Stickman Readers' Submissions June 14th, 2006

How Farangs Screwed Thailand in 1998

While Camaschua presents a fascinating discourse on the Thai economy and how it evolved, it’s interesting in the same sense as science fiction would be.

The Asian Financial Crisis of the late 90’s is one of the most studied macroeconomic case studies, as well as the source of some of the most enduring myths, conspiracy theories, and misunderstandings. The complexity and the multi-national
nature of the event is such that people who cherry-pick “facts” can support whatever pet theory they’d like to advance.

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Focusing on Thailand specifically, the Thai economy underwent a massive 10+ year expansion from 1985 to 1995. This expansion was driven by the same dynamics which provided economic prosperity for countries like Taiwan and Malaysia. Thailand
had cheap labor, loose regulations, and a share of the worldwide textile export quota. This led to the first large scale industrialization of Thailand, and farmers started becoming factory workers. Instead of a commodities (rice, fruits, natural
gas) exporter, Thailand became an exporter of manufactured goods and its economy began to be tied more closely to the US and Europe.

In 1985, the Thai baht was converted from a controlled currency (which is normal for developing nations) into a pegged currency. That means you’re allowed to freely trade the baht, but the central bank wanted the baht to remain at
a specific ratio to the dollar. For the next decade, the baht remained stable at 25:1 to the US Dollar. The foreign banks brought in to advise the Thai government made the fatal suggestion that since their export market was primarily the USA and
that the baht was stable relative to the dollar – contracts were written in dollar terms. This has proven to be hideously foolish because Thai factories were running operationally on baht but were funded with loans that required payments in dollars.

From 1985 to 1996, the Thai economy was a hub of growth and investment. The free ride was coming to an end though. The rest of the East Asian area had expanded into the exact same economic activities which Thailand had grown fat on. China
was ramping up its industrial output, along with every other poor 3rd world nation in the area. So there was increased competition for the low-cost manufacturing. Thus the Thai economy was riding for a fall regardless, although it wasn’t
clear at the time to people who believe good times can continue forever.

During this period, the vast export economy caused an economic boom within Thailand domestically and billions which could have gone into useful infrastructure projects went into real estate speculation instead. This is quite common in EVERY
boom economy. It happened in Japan, Hong Kong, Korea as well as California and New York. This kind of real estate speculation would not have been fatal if not for the fact that the Thai banking system was poorly regulated and the vast inflow of
low-interest cash made it possible to be foolish.

The parallel to keep in mind is that American telecommunication companies poured more billions than the Thai banks had into a speculative land-rush on fiber-optic cabling which ended in massive bankruptcies. The result was an economic depression,
but one which the American economy handles with less pain because of size.

Size is the key question. The Thai economy was not big enough to absorb the impact of the speculative bubble bursting. Combine that with the increased competition from other third world nations, and Thailand was heading into a recession one
way or another.

The Thai economy crashed instead of going into a recession. That’s because the West, in the form of investment advisors and the IMF, screwed Thailand – big time.

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First, currency speculators did attack the Thai currency, but they weren’t singled out. Guys like Soros went after everyone in the region. The macroeconomic problems were there to be seen. Someone would have toppled the house of cards,
and Soros saw no reason it couldn’t be him. They set the trap for Thailand, and then the investment advisors to the Thai gov’t helped push the Thai economy over the edge. They recommended that the Thai national bank try to weather
the crisis by spending their foreign currency reserve (i.e. dollars) to buy back those baht contracts.

Here’s the first true (as opposed to the imaginary Chinese cabal which secretly control Thailand) double-dealing at work. While they were recommending that the Thai treasury try to fend off the speculators, guys like Soros were borrowing
cash to attack the Thai currency from the same investment banks. They were playing both ends.

For the bankers, they have investments in Thailand which would lose value if the currency speculators succeed. Yet they were also making money lending money to the speculators. Either way, they win.

Huge Thai Mistake #1 – they didn’t see the conflict of interest of their advisors

Now Thailand is depleting its foreign currency assets in order to defend the baht, but the currency traders are also upping the ante. Billions later, the Thai baht remains one of the most heavily leveraged currencies in the word. The pressure
built until the inevitable happened. The Thai currency was released to float freely.

Huge Thai Mistake #2 – allowing floating baht when they had no dollars left

Remember that foreign advisors recommended that contracts and loans be dollar instead of baht-denominated? At the end of the failure to fend off the currency speculators, the Thai economy was drained of dollars. Now that the baht was devalued
to a peak of 55:1 relative to the dollar, it became twice as expensive to pay off those loans which were written when the baht was 25:1.

Imagine if you borrowed a case of beer worth $15 from a neighbor. Instead of promising to return a case of beer, you promise instead to pay for 12 beers. When it comes time to repay the debt, the neighbor takes you to a bar and orders 12
beers. You’re now paying $30 instead because the contract itself screwed you.

When faced with massive interest payments you don’t have cash for, you can either declare bankruptcy or borrow even more money to pay the interest. The government of Thailand then reprised HTM #1 by listening to their western financial
advisors. Wall Street and the IMF never advises defaulting on loans because they are the ones who lose money. Instead, they recommend a loan shark – the International Monetary Fund.

Huge Thai Mistake #3 – taking IMF bailout funds

When the IMF shows up, they come with a laundry list of structural changes which they claim will restore the economy. Despite the fact that the IMF has never successfully restored an economy that way, they continue to advise it.

The result of the IMF bailout is that those dollar-denominated debts were paid off by selling off Thai assets for 20 cents on the dollar. It’s true that a lot of Chinese businessmen were able to take control of Thai assets at a huge
discount, but they were the only ones in Thailand with liquidity. The overseas Chinese financial network poured dollar-denominated liquidity in.

But remember, the fire sale got started because the IMF funds came with conditions which prompted the fire sale. The IMF demanded that the Thai government force the bankruptcy and sale of those businesses and factories. The dollars generated
by the IMF loan and those fire sales went to pay off loans to western financial institutions. In short, the IMF screwed the Thai economy in order to bail out western financial institutions and the Chinese simply took advantage.

Imagine you spend your life savings putting the down payments on a bar, based on the number of customers you saw in the place during high season of tourism. The previous owner assured you that the income was excellent. 4 months later, the
tourists disappear and you’re left with a bar with a tenth of the previous income. You are forced to sell for a huge loss because you can’t keep up with interest payments. Is it really the fault of the guy buying the bar for 20 cents
on the dollar?

No, it was the guy who screwed you in the first place by selling you the bar at a highly inflated price. Wall Street advisors and the IMF screwed Thailand twice. Chinese businessmen took advantage in the aftermath, but the damage was already

During the same financial crisis which crashed the Thai economy and brought down the government of Indonesia, there were multiple alternative policies which worked better.

Malaysia faced the same currency trader assault, and their solution was to simply freeze their currency. They re-imposed capital controls and simply refused to let dollars leave the country. The IMF and financial institutions screamed bloody
hell, but the Malay government held steady. They came out of the 90’s with only a mild recession – not a total crash.

While Malaysia was doing this, the IMF spent a lot of time condemning the Malay government while praising the Thai and Indonesia government for following their policy. Subsequent events show that the IMF was full of it.

While they don’t exactly go into details, the Thai newspapers have not been shy to blame the IMF on the crash along with guys like Soros. In the event you speak with someone who knows what the IMF is, I bet that Thai person will have
a very negative opinion of them. <But not necessarily because they "understand" what happened, more that it is easy to nominate someone with white skin as the scapegoatStick>

Coming back to land ownership now, there is a HUGE hole in the logic that while farang are legally forbidden to own land, somehow the Chinese from Singapore, Taiwan, and Hong Kong bought up huge amounts of Thai assets. Aren’t those
foreigners too? The law applies as well, right?

The way the post-crisis fire sale worked out is that overseas companies still willing to invest in Thailand were largely other Asians, meaning Chinese and Japanese. They funneled cash into local companies which were, unsurprisingly, controlled
by Thai-Chinese. There is a comfort level for these foreign investors to deal with a Chinese person instead of Thai. Instead of directly owning land like the tourist-turned-resident, they simply owned shares or loans to these Thai-Chinese companies.
These foreign investors have no interest in owning the actual land the way that an individual might. They just want to make money.

The desire to keep all foreigners, including Chinese, from owning land in Thailand does not stem from a conspiracy by the Thai-Chinese. It’s simply a matter of local culture which values land ownership highly.

The desire to blame the Americans and Europeans for Thailand’s economic woes is based on real life experience, since western banks and the IMF did severely screw Thailand in the near past.

The idea that owning land is somehow key to building wealth in Thailand is ridiculously out of touch with reality. Thaksin’s wealth is built on television, telecom services and computer factories. The other 3 Thai billionaires are
in the beverage and animal feed business. Most of their business doesn’t require large amounts of real estate, and can be run just as easily by a foreign conglomerate who doesn’t own any land in Thailand.

The idea that an MP or Congressman would give a damn about their constituent’s ability to own land in foreign countries is doubly ludicrous. First there’s the question of the principle of sovereignty. Thailand has the right
to decide how they sell the land. Secondly, foreigners who want to own land in Thailand isn’t a constituency which matters. The big

money could care less about allowing individuals owning land directly. They’d prefer to own the banks which can take possession of the land, if it’s profitable to do so.

In conclusion, while the Chinese do have disproportionately oversized control of the economy of Thailand, they are not the reason you can’t own land. The Chinese didn’t screw Thailand in the Asian Financial Crisis. The western
investment advisors and IMF did a lot of that, along with the stupidity of the Thai government. As we can see from how the Japanese and American economy lurch from bubble to recession, such stupidity is universal for governments. At the end of
the day, you still won’t have the right to own land in Thailand until the Thais themselves decide that they’d like to allow it.

Stickman's thoughts:

Very interesting reading.

nana plaza