It is hard to believe today but Thailand appeared on the verge of economic doom 20 years ago. The culmination of financial sector convulsions, compounded by a currency crisis and reinforced by corruption and cronyism, induced a forced devaluation of the baht on July 2, 1997. Back then, the Thai economy was in dire straits but politics looked promising. It is the opposite today, as macroeconomic conditions have become sound but the political system has reverted to a military dictatorship with doubtful prospects for popular rule.
The forced devaluation 20 years ago -- so-called "managed float" -- has produced the intended effects. In the pre-crisis months, Thailand ran a current account deficit of 8%, but now the equivalent is 11.5% in surplus. On the other hand, external debt in the run-up to the crisis was US$110 billion, and its short-term portion was 140% of foreign reserves. Today, external debt exceeds $131 billion but only 32% for short-term repayments in proportion to foreign reserves. Having sank from 25 to over 40 per dollar in the eight years since its float, the baht's real effective exchange rate depreciated by more than 25% during the decade from the mid-1990s. Today, the Thai currency has been calculated as 12% cheaper than it was as a pegged currency, rendering Thailand an attractive investment destination. While these indicators explain Thailand's current macroeconomic robustness, they gloss over the larger story and lessons.
Thitinan Pongsudhirak is associate professor and director of the Institute of Security and International Studies, Faculty of Political Science, Chulalongkorn University.
The Thai economy had become over-leveraged in the mid-1990s because of a confluence of factors. First, there was an ambitious growth strategy after the Cold War to turn the battlefields of Indochina into a Thailand-centred marketplace and financial hub that went awry. Bangkok was supposed to be mobilise capital flows from outside for development finance in Indochina but instead the local economy sucked in most of the "hot money", overinvested it and became over-leveraged. Second, as capital flowed in from outside, the pegged exchange rate and inflexible monetary policy in what was an open economy led to poor macroeconomic management. What was needed was a strong devaluation, much like in November 1984, to release pressure on the current account but too much foreign debt and too much politics precluded it. Third, the politicisation of what had been a solid macro-policy technocracy exacerbated macroeconomic supervision.
When the Thai bubble burst after the "go-go" years of 1988-95, when high-flying financiers raced fancy cars in downtown Bangkok and flew for lunches in Hong Kong, while all kinds of investment banks and financial players from abroad set up shop, it was a perversely perfect crisis with shoddy macroeconomic management on the one hand and corruption and cronyism on the other, all underpinned by hubris and greed.
The lessons from the macro-policy side are clear. Thai leaders, whether elected or appointed, must shield the grasp of macroeconomic agencies from vested interests and place them in the hands of impartial technocrats and policy experts at the Bank of Thailand, the finance ministry, the budget bureau, and the National Economic and Social Development Board. When these agencies became politicised in the late 1980s and early 1990s, the result was shoddy financial sector management and macroeconomic mismanagement.
With the external account in surplus, foreign reserves at an all-time high and the baht stable, even while growth averages less than half of what it was in the decade to 1997, macro-policy agencies are not under the kind of supervisory pressure we saw in the mid-1990s. If the cut-and-thrust of Thai politics can be kept out of macroeconomic management, the Thai economy will be in relatively good shape. Growth could slow, or even stall and contract, but these technocratic agencies are the backstop of how far any economic downturn can slide.
In 1997, the International Monetary Fund had to be called in to settle matters, close bankrupt finance firms, institute sectoral reforms, and sell off assets. It was a controversial period. Countless Thais suffered in different ways. As companies were shuttered, many became unemployed. Malls closed early. Students had to return home from abroad. The list of hardships went on. The rural sector became a saviour, absorbing much of the laid-off labour until the economy revived. But the two decades that have elapsed have seen the Thai economy stand on a much firmer footing. Challenges remain with education reform, upgrading, innovation imperatives, welfare needs, and bridging inequality but the Thai economy has come up from a very long way down.
In 1997, Thai politics was looking up. The Thai people managed to come up with a reform-driven constitution that promised to take their country to greater democratisation, away from the "money politics" of patronage and graft and its attendant cycle of corruption, coups and constitutions. The 1997 charter was equipped with checks-and-balance mechanisms and independent watchdog institutions to promote transparency and accountability.
Notwithstanding early anti-graft successes, it ran into the political juggernaut embodied in Thaksin Shinawatra and his party machine, which remains the undisputed champion of 21st century Thai elections. But inevitably, Thaksin became a monopolist in politics the same way he was in the telecom business, undermining what was a fledgling democracy and posing an existential threat to established power centres. All that was good in the 1997 charter was eventually stymied, manipulated and co-opted.
Yet the military coup that ousted Thaksin's regime in September 2006 failed because his party machine kept winning every time there was an election. Once and for all, the May 2014 putsch was intended to restore Thailand's bureaucratic state that privileges the corporate interests of the military and bureaucracy at the expense of elected representation.
This is where Thailand stands now. Economic growth is subpar and challenged, but GDP contraction does not appear on the cards, while the macro-economy is in good health. Put another way, the economy is in a worrisome but not dire state. Thai politics is the problem. If Thailand gets its political house in order, its economy would be poised to climb on a 4-6% trajectory for the foreseeable decade.
Given the big mess created by the coup-induced regime of Prime Minister Prayut Chan-o-cha, from a crooked constitution of 2017 and a misguided 20-year national development strategy to the military's growing dominance in all areas of national life and governance, the immediate future warrants huge concern. The best that can be hoped for under these circumstances is a compromise and a power-sharing arrangement of sorts between military and civilian leaders after the election, which is slated for the second half of next year. This power-sharing would resemble the eight-year administration of Gen Prem Tinsulanonda in the 1980s. But Gen Prem was clean without the baggage of relatives on the take. Gen Prem also empowered technocrats to run the economy and insulated them from vested interests. These are the two prerequisites for Thailand's next leader if any sort of civil-military power-sharing is to emerge.