Name: Could Thailand Reshape Asia Despite Its Chronic Instability?
Uploaded: 2024-08-29T03:19:20.000Z
Duration: 15 min 16 s
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Thailand is one of the most important economic players in Southeast Asia.

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Not only is it one of the outright largest economies in the region, but it's also an essential provider of some of the world's most essential, yet underappreciated goods.

It's strategically located along the busiest trade routes in the world, and it's become a surprisingly popular center for a new age of labor that's bucking the trend of global migration.

But the truly remarkable thing about Thailand is that it's still growing.

Now for a developing and industrializing economy this may not sound too surprising, however there are a lot of economies in the world today that should be highly successful because of endowments in natural resources, large labor forces, great geographic positions, or just because they have major industries that still aren't.

Thailand on the other hand has been one of the most politically unstable countries on the planet.

Over the last century the small country has averaged about 2 military coups every 10 years.

It's government has been couped more times than it's been peacefully re-elected, which makes managing economic affairs difficult to say the least.

Beyond this the country was one of the most heavily impacted regional economies by the recent financial crisis, the GFC, and the covid pandemic, but it's overall growth outlook is still relatively positive.

So what has made the Thai economy so weirdly resilient to these economic challenges?

What has been fueling the most recent round of growth?

And finally, are the current set of challenges going to be as easy to work through?

Once we have done all of that we can put Thailand on the economics explained leaderboard.

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To understand how Thailand operates economically there are a few historical developments worth mentioning that make it unique compared to its neighbours.

Aside from a few little invasions here and there the country is the only southeast Asian territory to avoid direct colonial rule.

Moreover, while acting as a zone separating French and British colonies it managed to act as a hub for trade and after the opening of the Suez canal Thailand became the primary exporter of rice in the region, a trend that continues to this very day.

Although this may appear to be a profitable series of events for both the leadership and the people of Thailand, it's economic prosperity was often separated from the public by technocrats managing the bulk of exchanges as it continued to industrialise.

Domestic benefits were not yet realised and this continued to be a trend for decades.

In fact Thailand's economy as it exists today really got started in the mid-1980s when the plaza accord pre-shared the US dollar against the currency of the UK, France, West Germany and especially Japan.

Of course Thailand was not involved in this deal at all and they didn't even use any of the currencies directly impacted, but this new agreement, mostly amongst countries on the other side of the world, changed the kingdom in profound ways.

The first phase was initiated when Thailand re-pegged its currency, the baht, at 25 per US dollar in 1984.

The goal of the plaza accord was to devalue the dollar.

In theory it would reduce the US trade deficit, making exports more competitive in an effort to stabilise trade with Japan.

Either way this also devalued Thailand's native currency because it was pegged to the US dollar.

The accord made the Japanese currency more valuable, making their exports more expensive and therefore less competitive, which pushed Japanese manufacturers to find creative ways to cut costs.

The Chinese market was still just opening up, so Japan started looking at the strategic trade advantage Thailand held at the crossroads of the South China Sea and the Malacca Strait, a channel prime for shipping between the Indian and Pacific Oceans.

This could not have come at a better time as Thailand had been making an effort to deregulate industries and open its doors to more foreign investment, which played a massive role in enticing Japanese firms to make the leap and plant factories and operations in the country, training up the workforce to change them from farmers to factory workers.

This also paired well with and encouraged Thailand to make the leap from agrarian self-sufficiency to a model of exporting the goods it could produce most competitively and importing whatever it needed with the money it made from selling those goods, leading to a range of those long-awaited domestic benefits.

This process of industrialisation also helped agriculture, which changed from pretty basic subsistence farming to relatively mechanised agriculture during this time, allowing more people to put down their farming tools and get higher-paying jobs than factories.

Now this is a story that has happened in dozens of countries across the world over the last 4 decades, but what made the Thai economy so interesting is how weirdly resilient it was to the upcoming economic challenges.

This can be explained by looking at the events leading up to the Asian financial crisis.

For a time, economic changes for Thailand led to a boom in the market with the baht linked to the US dollar at a set rate.

This link ensured that foreign investments were more enticing because investors didn't have to worry about returns being impacted by foreign exchange fluctuations, that is as long as the Thai currency remained in line with the US dollar.

Of course there were also other traits that added fuel to the fire.

Foreign investors could charge relatively high interest rates on their loans which encouraged institutions to take out loans in their home currency to exchange them for Thai baht.

Furthermore, borrowers could take out and return loans as a result of Thailand's acceptance of Article 8 of the International Monetary Fund in 1990 to open Thailand's financial system to the international community.

This lending strategy was a way to make pure profit with higher interest rates on Thailand's peg currency.

This meant that there was lots of money flowing into Thailand to fund its expansion, which was great.

But at a certain point the country didn't need any more investment and all it was doing was driving up asset prices.

The massive inflow of hot money, risky loans, and crony capitalism made Thai banking under-regulated when giving loans to corporations.

Without proper risk assessment and Thailand's connections to the US dollar, the system morphed into an unstable house of cards with three major events that caused it to finally come toppling down.

The first was that the USA increased its interest rates in the mid-1990s to fend off inflation.

This decision effectively made this baht exchange method of taking out loans in one country and giving out loans in Thailand less profitable.

The rising interest rates ultimately caused the dollar to appreciate, which caused the baht to appreciate as well, which led to a fall in international exports.

The second was China, which finally managed to open its doors enough to compete on the world stage, exporting enough to finally challenge even its more distant neighbours.

The third was unprofitable industries like real estate that couldn't make a return on their investment at high interest rates.

The expansion was largely fuelled by investments into land, residential property, condos, and offices, breeding a highly speculative market in the sector, which made it very vulnerable.

As the bubble burst, loans were defaulted en masse, crushing banks that played the precarious game.

In the eyes of those putting money into the machine, Asian markets, Thailand in particular, were now seen as sinking ships and everybody wanted to jump fast.

So they were all getting their money back, which pushed the value of the Thai baht down in foreign exchange markets, but because the value of the currency was pegged, the government had to raise the price back up by selling its US dollars.

Sticking with the metaphor, the hole was now punctured and Thailand was forced to get rid of everything in an attempt to stop the sinking.

And this was where things got really bad.

Hemorrhaging cash as well as international faith, Thailand had no choice but to raise interest rates, in the short term, by 25%.

Now in theory, when things are running smoothly, this seems like a power move.

Basically if one sees 10% interest rates it might look like a good investment, but if one sees 20% interest rates it starts to look like a desperate attempt to get money by any means necessary.

With Thai foreign exchange reserves drained, the country's stock market crashed.

Along with other Asian currencies, the baht fell sharply.

Capital inflows slowed, some even reversed.

By the end of 1997, the baht lost almost half of its value, falling from around 26 to the dollar to 53 by January of 1998.

On top of everything, unemployment tripled from 1.5% to 4.5%, which might not sound bad from the perspective of an advanced economy where unemployment rates are normally around 4%, but Thailand has very little social safety and it also has much lower employment standards, which means its rate is normally much lower.

In short, if it gets this high, it's game over for many and people will inevitably experience severe poverty.

But out of the chaos that erupted in Asian markets, there was a silver lining for Thailand and it had to do with the way that they spent money when times were good.

Much of the investments the country received were put towards infrastructure, building roads, ports, construction of electrical grids, airports, housing and anything else that the country could think of to improve productivity.

This meant that even though the coffers were empty, Thailand had many of the tools at its is what started the revival in the early 2000s.

Another aspect of Thailand's return to growth had to do with its currency, which was allowed to float and fall in value, which made exports more competitive once again.

The country's decision to join the International Monetary Fund, or IMF, in 1949 turned out to be fiscally responsible as well.

After paying off loans, they were subsequently bailed out a striking two decades in advance of initial projections, and they did this by focusing on the real economy within their borders, all while adding a high level of prudence and general discipline to their export-led economy.

This development in particular was almost a blessing in disguise, as they learnt early that a heavy reliance on financial institutions and speculation would leave them vulnerable if they were confronting similar crises.

By embracing exports, they ended up being one of the few major nations to circumvent foreign exposure in the wake of the 2008 global financial crisis.

Of course, nobody completely dodged the bullet, but it allowed Thailand to bounce back much faster than many of its competitors.

Additionally, as referenced earlier, utilising the Malacca Strait, Thailand's legendary reputation for rice exports was a godsend, and even that is a bit of an understatement.

See, rice is considered to be an inelastic good, meaning that when the price of said good changes, the quantity demanded doesn't change that significantly, because it's more or less an essential form of sustenance to billions of people.

And given the location of Thailand, close to a large number of countries that consume rice as a mealtime staple, dessert, and necessity, there was always going to be a large consumer base eager to purchase it, meaning that even though it may not be the most profitable export, it was always going to be in demand.

That location is good for more than just competitive global trade too, there's also the environment that comes along with it.

Whether it's the beaches of Koh Samui, the lush landscape of Phuket, or partying in Bangkok, Thailand stands as a cultural monument ripe for tourism.

This in conjunction with the aforementioned improvements in infrastructure has made it a global hotspot, but there were, and are, still considerable hoops to jump through to sustain that.

Before the pandemic, it was actually the 8th most visited country on the planet, with Bangkok being the most visited city in the world.

It's tourism that's earned a spot amongst Thailand's biggest industries, accounting for some 20% of gross domestic product.

In 2019, Thailand earned $90 billion from domestic and international tourism, but the pandemic caused revenues to crash to $24 billion in 2020.

Surprisingly though, even with this loss of foot traffic and the gradual recovery, Thailand is still doing okay.

There are a large number of travelers who visit Thailand and can't help but stay for long periods of time.

The country has become a hotspot for digital nomads who are attracted to the country for its low cost of living, good internet, and relatively pro-business culture.

Its growth has been slower than in the 1980s and 1990s, but that's potentially a sign of things being more stable and sustainable.

After all, a rapid rise in GDP is not often indicative of lasting prosperity.

Of course, it's easy to assume that this might turn into an all-too-familiar situation where foreign workers and other buyers flood in to make large acquisitions, while locals sacrifice affordability to favor foreign participation, but Thailand appears to have that handled.

The country is very welcoming and accommodating of foreign workers and even foreigners who want to set up their own businesses in the country or buy a home, but there are severe limitations on things like property ownership not used as a primary residence.

This tends to create just enough incentive for foreign participation, while not giving up sovereign wealth sectors significantly.

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Could Thailand Reshape Asia Despite Its Chronic Instability?

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