The surge of economic growth in Thailand during the late 1980s and through the mid 1990s owed very little to initiatives of elected governments. Rather it was the two brief post-coup caretaker administrations led by the technocrat Anand Panyarachun that provided the policy push for growth. Unelected and not being a career politician, Anand and his team were subject to very few of the customary constraints faced by elected Thai governments . During this time Thailand built a reputation for financial orthodoxy and macroeconomic stability, and it was hailed as a model for robust economic development in the World Bank�s Miracle Report (1993). Things however changed and in July 1997, Thailand stood at the doorstep of a severe crisis due to the appearance of cracks in its internal regime. The political confusion of that period and inherent defects in bank ownership produced an injurious mix that reinforced each other to exacerbate the weaknesses in the system thereby damaging the prospects of sustained growth.

Much of the literature on East Asia’s financial crisis has exclusively focused on international and region-wide economic weakness. Other important dimensions such as connected lending and a weak political structure were responsible for sustaining, if not triggering the crisis. Thailand�s political institutions prior to 1998 reflected a highly decentralized system which tended to produce policy paralysis more often than not. Investor confidence in Thailand was undermined by the fact that timely policy reform was all but impossible and the resultant delays extracted a heavy price from the system.

The banking system in Thailand was overwhelmingly based on relationships between firms and banks. This phenomenon of connected lending became one of the main proximate reasons of the financial crisis in 1997. Empirical evidence shows that the majority of shareholders of big firms were powerful Thai families. A number of single family controlled firms existed and wielded enormous and unconditional power. A relatively lower proportion of firms were controlled by multiple shareholders. In the pre-crisis period an oligopolistic structure of ownership and governance prevailed in which powerful families had a disproportionate influence in the system.

In addition to the problem of tightly controlled banks and its consequences (see Table above), the political structure of Thailand added another layer, increasing vulnerability of the system. The Government was virtually captured by private interests and there was rampant corruption, opportunistic behavior and unstable coalitions. Very little economic reform could be introduced because of the massive and embedded vested interests.

Thailand�s multimember electoral system strongly encouraged candidates to campaign on the basis of individualized strategies (rather than on the basis of a party label) as they were compelled to differentiate themselves from competitors of the same party. Not only did this create contradictions as far as the party stance and opinion on issues of public interest were concerned, but the emphasis on candidate-based rather than party-based electoral strategies ensured that politicians would strive to deliver selective benefits to voters in their electorate in order to differentiate themselves from rivals from the same party. This encouraged vote buying and placed a premium on politicians being able to generate a flow of cash to cover costs while in office. In short, the logic of the country�s electoral system made it all but impossible for politicians to agree to economic reforms if they threatened rent-taking arrangements they had put in place for themselves or their key supporters .

An uncanny resemblance in the operation of both the political and financial system was emerging which was extremely detrimental for the economy. The adoption of �individualistic� over a �collective� approach reflected the difficulty of taking action for the greater public good- the malpractices in the banking and political systems combined to create a deadly vicious cycle. Crony capitalism contains a number of contradictions within and is unsustainable and inevitably culminates into crisis. But it leaves behind a damaging legacy that could take many years to correct. This lesson is relevant for many countries including India. We would be prudent to recognize that our real estate and land markets, among others, need serious corrective measures else the India growth story could hit a roadblock sooner than later.

–Nilesh Basu Roy



Anuchitworawong, Chaiyasit, Toshiyuki Souma, and Yupana Wiwattanakantang, 2003, Did family controlled banks prevail after the East Asian financial crisis? evidence from Thailand, Working paper 2003-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University, Tokyo, Japan.

Laurids S. Lauridsen, Roskilde University, Denmark, Financial Crisis in Thailand: Causes. Conduct and Consequences.

Rajan, Raghuram G., 1992, Insiders and outsiders: The choice between relationship and arms-length debt, Journal of Finance 47, 1367�1400.

Chutatong Charumilind, Raja Kali and Yupana Wiwattanakantang, Connected Lending: Thailand before the Financial Crisis, Center for Economic Institutions, Institute of Economic Research,

Hitotsubashi University 2-1 Naka, Kunitachi, Tokyo 186-8603, JAPAN.

Koji Kubo, The degree of competition in Thai Banking industry before and after the East Asian crisis, ARRIDE, discussion paper no-56.


i. Doner & Laothamatas, (1994).

ii. Anuchitworawong et al, (2003).

iii. Bualek, (2000).

iv. The top four family-owned banks in 1996 were the Bangkok Bank, the Thai Farmers Bank, the Siam Commercial Bank, and the Bank of Ayudhaya. They were controlled by; Sophonpanich, Crown Property Bureau, Lamsam, and Rattanarak, respectively.

v. Allen Hickey, (1998).