Recovery won't last without real reform

If Thailand wants a sustainable recovery it must be committed to institutional reform, Thanong Khanthong and Vatchara Charoonsantikul report.

FROM the onset of the crisis in 1997 until the second half of last year, the prevailing wisdom was that Thailand would not emerge from its economic woes until it successfully instituted wide-ranging structural reforms.

For Thailand's problems, apart from the financial excesses and over investment, included weak institutions ill suited to a modern economy. Thailand's corporate and banking practices, commercial law, bankruptcy process, accounting standards and justice system all lagged far behind those in most other modern economies.

Thailand's institutional weaknesses accentuated the economic crisis, many economists noted. Although developing countries have embraced capitalism, they have failed to develop the domestic institutions that help make the modern system work, whereas these institutions have a long history of development in the West, pointed out Nobel laureate for economics Amartya Sen.

When the International Monetary Fund (IMF) offered support to Thailand in 1997 it demanded structural reform. Apart from the tough fiscal and monetary conditions, the IMF required reform of the financial sector to modernise an outdated banking system, resulting in a liberalisation of the banking sector.

The IMF also placed a high priority on far-reaching institutional reforms, including improvements to the foreclosure and bankruptcy laws, the creation of bankruptcy courts, the transparent disclosure of information by the government, corporate debt and business restructuring and corporate governance.

The rationale was that without the reform confidence in Thailand would not recover. The IMF support programme for Thailand banked on a return of foreign private capital to pull the Thai economy out of crisis. Finance Minister Tarrin Nimmanahaeminda waved the reform flag too.

''The institutional reform that the finance minister has been conducting will have far-reaching implications for Thailand's development in the future,'' Prime Minister Chuan Leekpai said last year.

Momentum pushed reform ahead in the initial months of the Chuan government as Thailand had no choice but to reform the banking system or sell off stakes in enterprises.

Initial reactions to the reforms were hostile. Reforming the system at a time when companies or the banks were weak would amount only to selling the country at a cheap price, many critics of the reforms noted.

Conservatives in the Senate even tried to block passage of the disclosure and bankruptcy laws. Several notable economists, such as Dr Virabongsa Ramangkura, voiced their disagreement with adoption of the tough banking standards, which further weakened the balance sheets of the banks.

Fortunately, constitutional reform was completed during the Chavalit government, paving the way for a more democratic system of government, which allowed reforms to proceed.

However, the reform process lost its momentum last year as the willingness to endure further hardships dissipated. And then, despite the lack of progress in reform, the economy managed to stage a recovery. Complacency is easier now.

The unexpected economic recovery has occurred due to government spending, a revival of consumer confidence and the massive turnaround in the current account. Thai exports, buoyed by a weaker baht, have helped maintain macro-economic stability.

Even Dr Paul Krugman, the famed economist from the Massachusetts Institute of Technology, was surprised by the recovery in Thailand and the region. Recovery has taken place without much reform, he said. The ailing Thai financial system has not been fixed: Thais have just learned to live with it, he said.

Concern has been raised over the lack of real reform in the Thai economy. For sustainable recovery over the next five to 10 years depends on reforms taking place now.

''In corporate debt-restructuring all you see is the banks rescheduling the debts, whereas there is virtually no restructuring on the business side,'' noted one banker. ''Without business restructuring, how can Thai companies compete in the future?'' he asked.

At present, any call for reform will fall on deaf ears. With the economy growing at more than 4 per cent this year and recovery in the stock market, Thai corporations and some banks believe that the problems will go away without reform.

However, a reality check will strike soon if complacency is allowed to prevail in the face of the ongoing globalisation of the economy.