as follows: (1) export proceeds must be brought into the country immediately upon receipt of payments or no

SLIDE 34

34 Jan.

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)