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BANGKOK: Thailand is facing a period of crisis, following a decision by the Thai government to accept an International Monetary Fund (IMF) bailout of the country's crumbling economy.
The coalition government of Prime Minister Chavolith Yongchaiyudh signaled its intention to accept the deal on August 5, when he announced the closure of 42 finance companies, in addition to the 16 that had been shut down several weeks earlier.
The clean-up of the country's ailing finance sector, widely viewed as the key culprit behind the economic mess for accumulating billion of dollars in non-performing loans from foreign banks, was set down as a key condition of IMF assistance.
A week later the IMF and a number of countries came up with US$16.7 billion in an effort to prop up Thailand's foreign currency reserves and restore international confidence in the economy, battered by a 30 per cent fall in the value of the Thai baht and mounting capital flight.
The bailout means the Thai public will have to subsidize the greed and economic mismanagement of the country's tiny corporate elite, who are responsible for US$73 billion of the US$89 billion debt.
Thailand is now at the mercy of a brutal structural adjustment programme to be conducted by the IMF and the World Bank. This will include massive budget cuts, the privatisation of major state-owned enterprises, and measures d esigned to further liberalise and open up the economy to foreign interests. In addition, the IMF package must be repaid at market interest rates in three to five years time.
The Thai bailout was the biggest since the US$40 billion package to Mexico engineered by the IMF and the US government following the country's economic collapse in 1994.
Leading the charge along side the Fund this time was Japan which put up nearly US$7 billion. As one of the biggest investors in Thailand, Japanese corporations have the most to lose in the event of the complete breakdown of the Thai economy, while Japanese banks are owed approximately half of the country's foreign debt.
Australia, Singapore, Malaysia, China, South Korea, Hong Kong, the World Bank and the Asian Development Bank also pitched in with funds. Although the effort was dressed up as a path breaking gesture of pan-Asian economic solidarity, like Japan, all share a much more basic concern: fear that a collapse of the Thai economy would drag down the rest of SE Asia's so-called 'tiger economies'.
As one Hong Kong newspaper put it: 'If the whole of Southeast Asia goes under, Hong Kong will be deeply affected. Hong Kong's continued economic success is not set in concrete and there is no guarantee that currency speculators will not go for our dollar. Someday we, too, may be in need of help.'
Already Thailand's economic woes have lead to great instability in other Asian currencies, including the Philippine peso, the Malaysian dollar and the Indonesian rupiah.
As the next few months will show, SE Asia's other major economies share many of the same problems that triggered off the crisis in Thailand: weak manufacturing and agricultural sectors, widening current account deficits, massive amounts of unproductive loans sunk in areas like real estate and luxury car imports.
The IMF was active in Thailand in the mid-eighties, when the nation was in the grip of a recession resulting from the rising price of oil, dropping prices for agricultural goods, and the servicing of a massive foreign debt. Then, the IMF put Thailand on an economic stabalisation programme, to be coordinated with a structural adjustment programme being carried out by the World Bank, with the aim of forcibly opening up the country's economy to the international market.
These plans were derailed by a massive flow of private Japanese investment caused by the Plaza Accord of 1985, the result of pressure from the US for the Japanese yen to appreciate relative to the US dollar, thus narrowing America's growing trade deficit with Japan by cheapening its exports to that country and making exports from Japan more expensive in dollar terms to US consumers.
As a result of the Accord, approximately US$15 billion worth of direct Japanese investment flowed to cheap labour sites throughout SE Asia, in an attempt to transform them into production bases for Japanese corporations assembling manufactured goods for export to Europe and the US. In 1987 alone, Japanese investment to Thailand exceeded cumulative investment for the past two decades. This was accompanied by huge amounts of Japanese overseas development assistance, and Thailand was also the target of massive lending by Japanese banks.
In turn, SE Asia become a magnet for capital flows from other parts of the globe, especially portfolio investments tapping the massive pension and savings funds from the north, seeking quick and profitable investments. Governments around the region adopted a number of measures to maintain these capital flows. Foreign exchange restrictions were eased to make capital movements and lending easier. Banks were opened to foreign participation, and interest rates keep high relative to US and Japanese rates to attract money. Regular government intervention assured a fixed foreign exchange rate to the dollar.
The strategy worked for a time as billions in foreign capital continued to pour in, mainly to real estate, the sector that promised the quickest and best profits.
In Thailand, the combination of all these factors produced an economic boom for finance companies, and the indigenous class of yuppie entrepreneurs they spawned.
Taking advantage of the country's liberalised exchange and banking system, and with Thailand's 10 per cent economic growth as collateral, finance companies had foreign banks virtually lining up to throw money at them. This was re-lent to local enterprises and corporations who channeled it into financing the construction of condominiums, office towers, and luxury car imports.
The strategy began to breakdown in the early nineties, however, as the country experienced a massive glut in new property development. Property developers with unsold residential and commercial units were unable to meet interest payments, leaving finance companies unable to service their huge debts. By the beginning of 1997, an estimated half of the loans to property developers were deemed "non-performing".
Sensing blood, foreign speculators launched a major attack on the artificial value of the Thai baht. The Bank of Thailand threw away US$24.4 billion in a futile attempt to fend off this attack, before finally agreeing to a managed float of the baht in early July.
Within days of the decision the baht lost nearly 30 per cent of its value, and Thailand was in the grip of a major capital flight.
The emerging economic crisis made for high drama. The nation's newspapers carried front page pictures of panicky depositors rushing to withdraw their money from finance companies rumored to be on the verge of collapse. The government attempted to gag the media amid raising calls for Chavolith to resign. Stock market chaos worsened amid rumors that the military was on the verge of launching a coup to restore order.
Faced by impending economic meltdown, Thai finance minister Thanong Bidaya went to Japan in July to plead with government and bank officials to keep Japan's share of Thailand's debt rolling. The replied that they would only help if Bangkok accepted direct IMF intervention.
After several weeks of negotiations, on August 12, the IMF announced the bailout package. A total of US$16.7 billion was pledged to shore up Thailand's reserves, a figure which could rise to as much as US$20 billion once negotiations have been concluded with commercial banks in America, Europe and Asia.
According to a recent statement by the IMF's managing director, Michel Camdessus, 'Thailand's problems could have been corrected at much less cost to the economy and to the economies of neighboring countries if they had been addressed in a more timely manner."
At the same time, the IMF itself hardly pushed for a speedy response to the emerging crisis. As Thai columnist Chang Noi put it in a recent analysis" "Presumably, experience has taught the IMF that only a financial crisis overcomes the resistance to liberalisation.'
'... Certainly, a financial crisis seems to be doing the trick here,' he continued. 'The baht is afloat. Property magnates are clamoring for government to let foreigners in to boost the property market ... Finance licenses are available at fire sale prices.'
'So, Thailand's current crisis is just a stage in the liberalisation programme. Where incidents involving gun boats were the trigger mechanism of the imperialism of free trade, financial crises play the same role in the imperialism of free finance.'
Indeed, that the magnitude of the country's economic crisis took so long before it became apparent was no coincidence. Many of the finance companies on the verge of bankruptcy were owned by politicians and other 'influential people'. More than a few construction companies that had borrowed heavily to invest in real estate that they could not sell are owned by members of parliament.
Facing massive losses, these groups banded together to lobby the government to come to their rescue, instead of closing them down.
The government set up a US$18 billion Financial Institution's Development Fund to to "inject liquidity" into cash strapped financial companies, an amount roughly equivalent to half the country's annual budget. Finance executives treated the Fund as a type of publicly funded pyramid scheme, borrowing money at 13 per cent interest one day, and then re-lending it at 20 per cent the next. In turn it was often relent at 25 per cent, and so on.
As one observer put it in the Bangkok English daily The Nation: "Back in March and April, when the financial crisis was taking shape, it was considered fun to make a profit this way".
Announcing the bailout package in August, Japan's Vice Finance Minister for International Affairs hailed as affirming "the solidarity of the Asia Pacific region".
Solidarity aside, it was very much a case of self interest mixed with securing future market opportunities. Faced with the potential that the Thai crisis could be infectious, Asian governments could not sit and do nothing.
Already, there have been hints in Thailand's business media that those countries that contributed to the rescue package, including Australia which shelled out US$1 billion, will get access to "special market openings". The group expected to benefit the most from the crisis is Japan, which put up the largest contribution, a total of US$7 billion through Japan's Export-Import Bank.
While declining economic conditions may scare away US and European companies, it is likely to strengthen the hand of Japanese capital, already far ahead in terms of making the region a base.
The slump will put massive downward pressure on wages. Thai companies hit hard by the baht devaluation and mounting debt will be easy prey to buy outs, in which Japanese corporations are expected to feature heavily.
The immediate implications of the IMF bailout are clear: massive budget cuts, the privatisation of state enterprises, including Thai Airlines, the Electricity Generating Authority of Thailand, rising prices and increased pressure to freeze wages.
In a recent round table of top economists and businessmen held by one Bangkok daily said that IMF assistance will mean 'a lower quality of life' for Thais.
Although politicians have stressed that health and education will be spared from major budget cuts, few observers have confidence in that this will be the case once these areas come up against sacrosanct budget lines such as defense and funds for special projects which are vital in the Thai political system for dispensing patronage and building political support. As proof of this, at the same time that it was hitting its neighbors for US$16 billion, the Thai government spent US$250 million on a new aircraft carrier.
According to Filipino academic Walden Bello in a recent commentary the impacts on Thailand can best be seen by looking at Philippines.
Bello maintains that 15 years of uninterrupted IMF/World Bank enforced structural adjustment in the Philippines has facilitated a flood of cheap manufactured goods and subsidised grain from the US, crippling the nation's manufacturing and agriculture sectors.
'Moreover,' wrote Bello, 'the debt problem, which the structural adjustment programme was supposed to decisively resolve, remains a massive burden.' The foreign debt has climbed from US$26 billion in the mid-eighties to over US$40 billion today.
'It is almost certain that, presented with a second chance by Thailand's economic crisis, the IMF and the World Bank will not be satisfied with imposing a short-term stabalisation programme, but will try to complete the structural adjustment process that was derailed by the cornucopia of Japanese investment'.