Thailand: Moving Towards A New Era

1998

Peter G Warr

From 1987 to 1995 the Thai economy was the fastest growing in the world. Real GDP grew at over 10 per cent per year. Indonesia and Malaysia were not far behind. In each of these economies, the boom was fuelled by dramatic export growth and high levels of capital inflow, consisting of both direct foreign investment and speculative portfolio investment. In Thailand, the result was unprecedented business optimism, reflected in enormous property market speculation and construction in Bangkok. Risk-taking was paying off. Booms like that cannot last and Thailand's boom started to collapse in 1996, culminating in the currency crisis of early 1997 and the currency float of 2 July. Much of the investment in real estate and commercial office space proved to be financially non-performing, destroying the companies which had financed it, particularly those which had borrowed in foreign currency without hedging against exchange rate risk. Why had investors acted so imprudently? Euphoria induced by almost a decade of high growth was a major reason. The classic bubble economy is one in which real estate 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 investment, and so on - until the inevitable crash. Unrealistic expectations of continued boom are the underlying fuel for this process. These expectations are generally possible only after several years of sustained boom. The boom therefore generates the mechanism for a crash. This is why economic booms almost never peter out gradually. They collapse. Once the over-confidence is punctured, the boom comes crashing down. In these respects, Thailand's financial panic was similar to many previous examples around the world, including the Mexican crash of 1994. What of the future? Despite the hardship it will bring, the large depreciation of the baht that has now occurred will stimulate the exports required for short term recovery. Signs of export recovery and resumption of foreign investment inflows are already present. The long term future remains uncertain. Thailand's industrialisation was based on cheap labour, but that era is essentially over. It is now vital to move to more skill-intensive modes of industrial production. At similar stages of their own development Taiwan and Korea had invested heavily in education. Thailand lags badly, especially in secondary education. Enrolment rates remain very low, even by Southeast Asian standards. Secondary education is a prerequisite for effective vocational training and development of Thailand's base of skilled labour requires that secondary school enrolment rates increase significantly. That will require a massive investment.

WATCHPOINT: Thailand will need to upgrade its skills and management base by investing more in education.

 

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