August 14, 1997
Economic Scene: Monetary Fund's Rescue Package for Thailand May be Too Late
Related ArticlesJapan Joins I.M.F.'s Rescue of Thailand, $16 Billion in All (Aug. 12) Analysis: Thailand Ignored Painful Lessons of Mexico (Aug. 1) Market Place: Devaluing the Baht -- Thailand Gambles to Revive Economy (July 3) New Minister Seeks to Boost Thailand's Economy (June 26) By PETER PASSELL
ow that you've finally figured out what a baht is, it's probably OK to forget.
This week the International Monetary Fund cobbled together a rescue package for Thailand's currency (that's right, the baht), which has tumbled 21 percent in value against the dollar since early July. With a little luck, Thailand and neighboring economies caught in the financial downdraft will suffer just brief pauses in growth.
But even a speedy resolution of the crisis will leave some big questions unanswered. Did the IMF's currency surveillance mechanism, introduced with considerable fanfare after the collapse of the Mexican peso in 1994, fail to provide adequate warning? Does increased international capital mobility do more harm than good in the capital-hungry emerging markets of Asia and Latin America?
With hindsight, argues Fred Bergsten, director of the Institute for International Economics in Washington, Thailand's plight seems "a very familiar problem."
The Thai economy was the global capital markets' flavor of the decade, a much favored venue for international investors in search of high returns. But by fixing the exchange rate of the baht, the government encouraged Thais to accumulate debts in foreign currencies. Worse, by fixing the rate in terms of dollars, exports became less competitive as the dollar soared.
By the time Bangkok understood the size of the problem, there was no longer a low-pain solution. Deputy Treasury Secretary Lawrence Summers cites private estimates that "nonperforming loans in the Thai banking sector may be around 20 percent of GDP." Hence devaluation would put many banks with debts in dollars in a truly hopeless position.
On the other hand, failing to devalue would feed the local speculative boom in unproductive real estate as well as damaging the engine of Thailand's economic miracle, its export base.
In the end, foreign currency speculators pulled the plug, forcing the Thais to seek relief from official multilateral lenders like the IMF. The moral is as old as the tale of the easygoing grasshopper and the hard-working ant, suggests Albert Fishlow, a senior fellow at the Council on Foreign Relations: "Countries that run current account deficits equal to 8 percent of GDP can't hope to maintain independent policies."
The package includes $16 billion in official loans to shore up Thailand's currency reserves and to keep the domestic financial system afloat in return for a variety of austerity measures -- spending cuts, tax increases, closing of insolvent banks. Roughly one-fourth of the money will come from the IMF and one-fourth from the Japanese government, with smaller contributions from Hong Kong, Australia, Malaysia, Singapore, South Korea, Indonesia and China. Private Japanese banks -- Thailand's biggest creditors -- will ante up a sum still to be negotiated.
While austerity will most likely lead to a recession, Thailand is not Mexico: once the financial crisis is past, the underlying fundamentals of high savings rates, cheap, competent labor and a friendly business environment should push the economy back onto the high-growth track.
That said, how could Thailand have stumbled so badly three years after the IMF resolved to prevent a repeat of the Mexican fiasco?
By most accounts the IMF did its job, privately counseling Bangkok to pull up its socks and publishing all the information needed for markets to conclude that Thailand's course could not be sustained. Robert Hormats, vice chairman of Goldman Sachs International, suggests that "foreign investors were aware of the problem," yet were reluctant to be seen as the first to abandon ship.
This puts an ironic twist on the conventional tale of global capitalism undermined by speculation and short-term thinking. Narcotic-like inflows of capital may have lulled Thailand into complacency. But it was the reluctance of the private market to act that allowed the Thais to dig themselves so deep a hole. Nearly to the end "the government was saying, 'How could we be in trouble -- the markets love us?' " Bergsten pointed out.
If market forces won't do the job, fixes seem hard to come by. Hormats wants the IMF to keep doing its surveillance job, but less discreetly. "The IMF should go public earlier," he argued, adding that what is needed here is "tough love."
Bergsten wonders whether IMF counsel should be augmented with regional currency stability pacts "to convey a little peer pressure." Advice from neighbors backed by independent lending capacity, he suggests, would be easier to swallow than diktats from the IMF.
Last but hardly least, Bergsten is tempted by true economic heresy: the idea of throwing a little sand into the wheels of global capitalism. While he acknowledges that government controls on capital flows have rarely worked as intended, he sees them as "a transition measure" that would moderate excesses in economies like Thailand, where productive capacity has far outpaced the development of efficient financial markets.
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