financial crisis and constitutional reform
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Thailand in 1997: Financial Crisis and Constitutional ReformAuthor(s): Suchitra PunyaratabandhuSource: Asian Survey, Vol. 38, No. 2, A Survey of Asia in 1997: Part II (Feb., 1998), pp. 161-167Published by: University of California PressStable URL: http://www.jstor.org/stable/2645674
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THAILAND N 1997
FinancialCrisis ndConstitutionaleform
Suchitra unyaratabandhu
The devaluation ftheThai currencynJuly riggeredfinancial risis hat ubsequentlyngulfedhe entire egion.The country'seconomicwoes have overshadowedhe promulgationf Thailand's newConstitution,n eventof potentiallyar greater ignificancen the ongerterm.
The EconomyAfter decadeofspectacularerformance,ith er apitaGNPgrowthver-
agingmore han %, Thailand's verheatedconomy egan oslow down n1996. A considerablyteeper ownturn as anticipatedor1997. Not eventheworst-casecenario, owever, ameclose topredictinghemeltdownhatoccurred.Macroeconomicrojectionsor1997 released ytheFinanceMin-istryndtheBankofThailandnNovember stimated ealGDP growth t0.6%, consumer rice index inflation t 10%, and an external ebt ofUS$94.9 billion, r58.6%ofGDP. Short-termebts, efineds thosematur-ing nthenext12months,mountedoUS$39 billion, bouthalf onsisting
of oans from apanese anks.The StockExchangeof Thailand SET), mirroringhe condition f theeconomy,ell teadily rom 16.79points n December 0, 1996,to 385.25points n December19, 1997,a loss ofmorethanhalf ts value and nearnine-yearow. The Thaibaht, inallyllowedto float nJuly afterostlyattemptso defendt against number f concentratedttacks y foreignspeculators,romptlyropped 0% invalue. The baht ontinuedtsdeclineto an all-timeow;by mid-December,thaddepreciatedy roughly7% of
thefixed ateprior otheJuly flotation.
Suchitra unyaratabandhus AssociateProfessor ndVice-PresidentforAdministration,ational nstitutefDevelopment dministration,angkok.
? 1998byTheRegents f theUniversityf California
161
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162 ASIAN URVEY,VOL. XXXVIII, O. 2, FEBRUARY998
Financialmismanagementies at theheart fthenation's conomic risis.Massive bad debts ccumulatedhroughverlendingn thepart fprivate-sector inancialnstitutionsedtothepermanentlosure f56 outofa total f
89 finance ompanies. Operations f the firmswere suspended n twowaves-July ndAugust-but he losure ecisionwas not nnouncedntilDecember, husreinforcinghewidespreadmpressionhat hegovernmentlacked a firm ommitmento solvethe crisis. The combined ssetsof thesuspended irms mounted oughlyo US$23 billion.Nonperformingndunderperformingoans,mainlynthereal estate nd constructionector,c-count or round alfofthis mount.
The Bank ofThailand, nce highly espectedor tsacumen nd ntegrity,
has putup a performanceo seriouslylawed s to cause rreparableamageto itscredibility. he central ank failedto exercise egulatoryversightoverthebankingystem,nd tmayalsohave committed serious rror fjudgmentn authorizingn $11 billion escuefund obail out thetroubledfinance ompanies.The bailout apparently ave no considerationo thefirms' ssetquality r liquidity roblems,nd fueled ccusations hat hebank cteddespite nowing hatt wouldnever ecover he oans.
The central ank s under crutinyor ts disastrous efense f thebaht.
The financeminister as setup an investigatingommitteeo review heentire ecision-makingrocessthat ed to the central ank's depletionnMarch of US$7 billion n foreign xchange eserves,s well as creatingUS$23.4billionnobligationsnforwardontracts. hebank's ll-conceivedmaneuvers ontributedignificantlyo the oss ofconfidencen Thailand'sabilityo honor tsforeignbligations.
In July heThaigovernmentas forced o seek, nd was granted,mer-gency id from he nternationalonetary und. Acceptance f an IMF-
imposed ecovery lanwasa preconditionor US$17.2billion oanpackageput ogetherythe MF to shore pThailand's oreigneserves.The condi-tions f the oan were tringentnd, f mplemented,ould ertainlyead torecessionn the short erm. The following onditionswere stipulated:value-added-taxncrease rom% to10%; a reductionf the urrentccountdeficit rom .9% ofGDP in 1996 to 5% in 1997 and 3% in 1998; and afiscal oalofkeeping he onsolidated ublic ectorna surplus f oneper-centof GDP in 1997and 1998.
A root ause ofThailand' financialurmoilies nexcessive orrowingytheprivate ector, ompounded y lax regulatoryversight y the centralbank. Thailand'seconomicgrowth as depended lmost ntirelyn bor-rowedforeign apital, nd the financialrisis s basedon excessiveprivaterather hanpublicdebt. Of the total xternal ebt, pproximately0% isprivatend 30% is publicdebt.During hailand's oomyears, s corporatedebtgrew, o did the quitymarket. xaminationf movementsnthedebt/
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THAILANDN 1997 163
equity atio eveals, owever,hat quity ncreaseswerenotused to ower hedebtdependence ut rather o leveragemoredebt. The use of short-termforeignoansfor ong-termnvestmentas anintrinsicallynsoundtrategy:
erosion fforeignnvestors'onfidenceed to immediate ithdrawals,husexacerbatinghecrisis.
Governmentolicy, y opening p the apital ccount herebyacilitatingcorporatendebtedness,ontributednno smallmeasure o theproblem. n1993 the entral ank ntroducedheBangkoknternationalanking acility(BIBF), which nabled ending y foreignerso Thai firms ith anks ctingas intermediaries.y theend of 1996,almosthalfoftotalprivate oreigndebthadbeen channeledhroughheBIBF. Muchof the ending, t interestrates ower han omesticources,went nto apital-intensiveectorsuch schemicals, etroleum,ndconstruction.mmar iamwalla, henoted cono-mist nd formerresidentf theThailand evelopment esearchnstitute,prestigioushinkank, asprovided perceptivend succinctnalysis fthesituation.'The establishmentftheBIBF led to a heavy nflow fforeigncapital, heconsequences f whichwere 1) a prolongingf thepropertyboombubble; 2) a decline n Thailand'scompetitiveness;nd (3) soaringcurrentccount eficits.
Banking rises are not uncommon henomena.ndeed,between1980-1996 more han wo-thirdsfthe 181 members f the MF haveexperiencedserious anking roblems.2Globalizationndglobalmarketsmplifyrisesthat reoften ausedby macroeconomicolatility,ending ooms,maturity/currency ismatches,adlypreparediberalization,ndstructuralnd egalframeworkeaknesses. Recovery epends n how speedily onfidencesrestored.n theThaicase, theChavalit overnment'sctionsworsened hecrisis. PrimeMinister havalit'srecordhas been summed p bluntly utaccurately ytheEconomist:
It s hardobeunfairoChavalit's.. record.... nhis11monthsnofficeehasdithered hen ecisions ereneeded, umbled hen learwordsmight avehelped,nd miledenignlyhile he conomyotworse.He hasfailed opurgehiscabinetf shady ower-brokers,ndrepeatedlyeddled ith he olicies fthe echnocratseappointedoburnishhegovernment'sloudymagend ortout hemess.3
1. Ammar iamwalla, WhyAreWe inThisMess?"theJ.Douglas GibsonLecture, ueen'sUniversity,ntario, anada, reprintedn Bangkok ost, sectionA, November 2, 1997, pp.12-13.
2. BengtDennis,former overnor f Sweden's central ank, n a seminar orThai bankersand FinanceMinistryfficials,s quotedn TheNation, usiness ndfinance ection, ecember11, 1997,p. B6.
3. The Economist,The RelegationfThailand," ctober 5-31, 1997,p. 29.
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164 ASIAN URVEY,VOL.XXXVIII, O. 2, FEBRUARY 998
Thegovernment's ishandlingf the conomyroded ublic onfidencet amost riticaluncture.NotwithstandingMF intervention,heeconomyn-clinedfurtheroward ecession. n NovemberMoody's Investor ervices
downgradedhailand's overeign ebtratingo ustone notch bove unkbondstatus.PrimeMinister havalit esignednearlyNovember.On No-vember , hisgovernmentas replaced ya Democrat-ledoalition eadedby former rimeMinister huanLeekpai.
PoliticsOne of thecharacteristicsf thepolitical ystemnThailand'sfledglinge-mocracys theproliferationfpolitical arties.Coalition overnments,ithalltheirimitationsnd iabilities,re anunavoidable onsequence.The poli-ticsofmaintainingragile oalitionswith limmajoritiesnParliament asmeant hatmaller olitical arties avewieldednfluenceisproportionateotheirize. This showsupinthe pportionmentfcabinet eats. Governmentpolicies reflect hereality f fragmentation:heres little r no unity,etalone cohesion. Eachministryecomes hepersonal iefdomf thecabinetministerncharge.
WhenPrimeMinister havalit esignedfter 1monthsnoffice,ntensepoliticking enton forfourdays,as the Democrat ndChatThai partiesendeavoredo build majorityoalition.Nearly ll ofthe emainingoliticalpartieswerecourted yboth ides. Timeprovides n apt commentary:
FormingnewgovernmentnThailands likepickingidesfor nelementaryschool ootball atch:ll the layersnowach ther,ave een hroughhe rillbeforendusuallyndupbickeringverwhowillget oplaywhat osition.4
Precisely o. At one point, othChuan Leekpai,theDemocrat ontender,and Chatichai hoonhavan,eader f therivalChatThaiparty, eld imulta-neous elevised ress onferencesoannounce uccessful ormationfa coa-lition. n the nd,Chuan merged ictorious.
Thevictoryouldprove o becostly, owever.Thesix-partyoalitionwasjoined t the asthour ydissidentsrom rachakornhai,oneof the mallerparties.As recompense,abinet ostswere warded o thedissidents,omeof whom rereputedo have shadybackgroundsncluding perating am-
bling ens nddealingndrugs.At eastonehas beendenied nentryisa totheUnited tates.Chuan's mage s a cleanpolitician as beentarnishedythe abinetine-up.Nevertheless,isgovernment,nparticularhe conomicministers,njoygreater ublicconfidencehan ither f the twoprecedinggovernments.
4. Time, Now Get toWork,"November 7, 1997,p. 20.
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THAILANDN1997 165
The New ConstitutionOn October11, 1997, a new Constitution as ratified.n recentyears,amending hai constitutionsas becomea somewhat outine ndertaking,with ittle oticeablempact n thepolitical ystem. he atest ersion, ow-ever, epresents radicaldeparturerom ts predecessors,oth n substanceandin the draftingrocess. The Constitution as drafted y a 99-personelectedAssembly nd nvolved articipationrom ll sectors f society veraneight-montheriod. ts339 articles eflectxtensiveublic onsultation.In this, hemedia-in particularhenumerouselevisionalk hows nd na-tionallyelevised ublicfora-played keyrole. A majordesign eatureftheConstitutions the ttemptolimit he nfluencefmoneyn Thaipoli-
tics. The so-called people'sconstitution"epresentsvictoryfdemocracygroups ver supportersf theold political ystem ased on clique politics.
Thenew Constitution akesprovision or 200-memberlectedSenate(in contrasto the urrent70-memberppointed enate) nd a 500-memberHouse ofRepresentativesas opposed o the urrent60 members).A some-what urious tipulationorbids enate andidates ither o canvassfor otesor tobelong oa political arty. enatorial eats reapportionedna provin-cialbasis,withmore eats ssigned o arger rovinces. he termfoffices
sixyears.The House of Representativesonsists f400 members epresenting00
electoral istricts,lus 100 members rawn rom arty ists. The party istrepresentsn innovation orThailand. The idea is foreach voter o votetwice na national lection,nce for districtepresentativend onceforpolitical arty.Afterhe votes are tallied, andidates n theparty istsre-ceiveparliamentaryeatsbasedonproportionalssignment;or xample,political arty ecuring0% ofthevotes s entitledo20 MPs fromtsparty
listof 100 candidates.The partyists reranked romheoutset o thefirst20 nameson the istwillgettheseats. The introductionf thepartyist stacit cknowledgmenthatThai voters avetendednpastelections ovoteforndividualsatherhan or olitical arties.By splittinghevote nto woparts,henew Constitutionllowsvoters o votefor oth pecificndividualsandpolitical arties.
Will the new election ulesreducevote-buying? kepticism ersists nthis core.Thenew Constitution akesvotingmandatory,herebynsuring
a very igh urnouttthepolls. It s hoped hat y forcingll eligible otersto casttheir ote ndby ncreasinghenumberfconstituencieshile educ-ing henumber fMPs tooneperconstituency,ote-buyingillbe renderedmoredifficult.hepartyist s a deterrentomoney oliticss questionable.Listsofthe arger olitical arties bviously rovide reaterttraction,nd tbecomes ll-importantor andidates o be ranked igh nthe ists, refera-bly mong he op en. Theprobabilityfa parliamentaryeatfor nyone n
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166 ASIAN URVEY,VOL.XXXVIH, O. 2, FEBRUARY 998
thebottom alf f a partyist s virtually il. For obviousreasons, nemayanticipateontributionso party offersnexchange or desirable laceontheparty'sist.
Before ational lections an be held, series f organic aws,specifyingdetails ndprocedures, ustbe passed. The Constitutionequires hepas-sageofthree rganicaws-an electoral aw, theElectionCommissionaw,andpolitical artyaw-within240 days ofthe Constitutionaking ffect,thats, bymid-May 998. The House of Representativess expected oreadandpass the hree ills n February,nd theSenatewill completetsreadingby May.
Provisions madefor number fnewcourtsnd commissions. he Con-
stitution ourt s an independent odyconsisting f a president nd 14judges. Ithasthepower o consider illsthat ne-tenthftheMPs, one-tenthof the enators,ne-tenthfthemembers fbothhouses, r theprimeminis-ter eeas unconstitutional.heNationalHumanRights ommissiononsistsof a chairpersonnd10membersppointedy theking nthe dviceoftheSenate.TheOfficeftheOmbudsmanonsists fthree mbudsmenelectedbytheSenate. Ombudsmenreempoweredo examine omplaintsoncern-ingfailure oabidebythe aw,or negligencef duties r violations f human
rights y civil servants,tate nterprisefficials,nd local administrators.Thefive-personlectionCommission,n independentody, s chargedwithoverseeinglections t all levels,from ational o local. Theseentities renew toThailand,nd will notbe inplace until arly1998. It wouldbe pre-mature o ventureny conjecturebout theirmpact n Thai political ndadministrativeystems.
ForeignRelationsThailand's upportfMyanmar' entrynto heAssociation f Southeast a-tionsASEAN) inJulynd thegovernment'svowedpolicy o "abidebytheprinciple fnon-interferencen Myanmar's) omestic ffairs" asproducedbetter elations ith hailand'swesterneighbor.5 angkok's oreignolicystance s consistent ith tsperceptionhat loser ntegrationn SoutheastAsia is achievable nly hroughSEAN. Themembertates aveadoptedunited tandnprotecting ember ountries'trategicnterests.
SupportfMyanmar as had tsprice. nNovemberhepreparatoryeet-
ingfor heAsia-EuropeMeeting ASEM) summit cheduled o be held nLondon nearly1998was abruptlyalled off.Myanmar ad announcedtsintentionfattendinghemeetingutwas informedhat isas wouldnotbeissuedto itsrepresentatives.aunchednMarch1996inBangkokwith 5
5. SeeMinistryfForeign ffairs,Action lan: SectionA) PoliticalAction," http://www.mfa.go.th/Policy/policy2.htm>,ecember1, 1997.
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THAILANDN 1997 167
headsof governmentrom sia andEurope n attendance,SEM has beenaloose forum or developing eeperpolitical nd economic ies. In March1997, 25 foreignministers et n Singapore o deliberatehefuture f the
forum.Myanmar'sntryntoASEAN has effectivelyut stop o a poten-tiallymutuallyeneficial ialoguebetweenAsia and Europe.The United tates s wellhadappealed o ASEAN member tates o turn
downMyanmar's ntry ntothegroupingn grounds f its human ightsperformance.ome observersf Thai-U.S. relations ttribute .S. apathyduring hailand's inancialrisis otheThaigovernment'sdamant tancenregard o Myanmar.Certainly,hailandwas givenfar ess assistance hanSouthKorea. By the year's end,Thailand'sforeignelations ad become
inextricablyinkedwith olving hefinancialrisis.nthe
year head,t will
be difficultut essential o meet therequirementsf the MF agreementwhile voiding onflicts ithnationalnterests.