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WEB-ONLY EXCLUSIVE
'People Are Tired of this IMF Mantra of Reform'
Exclusive interview with Thai academics Pasuk Phongpaichit and Chris Baker
By ROBERT HORN

October 31, 2000
Web posted at 6:10 p.m. Hong Kong time, 6:10 a.m. EDT

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No one has been better than Pasuk Phongpaichit and Chris Baker at explaining how Thailand transformed itself from a sleepy backwater to the world's fastest growing economy -- and subsequently ignited the Asian meltdown. A husband-and- wife team, Baker has taught Asian history, sociology and politics at Cambridge University and authored four books on India, while Pasuk is a professor of economics at Chulalongkorn University in Bangkok. Together they have written "Thailand, Economy and Politics" (Oxford University Press 1995), "Thailand's Boom" (Silkworm Books 1996) and "Thailand's Boom and Bust" (Silkworm Books 1998).

Their latest effort, "Thailand's Crisis" (Silkworm Books September 2000), analyzes the causes of the meltdown, efforts by the International Monetary Fund and the Thai government to rescue the country, and the impact it had on business, politics and society. The book is highly critical of the IMF, saying the agency "applied an off-the-shelf macroeconomic solution which was spectacularly ill-suited to Thailand and other Asian economies." The result was a needlessly severe recession that compounded the problems with which Thailand is still struggling. "When a crisis happens, the first priority for a country such as Thailand should be to stay clear of the IMF (in its present form)," they write. Pasuk and Baker met with reporter Robert Horn recently and they discussed the economy, reform efforts and upcoming national elections. Edited excerpts:

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TIME: When Prime Minister Chuan Leekpai came to power three years ago, the economy was contracting by 10%, millions of people were unemployed, and the banking system was near collapse. Three years later, the economy is growing again, exports are up, unemployment is down and the banking system is working, although not very well. But the public seems to have turned against Chuan, and we're hearing that he and his Democrat Party will probably lose the national election coming up in a few months. What went wrong?
Pasuk: Well, to start, the banking system is not working. It's basically in seizure. The feeling among the people is that we've adhered to the International Monetary Fund (IMF) reforms too strictly. [Finance Minister] Tarrin Nimmanahaeminda has refused to relax new rules and regulations for banks, which are finding them difficult to meet. The bankers have been trying to bargain with Tarrin to relax, not eliminate, some of these rules, but he won't change his view. He says the reform program is already underway, and that foreign investor confidence would decline if it stopped. But the confidence of the investors is no longer there, anyway. The international financial people love Tarrin, but the local people don't. He firmly believes that our future is tied up with foreign investors and globalization, but many Thais feel globalization has hurt them. A key question for this election is whether or not the Democrats will push Tarrin out.
Baker: Local businessmen are saying that Malaysia and Korea -- two other countries that suffered during the crisis but adopted different solutions -- are pulling ahead. Tarrin keeps saying that foreign investor confidence will come back, and that's the answer [to the country's problems]. But he's been promising that for three years, and it hasn't. Thailand was left with a serious debt problem. Lenders got all their money out [during the crisis]. So all the problems were left with the locals. We had a capital outflow equivalent of one- sixth of gross domestic product over two years. How can you revive the economy when you've localized the problem and stopped the economy dead in its tracks?
Pasuk: Korea's debt was bigger than ours in the beginning, but the Koreans were powerful enough to negotiate rollovers and reschedule payments with bankers in the United States. Nothing like that happened here.
Baker: It was also Korea's third time [in an economic crisis] and so they knew what to do.

TIME: So what should Thailand do about its debt problem?
Baker: Supachai [Panitchpakdi, Thailand's Commerce Minister] said almost from the beginning that the government should buy up nonperforming loans. Instead, they threw the problem back to the banks and the debtors. Some way has to be found to take the dead loans out of the system. Whatever they decide, the costs, including political costs, will be very high. Some people have said that if the privatization of state enterprises goes through, it would help [by using the money from the sales to pay off the bad debts], but politically that won't happen, and Tarrin has to accept that.

TIME: How much of the problem is the result of misguided policies of the IMF, and how much is the fault of the government?
Baker: The IMF predictions were very indicative. At the beginning they said Thailand would suffer a mild recession, and have 3.5% growth in 1998. (Thailand's economy contracted by 10% that year.) They badly misunderstood the nature of the situation. By the time the Democrats took over most of the bad decisions had already been made [by the IMF and the previous government]. And it took more than six months before they got on top of it. It wasn't until mid-1998 when [U.S. Treasury Secretary Robert] Rubin came to Bangkok, that we started seeing statements from the Democrats about changing the IMF program. That was when the government started to undo the high interest rate policy.
Pasuk: The Democrats also believed the IMF. They said the money [foreign investment] would come back and start flowing in. It took about a year before they started to change what the IMF was doing.
Baker: The government said the crisis would be over in six months. There was a definite failure of leadership on the part of Chuan. There was a failure of communication throughout. He should have tried to incorporate the people into understanding the severity of the situation.

TIME: On the whole, though, the country is in much better shape than it was when Chuan took office. So why does support seem to be increasing for his rival, Thaksin Shinawatra, and his Thai Rak Thai party?
Baker: The Democrats are associated with a certain point of view. It's the IMF point of view that says, 'Open up your country completely, remove all forms of impediments to foreign capital, let us do what we want in your country, and eliminate all forms of support you give to local capital.' It's inevitable that there will be some reaction to that. Thaksin says we will return to backing local capital and businesses with some form of state support. You can dispute quite rightly the way he translates those two ideas into policies -- or just who he really is -- but the debate he's raised is important.
Pasuk: People are tired of this IMF mantra of reform and opening up the economy. We do want reform. The question is, how quickly. If it's forced on a country too quickly, it could undermine the political system and cause more harm than good. People around the region feel this way. Having suffered so much over the past few years, they are tired of constant pressure from the United States to open everything up quickly and completely. They are saying, 'Look, our economy is booming and so you have to do it our way.' People view this as U.S. hegemony and are saying enough is enough.

TIME: So is Thaksin the answer?
Pasuk: A lot of people are fooled by the glamour of his success in business. A lot of people feel there is no place else [for the country to go], so it may be better to support a successful businessman. Little do they know what kind of business he's in, or how he makes profits from monopolies and his connections...But the glamour of his business success in this time of crisis seems to have raised his position in the eyes of the people. It's very superficial, but it works. A lot of people in Thailand believe in money. I'm very surprised that many of my colleagues think he will be a good Prime Minister. He came to talk to us [academics] three years ago. All my colleagues said, 'Why not give him a chance? At least he has a lot of money. And if you have a lot of money, you can move things.' I said, 'What's his ideology?' They said, 'It doesn't matter. In Thai politics you need money.' A lot of people can't make the distinction between running a business and running a country. In a business you can dictate, but in a country you just can't, especially in a country like Thailand where social divisions are great. If you want to judge Thaksin on his past work in politics and government, it's a complete failure. But people have conveniently forgotten that, already. It's very dangerous to let Thaksin succeed, on many counts, especially 'money politics.' He's spending so much money, more than anybody else...Can you imagine how much the next election will cost?
Baker: Thaksin is a logical extension of what has happened to Thai politics since Chatichai Choonhavan, [who was elected Prime Minister in 1988 and who was ousted in a military coup in 1991. His government was regarded as corrupt], when it became a business preserve. Banharn [Silpa-Archa, Prime Minister between 1995 and 1996] was the continuation of that. Chavalit [Yonchaiyudh, Prime Minister between 1996 and 1997] was a throwback to a prior era [when military men controlled politics].

TIME: Some economists have raised fears that if times are still tough a year or two from now, people might lose faith in political reform and the way will be paved for a return to a more authoritarian leader. Is that a realistic danger?
Pasuk: There will always be that suggestion in the wings. The right wing, conservative, military element is always there to provide that alternative, but is it practical in this era? A lot of people in that camp still think wishfully because it was not that long ago that they were in control. But they are no longer the majority.

TIME: For people who don't live in Thailand, why is it important whether or not Thailand recovers, and how it achieves that recovery?
Pasuk: Countries that have not liberalized yet will look to Thailand and try to learn from it. The question is how to achieve change without also disrupting democratic trends.