Financing development and the financial crisis of Thailand: An empirical investigation

This study has analysed the causes of the 1997/98 financial crisis of Thailand by examining the links between the inflow/outflow of foreign capital and the behaviour of private agents (consumers and producers) in that country during the period from 1975 to 1998. Thailand, once known as an Asian Miracle, was the fastest growing economy in the world from 1987 to 1996. Furthermore, it was the country of origin of the 1997/98 East Asian crisis, a crisis that required the largest financial bailouts in history and has generated a heated debate among economists and policymakers worldwide.; In order to unearth the causes of the crisis in Thailand, we have examined the phases of Thailand's economic development during the period from 1975 to 1998. We have also discussed and critiqued the predominant explanations of the crisis, explored probable reasons for the massive inflow/outflow of capital, and then have tested a variety of hypotheses: the pro-cyclicality of consumer spending; the crowding-out effect of foreign saving on domestic saving; and the speculative behaviours of investors. To test these hypotheses, we have used data from the Bank of Thailand's homepage and from various issues of the International Financial Statistics, and have applied several econometric techniques such as co-integration, the ordinary least squares, the instrumental variable method and the Granger causality.; Our findings indicate that the prime causes of the crisis in Thailand were as follows: the mismatching of domestic economic policies with a changed global economic climate; excessive praise of Thailand's “miracle” economy; the pro-cyclicality of consumer spending; the crowding-out effect of foreign saving; and the speculative behaviours of investors. The IMF's billion-dollar rescue package in the aftermath of the crisis failed to improve the situation because of the inappropriate conditions imposed on Thailand in return for these loans.; Based on these findings, we have suggested several important policy tools, both to prevent such a crisis from occurring, and to mitigate the impact of a crisis should one occur. First, we would recommend pursuing a balanced growth strategy compatible with the changing global economic climate. We would further recommend economic literacy for all, short-term capital control, and a concerted effort by all quarters, both local and foreign. We trust that the analyses, findings, conclusions, and recommendations provided by this study will provide valuable assistance to policy makers in general and governments of capital-dependent nations in particular.