Conclusions and Policy Implications

The 1997 Asian Financial crisis has led to the generation of some debate on the degree and the pace with which the openness and reform in the financial system should be pursued. The financial crisis that has afflicted many emerging countries is a costly reminder of the disastrous consequences for development of weak financial markets and inappropriate reform. Historical evidence suggests that periods of financial liberalisation coincided with, or are soon followed by financial instability ending in financial crisis like the East Asian crisis in the late 1990’s. Clearly, the transition has not been smooth; therefore some people believe that there is some form of causality between financial reform and the liberalisation and financial instability. The financial liberalisation process as well can undoubtedly be handled well if the existing inefficiencies and distortions in the financial markets are taken care of with appropriate policy by developing a strong regulatory and institutional framework prior to the liberalisation process. Also, research has shown that the sequence of the reforms process and the pace of liberalisation play a crucial role in avoiding financial instability of any emerging economy.

This book analyses these issues in relation to the Thai economy as a case study although the arguments and concerns are equally relevant for many developing and developed countries as given its relative openness, the Thai economy presents an example of a complex international financial system with emerging issues of significant public policy, economic development and social welfare. Like many developing countries, Thailand experienced a series of economic disruptions in the first half of the 1970s and the beginning of the 1980s, resulting from the oil shock and world economic slump. In response, the Thai government developed an economic stabilisation program to restore economic stability and encourage growth by pegging the baht to the US dollar and introducing manufacturing and industry led growth policy. Consequently, the economy began to pick up and performed well from mid 1980s onward. This was a critical period in Thailand’s development, as the economy experienced strong economic growth led by high export growth with significant foreign direct investment. These factors contributed to the Thai success story between 1980 to 1990, especially during 1988 to 1990 when the economy expanded at a double-digit GDP growth rate and was hailed as the fastest growing economy in the world. Such an impressive economic performance led the IMF to suggest that Thailand liberalise its financial system, in part by accepting the Article VIII agreement (see Appendix A). The overall objective of financial liberalisation was to increase the flexibility of the financial system so that the Thai economy could compete successfully in the international economic community, and have assured economic growth rates. The main features of the agreement stated that Thailand needed to remove restrictions on foreign exchange transactions and ensure the convertibility of the currency by allowing more freedom in foreign currency trade, for instance, capital controls deregulation and foreign exchange reform.