August 1, 1997
Analysis: Thailand Ignored Painful Lessons of Mexico
By PAUL LEWIS
he plunge in the Thai baht, followed by a wave of currency depreciations through South and Southeast Asia, illustrates the shortcomings of the international early warning system set up after the Mexican peso crisis of 1994-95 to head off currency upheavals in emerging economies.
Over the last year, officials say, Thailand steadfastly resisted pressure from the International Monetary Fund and Western governments to take new steps to curb its current-account deficit, raise productivity, reduce short-term foreign borrowing and strengthen a creaky banking industry weighed down by speculative property loans.
Meanwhile, foreign bankers and investors continued to pour money into the country, even though they knew that Thailand had an estimated $60 billion of foreign debt falling due, but only $40 billion in reserves.
Even after speculative pressure started building against the baht around February, Thailand refused to apply new economic measures or to seek IMF assistance, saying that it could weather the storm with help from Asian neighbors.
And even after it was forced to effectively devalue the baht on July 2 -- by allowing it to float to market levels -- Bangkok waited until this past Monday before reluctantly accepting that the only way to restore confidence in its currency was to ask for an IMF loan and accept whatever economic disciplines were imposed.
"Frankly, the early warning system failed," says Fred Bergsten, a former under secretary of the Treasury, who heads the Institute for International Economics in Washington. "The Thais did not listen to the fund, and the markets were very slow to send Bangkok warning signals, even though they knew there was trouble coming. The IMF and the Group of Seven countries should have really put the heat on the Thais."
While pleased that Thailand has finally agreed to put its economy under their supervision, senior officials of the monetary fund remain angry that their warnings went unheeded so long and that officials in Bangkok refused to cooperate with the elaborate procedures put in place after the Mexican debacle.
In a speech in Jakarta, Indonesia, in November, the IMF's managing director, Michel Camdessus, warned that despite high growth rates, Southeast Asian countries faced "new challenges and risks" to their economic and financial stability.
"It had no effect beyond making the Asians angry," said a senior IMF official, who spoke on condition of anonymity. "They thought they could manage on their own.
Then in June, after a highly critical review of its economic policies by the IMF executive board, Thailand refused to allow publication of an account of the discussion under a procedure instituted the previous month intended to let financial markets know more quickly where the fund sees trouble brewing.
"That should tell you something: The Thais thumbed their nose at us all along," the IMF official added, noting that the Thai delegation sent to Tokyo right after the devaluation returned empty-handed because Japan refused to help unless the Thais called in the monetary fund.
Under the early warning system, emerging economies were urged to provide markets with much more information than in the past about their economic performance. At the first hint of trouble, the reasoning went, well-informed bankers would press them to take new measures or seek IMF help.
At the same time, the fund vowed to increase its surveillance, keeping a hawk-like lookout for signs of weakness that could undermine their creditworthiness and cause a Mexican-style outflow of capital.
The IMF also set up a World Wide Web site where countries can post their latest financial statistics. It arranged a big new pool of lendable funds to finance future bailouts, and streamlined its lending procedures so borrowers could get credit more quickly.
It began publishing background papers on economies it is monitoring to keep markets better informed. And in May it agreed to release the results of these economic checkups, as long as the country agreed.
Such precautions reflected a perception that the Mexican crash represented a new type of financial crisis, one closely linked to the globalization of markets. In this new world, flood tides of speculative capital could flow in and out of emerging economies, playing havoc with their development and sending shock waves out to foreign lenders and investors.
Thailand, along with some other Southeast Asians, was vulnerable to devaluation because it had linked its currency to the dollar as a way of limiting inflation. But as the dollar rose, these export-dependent economies lost their competitiveness.
Once the baht fell, other regional currencies became candidates for devaluation, as well. Speculative pressures quickly forced down the Philippine peso, the Malaysian ringgit, the Indonesian rupiah and even the mighty Singapore dollar.
"The rest of the region had to re-establish its competitiveness against Thailand," said Kermit Schoenholtz, Salomon Brothers' London-based chief economist.
While Thailand delayed approaching the IMF after it devalued, the Philippines, whose economy was already under IMF surveillance, moved quickly to negotiate a new $650 million loan with the fund and to take additional economic measures.
Last week, the IMF sought to assure investors that the wave of devaluations did not spell the end of the Asian economic miracle. The strong growth record of these countries, they said, leaves them able to ride out a currency crisis.
"We don't see the underlying adjustment that has to be made in any of these economies as anywhere like what had to be done in Mexico," Stanley Fischer, the fund's deputy managing director, said in its first official comment on the Asian currency losses.
Schoenholtz agrees, saying: "These countries retain impressive fundamentals -- including high savings rates, flexible labor forces, natural resources and now a more competitive exchange rate. Growth will return."
IMF officials warn that they are likely to recommend a much greater dose of austerity for Thailand than they imposed on the Philippines, though they still hope that the Thai economy will record some growth this year and avoid the 6.2 percent contraction Mexico underwent the year after it devalued.
Copyright 1997 The New York Times Company