Since the establishment of a constitutional monarchy in 1932, Thailand has maintained a British-style parliamentary system, in which the King serves as a nominal head of the government, while the Prime Minister is the real head of the executive and is responsible to the parliament. While the King in a few critical junctures had exerted political influence to affect Thai's political development, he remained aloof from everyday politics most of the time.79 This political aloofness helped the longevity of King Bhumibol Adulyadej's reign from 1946 to the present, but probably indirectly contributed to the constant turnover of the Prime Ministers due to their lack of overt support from the highly esteemed king. Military coups were the direct causes for the instability of the cabinet governments. From the establishment of
79 One such critical juncture was the "Black May 1992 incident." When General Suchinda Kraprayoon named himself as an unelected Prime Minister and ordered a bloody crackdown on protesters, King Bhumibol intervened and caused General Suchinda to resign. In October 1973, the King also intervened in favor of student protesters.
constitutional monarchy in 1932 to 1991 when the last coup occurred, Thailand experienced sixteen coup attempts. Nine of these sixteen coup attempts succeeded in overthrowing existing governments.80
The instability of the cabinet governments had a corrosive effect on the behavior of appointed officials of the government, i.e., Prime Ministers, department secretaries, and under secretaries, etc. Having a short vision of the future, they tend to maximize their political and economic gains in the short term and ignore long-term development. Corruption was therefore rampant under uncertain future. This contributed to what Xuto called a "political vicious cycle" in Thai politics: A military coup abolished the government in the name of eliminating corruption. Once the coup leaders installed a new government, corruption resumed its steam because politicians did not expect long political life.81 Then, another coup was raised to abolish this corrupt government. In such an uncertain political environment, state agencies tended to lack the necessary political autonomy to implement long-term development projects.
Many scholars have characterized the Thai politics before the 1980s as a bureaucratic polity, referring to the dominance of the military governments over political parties and business.82 Doner and Laothamatas further attributed Thailand's economic success of the 1980s to such a polity. Whether the bureaucratic polity alone contributed to the economic success is a historical debate,83 which is beyond the scope of this paper. But in order to explain the 1997 financial crisis, the bureaucratic polity thesis is no longer applicable to the Thai case. Alternative conceptions of the Thai state after the 1980s are necessary for the analysis of Thai financial politics.
Hutchcroft suggests that the Thai state has become more like the Philippine patrimonial state. Laothamatas observes the transformation of Thai state-business
80 Paul D. Hutchroft, "After the Fall: Prospects for Political and Institutional Reform in Post-Crisis Philippines and Thailand." Paper presented at the Annual Meeting of the American Political Science Association, Atlanta, Georgia, September 2-5, 1999, 17.
81 Somsakdi Xuto, ed. Government and Politics of Thailand (New York: Oxford University Press, 1987), 201-202.
82 John L.S. Girling, Thailand: Society and Politics (Ithaca, NY: Cornell University Press, 1981).
83 Two simple reservations can be raised against the bureaucratic polity thesis. One, the same bureaucratic polity did little to help the Thai economy before the 1980s; for instance, under the
"development-oriented" Marshal Sarit Thanarat and Marshal Thanom Kittikachorn regimes. Clark D.
Neher, Southeast Asia in the New International Era. 3rd ed. (Boulder, CO: Westview Press, 1999), 25.
And two, most analysts of Thai politics would agree that Thailand experienced significant democratic transition in the early 1980s. The bureaucratic polity of the early 1980s should have experienced transformation as well. Richard E. Doner, and Anek Laothamatas, "Thailand: Economic and Political Gradualism." In Stephan Haggard and Steven B. Webb, eds. Voting for Reform: Democracy, Political
relation from "bureaucratic polity to liberal corporatism." Or, as Sidel puts it, Thailand has transformed "from bureaucratic polity to bossism." These conceptions seem more cogent for analyzing Thai financial politics.84
In Thai financial politics, the highest regulatory agencies did not have political autonomy both in terms of their organizational design and actual practice. The Prime Minister was ultimately responsible for all financial policies. But the more direct supervisor was the Minister of Finance, who had real control over Thailand's central bank (the Bank of Thailand) and the Security Exchange Commission. After the expansion of democratic elections of the 1980s, most of the Prime Ministers and cabinet members, including the Finance Ministers, were recruited from popular provincial politicians who were notorious adherents of patronage politics.85
The Finance Minister had real political control over the Bank of Thailand by both organizational design and actual practices. The predecessor of the Bank of Thailand was the Thai National Banking Bureau, set up in 1939 as a subsidiary of the Finance Ministry. The Bank of Thailand Act of 1942 expanded and elevated the Bureau to a central bank. According to the Act, the Finance Ministry supervised all affairs conducted by the Bank. The cabinet nominated or removed the governor and deputy governor of the Bank, with the ceremonial approval of the King. Other directors of the Bank were recommended by the Finance Minister and approved by the cabinet.86 The Finance Minister decided on the amount of salary of the Bank's top officials. In actual practice, the Finance Minister could fire the governor and deputy governor. This means, not only did the Finance Minister have the legal jurisdiction over the Bank of Thailand, it also had real political influence over the governors, deputy governors, and directors of the Bank of Thailand.
The short tenure of the Bank's governors might indicate the Bank's lack of political independence. Since its establishment in 1942, the Bank of Thailand has had nineteen governors, averaging one turnover every three years. Among them, eight had
Liberalization, and Economic Adjustment. (New York: Oxford Press, 1994).
84 Hutchcroft, Paul D. Hutchroft, "After the Fall: Prospects for Political and Institutional Reform in Post-Crisis Philippines and Thailand." Paper presented at the Annual Meeting of the American Political Science Association, Atlanta, Georgia, September 2-5, 1999. Anek Laothamatas, Business Associations and the New Political Economy of Thailand: From Bureaucratic Polity to Liberal Corporatism (Boulder, CO: Westview, 1992). John T. Sidel, "Siam and Its Twin? Democratization and Bossism in Contemporary Thailand and the Philippines." IDS Bulletin, Vol.27, No.2, 1996, 56-63.
85 Daniel E. King, "Thailand in 1996: Economic Slowdown Clouds Year." Asian Survey, Vol.37, No.2 (February 1997), 162.
86 www.bot.or.th/govnr/public/history/rol&respon-e.html, 4/12/2000.
tenure less than thirteen months.87
In the Thai banking community, the Bank of Thailand was regarded as a
"benevolent lender" to troubled banks, especially to banks owned by the military or by relatives of the King, e.g., the Thai Military Bank and the Siam Commercial Bank.88 The Bank had a finely differentiated structure with twenty-three functional departments (called "groups," including the "Supervisory Group") and a large staff numbered over 5000 by the end of 1999. However, the Bank seemed to exercise its
"lender of the last resort" function more often than its supervision function. Among the neglected areas of supervision, the Offshore Bangkok International Banking Facility and the non-performing loans turned out to be the Achilles' heels to Thai financial system in 1997. In 1993, the Bank of Thailand granted permission for commercial banks to operate offshore banking businesses, but it failed to closely monitor the turbulent market or to control the liquidity and capital ratios of banks.89 Imprudent loan policies unchecked by the central bank led to high ratio of non-performing loans in the banking system. Before the 1997 crisis broke out, the Bank of Thailand allowed individual banks to "camouflage their non-performing assets and to rehabilitate themselves over the years".90
During the 1997 financial crisis, the Bank of Thailand was ordered by the Finance Minister not to release the true figures about the crisis, which resulted in a damaging delay of proper actions to control the crisis. The Bank cooked the accounting book by reporting only the spot component of swap transactions, while the future component, totaled US$30 billion (almost the same amount of Thai foreign exchange reserve then), was not mentioned. After the crisis, an independent investigation commission described the Bank as "led by people who promoted or were the victims of political interference".91
After the 1997 crisis, the Bank implemented a number of financial reforms requested by the International Monetary Fund. The Bank set up the Financial Restructuring Authority and the Asset Management Corporation to sell off unviable
87 Data received from the email by the Information and Public Relations Group, Bank of Thailand, 4/24/2000.
88 FEER 5/21/98, 62-63; 9/10/98, 6.
89 Scott MacDonald, "Transparency in Thailand's 1997 Economic Crisis." Asian Survey, Vol.38, No. 7 (July 1998), p.691. and Philippe Delhaise, Asia in Crisis: The Implosion of the Banking and Financial Systems. (New York: John Wiley & Sons, 1998 (Asia)), 84.
90 Philippe Delhaise, Asia in Crisis: The Implosion of the Banking and Financial Systems. (New York:
John Wiley & Sons, 1998 (Asia), 82.
91 FEER 5/21/98, 62
financial institutions and help viable ones.92 For those banks and finance companies unable to recapitalize before the end of 1998, the Bank intervened to restructure their management and capital structure. The Bank published more realistic loan classification and provisioning standards to reduce book-cooking practices and to speed up the writing off of non-performing loans. For itself, the Bank implemented its modernization program "aimed at redesigning the organizational structure, streamlining work processes, and changing its corporate culture." Experts from G7 central banks provided recommendations for the program. A new Bank of Thailand Act was drafted to strengthen the Bank's independence and accountability in conducting monetary policy. The Bank would also tighten its rules governing potential conflicts of interest of the Bank's executives and staff in order to strengthen the supervision of the financial system.93 However, the sustained high ratio of non-performing loans seemed to indicate that the effectiveness of these reform measures was yet to realize. In June 1999, total non-performing loans added up to US$70 billion, about 48% of loans outstanding.94
In addition to the Bank of Thailand, the Finance Ministry also had jurisdiction and real control over the security exchange authorities. Before 1992, there was no central authority governing the exchange of securities and other financial intermediaries. The security market was modest. With the economic boom of the late 1980s, businesses began to issue various securities to meet their capital needs.
Beginning in 1987, the government's bold initiatives to privatize infrastructure projects and state enterprises further added ammunition to the security market. In May 1992, the Securities and Exchange Act came into force to regulate the security market. The Act established the Securities and Exchange Commission (the SEC), which formulated overall policies and provided guidance to its executive arm, the Office of the Securities and Exchange Commission (the Office).
Both of the SEC and the Office were under the jurisdiction and real control of the Finance Ministry. The SEC board of directors comprised the Finance Minister as the Chairman, the Governor of the Bank of Thailand, Permanent-Secretary of the Finance Ministry, Permanent-Secretary of the Commerce Ministry, Secretary General
92 www.mof.go.th/ter1999/Thai_E_R.html, 4/12/2000.
93 www.mof.go.th/ther_2/index_ther.html, 4/12/2000. See also Doner and Ramsay's (1999) analysis of the Bank's internal problems and its reforms. Richard F.Doner, and Ansil Ramsay, "Thailand: From Economic Miracle to Economic Crisis." In Karl D. Jackson, ed. Asian Contagion: The Causes and Consequences of a Financial Crisis (Singapore: Institute of Southeast Asian Studies, 1999).
of the Office, and four to six members appointed by the cabinet upon the recommendation of the Finance Minister. The last category of members consisted of representatives of security companies trading in the Securities Exchange. The composition of the SEC revealed that all of its members were either political figures or those who maintained close relationships with the Finance Minister. 95
The Office had a differentiated structure with fourteen functional departments, including the Department of Market Intermediaries Supervision, the Department of Investment Management Supervision, the Office of Market Supervision, and the Enforcement Department. The Office had its own budget generated from its investment profits.
However, the Secretary General of the Office was recommended by the Finance Minister and appointed by the cabinet, thus, subjecting the Secretary General to political pressure. In actual practice, the Office was lax on its supervisory functions, as evidenced by the widespread insider trading in the security market. When the security market was in trouble, officials of the Finance Ministry often responded to investor complaints and disregarded government policies to strengthen the market discipline.96
In late 1997, the Thai government asked for financial assistance from the Asian Development Bank (ADB). As part of the conditions, the Thai government adopted the "Policy Matrix" specified by the ADB to amend the SEC Act. The Matrix included measures to restructure the SEC to make it more efficient, self-regulatory and politically independent, in order to strengthen the SEC's supervisory and enforcement powers.97 Many of the reform proposals, however, have not been passed through the legislature. Therefore, their impact on Thailand's financial politics remains to be seen.