Thailand Economic Growth and Trajectory : A case study

Rishabh Vaish (14553), Siddarth Agarwal (14691), Akshay Wadhwani (14063)

Thailand is a constitutional monarchy, is the second-largest economy in Southeast Asia.According to
nominal GDP, the Thai economy is the world's 20th largest. Manufacturing, agriculture, and tourism
constitute the leading sectors of the economy. The World Bank recognized Thailand as "one of the great
development success stories" in social and development indicators. Thai economy is unique because, it
was never colonized and hence was open in its trade and investment policies. Thailands economy
depends heavily on exports, accounting for nearly 70% of the GDP. The Asian crisis of 1997-98 was a
serious problem in Thailands long- term economic growth.
Trajectory of Thai Economy
According to figure1, Thai economy can be broadly divided into four periods - (1) Pre-boom (until 1986);
(2) Boom (1987 to 1996); (3) Asian Financial Crisis (1997 to 1999); (4) Recovery (2000 to 2006); (5)
Global Financial Crisis(2007-2008); (6) Aftermath and Current situation (2009-present)
Pre-boom and Boom
Although thailand does not have lot of oil and ores, it has lots of other natural resources such as rice,
rubber, timber, fishery products and horticulture products. During 1960s, agriculture constituted the major
proportion of the GDP but eventually, we see that their is a shift in the economy, from agricultural to
manufacturing sector in 1980s. On the expenditure side the structure of demands was private consumption
expenditures in 1960s but now, private fixed investment also become an important factor since 1980s.
(Figure 2)
Thai economy boomed because of large amount of investment made by both domestic and foreign
investors in physical capital in late 1980s (Figure 3). Capital Stock grew faster in Boom period and was
the most important contributor to Thailands growth. Thailands economy was the fastest growing
economy in the world in 1987. Labor productivity increased steadily, the average output per hour almost
doubled from 1990 to 1997 (Figure 4). Both growing outputs and the decrease in hours worked resulted in
labor productivity growth in Thailand. The major difference in pre-boom and boom era was in the ratio of
total investment that was financed by short-term capital inflows which increased from 2% in pre-boom
period to 23% during boom. Although it helped the economy initially but it also laid the foundation of
1997 Asian Financial crisis. The mobile foreign-owned capital accumulated to levels far more than the
stock of the foreign exchange reserves in Bank of Thailands. If the people wanted to withdraw their
reserves from Thailand, then the Bank of Thailand would not be able to keep up its fixed exchange rate
and this is what caused the 1997 crisis.
1997 Asian Financial Crisis

Towards the end of the 20th century, Thailand witnessed its darkest chapter in its financial history, that
later spread to south asian countries. Asian Financial Crisis happened because of three major factors :
[1] Fundamental problems and mismanagement in macroeconomic policies : To open up the
domestic market of thailand, BIBF was formed in 1993 whose main aim was to channel foreign fund into
domestic market. Thai baht was pegged to U.S. dollars in nominal terms. Although this was initially very
successful, later on it turned out to very disastrous.The inflow of the foreign capital and the economic
booms in caused domestic prices to rise in early 1990s. Fixing the currency to the appreciating U.S.
dollars made the country lost its exporting competitiveness. These problems were enough to start the
crisis. But this was not all, to make the matter worse, government used foreign exchange reserves defend
its currency. When they ran out of foreign reserves, they had no option but to open thai baht to market.
This is when they came to know that the Thai currency was overvalued by as much as 20% in real terms.
[2] Institutional problems in the financial sector : Although massive inflow of capital was a boon to
them, it led to a brand new problem which was overinvestment in inefficient and unproductive projects.
Because of capital account liberalization, liquidity in the domestic financial market increased. An
incentive to increase their profit made domestic financial institutions give loans without any second
thought. These loans were primarily given to unproductive sectors. The main problem was that they
insufficient institutions and regulations that could closely observe and regulate financial institutions in
the market-based system.
[3] A sudden reversal of foreign capital flows : After freeing the baht, there was a huge decline in the
foreign reserves and everyone predicted disaster in near future. Seeing this many foreign investors made a
sudden reversal and stock market fall dramatically.
As a combination of these three factors, Thailand was left with a slump in the real estate sector, a liquidity
problem in the financial sectors, a great number of non-performing loans, and a crash in the stock market.
The financial crisis also caused a decrease in labor productivity during the following years and as a
consequence their economic growth rate fall from 5.652 in 1996 to -7.634 in 1998. Although Thailands
initial contraction was more serious than other countries was the most long lasting, it was not as severe as
that of Indonesia and had a fairly good recovery.(figure 5)
Recovery Period (2000 to 2007)
Thailand went to IMF for help and its Executive Board approved financial support for them. As the part
of the program with the IMF, thai authorities made several changes in their monetary policy such as
floating of baht into the market, restructuring of distressed financial institutions, etc. Monetary policy was
now focused on both supporting exchange-rate stability and encouraging economic recovery. Fiscal
policies also underwent changes. Much of the increased spending by the government was focused on

increasing the social safety net programs to ensure the protection of Thais that were affected by crisis.
After implementing all these measures and over the due course of time, Thailands economic recovery has
been quite good as baht was restored and the economy recovered from the catastrophe.
2008 Global Financial crisis
The fall in economic activities in 2008 resulted in the huge drop in global trade and subsequently formed
the reason for recession in Thailand. It was because of its economic structure and long-term development
strategy, which was heavily dependent on exports and foreign investment as the fuel of growth. At the
beginning of the crisis, Thai economy was relatively unaffected. The Thai authorities were slow in
responding to the global financial crisis, with no clear direction. This was mostly due to the on-going
domestic political unrest, both Thai and foreign firms were in the cautious mode, and hence many of the
firms delayed their investment plans. The number of tourists came down by 21% on the yearly basis due
to airport shutdowns and global slowdown. Their was a 20% contraction in consumption and fall in
private consumption and investment at the same time also promoted the recession in Thailand.
Aftermath and Current situation
Not only the global financial crisis in 2008-09, but also political instability and weather disasters, have led
fluctuations in economic growth. Since 2009, with World Bank data (Figure 1) showing a sudden rise in
2010 as real GDP growth reached its maximum in 20 years , before going down again in 2011, majorly
due to floods because of which industrial production came to a halt late in that year. Thailand was
declared an upper-middle income economy in 2011. Growth rate rose again in 2012 because of the
recovery in manufacturing and consumer spending though political unrest affected the growth in coming
years. Real GDP growth dropped again in 2013 and further in 2014, due to a military coup which got its
former prime minister deposed. In 2014 industry and services constituted the major proportion, while
agriculture accounted for only 12% of the GDP. The coup reduced investor confidence hence the new
government started a number of stimulus measures and legal reforms aimed at improving investment and
supporting agriculture. Thai economy growth rate faltered in recent years due to political turmoil.
However, the falling global oil prices have benefitted the economy, led to a moderate recovery in 2015.
On 13 October, Thailands King Bhumibol Adulyadej died after a 70-year rule. The death of the popular
monarch increased the risk of instability at the time when the nations struggle with military coup is
already causing uncertainty, but so far there are no signs of a political crisis. Revival of tourism industry
and government expenditure has brought thai economy back on track for good economic growth of 3.5%
predicted.

References
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World bank thailand dataset (http://data.worldbank.org/country/thailand )

Thailands Development Strategy and Growth Performance

(https://www.wider.unu.edu/sites/default/files/wp2011-002.pdf)

Overview of the Thai Economy, Somprawin Manprasert, Ph.D.

(http://pioneer.netserv.chula.ac.th/~msompraw/Overview.pdf )

What Thailand Needs to Do to Sustain Growth

(http://trendline.dcrworkforce.com/what-thailand-needs-to-do-to-sustain-growth.html )

http://www.theglobalist.com/thailand-and-the-world-financial-crisis/

IMF future projections

(http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/weorept.aspx?pr.x=83&pr.y=9
&sy=2012&ey=2019&scsm=1&ssd=1&sort=country&ds=.&br=1&c=578&s=NGDPD%2C
NGDPDPC%2CPPPGDP%2CPPPPC&grp=0&a=#notes )

Recovery from the Asian Crisis and the Role of the IMF
(https://www.imf.org/external/np/exr/ib/2000/062300.htm#box1)

Figures
GDP growth of Thailand (1951-2015)

Source: World bank Dataset

Figure 1 :

Figure 2: Output growth and structure of GDP

Figure 3: Foreign Direct Investment over the years

Figure 4:

Figure 5: 1997 Financial crisis country growth rate comparison

Source: World Bank Dataset