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The Thailand Tiger
Subject Economic growth
Topic International Finance
Key Words Deflation, Inflation, Interest Rates, Economic Growth
News Story

Thailand's economy grew by 5.1 percent in the second quarter of this year, the fastest rate of growth in two years. Economic growth, fueled by loose fiscal policies and a surge in consumer spending, is estimated to be 4 percent for 2002. Retail sales are rising by 10 percent and exports increased by 3.4 percent last month, the first increase in 10 months. Consumer confidence is at its highest level since the Asian financial crisis of 1997 and 1998. The only source of concern about the economy is the prospect of a war with Iraq and its impact on oil prices.

Last year, Prime Minister Thaksin Shinawatra, who had promised to make life easier for Thai citizens, adopted a tight money policy. The failure of that policy caused Mr. Shinawatra to reverse course and adopt a loose fiscal policy, which has successfully increased economic growth. The Thai people have a high savings rate, but record-low interest rates have resulted in an increase in home sales, automobiles and other consumer goods. Only 20 percent of Thai families own their own homes and the residential property market had been in a seven-year slump. But easier borrowing terms for civil servants and lowered interest rates have resulted in a housing boom with new construction growing at 5 percent per year. Sales of new cars and trucks have also benefited from this policy, rising 51 percent in August.

Unlike 1997, economists say there is little worry that the increased consumer spending will ignite another financial crisis. Thai companies have paid off much of their foreign currency denominated debt and individual borrowers are apparently repaying their loans.

Analysts had worried that Thailand would suffer from deflation. But slow export sales and a weakening U.S. dollar were responsible for the inflation rate dropping below 1 percent. There are no signs that Thais are refraining from spending in the expectation that prices will decrease further.


(Updated October 10, 2002)

Questions
1.

The Prime Minister of Thailand adopted tight monetary policy measures upon his election. What is meant by the term "tight monetary policy"? What would you expect to happen to interest rates as a result of this policy?

2. Mr. Shinawatra then adopted "loose fiscal policy measures." What is meant by the term, "loose fiscal policy?" Provide some examples.
3. Economists say that there is overcapacity in Thai industries. Would you expect the continued increase in retail sales to fuel inflation? What role might imports play in controlling inflation?
Source Wayne Arnold, "Spending by Consumers Is Surging in Thailand," The New York Times, September 17, 2002.

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