How much capital fled from Thailand?

25 March 1999

How much money fled after Thailand collapsed into crisis in mid-1997? We have known all along that the answer was "an awful lot". But the figures have recently become a bit clearer. The Bank of Thailand publishes its best estimates and gradually refines them. The data for 1997 onwards are still labelled "preliminary", but recently the figures have become more complete and coherent, which is usually a sign that they are getting close.

As the figures have become more refined, the tale they tell has grown worse. The last three columns of the table show what has happened since the baht was floated on 2 July 1997. The top line ("government") includes the IMF loans and other borrowing from the World Bank, Asian Development Bank and other sources. Up to the end of last year, these amounted to an inflow of around 500 billion baht, or around US$13 billion at the current exchange rate.

But the real interest is in the second line showing the private sector. In the 18 months from the float to the end of last year, 1,171 billion baht of capital was repatriated from Thailand’s private sector. In the first year alone, the amount which fled was equivalent to almost one quarter of the whole Thai economy (GDP). Looked at another way, this eighteen-month outflow is roughly the same as the total inflow since the end of 1993.

The breakdowns show that most of the outflow has come under the categories of loans, currency and deposits. The latter began to seep away in early 1997, and the net outflow over the last two years cancels out total inflows since around 1988. Loan money was still flowing inwards, albeit more slowly, right up to the float. Since then the eighteen-month outflow of almost a thousand billion baht cancels out almost all the inflows back to the end of 1992.

You need little evidence other than these figures to explain the severity of Thailand’s crisis, and the extent of effective bankruptcy both in the financial sector and the real economy. No economy, however robust, can survive when private-sector capital equivalent to over a quarter of GDP disappears over a period of one-and-a-half years.

Where has all this money gone? The answer is complex, but the short version is: the United States. Most of Thailand’s foreign loans were owed to creditors in Europe and Japan. But over the past few years, as the crisis has rippled through Asia, Russia and Latin America, there has been a net flow of capital from Europe, Japan and the world as a whole to the United States, This tidal wave has pumped up a bubble economy in the US which is every bit as distorted as Thailand was in mid-1997. The current account deficit has ballooned. The stock market index has lost any contact with reality. Corporate profits are slumping because bubbles always misallocate capital.

As many American analysts lectured Thailand two years ago, the first reaction to a crisis is always denial. The same is now true in the US. From the President downwards, people are talking about a new (miraculous?) stage in American capitalism. But it’s a bubble. And bubbles burst. Many experts agree it’s a matter of when not if. And on the question "when", they are in total agreement: prediction is impossible.

Of course the US bust will not be like the Thai bust, not least because the US will not have to cede control over its economy to the IMF. But the transfer of the bubble from east to west raises important issues for the Thai recovery.

First, should Thailand be struggling with financial restructuring? Thailand was obviously foolish to admit the bloated capital inflows in 1993-5 which caused the bubble and bust. The IMF blames this foolishness on the Thai financial sector, and uses this to justify the programme of financial restructuring. But will this restructuring prevent a similar bubble in the future?

Obviously not, since we are seeing a similar bubble in the US which provides the model for much of the restructuring activity. In that case, should Thailand be so slavish about trying to restructure its financial sector in the midst of crisis? Is the IMF stubborn about this, not because restructuring is vital for Thailand’s recovery, but because the IMF’s needs to retain a role now that its macroeconomic programme for Thailand has totally collapsed?

Second, what has happened to the proposals for restraining wayward flows of international capital? Big countries can deal with these better. But small countries like Thailand have fewer defences. The amounts which flowed in and out of Thailand between 1993 and 1998 were huge and destabilising by local standards, but were an infinitesimal fraction of total flows around the world – international funny money.

So far the talks over a "new international financial architecture" have come to very little. Even the proposal to make the hedge funds more transparent died away after the Russian crisis promised to kill the hedge funds off. But now the hedge funds are back as active as ever. And besides, hedge funds are only a small part of the issue.

Finally, what will happen when the US bubble bursts? Should we cheer, or start planting cabbages? Here there are two schools of thought. One school predicts disaster. The US is now the only market driving any growth in world exports. If that growth disappears, a world depression is inevitable.

The other school takes an opposite view. For the last couple of years, the US has been a sponge, sucking up capital from the rest of the world, drying up liquidity, and causing economic slowdown. When the US bubble bursts, and US asset prices slide, this suction will go into reverse. This backflow will halt the creeping paralysis which is spreading through the economies of the rest of the world. There will certainly be some recession and a lot of panic at first. But ultimately this backflow will water the parched capital markets around the world.

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