The 1980s and 1990s have been critical periods for Thailand’s development. After an initial period of instability in the early 1980s, Thailand’s economy expanded at an average pace of 9 percent . during 1987–96, while the number of households below the poverty line dropped from percent in 1988 to percent in 1996. During this period, Thailand’s economy also underwent deep structural changes, including the liberalization of its financial sector and the integration of its economy with global financial and product markets. For example, trade as a ratio to GDP increased from 54. | Financial Liberalization and the Capital Account Thailand 1988-1997 by Pedro Alba Leonardo Hernandez Daniela Klingebiel World Bank and Central Bank of Chile. Valuable comments were received from Gerard Caprio Simeon Djankov Swati R. Ghosh and Giovanni Majnoni. The findings interpretations and conclusions expressed in this paper are those of the authors and do not necessarily represent the views of the World Bank. - 2 - Table of Contents I. Introduction II. Initial Conditions 1. The Macro-Environment a. Macro-Imbalances and the Macro-Stabilization Program of 1984-87 b. Structural Reforms 2. The Financial System a. Structure of the Financial System b. Regulatory and Incentive Framework of Financial Institutions c. Performance and Condition of Financial Institutions d. Resolution of the Banking Crisis 83-87 3. The Corporate Sector 4. Conclusion III. Liberalization of the Capital Account and Financial Sector in the early 1990s 1. Liberalization of the Capital Account 2. Liberalization of the Financial System IV. Consequences of the Liberalization of the Capital Account and the Financial Sector 1. Surge in Capital Inflows Increased Reliance on Foreign Capital and the Shortening of the Maturity Structure 2. Rapid Growth in Credit 3. Increased Leverage of the Thai Corporate Sector 4. Increase in Risk Profile of Financial Institutions V. Policy Response 1. Macro-Response a. Determinants of Capital Flows b. Monetary Policy c. Fiscal Policy d. Exchange Rate Policy 2. Policy Response in the Financial Sector a. Measures aimed at Deterring Short-term Foreign Capital Flows b. Changes to the Regulatory Regime 3. Conclusions VI. Conclusions - 3 - I. Introduction The 1980s and 1990s have been critical periods for Thailand s development. After an initial period of instability in the early 1980s Thailand s economy expanded at an average pace of 9 percent . during 1987-96 while the number of households below the poverty line dropped from percent in 1988 to percent in .
