The Southeast Asia Bust:
Experience of Thailand and Indonesia

by Karoon Sosothikul,
May 2002









            In 1996, I was a young teenage boy. I was enjoying all of the things that teenage boys do in times of prosperity. I played my video games, went to movies and arcades with my friends, took girls out to restaurants in the beautiful city of Bangkok. Also, of course, I went to school. More than that, I also made my plans for the future. I also made plans to continue attending the college level of schooling in the United States. I was sure my grades were high enough to get in and finally, I got in Boston University which as what I planed. I did not have to worry about money, because there was lots of money in Bangkok at that time in 1996.          

By the end of 1997, everything was very different. The collapse of the Thailand economy that changed everything was very fast. When we look back now it appears almost to have happened in a day. One day there was prosperity and then the next day there was poverty.  I remember watching those construction projects in Bangkok in 1996. On every block in the downtown there was a new office building going up. But then, in 1997 most of these projects were stopped. Many of them stopped in the middle. So Bangkok looked almost like a cemetery. The half-done offices were as the stones on the grave.

 Things were different at home too. The collapse of the baht and the Thai economy were a great damage to my family’s business. We did not start being poor, but a great optimism was gone from our lives. We thought about money more often, which we never thought about before. Money was just there and there was more to come. Now even my college in America was not sure. Maybe I would have to go to Chulalongkorn University in Bangkok and not go away.

It was not just at my house that cheerfulness was departed. The whole country of Thailand was very depressed emotionally about the economic depression. We read the papers every day for sign that things were better, but they were only worse. Instead of things going good, we read about how the collapse was spreading. Singapore and Malaysia, Indonesia and Taiwan, even Hong Kong and Japan. All of these countries fell to the same economic disaster that was in Thailand.

 Today the economy of Thailand is stronger but not as good as before in 1997. I believe that it is important in understanding what happened in Thailand and Southeast Asia in 1997, to have a better idea of how economy works in developing and developed nations. This paper examines what happened in Thailand and also why. It compares the experience in Thailand with the experiences in Indonesia as well, to see how that country was different and the same as Thailand.

The Background of the Thailand Economy

Pasuk Phongpaichit and Chris Baker give a very good and short history of the Thailand economy in the book Thailand’s Boom and Bust. From the colonial times of the 19th century (but Thailand was never a colony) the country was an agricultural economy. Until World War II, it was a very rice-exporting country that provided food for the colonies of South and Southeast Asia and also for other Asian countries like Japan. After World War II Thailand was still an agricultural economy, but during the 1950s, 1960s, and 1970s the government subsidized the growing of the local economy with an import-substitution policy. This policy protected the local maker of consumer goods from imports by tariffs and other barriers.

By the late 1970s, the local large companies saw import substitution to be no longer proper policy. Following their advice, the government changed policies to an export-oriented approach. This allowed the local big businesses to take advantage of the lower Thai labor cost than in the Asian Tigers and Japan. Manufacturing moved to Thailand because of this. The big boom in Thailand became because of the great amount of foreign investment in the late 1980s and early 1990s. The world economy was having a general good period, and there was much free capital available. Thailand was a place where many believed good investment potential was in an existence.

  Foreign Direct Investment (FDI) was encouraged with the government. The major Thai corporations used this investment to create new manufacturing and service industries. All this growth required servicing, so many smaller Thai businesses grew quick to provide the support. Great expansion of infrastructure was also needed, and this the government did. After 1985, all of Thailand appeared to be jumping about with growth (Phongpaichit and Baker, p.17-93).

  One part that was very important about the growing of the Thai economy was the way that the government handled the baht. Phongpaichit & Baker show how the first devaluation of baht was against the best judgment of the government. A strong baht was a “pillar” of the government thought about keeping the economy strong. But devaluation was forced by the economic shock of 1984 (p.69).  Devalued baht brought manufacturing to Thailand because wages were so low compared to Japan and other more developed countries. It also brought in foreign investment and currency speculation (Phongpaichit and Baker, p.79). The economy was “awash” with money. This was a major cause that caused the problems that led to the collapse of the economy.

The Collapse of the Thailand Economy

 As Gough points to (p.32), the economic boom in Thailand was already under pressures in 1995, from political unrest and rapidly increasing prices, but also domestic natural disasters. These including some very bad flooding that we that were there still remembered. But the boom was continued to appear strong by the strong real estate and stock market prices that were really only the result of short-term foreign investment. It was over-valued stocks and real estate that made the Thai economy appear strong. But when government crisis made government nervous and enforce stronger banking regulations, some banks failed and the market declined (Gough, p.33).

Similar things have happened in the United States. The recent huge decline in the stock market after September 11 is often seen by many to be the result of an investor that lack of confidence that made people conclude the stocks were over-valued. In Thailand, stocks and property were over-valued and when confidence shook because of government scandals and new regulations, the investors bailed out.

            Gough also makes clear what the scandals in Thailand were about. The central bank had most of its foreign currency reserve tied up in forward exchanges in currencies. Also, the central bank controlled development fund had loaned US$8 billion to financial institutions in trouble in Thailand (p.36).

This type of scandal did not surprise Thai people. The crony between government and big companies was a long-term fact of life in Thailand. What was surprising to my father and other businessmen was the announcement that the fund would not longer support Finance One, the biggest financial firm in the country. The response of Finance One in closing, as Gough states (p.36), set off the crisis. The government, that promised only a week before never to again devalue bath pulled loose the peg to the U.S. dollar and the bath dropped very swift. So swift was the dropping that speculators all over the world sold quickly, dropping it even more fast.  When the baht dropped so fast, the investor confidence dropped equally swift. Foreign short-term investors pulled out their investments. This is what caused the many stalling projects that I remember from 1997 in Bangkok. There was just suddenly no more money.

A part of the problem, in the view of Phongpaichit & Baker, was that so much money washed through Thailand in the early 1990s that it was invested badly (p.94). Thailand inflation rate was high, and wages were high, so Thailand was not any more a low-wage manufacturing location. China and other countries were more competitive than Thailand (p.94). But the economy in Thailand was appealing towards the foreigners, so they kept investing. But the investments were channeled to speculation on stocks and property and speculation buildings. These were unrealistic projects, built only on the optimism of investors. The Thailand economy could not really support a luxury and speculation based structure of investment on a manufacturing economy that was non-competitive and not solid.

The Consequences of the Collapse

Phongpaichit & Baker are correct in pointing that to the mid-1980s all Thais were much in agreement about the fact that Thailand was a rural country. The village was seen as the central pillar of the whole society (p.153). My father and grandfather talked about the villages of Thailand like American politicians talk about ‘family values.’ There is an idea, still, in Thailand that the village people are true to culture and have strong values.

In the many years of my life living in Bangkok, I noticed how Bangkok had made a shift from a rural country to a manufacturing and economical country.  Thailand is considered a country in the heart of Southeast Asia, and every year its population growth grows numerously. Villagers migrate to Bangkok looking for the chance to have a better life and trying to find jobs in factories, were they receive a higher wage. As Phongpaichit and Baker point out, most of these people were women and many returned to the villages because of the hard conditions of the city. Still, by 1990 there were 1.2 million people in Bangkok living in slum shacks (p. 132). After the collapse of the economy when wages declined and unemployment rose, these people’s lives were in even greater poverty.  The village society they used to live in was mostly gone, and so was the agricultural economy that once was there. In fact, this was why many came to the city in hope for a better life.  Instead, by the beginning of 1998,thousands of people were out of work due to the closing of many financial institutions. This resulted in many bankruptcies of companies and marked the beginning of Thailand’s financial crisis. These were terrible times in Thailand.

The Collapse in Indonesia

The Thai economic crisis made a domino affect towards other neighboring countries.  The Indonesian economy also suffered from the problems of 1997. In August 1997, the Indonesian rupiah was floated, as a result of the decline in value of the baht and the Malaysian ringgit (Gough, p.42).  It is reasonable to think that the Indonesian currency problems were caused, like those of Malaysia, by speculators and by Western people’s lack of ability to tell Asian people, or even countries, from each other.

            Indonesia also had other problems that made contribution to its own economic recession. The ‘haze,’ caused by thousands of acres of Indonesia rainforest burning, was seen as far away as Thailand. Some people even saw the haze to be the physical expression of the economic woe. Even educated Thai people could be heard saying this, for I heard this myself from business friends of my family.

As the result of the decline in the rupiah, many people went back to the farms to work.  Just as the economy was getting bad enough, there was a severe drought that caused damaged towards their crops.  The farmers were left with no hope; usually in this case, they will move to the cities to find jobs, but now, with the situation in Jakarta, they are stuck in a “no win” situation.  More problems rose when Suharto lost power to his following officer.  Now that there was no head of states, chaos started to begin when someone in the government wanted to jeapordize the country.  “On Tuesday, city officials in Jakarta were quoted in the local press declaring their intention to strictly enforce a ban on Chinese New Year celebrations because of fears that ostentatious displays by the wealthy ethnic Chinese minority would spark violence by resentful members of the Muslim majority” (Paul Blustein).  This caused many Chinese Indonesians to close their shops and caused more death among the citizens of Indonesia. (Edwin Hermawan). As a result of the crisis, there were severe ethnic backlashes experienced throughout the nation.

However, problems in Indonesia were less than in Thailand. This was because as Gough points, Indonesia was less developed than Thailand and there was less industry to be impacted by the crisis. More of a percent of population was still productive in the agriculture sector. But also as Gough points to, there are far more people in Indonesia than in Thailand. There are 200 million people on over 6,000 islands in Indonesia, and their annual income is only ‘lower-middle income’ by World Bank figures (Gough, p.10). therefore even a small decline in the economy has a great impact on per capita income.

 Indonesia industry was hurt by the Asian ‘meltdown.’ A friend of my family, Edwin Hermawan, owned several business ventures in Jakarta, including GS Battery and GS Spareparts. Because of the severe recession in business he decided to close down one venture, and sell off another. He came to the United States to attend graduate school and wait out the crisis.

The crisis also destabilized Indonesia. It was a basic cause of the ousting of the Suharto government. The corruption of that government was famous, and was seen by the people as a cause of the recession and economic woe. This is what our Indonesian friend told us before he left the United States. As pointed out, this crisis had severe consequences on Suharto’s long years of dictatorial rule and expropriation.

Conclusion About the Collapse in Southeast Asia

Kotler and Kartajaya see the need for a ‘repositioning’ of the Asia economy. They call for the creating of a sustainable economy instead of a ‘bubble’ economy. Why was Southeast Asia a bubble? Gough answers this and so do Phongpaichit & Baker. The problem was over-investment. Bankers have a herd behavior, from Gough’s view (p.109). They moved together from all over the world to lend money to Thailand and Indonesia, as well as the other Asian countries. Indonesia alone had $55 billion borrowed from foreign investors by 1997. This equaled about 25% GNP. Thailand was in a similar state.

With all this money available to business and government, projects were started just to use the money. Gough gives the example of the Bakun Dam in Malaysia as a main example of the type of questionable activity so much foreign investment caused in Asia (p.105-106). In Bangkok such investment caused the creation of many buildings on speculation, as mentioned above. These buildings were built only because the investments had to appear to be doing something. As Gough says, when the buildings were empty and were obvious to remain empty, the businessmen that built them stopped being able to pay interest. Banks foreclosed, but found that the value of the empty building was not near the value carried on the books (Gough, p.111). A friend here in Boston says the same thing happened in this city in the 1980s when the real estate market fell apart. Her father took some severe financial losses in investments on buildings built on speculation.

When real estate collapsed in the 1980s so did many Savings & Loan banks. This led to the famous ‘bailout’ by U.S. taxpayers. But this reveals what Kotler & Kartaya are aiming at in their discussion. The U.S. economy is sustainable, the bubble economy of Thailand and Indonesia is not. The high growth rates and rapid development in Thailand and Indonesia were based only on confidence, only on air.

Thailand, unlike Indonesia, has a longer history of independence and a more educated population. It also has a long history of trade and business. Thailand is already emerging from the crisis, but growth rates are not dramatic like they once were. They will probably never be so high again, and the same with Indonesia. Investors will be more cautious. The herd mentality of bankers will be a mentality of caution, because they have taken the bite once already. Slow, steady growth, however, is a sign of a sustainable economy. In the long-term, this is probably what will be best for Asian economies.


Gough, Leo. Asia Meltdown: The End of the Mircale? Capstone: Oxford,  1998.

Kotler, Philip & Hermawan Kartajaya. Repositioning Asia: From Bubble to Sustainable Economy. Wiley: Singapore,  2000.

Phongpaichit, Pasuk & Chris Baker. Thailand’s Boom and Bust. Silkworm: Bangkok, 1998.  

2002 [cited 19 April 2002]. Blustein, Paul,“Dreams Tumble With the Rupiah”.Available from World Wide Web: <>.

Personal Reference: Interview with Edwin Hermawan on April 17th 2002.





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