The existing regulatory framework was simply inadequate to detect and prevent the brewing problems. At one level, inadequate follow-up framework made it difficult to track where the funds were going. But the heart of the problem lay in the loose supervision and examination system in place. Regulatory waivers were common. And the culture evolved to one that encouraged or condoned excessive risk-taking behavior. Compounding the problem were Thailand’s underdeveloped capital markets. The absence of what Alan Greenspan termed a “spare tire” of finance made bank lending the dominant source of corporate financing. Consequently, viable businesses were trapped in the breaking down of the banking sector’s intermediary role with no way out, and the crisis spiraled into a devastating credit crunch. The most significant implication drawn from this lesson is thus a strong financial sector is essential for a country to sail through financial storms. It is perhaps not a coincidence that Singapore and Hong Kong fared better than many other Asian countries during the 1997 crisis, for their financial systems were, and still are, relatively deeper than the rest. A strong financial sector serves as an absorber for external shocks while a weak and inefficient financial sector aggravates the depth of the problem and prolongs the recovery process. Beyond the “hardware” of the physical and financial infrastructure, the “software” of the ethical issues governing the running of the system is also critical. Tales of businesses being endowed with extraordinary treatments from bankers through their cross-holding relationship are probably still fresh in everyone’s mind.
For Thailand to prosper in the future, we can no longer rely on the old way of doing business or, for policymakers, the old way of running the economy. We need a different and more effective paradigm that will not only sustain the current growth momentum but also helped the country meets future challenges. Putting the crisis under microscope reveals critical flaws that beg for new approaches and strategies in all of the four major areas: (1) the real sector, (2) the financial sector, (3) the issue of governance, and (4) the macroeconomic framework. In many respects, these lessons are neither limited to Thailand nor unique to the recent crisis. The challenge is perhaps how to put them into the context of rapidly evolving global and regional economies. Let me start with the real sector. For a brief period in the early 1990s, it seemed that everything was going well. Everywhere one turned, businesses were booming. Demand seemed to always outpace supply. And on top of all that, Thailand was just named Asia’s fifth economic tiger. Little did everyone know, however, that the spectacular economic performance masked certain structural weaknesses in some part of the real sector. As it now becomes all too clear, parts of Thailand’s real sector prior to the crisis were characterized by low productivity and high leverage. With the benefits of hindsight, Thailand’s past rapid growth could be attributed primarily to quantity, that is, the mobilization of capital, labor, and natural resources, rather than quality.