Publication Code: I22
This paper investigates the impacts of Thailand's economic crisis on the Southeast Asian Transitional Economies (SEATEs). It found that the contraction of the Thai economy in 1998, the high inflation, the credit crunch, and a reduction in government revenues have some adverse implications on SEATEs in number of areas, especially, trade, investment, tourism, employment, and development cooperation.
After the crisis, Thailand's imports from Lao PDR has been most severely affected by the crisis, while Thailand's imports from Cambodia started to contract in the fourth quarter of 1997. However, a slowdown of imports of Thailand from worldwide is more than that from SEATEs. In addition, over-capacity in some industries and credit crunch in Thailand also restricts investment to be expanded both domestically and internationally. This in turn results in a reduction of Thailand's investment in SEATEs. Furthermore, a number of Thai tourists travel to these countries does not decline as much as the number of Thai tourists travel to other countries, such as, Singapore, Hong Kong, Europe, and USA. In contrast, the baht depreciation may in turn benefit Vietnam's, Cambodia's, and Lao PDR's tourism industry via spill over effect. Since Thailand is one of the major labor receiving countries for workers from SEATEs and other neighboring countries, an "unemployment alleviation action plan", which aimed at reducing the number of undocumented migrant, will more or less result in a reduction of employment of workers from SEATEs. Moreover, a reduction of the 1999 budget for the Department of Technical and Economic Cooperation (DTEC), which is the major organization responsible for coordinating the technical assistance to SEATEs, will certainly affect the technical assistance to receiving countries including mainly SEATEs.
It was noted that these adverse impacts on SEATEs are not only affected by the crisis situation in Thailand, but also from the domestic environment of each country, includes the political stability. For instance, the trend of value of foreign investment in SEATEs has been declining even before the crisis due to number of obstructive domestic rules and regulations.
The study indicates that the possibility for Thai economy to recover remains uncertain. As the external environment is not quite positive to Thailand exports and a lot of constraints are lying ahead, the prospective of Thai economy is hardly to predict. However, according to the sixth Letter of Intents, the recovery is expected to begin in 1999 and for any potential economic recovery to be viable and to sustain, the current credit crunch problems has to be solved quickly and get the financial system back in order.
There are few lessons learned from the crisis which are, firstly, domestic financial systems should have been liberalized before opening up to foreign capital and strict bank regulation and supervision are necessary for financial liberalization to prevent capital influx and investment in unproductive sectors. Moreover, the flexibility of exchange rate system is required as free capital movement and pegged exchange rate are dangerous combination. Furthermore, to rely on foreign capital, FDI is better than portfolio investment and loans since free capital movement, especially short-term, is difficult to control. Last but not least, good governance in both public and private sectors is important. The corruption in public sector and the irregularities in business practices lead to lack of foreign investors' confidence and create efficiency loss.
January 1999