Foreign Policy Blogs

Why Austerity Always Fails: Lessons from Thailand


Watching the news these days and hearing about yet another austerity plan being implemented in some European country usually requires a shake of the head and a rueful look directed at the television for most people. I’m not sure what else can possibly be cut, but it seems there is always more to take away from the average person: pensions, welfare, entitlements, education, and healthcare are all typically the first casualties. Dissatisfaction among Europeans is manifest in the disturbing rise of extremist parties across the continent.

Dissatisfaction was also high in Asia a decade and a half ago. In 1997, it was that continent which found itself in a devastating financial crisis.

Many economists trace the origins of the calamity to Thailand when Bangkok decided to remove the fixed rate of exchange between the Thai baht and the U.S. dollar. Instead, Bangkok implemented a floating exchange rate. Thai liabilities were held in U.S. dollars but assets remained held in baht. A severe depreciation of the baht occurred and sent Thailand’s debt soaring; the state’s debt was higher than the state’s GDP, resulting in the collapse of the baht and, effectively, rendering the country insolvent. Contagion rapidly occurred and within a few short months the crisis had spread from South Korea to Indonesia and many places in between.

Most of the economies in Asia — especially the Asian Tigers — were not based on efficiency, a traditional underpinning of sound economic policy, but rather by an influx of capital and an expanding work force. Moreover, the propensity for Southeast Asian treasuries to rely on short-term loans – at the behest of IMF economists – to be invested in high-yield sectors, as opposed to social programs such as infrastructure, education, or healthcare, resulted in the incursion of substantial debt. As a consequence, the countries’ economic policymakers had no choice but to devalue their currencies.

Although Thailand’s Prime Minister Chavalit Yongchaiyudh initially resisted devaluation, the baht eventually collapsed by itself after Bangkok’s decision to peg their currency to the US dollar. Devaluation led to a sharp rise in the cost of imports and panic amongst foreign investors who were only too quick to pull out.

The IMF’s consequent intervention only augmented the disaster. The structural adjustment package offered by the IMF was conditioned with the expectations that the states in need of a bailout would adhere to the principles which underscore neoliberalism: privatization, deregulation, and trade liberalization. This is despite the prevailing dogma of the era which was that there were virtually no restrictions on capital flows during the run up to the crisis, as the IMF’s economists had previously recommended.

The austerity measures forced upon Thailand – bank closures, spending cuts, and staggering raises to interest rates – signaled to creditors that the Thai economy was only going to get worse. Improvements to the country’s healthcare and educational systems were abandoned and industrial manufacturing plummeted. Furthermore, the unemployment rate shot up from 1.5 per cent in 1997 to 4.4 percent in 1998 – a 193.33 per cent increase.

Social discontent was advancing at a rapid pace at the turn of the century and ended up manifesting itself in the election of a populist that evinced a fundamental transition which has come to define the Thailand’s political system in the 21st century.

If European political leaders don’t want to suffer a similar fate, they would do well to reverse course.




Tim LaRocco
Tim LaRocco

Tim LaRocco is an adjunct professor of political science at St. Joseph's College in New York. He was previously a Southeast Asia based journalist and his articles have appeared in a variety of political affairs publications. He is also the author of "Hegemony 101: Great Power Behavior in the Regional Domain" (Lambert, 2013). Tim splits his time between Long Island, New York and Phnom Penh, Cambodia. Twitter: @TheRealMrTim.