Fallen tiger: the story of Thailand's currency devaluation in 1997.

I. INTRODUCTION

According to the Chinese calendar, 1998 was the year of the Tiger.(1) However, the prospects of a successful 1998 remained in doubt for the "Tiger" economies of Southeast Asia(2) in light of the economic turmoil unleashed in 1997 that began with Thailand's devaluation of its currency.(3) To many investors and economists the trouble in Thailand came as a complete surprise. Due to strong economic growth during the late 1980s, Thailand became known as the Fifth Tiger, following the rapid growth of Taiwan, Korea, Singapore, and Hong Kong, the four other so-called Tigers.(4) This region has also been dubbed the `"East Asian Miracle'" by economists and investors, again due to the rapid economic growth they achieved.(5) Between 1985 and 1995, Thailand experienced an annual growth rate averaging 9.8%, while simultaneously experiencing low inflation, averaging around 4.4% per year.(6) But 1996 marked the beginning of an economic downturn, when exports began to stagnate and growth began to slow.(7) In July of 1997, Thailand was forced to devalue its national currency, the baht, which sent the country into an economic tailspin.(8) Thailand's currency devaluation had a domino effect on the other Southeast Asian nations, which had only months before seemed economically strong,(9) and eventually led to instability in U.S. markets.(10) Because of the amount of foreign capital invested in Thailand and the other Tiger countries, the economic health of the region in the Year of the Tiger had a dramatic impact on the rest of the world's major economies.

This Comment will analyze the events leading up to the devaluation of the baht, as well as evaluate Thailand's hope for economic recovery in the future. Part II of this Comment will examine the history of Southeast Asia's growth into a free trade area through the creation of the Association of Southeast Asian Nations (ASEAN) and the Asian Free Trade Area (AFTA), and the relative success of each group. Part III will highlight the rise and fall of Thailand's substantial economy in the 1980s and 1990s, including the political factors that fueled Thailand's substantial growth, the linkage of the baht with the U.S. dollar, and the effect of the flood of foreign investment into the region. It will then analyze the circumstances surrounding the devaluation of the baht in July of 1997. Part III will also discuss the economic measures put in place by the Thai government since the fall of the baht to help regain economic stability, as well as the impact of the billion-dollar International Money Fund (IMF)(11) bailout put in place in mid-1997 to help Thailand recover from the strain of significant debt obligations.(12) Part IV of this Comment will discuss the effect of Thailand's instability on other Southeast Asian countries in 1997. Finally, Part V will evaluate Thailand's chances for recovery in the future, and will discuss the merits of the IMF's position as a world bailout organization.

II. THE HISTORY OF FREE TRADE IN THAILAND--ASEAN AND AFTA

ASEAN was formed in 1967.(13) The original agreement between Thailand, the Philippines, Malaysia, Singapore, Brunei, and Indonesia was one of the few regional arrangements that originated in the 1960s still in force today.(14) ASEAN was formed primarily to defend against communist inroads in to Southeast Asia.(15) From the outset, ASEAN's focus was more on political stability than economic growth.(16) Because of its loose organization, ASEAN accomplished little in the way of progress toward meaningful economic cooperation during its first eight years of existence.(17) Instead, its major achievements centered on security and political considerations.(18)

ASEAN's first foray into attempting to create a free trade area came in 1977 with the emergence of Preferential Trading Agreements (PTAs).(19) PTAs allowed favorable treatment of ASEAN products within the region by granting tariff preferences for legitimate ASEAN-made products.(20) The PTAs were focused on only a few categories of products, such as crude off and rice.(21) At the same time, the tariff preferences were restricted in size, and the products chosen were subject to production constraints.(22) Because of these reasons, the PTAs were never successful in creating the type of free trade area that ASEAN was seeking.

In 1992, economic concerns came into the forefront for ASEAN. At the Singapore Summit, held in January of 1992, ASEAN began to move toward regional economic integration.(23) Largely in response to free trade agreements among trading nations, such as the North American Trade Agreement (NAFTA),(24) "ASEAN leaders developed a legal framework to promote economic cooperation in their region."(25) Three documents were developed outlining the goals of the Summit.(26) First, the Singapore Declaration summarized the agreements reached by the ASEAN leaders in areas including politics and economic cooperation.(27) The second document, the Framework Agreement on Enhancing ASEAN Economic Cooperation, laid the basic setting for enacting an economic cooperation scheme.(28) The third document, Agreement on the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area (CEPT-AFTA Agreement), enumerated the provisions for enacting economic cooperation.(29) Of the three documents, the CEPT-AFTA Agreement "provides the only binding action plan for achieving economic integration."(30)

The CEPT, set forth in the Singapore Declaration, had three major objectives. First, CEPT focused on increasing trade among ASEAN nations through accelerated tariff reduction plans.(31) Second, CEPT sought to increase foreign investment in ASEAN.(32) Third, CEPT wanted to increase "the efficiency and competitiveness of the manufacturing sectors."(33) The key regulatory provision of AFTA was the reduction of tariffs between ASEAN countries to five percent on all manufactured goods by January 1, 2008.(34)

The objective of AFTA was to unite Southeast Asian economies into a wider trading area.(35) By combining what was then nearly 330 million people, and generating an aggregate gross national product of nearly US$293 billion with an annual growth rate of around seven percent per year, arguably the real goal of AFTA was to attract foreign investment and to offset any losses in investment due to other regional free trade agreements, such as the hemispheric trade in the Americas.(36) Asian countries with export-driven economies feared that cheaper products would draw trade away from Asia.(37) ASEAN's main concern was that the signing of NAFTA would allow the United States to use Mexico as a principal import source, and that the majority of U.S. investment capital would flow to Mexico in return.(38) Because of protectionist trade policies and preferential tariff structures, ASEAN members were concerned that their exports to the United States would decrease, while Mexico's would increase.(39) Free trade areas necessitate discrimination against nonmember countries because they promote lower tariff and nontariff barriers that benefit only the partner countries.(40) ASEAN attempted to build an economic structure to protect itself against NAFTA, but accomplished little outside of offering political rhetoric.

In 1995, ASEAN members revisited their prior goals. The Fifth ASEAN Summit Meeting was held in Bangkok in December of 1995 (Bangkok Summit)(41) Members noted the significant progress of ASEAN, including the admission of Vietnam on July 28, 1995 and the participation of Laos and Cambodia as observers.(42) At the Bangkok Summit, ASEAN leaders agreed to step up progress toward AFTA by calling for a reduction in tariffs to between zero and five percent by the year 2000, revising the earlier projected date of 2003, previously revised from 2008.(43) Another goal of ASEAN at the Bangkok Summit was to intensify its cooperative relationships with other regional trade organizations, such as the European Union (EU) and NAFTA.(44) ASEAN also committed itself to the implementation of an ASEAN Plan of Action on Cooperation and Promotion of Foreign Direct Investment and Intra-ASEAN investment, designed to establish an ASEAN investment region, which would help enhance the area's attractiveness to foreign direct investment.(45)

In mid-1997, ASEAN leaders reported that substantial progress had been made toward the tariff reduction goal originally targeted for 2003.(46) Although they claimed that trade had increased significantly between ASEAN countries,(47) ASEAN leaders were intent upon concentrating their efforts on an attempt to recreate the success of the largest of the free trade areas, NAFTA and the EU.(48) Also contemplated was a plan to boost the economic growth of the export industry, especially in light of the currency devaluation.(49) Finally, the leaders discussed implementing an ASEAN Investment Area (AIA) that would encourage both foreign investment flow and free capital movement.(50) As a sign of their commitment to expansion, the ASEAN leaders, even after the devaluation of the Thai baht in July of 1997, remained committed to the CEPT plan for decreasing their tariffs by the year 2000.(51)