Thailand 1997 Case Analysis

Topics: Investment, Macroeconomics, Economics Pages: 2 (583 words) Published: December 3, 2013

Thailand, 1997 Case Write Up

During the 1990s, Thailand experienced remarkable economic growth for a developing nation. This boom in economic growth came from heavy emphasis on international trade, particularly through foreign investment in the financial sector. Using low-wage labor to their advantage, large volumes of labor-intensive products were exported to high wage countries resulting a double-digit growth rate. This accounted for forty percent of GDP. However, their strategy backfired when, due to the economic development, labor costs increased. Lower cost labor went to Vietnam, India, and China, plus a labor shortage within Thailand was occurring. These social issues were paired with an abrupt slow in economic growth rate from 1995 to 1996. Thailand, which was known as one of the fastest growing economies of a developing nation, was beginning to face an economic slowdown primarily due to overspeculation and lack of regulatory procedure of the financial sector. Thailand’s currency, the baht, was pegged to a basket of currencies with the US dollars holding the most weight. A pegged currency provides security and stability that a floating currency does not. While a floating currency fluctuates day-to-day, hour-to-hour, a pegged currency is much more stable being fixed against another currency (or set of currencies) at a certain exchange rate. This stability in a currency is very attractive for foreign investors and a critical part of Thailand’s success in an export-led economic development. However, there was a cost to this stability, such as the US dollar appreciating, causing the Thai products to increase in price as well and lose competitive value. At time, continuing to peg the baht to a basket of currencies was the best option in order to sustain investor confidence from ambitious foreigners looking for high returns, as foreign direct investment was integral to Thailand’s success in economic growth. With loans from other Asian central banks to...
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