Villain of the Asian Crisis: Thailand or the IMF?

Abstract

This article traces the roots of the financial in the weakness of the Thai economy. By using accounting framework, the author demonstrates that the IMF/World Bank structural adjustment programme in the 1980s failed to achieve resource switching from the non-tradable to tradable sector, as successive devaluations had to be matched with upward adjustment of minimum wages due to political reality. The improvement in the fiscal position was achieved primarily by a politically easier route of cutting infrastructure investment with detrimental effects on long-term growth. Thus, the seed of the was sown in the straightjacket IMF/World Bank programmes of the 1980s. I. Introduction Much soul searching has occurred since the onset of the Asian crisis that had spread from Thailand.1 However, curiously enough, not much attention has been devoted to the analysis of the origin of the problem in Thailand itself until about a year later. Pasuk and Baker (1999, p. 193) make a very pointed comment, analysis of the has been just as contagious ... In the course of this epidemic, diagnosis of the original local roots of the in Thailand has become rather obscured.2 Recent work on Thailand includes Chandrasekhar and Ghosh (1998), Hewison (1998), Lauridsen (1998) and Warr (1998). Most studies of the Thai financial examine immediate causes prior to the crisis. They primarily focus on financial factors and the period of high capital inflows in the 1990s. The analyses, whether of political economy persuasion or of neoclassical financial model, identify the lack of prudential control and rampant crony capitalism as the main causes of the crisis. This article traces the roots of the problem in earlier period of the 1980s and in the real sector of the economy. It is inconceivable that a of this proportion can happen without some deep-rooted structural weaknesses. In particular, it is claimed that the weaknesses of the Thai economy, which has always been prone, can be attributed to the International Monetary Fund (IMF)/World Bank structural programme, implemented in the 1980s. It is rather interesting to note that at the conclusion of the programme, Thailand's economic performance was hailed by the IMF as an excellent example of successful development, combining adjustment with (Robinson et al. 1991, p. 1). Even at the start of the crisis, the Managing Director of the IMF, Michel Camdessus expressed confidence in Thailand's economy by saying, I don't see any reason for this to develop further. What went wrong? In fact, it should not surprise anyone who observes Thailand's economic trajectory. During 1973-85 Thailand faced a cumulative deterioration in its terms of trade of about 36 per cent, real gross domestic product (GDP) growth was well below the historical trend, inflation rose sharply, and there was a substantial rise in current account deficit and external debt. These forced Thailand to enter into IMF/World Bank supported adjustment programmes in the early 1980s.3 As part of the structural adjustment programme, Thailand had to devalue its currency and implement tighter fiscal and monetary policies. The Thai economy performed quite well during the period 1987-89: real GDP grew at more than 10 per cent, the inflation rate fell below 5 per cent and the current account deficit was less than 3 per cent of GDP. This was the basis for such a positive and optimistic evaluation of Thailand's adjustment programme. However, the IMF failed to notice signs of distress that had been showing up since 1990; the current account deficit rose to 8.5 per cent of GDP in 1990, and inflationary pressure began to build up. Contrary to the IMF's assessment, this article attempts to demonstrate that Thailand's adjustment was flawed. The adjustment focused very much on the short-run aspects and, typical of IMF adjustment programmes, it ignored the political reality of implementation which at the end compromised long-term developmental imperatives. …