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A Thai Post Mortem

CAMBRIDGE: There are lessons from Thailand’s currency debacle beyond the sheer fun of pointing fingers. For how can a country reach meltdown proportions when, only a few months back, barely a problem existed. And if “tiger economy” Thailand can get into big trouble, woe to Latin America and some postcommunist countries.

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Thailand’s problem, like Mexico a few years ago, was its vulnerability, meaning that if one thing in the economy goes wrong, suddenly many things go wrong. The cause of Thailand’s crisis was the combination of a shaky banking system (made shakier by the dollar debts of its clients), a large, short-dated foreign debt with the resulting risk of a funding crisis, and a total lack of transparency coupled with a pervasive overlay of corruption. In Thailand, almost every politician or official had his hands in the pocket of some bank or business; every bank had officials in its pockets, too.

The Bank of Thailand could not raise interest rates to support external financing without worsening the loan problems of Thai banks, nor reduce interest rates without risking an external funding crisis. The central bank might have cleaned up the banking system long ago, ensured the covering by assets of external dollar debts and shifted to a band-basket-crawl (BBC) exchange rate regime. But with too much macho, too much politics and provincialism, reform never happened. So the idea that “this country is different,” that the rules of global finance did not apply, proved utter nonsense. By the time crisis came, Thailand looked like all the others who turn in desperation to the IMF.