Thailand and the Emerging Asian Crisis
Summary
Signs are emerging in Southeast Asia that strongly suggest a
relapse of the economic crisis that struck the region in 1997.
Ironically, events in Thailand - where the crisis began - are
leading indicators of a larger regional trend. The region is caught
in vicious cycle: unable to muster the political will to reform
economies and steadily unraveling economies that undermine
political will. The question now is whether events will be
contained in Southeast Asia - or spread north to China and Japan.
Analysis
In 1997, the Asian economic miracle came to a very public end.
Troublesome undercurrents finally became manifest in a financial
crisis, when Thailand's currency came under intense pressure,
collapsing and culminating in a general financial panic. Since
then, Asian economies have struggled to recover.
Some, like the South Korean economy, have done better than others.
But in general, most Asian nations have been unable to institute
the radical, fundamental restructuring that a full, regional
recovery would have required. Some, like Indonesia, have simply
lacked the wherewithal for reform. Others, like Japan, have lacked
the political will to endure the wrenching social costs.
Now, Southeast Asian currencies are once again under pressure amid
political turmoil and a continuously strong U.S. economy. We are
now seeing signs that, rather than recovering, Asia's economies are
once again running into rough waters. Indeed, the same country that
was the first domino to fall in 1997 seems to be leading the way
again.
The Thai government has been forced to intervene twice in the past
three months to stabilize the baht, without coming close to solving
the currency's problems. Last week, the government was forced to
intervene again. According to Thailand's The Nation, the Bank of
Thailand intervened in the London market on July 26 in an attempt
to strengthen the baht, which had fallen to its lowest level since
September 1999.
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Thailand is not alone in the region in having to cope with the
steady decline of the value of its currency. The Philippine peso,
which often closely follows the baht on the market, came within
0.134 pesos of its weakest crisis point of 45.209 to the dollar on
July 27. The Indonesian rupiah hit its weakest point since October
1998, and the Singapore dollar has reached its weakest point since
September 1998.
But the baht has taken the most curious and disturbing path of
regional currencies. The currency has experienced a general
downtrend since 1998, with intermittent upswings. There was a brief
rally between March and May 1998, and another between October and
December of 1999. Neither could reverse the general downtrend.
This general pattern is seen throughout Southeast Asia; the peso
has declined more sharply than the baht, and the rupiah has
declined steadily since the presidential elections in October 1999.
In the face of this pattern, stronger countries, like Singapore and
South Korea, have been forced to weaken their currencies in order
to remain competitive with regional rivals.
Three key factors are behind these events. First, Asia has yet to
truly recover from the economic crash of 1997 and remains
fundamentally weak. Second, the continued strength of the U.S.
economy - along with rising U.S. interest rates - has put heavy
selling pressure on Asia's currencies. Finally, political and
social instability in Asia - particularly Southeast Asia - is again
on the rise, decreasing investor confidence in these nations.
This last is the key to understanding the region's problems. The
issue is no longer economic, but political; the region's economic
problems are now symptomatic of the region's political problems.
The economic problems could be solved in many of the region's
nations if the necessary reforms could be instituted.
But the fragility of the region's political systems makes
meaningful reform impossible. A regime that imposes the required
measures cannot survive. Paradoxically, the failure to impose these
measures has already created a long-term malaise that erodes
confidence in the regimes' ability to manage the situation. As a
result, there is a no-win situation in much of Asia.
Consider Thailand. Thailand's ruling party, elected due to popular
dissatisfaction with the previous government that presided over
Thailand's epochal financial crisis, was badly beaten in the
mayoral election in Bangkok on July 23. The election was won by
Samak Sundaravej, a deputy prime minister during the 1997 financial
crisis. He beat the main opposition candidate by nearly two to one
and the ruling party candidate by a margin of four to one.
Samak's victory was particularly troubling for both the ruling and
the main opposition party. He is dogged by allegations of
corruption in the Thai press, supports close cooperation between
government and business, opposes freedom of the press and ordered a
brutal crackdown on pro-democracy demonstrators in the 1970s. Samak
is the epitome of the pre-1997 politician-businessman whose
manipulation of the banking system was a central cause of the Asian
financial crisis.
Nevertheless he won. He defeated both the party that promised
reform and the new opposition party that encouraged economic
reforms. This provides a sense of the dilemma faced by Thailand.
The public is simply incapable of accepting the social cost of
either moderate or radical reform. Faced with the need to change,
the public is turning back to the politicians who created the
crisis in the first place. With parliamentary elections mandated
before November, Thailand appears poised for a return to the
political status quo ante.
The consequences for international confidence in Thailand's economy
would be negative, to say the least. Indeed, the currency markets
are already registering their dismay. Other regional nations are
facing equally difficult political situations, as dissatisfaction
mounts over the lack of economic recovery.
Confidence in Indonesia's president, Abdurrahman Wahid, has
steadily declined since his election in October, and he faces an
August showdown with a parliament increasingly pressing for his
removal. In the Philippines, President Joseph Estrada has faced
continued accusations of corruption and cronyism, and thrown the
nation's slender resources into a full out military action in the
south against Islamic insurgents. In Malaysia, too, where
longstanding Prime Minister Mahathir Mohamad enacted currency
controls shortly after the economic crisis, competition from the
Islamic opposition has seriously challenged Mahathir's grip on
power.
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The economic and political instability in Southeast Asia feed upon
each other, creating a vicious circle that threatens to spiral the
region once again into the depths of economic crisis. If Thailand
fails to control the declining baht, the Philippine currency is
certain to collapse - if it doesn't do so on its own before that.
Indonesia, too, threatens to trigger a relapse of the currency
crisis and has called on its neighbors for technical assistance to
bolster the plummeting rupiah.
Estrada, in his State of the Nation Address on July 24, warned that
the peso decline was the result of "a new Asian contagion." While
largely intended to pass the buck for the 15 percent decline in the
value of the peso since his election two years ago, the Philippines
appeared cautious of another currency crisis early in the year,
establishing limited currency controls in January.
Thailand's central bank appears strong enough to delay the
inevitable for a while, but the nation's economy is large enough
that when it falls, it will certainly drag the Philippines and
Indonesia with it. Despite Mahathir's currency controls, Malaysia,
too, would be unlikely to avoid the regional relapse.
As a result, it appears that Southeast Asia is once again on the
brink of economic crisis, and its leaders are becoming aware of it.
Given the political configuration in many of these countries, it
seems unlikely that internal political intervention will stabilize
the situation. To the contrary, we would expect the regions'
political paralysis to exacerbate the problem.
It is equally unlikely that international intervention will provide
any stability. The International Monetary Fund (IMF) and the major
powers can stabilize currencies for a while, but currency
instability is a symptom of the problem, not the problem itself.
IMF austerity leads to social chaos; lack of austerity leads to
social malaise.
The real issue is how far north the disease will spread. The two
major question marks are China and Japan. Japan, the largest
economy in Asia, also suffers from the Asian disease in its extreme
form. Japan's political process has prevented meaningful reform
more effectively than anywhere else in Asia. The very size of the
Japanese economy has allowed Japanese politicians to buy enormous
amounts of time, not available to their poorer relations in the
south, with which to put off the day of reckoning.
If Southeast Asia moves into crisis, Japan will not be far behind.
Nor will China. China worked very hard to limit the effects of 1997
on China. Much of the labor was smoke and mirrors. China was hit
and hit hard. One of the results was an intensification of
political controls designed to limit social instability resulting
from economic dysfunction. That bought China some room for
maneuvering. But time has passed without a fundamental solution to
China's economic problems. A new tidal wave of Asian economic
problems could cause massive problems for China this time.
Asia and the United States now appear caught in a zero sum game, in
which U.S. economic strength costs Asia dearly. This is more
appearance than reality, though. We have noted the extraordinary
de-synchronization of the global economic system. The reality is
that whatever happens to the United States, Asia is feeding upon
itself.
Its inability to re-capitalize its banking system is reflected in
its endemic currency crisis. That in turn is rooted in a failure of
capital formation. So long as Asia maintains inefficient
enterprises in order to maintain social stability, it cannot
rebuild its economy. The region's best hope is that the long-term
malaise will be just that - long term - and will not turn into
another crisis.
That is what regional leaders are hoping for, and that is a pretty
dismal hope. It looks like Southeast Asia is headed once again for
rough waters and that it may well take the Asian economic powers -
China and Japan - with it.
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