A+| A| A-

Thai Capital after the Asian Crisis

The 1997 east Asian crisis marks a major shift in the role and prospects of private domestic capital, part of a major adjustment to globalisation with far-reaching implications. Over the second-half of the 20th century, Thai domestic capital had played a key role in expanding the productive potential of the economy. After the crisis, it has been confined mostly to a rentier and service role in an economy dominated by multinational firms.

and

2

2

1

1

1

1

1

1

1

1

1

1

0-

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2 5 12 14 17 24 33 43 52 60 70 75 6 11 19 20 20 23 29 33 36 40 44 49 2 6 7 9 11 15 17 19 20 23 24

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

EAST ASIA: A DECADE AFTERdecember 15, 2007 Economic & Political Weekly62Thaksin Shinawatra promised to regulate the retail sector and protect the interests of domestic capital. On achieving power, he initiated the drafting of a law. But in late 2002, Thaksin an-nounced that the idea of legislating any protection for local retail had been abandoned. A minister explained that this decision had been taken “simply because we don’t want to send a wrong sig-nal to the foreign community”. Thaksin added: “External trade is important to the Thai economy since it generates new investment and increases our productivity” (The Nation, November 17, 18 and 20, 2002).In most localities, domestic capital cooperated with the mega-store chains, particularly by selling them the land for prime loca-tions. However, in a handful of local towns, business groups were successful in excluding the megastores, sometimes by resort to local planning laws, and sometimes through openly threatening campaigns (“You build, we burn”). In 2004, when Tesco proposed to penetrate another segment of the retail trade by building another 400 smaller-sized stores, the domestic retail protesters forced government to impose a delay on Tesco’s expansion while the government drafted a regulatory law (still in process).Many other service firms entered Thailand in the aftermath of the crisis. Some of these were simply taking advantage of the low office rentals and the ease of evading the capital restrictions. Some came in order to service multinational manufacturers who were their worldwide clients. Some were attracted by the de-mand for special expertise generated by the crisis. The arrivals included firms in property, law, specialised finance, accountancy, consultancy, repair and maintenance. In 2007, when the govern-ment threatened to close the conventional loophole in the Alien Business Law, estimates of the numbers of companies which had exploited this loophole ranged up to 40,000 (Prachachat Thurakit, January 11, 2007). This number included a vast number of restaurants and other petty businesses, but also some major ventures in property, retailing, and other services.Some parts of the service sector were protected through politi-cal influence, but even this became uncertain after the crisis.Mobile phone services were provided by an oligopoly of three domestic firms, headed by a firm in the Shin business group owned by the prime minister’s family. This oligopoly repelled four prospective local competitors through political influence, and kept foreign firms at bay through a telecommunications law prescribing a maximum foreign shareholding of 25 per cent. For 20 years, this oligopoly delivered the highest volumes of profit gleaned by Thai domestic capital. But as the mobile phone busi-ness matured on a global scale, these local firms were affected by a global trend towards concentration. They needed to make further investments to keep up with the pace of technological development, but could only justify those investments if the busi-ness achieved a scale larger than that possible within the Thai domestic market. In 2005-06, two of the Thai firms sold out to multinational firms which were intent on expanding to achieve that scale. (The sector’s political influence was now used to re-move the capital restriction to make the sale possible.)In finance, manufacturing, and services, the inflow of foreign capital in the aftermath of the crisis was a sudden and marked change from past practice. Overall, the involvement of foreign capital in the economy increased substantially. In 1988, 122 of the world’s top 450 multinational companies had an operation in Thailand. By 2000, the number had doubled to 248 of the top 500, and the number of their subsidiaries had tripled from 214 to 630, of which 305 were in manufacturing [Suehiro 2003]. The amount of tax paid by multinational companies increased by 80 per cent over the four years 2000-04 [Deunden et al 2007].3 Impact on Domestic CapitalIt is difficult to give an accurate picture of the impact on Thai domestic capital as a whole, but a rough conclusion is that one quarter of all business groups of any significance suffered serious damage.Among the top 50 business groups on the eve of the crisis, one quarter either disappeared or sank to the lower reaches of the ranking table. Among a larger list of 200 top business groups, a quarter disappeared completely. Among the roughly 400 do-mestic firms listed on the stock exchange, around a hundred or almost a quarter were delisted over 1997-2004 (compared to only 11 delistings over the prior decade). Of these 153 were mandatorily delisted, usually because of bankruptcy proceedings. Among the other 47, many were Thai or joint-venture firms which had been bought out by a foreign parent company and removed from the exchange. Examples are Prudential Assurance and American Standard [Suehiro and Natenapha 2004].Two factors seem to have determined the Thai business groups’ chances of survival – sector and structure. Several of those which were badly affected had their core business in sec-tors overwhelmed by multinational capital. These included groups which had specialised in manufacturing joint ventures with foreign firms, groups involved in the more speculative parts of the finance industry, and groups with a heavy commitment to property development.Most Thai business groups had started out in the family-based structure of Chinese origin known as “kongsi” which roughly translates as partnership. Under this system, all members and branches of the family are considered part of a single enterprise. The patriarch (or, more rarely, matriarch) has absolute control over both the direction of the enterprise and the distribution of the profits. All adult males, and many females too, are expected to work in the family concern. On the occasion of a son’s mar-riage, the patriarch allocates the son a segment of the business for his family upkeep, though still within the patriarch’s overall control. On the patriarch’s death, control usually passes to the eldest son, but this may vary if another family member is clearly better qualified.Some family firms had grown into sprawling conglomerates over time. They not only accumulated financial capital but also acquired intangible assets through their relations with banks, politicians, and foreign partners which gave them advantages in exploiting new areas of profitable opportunity. Families often branched into new areas by indulging the ambitions of sons, es-pecially those who had been educated overseas and returned with new skills and a different view of the future. In the crisis, some of the most vulnerable firms were those which had deve-loped into such conglomerates without modifying the internal
Process industry Resource-based industry Tech based industry Other Agriculture Labour-intensive industry

Source: Bank of Thailand.

Business Government Households

Source: NESDB.

Public

Private

Source: NESDB.

EAST ASIA: A DECADE AFTERdecember 15, 2007 Economic & Political Weekly66Multinationals bring several built-in advantages. They im-port technology. They train people. They have a tendency to be highly efficient because of international competition. They contribute to growth. For a country highly dependent on ex-porting, tapping into global production chains through multi-national companies appears to be a highly successful strategy. Of course, there are problems over profit drain and risks that the multinationals will be footloose, but the very rapid spread of multinationals in recent years has happened in part because host governments perceive that the advantages outweigh the disadvantages.Here we are not so much concerned with the pros and cons of multinationals per se, but with the consequences of becom-ing so dependent on multinational capital that domestic capital is fatally weakened. An export-oriented, multinational-owned manufacturing sector tends to be capital-intensive, to have low labour absorption, and to have relatively few linkages with the rest of the economy. In several Latin American countries, a series of economic crises has progressively debilitated domestic capital to the point that its role in the local economy is insignificant. Is Thailand (and possibly other non-giant Asian economies) on the same path? If so, the government needs to concentrate on two key policy areas. First, it needs policies to develop support indus-tries, human capital, infrastructure and logistics which encour-age the multinational exporters to deepen their production base in the local economy. Second, it needs to promote and facilitate domestic firms venturing overseas since that is the only route of survival for domestic capital.Notes1 The Bank of Thailand figures used for this calculation underestimate the contrast as they exclude invest-ments in the banking sector, which increased after the crisis with the sell-off of controlling holdings in four banks.2 The local firms retained minority stakes. Delhaize also entered but failed and withdrew in 2003.3 The contribution of exports to GDP was 113 per cent in 1999, 210 per cent in 2000, 135 per cent in 2002, and 63 per cent in 2004 [Warr 2005: 30]. 2001 was an exception because of a slump in the US.4 Debt per household rose from 68,405 baht in 2000 to 1,32,263 in 2007 (Bangkok Post, August 24, 2007).ReferencesDeunden, Nikomborirak et al (2007): ‘Khrongkan BotbatKhong Borisat Kham Chat Nai Prathet Thai: Raingan Khwam Kaona Khrang Thi 2’ (Project on the role of multinational companies in Thailand: Second Progress Report), Thailand Research Fund, Bangkok.Pavida Pananond (2006): ‘Foreign Direct Investment and the Development of Thai Firms: A Case Study of Elec-tronics Industry’, proceeding of the annual seminar of the Faculty of Economics,Thai Economy in the Changing Global Economy and Society, Thammasat University, Bangkok.Suehiro, Akira (2001): ‘Family Business Gone Wrong? Ownership Patterns and Corporate Performance in Thailand’, ADB Institute Working Paper 19, ADB In-stitute, Tokyo. – (2003): ‘Big Business Groups, Family Business and Multinational Corporations in Thailand 1979, 1997 and 2000 Surveys’, paper presented at Medhi Wichai Awuso Project, Faculty of Economics, Chulalongkorn University, January 8.Suehiro, Akira and Natenapha Wailerdsak (2004): ‘Family Business in Thailand: Its Management, Governance, and Future Challenges’,ASEAN Economic Bulletin, 21, April 1.Warr, Peter (ed) (2005): Thailand Beyond the Crisis, Routledge Curzon, London and New York.National Housing Bank(Wholly owned by the Reserve Bank of India)India Habitat Centre, Core 5A, 4th Floor, Lodhi Road, New Delhi – 110 003Invites applications from Indian citizens for the following contractual positions:Sl. Name of the Post Number of Posts Compensation Age Maximum No as on 01.11.20071. Senior Advisor (economics) 1 Upto Fixed 45 years 8.00 Lakh p.a.2. Advisor (economics) 1 Upto Fixed 45 years 7.00 Lakh p.a.3. Senior Analyst (Statistics) 1 Upto Fixed 40 years 6.00 Lakh p.a.For details and for other posts, please refer to NHB’s website www.nhb.org.in or advertisement in Employment News/Rozgar Samachar to appear on 15-12-2007.Last date of Application: 24.12.2007 General Manager (HRD)

To read the full text Login

Get instant access

New 3 Month Subscription
to Digital Archives at

₹826for India

$50for overseas users

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Statistical data indicate that the Philippines has recovered post-2002 from the east Asian financial cataclysm. Recovery has been spurred by...

Ten years after the east Asian crisis, the volume of capital flows to developing countries has exploded, but has vulnerability to crises been...

In this paper, the post-crisis experience of the five economies of Thailand, South Korea, Malaysia, Indonesia and the Philippines is considered....

Until 1997, successive governments of South Korea had pursued "developmental citizenship" - industrialisation at a pace that created jobs and...

The article constructs a theory to understand a financial crisis in an open third world economy in the context of a sequence of stock equilibria,...

The financial disaster that erupted in east Asia 10 years ago had a devastating impact on Indonesia as the economic contraction was the worst...

In the wake of the east Asian financial crisis in mid-July 1997, not only were the initial policy initiatives taken by the Malaysian government to...

Back to Top