Ten Years on and Beyond: Remembering the 1997 Asian Crisis

July 2, 2007 - In the decade since the 1997 financial crisis, Thailand has become wealthier and has fewer poor people.  The nation has become more integrated into the global economy while being less vulnerable to external economic shocks.

However, Thailand now faces new challenges which stem in part from its recent success.

The policies which sustained strong growth for more than four decades – raising Thailand from lower to middle income - and ensured recovery from the crisis will not be sufficient to continue that strong growth in future.

Thailand could find itself in a “middle income trap with low rates of private investment and productivity-growth,” said Dr. Kazi M. Matin, the World Bank Lead Economist for Thailand.

Ten years after the Asian Crisis, Thailand has fewer poor people and become more integrated with the global economy

South Korea, Taiwan (China), and Singapore each found strategies to continue growth after first achieving middle income levels.  Thailand can too.

But pundits and policy makers should reflect on the fact that many nations, notably in the Middle East and in Latin, have failed to make this vital transition.  Hence the challenge and the urgency facing Thailand today, Dr. Matin said.

Remarkable Recovery After Slow Start

Though initially slow, Thailand has made a remarkable recovery from the 1997 financial crisis, led by strong exports and growth in private consumption. Overall growth peaked at an annual average of 6% in 2002-2004 but has fallen to 4.5% since.

Export growth has been significantly faster than that for GDP, export’s share rising from 47 to 67 percent of GDP in a decade since the crisis.  This was made possible by the increased openness of the Thai economy, which helped it to benefit from China’s explosive growth and WTO accession.

Thailand’s recovery has definitely led to lower poverty rates and reduced inequality, which will remain important reasons for continuing robust growth.

However, Dr. Matin noted that Thailand’s recovery has a critical weak point - slow growth of private investment.  Investment has been constrained by a spotty domestic investment climate and by vigorous foreign competition.

The regulatory burden, the inadequacy of infrastructure and insufficient skill availability are among the reasons that Thailand’s private companies have been constrained from investing more and raising productivity growth.

This weakness in Thai private investment is a main reason why the nation’s growth since 1997, though notable, has been less than Thailand’s own performance in the two decades prior to the crisis.

Toward Future Growth

The strategy that Thailand will need to continue strong growth beyond middle income levels is quite different than that which has helped it succeed thus far. This has been shown time and again in similar economies. Dr. Matin noted.

“There are three main elements of the new strategy,” Dr. Matin noted.  “The first is moving from diversified to more specialized structures.  The second is moving from a strategy of accumulation to a strategy of innovation which means working smarter.  Third, is the need to move from an emphasis on basic skills to advanced skills, thereby producing workers that can produce innovative products and processes.”

Waiting for higher income...

Thailand, however, has begun this process of specialization, with potential for economies of scale and technological leadership, through its strong performance in automotive parts and electronics.

The challenge is to sustain this great start with innovation. Other areas in which Thailand could potentially achieve specialization include tourism, medical services, IT and possibly farm-to-table agriculture.

Robust growth through specialization in these sectors will require investment and innovation rather than simple movement of labor from less productive sectors to more productive ones, which has been characteristic of Thailand’s growth thus far.

“It also requires the development of deep financial systems that provide a diverse range of services to support the changing economic structure,” Dr. Matin added.  “Movement of the population into livable and effective cities with efficient and highly competitive population clusters also requires support, so that the country becomes better integrated within and growth benefits are better shared.”

Another key theme for continued growth will be increasing rule of law with transparent government decision making.  Regional inequities and social conflict can also quickly stall needed growth.
Continued growth, as demonstrated by other middle income countries over the past two decades, will require vigorous private investment in sectors ripe for innovation and specialization.

The government should focus on reducing policy uncertainty, lowering costs of private investment, and enhancing work force skills.  It will also need to reduce social inequities and continue to improve governance.

“The emergences of deep regional inequities of the kind that fuel social conflict and political instability, with potential to stall growth, have to be avoided,” Dr. Matin said.

“Similarly, a clean government and the rule of law must increasingly become the norm, with corruption and the rule of personalities, increasingly the exception; recent experience also suggests that without such improvements, growth can also stall,” he added.  “Fortunately, this is a central aspect of the Government’s agenda.”

In April, the World Bank has released Thailand Economic Monitor, a semi-annual review of the Thai economy. To download this publication, please log on to www.worldbank.or.th