World Policy Journal: The Big Mango Bounces Back

World Policy Journal
Volume XVII, No 1, Spring 2000

The Big Mango Bounces Back: Economic Recovery in Thailand and Southeast Asia
By Joshua Kurlantzick

On an average day in November 1998, sixteen months into the Asian economic crisis, Bangkok's new Emporium Mall seemed more like a mortuary than a commercial center. Throughout the mall, built during the Asian economic boom and home to brand-name clothing boutiques, bored staff waited on solitary customers and rearranged merchandise. The ground floor, where the high-end stores are located, was so empty that it looked like a scene in a Western just before the bad guy rides into town. No customers entered the Louis Vuitton shop for the entire day. The mall's only cash flow came from its food court, where a relatively cheap eatery was offering noodles for 20 baht (50 cents), a competitive price even in a crisis-wracked economy.

By January 2000, just 29 months after the detonation of the economic crisis, the Emporium was crowded with shoppers. The mid-priced stores teemed with Thai families hunting for "winter" clothing. People were waiting for tables in the ground-floor café, a posh meeting-place serving high tea with Devonshire cream. Customers were leaving the mall laden with bags conaining their purchases, heading home by way of a shiny new elevated railway.

Faster than many economists initially predicted, Thailand and the other sick Southeast Asian "tiger cub economies"—Malaysia, Singapore, the Philippines, and Indonesia—have begun to heal themselves. Surpassing March projections for the year, the Thai economy grew by more than 4 percent in 1999. This recovery has been initiated and dominated by Bangkok, known affectionately as the "Big Mango." (The Thai capital is home to 10–15 percent of the country's population and three-quarters of its commercial bank deposits, and produces more than 50 percent of the country's wealth.) Other newly industrializing Southeast Asian states boasted similar or even higher rates of growth for 1999. Unemployment has fallen, and foreign investors have started to return to the region. As exemplified by the upturn in the Emporium Mall's business, consumer confidence is recovering in Thailand and other Southeast Asian states.

This reversal has been due in part to circumstances beyond Southeast Asia's control. In other words, the tiger cubs have gotten lucky. The amazingly resilient American economy has soaked up increased Southeast Asian exports and prevented global financial contagion. Dramatic shifts in world commodity prices have benefited Malaysia, Thailand, the Philippines, and Indonesia.

But Thailand and the other former tiger cubs deserve considerable credit. Southeast Asia has begun to address the structural flaws in its economies, societies, and polities that caused the crisis. Throughout the region, the slump has forced countries to embrace better governance, commercial and financial transparency, labor-management cooperation, and stronger work ethics. Thailand and its neighbors are far from complete economic recovery, and the glory days of the early 1990s probably will never return. But if Southeast Asian states continue to rethink their concepts of development, to strengthenand broaden their reforms, and to upgrade the value of their exports, they could not only consolidate their recovery but also ensure that their future growth benefits more sectors of society.

The Rise . . .

From the early 1980s until 1997, the Southeast Asian tiger cubs removed virtually all barriers to capital flows, wooed foreign investment, and broadened their economies by producing labor-intensive goods like textiles and, later on, medium-tech items like electronics. Thailand initiated broad tariff cuts and passed laws allowing new industrial firms to be wholly foreign-owned. The Philippines convinced Intel to locate several largenew assembly facilities in the archipelago by offering tax breaks and other sweeteners. ₁

By the early 1990s, the tiger cubs were booming. Their economies were highly integrated into the global market, their export sectors were growing, and their cities were flush with money, packed with people enjoying some of the fastest-rising standards of living in the world. Between 1990 and 1996, the total value of Thailand's manufactured exports increased 13 percent a year; during the same time period, Malaysia's GDP grew by 8.7 percent. ₂ Foreign brokerage houses believed that these emerging markets were viable places to invest, and capital—particularly short-term portfolio capital—flowed into Bangkok, Jakarta, and Kuala Lumpur. Massive waves of people migrated to cities to work in burgeoning industrial and commercial sectors. There was no shortage of new buildings in which migrants could live, work, or shop. Funded by money raised in liquid stock markets, property sectors boomed.

. . . and the Fall

In the mid-1990s, the wheels began to fall off. Southeast Asian economies started to overheat as short-term capital inflows increased at an unheard-of pace. Much of this money poured into unregulated investments in financial and property sectors. Inflation picked up and current account deficits skyrocketed. Governments hoped to absorb inflows by increasing local savings but failed to stop consumers from spending their newlyacquired riches. ₃ Awash in bad debts, the Bangkok Bank of Commerce collapsed, forcing the Bank of Thailand to waste money on a massive rehabilitation fund. Foreign brokerage houses started to examine irregularities in Southeast Asian economies and to pull money out of the region; domestic investor confidence plummeted.

In the summer of 1997, the bubble burst. For reasons ranging from legitimate concerns over the lack of transparency in Thailand's economy to unsubstantiated investor panic, capital fled Thailand at a rapid pace, and foreign speculators attacked the baht, which had been pegged to the U.S. dollar. On July 2, 1997, Thailand floated the baht, which rapidly depreciated against foreign currencies. Thailand's external debts soared, and investors started to attack other currencies, destroying balance sheets in Malaysia, Indonesia, and elsewhere, sapping liquidity out of Asia, and triggering the economic crisis.

Almost immediately, these macroeconomic dislocations had devastating effects. Over two million Thais were laid off, in a country that used to import labor. At the beginning of 1999, Indonesia's Employers' Association estimated that the formal unemployment rate was 24 percent. ₄ Many workers moved into the informal sector, becoming noodle vendors, part-time taxi drivers, repairmen; these casual jobs offered lower salaries and no benefits. School dropout rates rose precipitously, and large numbers of children (and adults) turned to drugs—especially yaaba, a potent amphetamine—to escape daily reality. Mob violence in Indonesia and violent crime in the Philippines threatened social order.

Up until mid-1999, economic experts forecast doomsday scenarios on a depressingly regular basis in regional papers like The Nation and the Jakarta Post. Asia would spiral downward from a recession into a depression. Standards of living in the former tiger cubs would return to pre-boom levels. Thailand, Indonesia, and other states would be home to "lost generations" of young adults who had dropped out of school and knew nothing but economic despair.

An Ounce of Good Fortune

But none of these scenarios have come to pass. As the crisis has unfolded, the tiger cubs have benefited from several fortuitous events. The region's undervalued currencies have made its export and tourism sectors more attractive. Malaysian exports grew by 7.6 percent for 1999; Thai exports grew by 13.3 percent during the third quarter of the year. In Thailand and the Philippines, the weak baht and peso have made beaches, temples, and markets even more alluring to foreign visitors. Both countries have actively promoted tourism, and arrivals to Thailand grew by 11 percent during the third quarter of 1999.

Southeast Asia has also been fortunate that the U.S. economy has continued to grow. Long a major consumer of Southeast Asian goods, the American economy, increasingly driven by information technology, has been a seemingly bottomless marketfor Malaysian disk drives, Thai semiconductors, and Singaporean telecommunications equipment. Although many Thais were angered by America's inaction at the beginning of the financial crisis, they and their Southeast Asian counterparts have been only too happy to satiate the global superpower's economic needs.

In addition, the former tiger cubs have received considerable help from Japan, whoseown economic problems have not curtailed its largesse. Historically the largest investor in the region, Japan slashed its investments in Southeast Asia during the 1990s as its own economy stagnated. But when the crisis hit, Japan offered the former cubs over $35 billion in aid. Some area specialists believe that Tokyo has been so magnanimous in order to counter Beijing's increasing economic and political assertiveness in Southeast Asia. ₅

A steep rise in oil prices and some of the best weather in recent memory have also helped bail out the crisis-hit economies. The decision by the Organization of Petroleum Exporting Countries in March 1999 to cut production caused crude prices to rise by more than 100 percent, a windfall for Malaysia and Indonesia, both of which export petroleum. A return to excellent weather after droughts caused by El Niño has allowed Thai rice producers and Indonesian coffee growers to boost output for export.

A Ton of Reform

Although some economists claim that this good fortune has allowed Southeast Asia to avoid retrenchment, the truth is that Thailand and its neighbors have gagged down bitter structural reforms. ₆ In the financial sector, the former tiger cubs have closed or recapitalized insolvent banks and removed the most corrupt bank officials and finance ministry bureaucrats. Several Southeast Asian states have passed bankruptcy and foreclosure laws, giving creditors some ammunition and facilitating corporate debt restructuring.

In the commercial and industrial sectors, enterprises that previously saw downsizing as anathema have slashed bloated management and employee rosters. In one notable example, the elderly chairwoman of Thailand's Dusit Thani Hotel & Resorts revamped her roster of executives, pushing her own son into a less prestigious position. Yet rather than just laying off workers indiscriminately, some enterprise managers have worked with employee representatives to balance productivity and workers' security. In some cases, workers have accepted temporary layoffs, redeployment, and short-term salary freezes in exchange for promises of continued employment.

Perhaps more important, Southeast Asia's citizens have committed themselves to working as hard as necessary to regroup from the crisis. Foreign managers of multinationals with branches in the region still complain about the docility and sloth of their workforces, but the crisis has helped shatter the idea that Southeast Asia cannot match Northeast Asia's work ethic. Anecdotal evidence collected by the Bangkok Post suggests that many Thais now work upward of ten hours a day, six to seven days a week. And despite educational systems that promote rote learning, people in parts of Southeast Asia—most notably in Bangkok—have demonstrated significant creativity in adapting to the changing economic climate. A former financier in Bangkok has opened profitable sandwich stalls. Former graphic designers at Thai newspapers have enrolled in Webpublishing courses and gone to work for internet startups. Impressed by this adaptability, some observers have suggested that chaotic cities like the Thai capital will be at the forefront of a twenty-first-century world economy that demands innovation and flexibility. ₇

Regaining Confidence

Financial, commercial, and industrial reforms, hard work, and a boost in exports had started to pay dividends by early 1999, as Southeast Asian economies began to report growth. Seizing on this news, leaders across the region worked to convince their constituents that their economies were off life-support, that job instability was receding, and that they could start shopping once again. Restoring domestic consumer spending and investment has been essential. Although foreign money flowed into Southeast Asia during the 1980s and 1990s, the boom in domestic investment dwarfed the shift of foreign money to the region. ₈ Government leaders encouraged citizens to buy local products and passed fiscal stimulus plans.In March 1999, the Thai government reduced the country's value-added tax to 7 percent and announced a stimulus package that included $3.5 billion in tax cuts and infrastructure spending.

Today, Southeast Asian investors and consumers are regaining confidence. Swayed by reports of growth and by programs designed to promote spending, domestic retail consumption and commercial/industrial investment grew in 1999 in all Southeast Asian states except Indonesia. Chastened by the collapse of finance houses, wealthy Southeast Asians have shifted their money from portfolio holdings—options, derivatives, and other gambles with little basis in real economies—into projects like factories and internet start-ups that will help long-term recovery. And although Southeast Asians demonstrate a newfound frugality—the head of Thailand's financial restructuring committee boasts of bringing a bag lunch to work—the region's markets, malls, and car dealerships are again filled with consumers. The shoppers may no longer be convinced that they will become as wealthy as the Japanese but at least believe that they will have a decent job for years to come.

Seeing that some reforms are under way and that many Southeast Asians have boughtinto the recovery, foreign investors have cautiously returned. Brokerage houses have recommended bottomed-out stocks, and the Jakarta, Kuala Lumpur, Singapore, Manila, and Bangkok stock markets all made significant gains in 1999; foreigners accounted for approximately 33 percent of the turnover of Thai securities in 1999, an improvement over 1998. Singapore's stock market, the region's best performer, rose from a low of 805.04 in October 1998 to 2,222.45 in July 1999. ₉ Convinced that Southeast Asia has started to address the fundamental weaknesses that made its currencies overvalued, speculators have refused to attack most of the region's issues. Combined with relaxed monetary policies, this exchange-rate stability has contributed to investor and consumer confidence.

With the return of some domestic and foreign investment and the completion of an initial wave of corporate downsizing, leaner Southeast Asian enterprises are reflating and refocusing on making money. As a result, the number and range of job openings in the region is improving. In Singapore, unemployment stood at 4 percent during the fourth quarter of 1999, and job-hunters havehope that the island's restructured petrochemical and disk-drive producers will soon begin hiring again.

Preventing Another Bust

Although all of the former tiger cubs boasted GDP growth in 1999, recovery is far from assured. Many of the political, economic, and social reforms that are essential to consolidating the recovery have yet to be realized, and analysts worry that last year's growth will lull Southeast Asia into believing it can restore its health without enduring more hardship. To put the crisis behind them, and to prevent another bust, Thailand, Malaysia, Indonesia, Singapore, and the Philippines must address four major challenges:

Deepening financial-sector reforms. Southeast Asian banks have been purged of corrupt officials and recapitalized, but many are still in desperate need of further reform. The banks should use new bankruptcy and foreclosure laws to move quickly against indebted companies; without stronger action, nonperforming loans will remain on the balance sheets indefinitely, reducing the pool of money available to viable businesses. Because of remaining bad debts (economists estimate that 45–50 percent of loans in Thailand are nonperforming), banks are not lending to the private sector; wiping out nonperforming loans will ratchetup lending.
Moreover, Southeast Asian governments should hire independent bank supervisors. In all the former tiger cubs except Singapore relations between banks and finance ministries are still unacceptably cozy. In late 1999, opposition politicians accused Thai finance minister Tarrin Nimmanahaeminda of signing off on an investigation that underreported nonperforming loans at Krung ThaiBank, which was run for eight years by Tarrin's younger brother.
Maximizing productivity by improving primary and adult education. Rising global economic interdependence both fostered Southeast Asia's boom and accelerated its bust. With the exception of Malaysia, which introduced capital controls in September 1998, the former tiger cubs have not shied away from the global economy in the wake of the crisis. To compete in an international economy in which poorer countries can makelabor-intensive goods in a more cost effective manner, Southeast Asia must not only produce cheap manufactured exports but also offer financial services, and make high-tech items. In order to do so, Southeast Asian states will need more educated workforces. Governments in the region must devote considerable resources to providing schools with computers, internet servers, andother technology, as well as create school curricula that emphasize problem solving over rote learning.
Southeast Asian governments and employers also should fund retraining programs designed to provide laid-off workers with the skills needed to find employment in high-tech fields. Ideally, this worker retraining would benefit everyone. Retrained laborers would be more productive, improving their marketability and bolstering employers' bottom lines. As employers became more profitable, they could offer better pay and more benefits.
Maintaining stability by distributing growth and devolving political autonomy. A complete recovery will require a prolonged period of economic and political stability, which will be impossible if Southeast Asia does not ensure that its next boom benefits more people than the last and that its economic opening is combined with greater political freedom. The previous boom did not lift all boats: in the early 1980s the average income of the top 10 percent of Thailand's households was 17 times that of the bottom 10 percent; by the late 1990s, the top tenth's income was 37 times greater than the bottom tenth's. ₁₀
Widening income disparity creates the potential for crime, mob violence, and bitter labor-management and urban-rural cleavages. Economic growth can be distributed more evenly if states enforce minimum wages and progressive taxes—tax evasion is a pervasive problem in many Southeast Asian states—and devote more money to public education, worker retraining, and state social security nets.
In addition, governments in the region should allow broader sectors of the population to influence policymaking. In Indonesia, the most fragile country in Southeast Asia, Jakarta must give greater autonomy to restive outlying regions like Aceh while ensuring that these provinces remain part of the country. Malaysia and Singapore, less extreme cases, should allow opposition parties greater civil liberties. Clashes between opposition members and police such as those that took place in Kuala Lumpur in the fall of 1998 can paralyze economies and scare off investors. In Thailand and the Philippines, the most democratic states in Southeast Asia, governments should enforce legislation intended to reduce the influence of money on politics and enfranchise more voters.
Increasing capital inflows by reducing unpredictable policymaking. Foreign and domestic investors look to put their money into countries that are not only free from violence stemming from ethnic, class, and political divisions but where there are also astute, reliable leaders. Malaysia's capital controls have helped heal its economy, but they have added to Prime Minister Mahathir's image as a wily but extremely unpredictable politician. Likewise, Indonesian president Abdurrahman Wahid's indecisiveness on issues ranging from recognition of Israel to autonomy in Aceh has worried Indonesia-watchers.

Confidence—investor confidence, constituent confidence, pundit confidence—is an intangible, tenuous quality, but it is an essential component of a healthy economy. To bolster confidence that Southeast Asia is recovering from the crisis, the region's leaders should address issues firmly and consistently, without backsliding. Moreover, debate and decisionmaking in the former tiger cubs should be conducted as transparently as possible, so that policy initiatives do not take foreign and domestic investors by surprise.

Making Progress

The countries of Southeast Asia must still overcome major hurdles in order to consolidate and broaden their economic revival. But they have begun to make progress, and in all of the former tiger cubs except Indonesia, which is threatened by murderous ethnic cleavages, sustained growth looks likely for the next four or five years. Although it would have been laughable a year ago, today it does not seem far-fetched to predict that 25 years from now the Southeast Asian economic crisis will appear as no more than a bump in the road of steady socioeconomic development. After all, construction recently began on an extension to the Emporium Mall.

Endnotes

Note 1: Far Eastern Economic Review, Asia 1999 (Hong Kong: Review Publishing, 1999), p. 187. Back.

Note 2: Asia 1999, pp 14–15. Back.

Note 3: Chris Baker and Pasuk Phongpaichit, Thailand's Boom and Bust (Chiang Mai, Thailand: Silkworm Books, 1998), pp. 116–22. Back.

Note 4: Indonesia Employers' Association, paper presented at the ILO/Japan Asian Regional Tripartite Seminar on Industrial Relations and Globalization, 1999. Back.

Note 5: See Amitav Acharya, "Realism, Institutionalism, and the Asian Economic Crisis," Contemporary Southeast Asia, April 1, 1999. Back.

Note 6: Vatchara Charoonsantikul and Thanong Khanthong, "Recovery Won't Last Without Real Reforms," The Nation (Thailand), January 12, 2000. Back.

Note 7: See Ian Buruma, "What Happened to the Asian Century?" New York Times, December 29, 1999. Back.

Note 8: Baker and Phongpaichit, Thailand's Boom and Bust, p. 312. Back.

Note 9: Far Eastern Economic Review, Asia 2000 (Hong Kong: Review Publishing, 2000), pp. 34–35. Back.

Note 10: Baker and Phongpaichit, Thailand's Boom and Bust, pp. 284–85. Back.