This is the second article in a series by Kheetanat Wannaboworn and Walden Bello. Read the first here.
This guest article has been edited to correct some factual errors and clarify certain historical details. The authors’ analysis, arguments and opinions remain unchanged, their own, and do not necessarily reflect those of Khaosod English.
In the decade 1987 to 1997, Thailand’s economy was red hot, leading the pack of the so-called Southeast Asian “tiger cubs” with an average GDP growth rate of 8 per cent. Then came the apocalypse. On July 2, 1997, the Thai baht collapsed, as the Bank of Thailand ended efforts to prop it up. This triggered a regional chain reaction known as the Asian Financial Crisis.
A key cause of Thailand’s downward economic spiral was the International Monetary Fund, which will be holding its 2026 fall meeting in Bangkok, along with its sister agency, the World Bank, from October 12 to 18.
Instead of rolling out the red carpet, the government of Thailand should be suing the IMF for reparations for the damage to Thailand caused by its policies.
How the IMF Triggered the Asian Financial Crisis
In the 1980s and 1990s, in addition to its role of disciplining developing countries, the IMF took on a new role of promoting the liberalizing of global capital flows, and a big reason for this was that the US and other leading developed economic powers that dominate decision-making at the IMF wanted their financial institutions and corporations to have greater access to the booming economies of East and Southeast Asia.
The IMF pressured the financial authorities of Thailand, Malaysia, the Philippines, and Indonesia, as well as South Korea, to remove the barriers to the inflow and outflow of capital, and they gave in. With the liberalization of their capital accounts, foreign funds flowed into these countries, with net private capital flows to these countries shooting up from $37.9 billion in 1994 to $79.2 billion in 1995 to $97.1 billion in 1996.
The problem was that these capital flows went mainly to very profitable sectors like real estate and the stock market. There was overinvestment in these two sectors, meaning profits dropped, leading investors to move their money out of the country. The problem was that there were no exit barriers, since the government had acceded to the IMF’s pressure and removed these. In Thailand, with investors panicking and seeking to exchange baht for dollars so their money could leave the country, the oversupply of baht seeking scarce dollars led to a drop in the value of the baht. And when the Bank of Thailand tried to prop up the value of the baht by using its dollars to buy baht, it lost practically all of its $38.7 billion in reserves in six months. The exchange rate fell from 25 baht to the dollar to 50 baht.
Bangkok was ground zero of the Asian Financial Crisis of 1997. Hundreds of office buildings and condos were left unfinished, businesses folded, unemployment soared, and over one million Thais fell below the poverty line in just a few weeks. The still unfinished “ghost tower” in Sathorn came to symbolize Thailand’s financial Armageddon.
How the IMF Worsened the Crisis
The IMF led a consortium of lenders, including the World Bank and Asian Development Bank and several western countries, to “give” Thailand a $17.2 billion “rescue” fund (in current inflation-adjusted dollars, $35.9 billion or 120 billion baht), but the money did not go to the rescue of Thais suffering from the collapse of the economy but to rescue foreign banks and investors, largely by giving them the dollar value of their original loans and investments.
In return for the misnamed rescue fund, the Thai government agreed to a harsh adjustment program that included radically cutting government expenditures and raising the value-added tax (VAT) from seven to a suffocating 10 per cent. The stabilization program worsened the crisis. The private sector was collapsing, so a countercyclical program of accelerated government spending was needed to counteract the economic contraction. Instead, the IMF-directed “pro-cyclical” program of budget cuts accelerated the collapse of the economy.
But the Fund demanded more. At the behest of its principal controlling interest, the United States, the IMF pushed Thailand to remove all limitations on foreign ownership of Thai financial firms, accelerate the privatization of state enterprises, and revise bankruptcy laws along lines demanded by foreign creditors.
As President Bill Clinton’s Trade Representative Charlene Barshefsky testified before the US Congress, the Thai government’s “commitment to restructure public enterprises and accelerate privatization of certain key sectors—including energy, transportation, utilities, and communications—which will enhance market-driven competition and deregulation—[are expected] to create new business opportunities for US firms.”
Clinton’s former Under Secretary of Commerce Jeff Garten enthusiastically endorsed the reforms, saying, Thailand and the other Asian countries “are going through a dark and deep tunnel…But on the other end there is going to be a significantly different Asia in which American firms have achieved a much deeper market penetration, much greater access.”
Not surprisingly, the IMF received heavy criticism not only from Thai civil society but internationally on four counts:
- It encouraged the elimination of capital controls, that led to massive capital inflows and outflows that destabilized the economy.
- Its rescue program of $17.2 billion went to save foreign creditors and investors, not the Thai people.
- Its stabilization program drove the economy to recession.
- Its “reform” program for Thailand carried out liberalization measures that mainly benefited foreign corporate actors.
The Backlash
There was a great deal of popular resistance in Thailand. There were marches. When IMF chief Michel Camdessus visited the country in 2000, he was greeted with a cherry pie that landed on his face. But the most important resistance took place on the electoral front. In 2001, the pro-IMF governing coalition was ousted with the election of a parliamentary contingent dominated by the Thai Rak Thai Party (TRT) led by Thaksin Shinawatra. Thaksin promptly but painfully paid off Thailand’s debt to the Fund-led consortium two years in advance in 2003 and declared Thailand’s ‘independence’ from the institution.
After three stagnant years under governments faithfully complying with the IMF’s neoliberal prescriptions, Thaksin propelled countercyclical, demand-stimulating neo-Keynesian policies to get the economy back on track, registering an average GDP growth rate of 5.4 per cent between 2001 and 2006. The Thai government provided low-interest loans, instituted government-financed universal health care, and gave each village and urban community a 1 million baht revolving fund, alongside the famous OTOP program.
Despite dire predictions from neoliberal economists, these measures contributed to propelling the economy onto a moderate growth path. However, when Thaksin was ousted as prime minister by a military coup in 2006, there was a return to a more conservative, orthodox economic approach that led to and consolidated the stagnant economy that persists till today.
The Fund’s Mea Culpa
So disastrous were the IMF’s interventions in Thailand and Asia during the crisis that George Shultz, President Ronald Reagan’s former secretary of state, called for its abolition for encouraging moral hazard, or irresponsible lending, and prominent economists like Jagdish Bhagwati and Jeffrey Sachs accused it of provoking global macroeconomic instability. Indeed, a rare conservative-liberal alliance in the U.S. Congress came within a hair’s breadth of denying the IMF a $14.5 billion replenishment.
Eventually, the Fund was forced to admit that in Thailand, the “thrust of fiscal policy…turned out to be substantially different…because the original assumptions for economic growth, capital flows, and exchange rates…were proved drastically wrong.” It was a damning admission.
The Case for Reparations
The $17.2 billion fund to save foreign creditors and investors came to a whopping 11.5 per cent of gross domestic product. Repaying the IMF-led consortium was painful, mainly with the proceeds from the higher VAT rates imposed on the population. But this was not the only debt burden imposed on the population. To save a banking system pushed to the brink of collapse owing to the consequences of the IMF push to liberalize the capital account, the Ministry of Finance had to issue various types of domestic bonds with high interest rates in the years following the crisis.
Noting the weight on the people imposed by these foreign and domestic obligations, the Bank of Thailand recently noted, “An important ‘burden’ that has fallen upon the new generation is the amount of debt that has been created…which was used to repay depositors and creditors to foster confidence for depositors and financial institution debt owners….Whether they like it or not, the new generation cannot deny these heritage and burden resulting from the Tom Yam Kung crisis.” Indeed, the debt to bondholders incurred to save the banking system will not be completely paid off until 2030!
No formal apologies were issued by the IMF to the Thai government and people for its mistakes. But the IMF owes the country more than apologies.
The cost to Thailand of the bad policies forced on the country by the IMF goes beyond the value of the debt paid to creditors. The Thai financial crisis caused tremendous social and economic dislocations. The economy never recovered its pre-crisis dynamism and became mired in the stagnation that has been its trademark over the last two decades.
More than apologies, the IMF owes Thailand reparations. In taking this path of suing the Fund for compensation for economic damage caused by the policies of powerful international actors—a now recognized principle of international law—the government can lead the world in making powerful international institutions accountable for their destructive policies, to teach them they simply cannot walk away from the scene of the crime.
Kheetanat Wannaboworn is a Bangkok-based analyst with Focus on the Global South while the Manila-based Walden Bello is the author of Paper Dragons: China and the Next Crash (Bloomsbury, 2019) and A Siamese Tragedy (Zed, 1998).
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