Where Thailand Went Wrong

Four years ago, Thailand was one of the economies singled out by World Bank as a model of a developing country that produced consistent high growth with low inflation. Among its secrets: disciplined technocrats who ensured that the county's finances were in solid shape.

Today Thailand serves as an object lesson in how quickly an economy can unravel once that discipline slips. Thailand's projected growth of 6.5% still seems enviable, even if it's well below the pace Thai have become used to. But other vital signs are bleak indeed--a big government budget deficit, a current-account gap equal to 8% of gross domestic product, and a dangerously high dependence on short-term credits in foreign currencies. After a string of collapses by over-extended lenders, the government is belatedly taking firm action to shore up shaky banks and finance companies. But with many billions in bad loans on their books, the bad news isn't over.

Where did Thailand go wrong? Besides sloppy oversight by an increasingly politicized bureaucracy, Thailand's big mistake was half-hearted financial liberalization. Officials had an ambitious plan to open the sheltered banking industry to foreign and local competition to position Bangkok as a regional financial hub. But while they made it easier for Thai companies to get cheap credit in foreign currencies, authorities balked at easing control of lending in baht. The result: a huge inflow of dollars and yen, much of it going directly into the overbuilt property sector and heavy industry. The bubble, predictably, has begun to burst. Many Thai hope that another surge in exports will come to the rescue. But rising costs are fast eroding Thailand's edge in garments and shoes. And being hobbled by a weak education system and severe infrastructure bottlenecks--problems never fixed by recent corrupt administrations--it won't be easy to compete in more sophisticated industries.

Thailand joins the other East Asian tiger economies in facing severe problems that go beyond regular business cycle difficulties. It must move its entire economy to a higher, more sophisticated level. That requires serious reform of the traditional old-boy capitalism that has generated previous prosperity. Without clean government, it will be difficult to move ahead in improving education, building roads, and rekindling fast economic growth.

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