Asia has been the world's economic miracle for the last 30 years. South Korea, Hong Kong, Taiwan, Indonesia, and the Philippines have achieved remarkable rates of growth, building high quality manufacturing industries in everything from clothes to computers. Why then, are these economic tigers now struggling with collapsing currencies and plunging stock markets? The simple answer is debt. Thailand provides a very good example of the reasons for the Asian crisis. Thailand borrowed vast sums of money as their economy boomed. Even worse, they borrowed much of it in U.S. dollars whose interest rates were much lower than on their own currencies. The exchange rates of local currencies were pegged against the dollar so they had no fears about having to earn money in local currency to pay back loans in dollars. This was fine while the economy was booming. But from the middle of 1995, the U.S. dollar started to rise against most of the world's currencies. Asian currencies pegged against the dollar rose with it--making exports more expensive and less competitive on world markets. It was obvious that Asian currencies would have to abandon the dollar peg in order to revive exports. However, the Thailand government tried to resist knowing that devaluation would cripple firms who had borrowed huge sums in dollars. The money traders won. They sold massive amounts of Thailand baht, often selling it forward (concluding a sale today but promising to deliver the currency at a date one month or more in the future), betting that when the time came, they would be able to buy the baht needed for much less than they had already sold them for, making an instant profit. Capital came in dramatically - huge flows of capital - much of it through the banking sector. The government allowed an offshore banking sector to be set up. So when foreign banks would come in; they didn't have to pay taxes. Thai banks could borrow from this offshore dollar resource and fling the money round the country to anyone who wanted to pick it up. Much of that money didn't go into investment for export capacity (i.e. new factories or new manufacturing processes). It went into golf courses, hotels, real estate and speculation on the stock market. Dangerous and unsound financial investments began to take place. First, a huge credit bubble built up. Then - and this was the key to the whole region's problems - the US dollar shot up against all other currencies from April 1995 until fairly recently. All these economies shadowed the dollar. The Thai baht (country currency) in particular suffered as it was fixed to a basket of currencies in which 80% of the total amount was the US dollar. The result was that the Thai baht became an expensive currency and exports died. Even worse, all the money coming in didn't get a return because Thai companies, even the productive ones, weren't making a profit (mostly due to their foolish investments). There were defaults and the whole process began to unravel.
Thailand went first into the asian economic crisis. But because it's ahead in the process of re-tructuring the economy and implementing IMF prescriptions, Thailand may also be the first out. Thailand is currently trying to restructure and nationalize their banks. This involves diving into the public purse, stripping off bad bits and reorganizing them in an attempt to put them back on the market, allowing foreign capital to buy them. The process is still under way. The cost of this radical re-alignment is significant because of the size of their debt build up. Trying to finance the re-alignment, the government could be tempted to print money, thus increasing inflation, and driving the currency still further down. But because the currency is already well down, the government is trying to maintain the prescription of the IMF currency. Thailand's democratic base is another pro to their survival and reemergence. Because the people elect the government representatives, it is their mandate to see the passage of tough reform bills. Although Thailand is working within itself to muddle out of the Asian economic mess, they have to be reminded that it is an ASIAN economic mess; not just Thailand's. As long as Asia is in deep depression, Thailand, being an export led economy, will find it hard to grow.