Discussion Paper

No. 0045

Misalignment of the Baht, Trade Imbalances

and the Crisis in Thailand

Ramkishen S. Rajan, Rahul Sen and Reza Siregar

November 2000

Adelaide University SA 5005 AUSTRALIA

ISSN 1444-4534
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 1

CIES DISCUSSION PAPER 0045

Misalignment of the Baht, Trade Imbalances

and the Crisis in Thailand

Ramkishen S. Rajan, Rahul Sen and Reza Siregar

School of Economics, University of Adelaide, Australia and

Institute of Southeast Asian Studies, Singapore.
E-mail: [email protected]
and
Department of Economics, National University of Singapore.
E-mail: [email protected]
and
Department of Economics, National University of Singapore.
E-mail: [email protected]

November 2000
____________________________________________________________________
 2

ABSTRACT

Misalignment of the Baht, Trade Imbalances

and the Crisis in Thailand

Ramkishen S. Rajan, Rahul Sen and Reza Siregar

This paper examines Thailand’s exchange rate policy, focusing on the degree of the
country’s real exchange rate misalignment pre-crisis, and their consequent effects on
Thailand’s trade balance with its two large trading partners, the US and Japan. We
estimate misalignment as the difference between actual and “equilibrium” exchange
rates. We use three key “equilibrium” exchange rates of the Thai baht, viz. the real
effective equilibrium exchange rate of the Thai baht against its twenty two major
trading partners; the bilateral real equilibrium exchange rates of the baht against the
US dollar; and the bilateral real equilibrium exchange rate of the baht against the
Japanese yen. Our sample period spans two decades (Q1: 1981 to Q3: 1999).

Keywords: Japan, real exchange rate, Thailand, trade, US

JEL codes: F30, F32, F34

Contact author:
Ramkishen S. Rajan
School of Economics
Adelaide University
SA 5005 AUSTRALIA
Tel: (+61 8) 8303 4666
[email protected].
1. Introduction

Just as the Tequila crisis of 1994-95 has inspired a great deal of interest in

the Mexican economy, the East Asian debacle of 1997-98, triggered by the July 2nd,

1997 devaluation of the Thai baht, has invariably focused attention on the Thai

economy and crisis. Detailed studies of the Mexican and Thai debacles have

reached a broadly similar conclusion, viz. that these crises ought most appropriately

to be seen as consisting of two distinct but related components: an initial crisis-

induced devaluation followed by a post-devaluation economic collapse. The initial

Thai devaluation in turn was largely a case of “bad fundamentals”, both financial and

economic (Rajan, 2000a). For instance, most of the key economic variables in

Thailand were on definite downward/deteriorating trends since mid 1996. Paralleling

this worsening of economic fundamentals were rising concerns by market

participants about the near term prospects of the Thai economy (Lauridsen, 1998).

Also of importance is the fact that the empirical studies that have attempted to

develop indicators of currency crises have been able to “predict” the Thai crisis with a

fairly high probability ex-post (Rajan, 2000a). Kaminsky (1999) for example refers to

Thailand as constituting “the perfect picture of the typical financial crisis” and finds

that the probability of a currency crisis rose from a low of 20 percent in 1995 to about

100 percent in mid 1997”. Berg (1999) has concluded that “(t)he Thai crisis was

predictable on the basis of a variety of macroeconomic and microeconomic

weaknesses. Moreover, the situation was deteriorating through 1996 and the first

part of 1997. It is thus not surprising that most models that are designed to predict

currency crises, even those formulated and estimated on pre-1997 data, are able to

identify Thailand as a country at risk of crisis in 1996” (p.46).

Among the weak macro fundamentals in Thailand that have been frequently

pointed out are the sharp real exchange rate appreciation of the Thai baht between

mid 1995 and 1997 and the accompanying burgeoning current account deficit which

averaged between 6 and 8 percent in the first half of the 1990s (Table 1). This paper
 1

examines Thailand’s exchange rate policy, focusing on the degree of the country’s

real exchange rate misalignment pre-crisis and their consequent effects on

Thailand’s trade balance with its two single largest trading partners, the US and

Japan. We estimate misalignment as the difference between actual and “equilibrium”

exchange rates. We use three key “equilibrium” exchange rates of the Thai baht, viz.

the real effective equilibrium exchange rate (REER) of the Thai baht against its

twenty two major trading partners; the bilateral real equilibrium exchange rates of the

baht against the US dollar; and the bilateral real equilibrium exchange rate of the

baht against the Japanese yen. Our sample period spans two decades (Q1: 1981 to

Q3: 1999).

Connection to Related Literature

How is this paper related to previous literature? Two papers of direct

relevance are Montiel (1997) and Lim (2000). Montiel (1997) concentrates on the real

effective exchange rate of Thailand as well as the other Southeast Asian economies

of Indonesia, Malaysia, Philippines and Singapore. The key objective of the Montiel

study is to empirically test whether “the recent behavior of the real exchange rate in

these countries is or is not an equilibrium phenomenon” (p.256). The study covers

the period of 1960-1994 using annual data, and employs a sequence of time-series

testing, viz. the Unit Root test and the Johansen cointegrating test. Montiel fails to

find any significant and persistent misalignments during the period of late 1980s and

early 1990s. The results provide statistical support that the paths followed by actual

real effective exchange rates of Thailand and the other regional economies have

closely followed their respective equilibrium ones1.

The Lim (2000) paper is an extension of the Clark and MacDonald (1999)

who distinguish between the fundamental equilibrium exchange rate (FEER) and the

1
The long run equilibrium real effective exchange rate is determined by the values of a set of
fundamental variables. For the case of Thailand, the fundamentals are: world inflation rate;
terms of trade; government expenditure to GDP; an index for commercial openness of the
domestic economy; and time trends.
 2

behavioral equilibrium exchange rate (BEER). The study finds two significant

fundamental variables to have determined the equilibrium real exchange rate of the

Thai baht against the US dollar - the level of foreign debt and the cumulative sum of

real interest rate differentials. The study covers the period between January 1988

and December 1996 (i.e. pre-crisis period). Having tested the Unit Root properties of

the variables, Lim proceeded to undertake three types of cointegration tests, viz. the

Engle-Granger test, the Johansen test and the Phillips-Loretan Test. The results

reveal that the estimated long run equilibrium real exchange rate of the Thai baht

tracks the actual real exchange rate quite well.

Applying the standard Johansen cointegration test to the Natural Real

Exchange Rate (NATREX) model developed by Stein (1994 and 1996), our findings

support the conclusions of the earlier studies for the REER and the bilateral real

exchange rate cases against the US dollar. However, by extending our coverage to

the case of real exchange rate of the Thai baht against the Japanese yen (RERJP),

we are also able to identify persistent and significant misalignments with the RERJP.

In addition, the results of the unrestricted vector autoregressive (VAR) Impulse-

Response and Variance Decomposition tests clearly underscore the contribution of

the RERJP misalignment in generating large and growing trade imbalances in

Thailand, particularly during the late 1980s until the mid 1990s. Detailed analysis of

Thailand’s bilateral trade relations with Japan and the US further supports the

conclusion regarding the trade balance consequences of the misalignment of the

baht, particularly with reference to the yen. Hence, this paper adds further weight to

the argument by Ito et al. (1999), Ito and Ogawa (2000) and others regarding the

“ineffectiveness” of the soft US dollar pegged system adopted by Thailand.

Roadmap of the Paper

The remainder of this paper is organized as follows. The next section focuses

on Thailand’s pre-crisis exchange rate policy and trends in the various real exchange

rates. Section 3 estimates the equilibrium exchange rate of the baht by

 3

operationalizing the concept of the “natural equilibrium exchange rate” or NATREX a

la Stein (1994, 1996) and establishes the degree of misalignment of the baht pre-

crisis. Section 4 goes on to consider the implications of the pre-devaluation exchange

rate policies on Thailand’s bilateral trade balance with two of its most important

trading partners, the US and Japan. The final section provides a summary by way of

concluding the paper.

2. Exchange Rate Policies and Trends in Thailand Pre-crisis

Speculative attacks on emerging market currencies have almost always been

preceded by very large private capital inflows (Dooley, 2000). More specifically,

Radelet and Sachs (1998) have observed “at the core of the (East) Asian financial

crisis were the massive capital inflows that were attracted into the region during the

1990s” (p.8). A proper perspective of the East Asian crisis may therefore only be

gained by considering the pre-crisis boom period.

Referring to balance of payments data based on the IMF’s World Economic

Outlook data set, we see that net private capital inflows to the Asia-5 economies

were positive and exceeded the corresponding current account deficit, resulting in a

sustained accumulation of international reserves (Figure 1). This accumulation was

particularly high in Thailand, which was among the ten largest emerging market

recipients of net private capital flows (together with Malaysia and Indonesia) during

the period under consideration (Lopez-Mejia, 1999 and World Bank, 1997). This

boom period coincided with relaxation of controls of capital flows. In Thailand, the

now notorious Bangkok International Banking Facility (BIBF) was established in early

1993. Financial institutions under the BIBF were authorized to accept deposits and

loans from abroad in foreign currency and extend loans to both overseas and local

markets, as well as engage in cross-currency foreign currency trading and loan

syndication (Sirivedhin, 1997).

With regard to components of capital inflows, it is revealing that, on average,

 4

the “other net investment” component constituted the largest share of overall capital

flows (Table 2). This category of capital flows includes syndicated bank lending, trade

financing, along with some other smaller items. It therefore captures movements in

bank financing and has consistently been found to be the most interest sensitive and

volatile component of capital flows in the balance of payments account. The stability

of the bilateral exchange rates vis-à-vis the US dollar (Figure 2) as well as the

interest rate premium offered by Thailand (Table 3) seemed to have been important

contributory factors for these capital inflows and the consequent build-up of external

debt (Table 4)2. Given the expectations about the durability of the US dollar-based

peg, most of this external debt accumulation was short-term in maturity and was left

exposed (i.e. unhedged) to foreign currency fluctuations.

In principle Thailand and the other regional economies were supposed to

have adopted basket peg systems, with the US dollar, yen and other currencies

receiving appropriate weights consistent with their respective significance in

economic linkages with the East Asia. However in reality the US dollar had the

overwhelming weight de facto (Table 5), leading McKinnon (1990) and Ohno (1998)

to refer to East Asia’s “dollar standard” and “soft dollar zone”, respectively. The

reasons for this dollar peg remain uncertain3. Regardless, the dominance of the US

2
Short-term indebtedness has been found to be a robust predictor of financial crises (Rodrik
and Velasco, 1999 and World Bank, 2000a). The reason for the relatively high (and
sustained) interest rate premium offered by an economy that has undertaken international
financial liberalization (even after accounting for potential default and devaluation risk premia)
is an important empirical puzzle (Bird and Rajan, 2000a).
3
For instance, Kasajima and Lewis (1998) claim the reason for the dollar peg was the
dominance of the US dollar as the international transaction settlement currency, and the
potential capital loss on the part of borrowers of mostly the US dollar denominated debt (due
to variations in the baht-US$ rate). Others have noted that Thailand and other regional
economies viewed a stable and competitive exchange rate as key to remaining attractive as a
destination for Japanese FDI (Goldberg and Klein, 1997). Bénassy-Quéré et al. (1999) also
emphasize the importance of exchange rate stability for attracting FDI.
 5

dollar continued in 1990s, despite the fact that Japan was Thailand’s largest export

market, and Thailand’s dominant import source (of intermediate goods) along with

the US (Figure 3). Japan was also Thailand’s largest single creditor (Table 6), and a

substantial share of external debt to the region was denominated in yen (Table 7).

These intensive economic linkages between Thailand and Japan suggests a priori

that the Japanese yen was significantly under-represented in Thailand’s currency

basket. There have in fact been a number of recent studies that have attempted to

measure optimal currency baskets in Southeast Asia (Table 8). A simple average of

the various studies reveals the optimal weight of the Japanese yen to be in the range

of 40 percent, the remainder being divided between the US dollar, euro and/or

regional currencies (depending on the type of study)4.

2.1 Trends in Real Exchange Rates

The nearly fifty percent nominal appreciation of the US dollar relative to the

yen between June 1995 to April 1997 led to a rise in the value of the regional

currencies vis-à-vis the yen. This in turn contributed to a marked appreciation of the

real effective exchange rates (REERs) of most of the East Asian economies

(including Thailand) by end December 1996 and into mid 1997 over 1995 (Figure 4)5.

This was in sharp contrast to the decade preceding that period when the REER of

the baht was quite stable. The same degree of stability is found in the case of the

real exchange rate of the baht against the US dollar (RERUS). In contrast, the real

exchange rate of the baht against the Japanese yen (RERJP) has been significantly

more volatile, as would be expected given the above-noted dollar peg operated by

4
Needless to say that there remains much work to be done on refining the methodologies
and assumptions used in the determination of optimal currency baskets (Rajan, 2000b and
Williamson, 1999).
5
To be precise, REER appreciations were experienced by the Southeast Asian economies
only, South Korea’s REER being relatively stable during the period under consideration.
 6

the Thailand (Figure 5)6. After a sharp depreciation of the baht against the yen

(following the Plaza Accord in 1985), the baht appreciated gradually from 1989 and

1990 against the yen before depreciating again from 1990 to late 1995 (when the yen

appreciated sharply against the US dollar). This trend was suddenly reversed with a

sharp nominal appreciation of the US dollar relative to the yen between mid 1995 and

1997.

It is in this sense that it is often suggested that if Thailand had given greater

weight to the yen in their baskets pre-crisis there would have been lesser degrees of

regional real exchange rate misalignments7. Williamson (2000) has gone so far as to

conclude “the yen/dollar exchange rate had a statistically significant impact on output

growth in the Asian economies. A strengthening of the yen depreciated their real

effective exchange rates, given their de facto dollar pegs, and thus accelerated their

growth, while a weakening of the yen had the opposite effects” (p.6).

A REER appreciation does not necessarily denote currency misalignments

(overvaluation). For instance it may reflect a secular trend in the “fundamental” or

“equilibrium” real exchange rate. This in turn could be due to a number of reasons,

including differing rates of technological change between the tradables and

nontradables sectors, the so-called Balassa-Samuelson theorem (Neuhas and

Associates, 1998), a relative increase in the demand for non-tradables over tradables

(Arndt, 1990, 1998), or changes in “equilibrium” patterns of capital flows8. We need

6
Similar conclusions are drawn if the focus is on nominal exchange rates. Real exchange
rate volatility is constructed by the moving sample standard deviation of the growth rate of the
real exchange rate:
m
2 1/2
Vt = [ (1/m) (log Q t+i-1 - Q t+i-2) ]
i =1

where Q is the real exchange rate and m = 6. This index has been used in previous studies
including Kenen and Rodrik (1986), Koray and Lastrapes (1989) and Chowdhury (1993).
7
McKinnon (2000) refers to the yen/US dollar exchange rate as the “loose cannon” in East
Asia pre-crisis.
8
Empirical tests by Ito et al. (1996, 1997) do suggest that the experiences of Malaysia and
Thailand provide counterexamples to the Balassa-Samuelson hypothesis. Also see Chinn
 7

therefore to first ascertain some sort of “equilibrium benchmark” in order to determine

the consistency (or lack thereof) of the observed real exchange rates of the baht

against the fluctuations of the economies’ key economic fundamentals. To do so we

operationalize the concept of a Natural Equilibrium Real Exchange Rate (NATREX)

model developed by Jerome Stein (1994, 1996).

3. Measuring Exchange Rate Misalignment: The NATREX Model

The NATREX is the rate that is determined by the prevailing real economic

fundamentals in the economy. Unlike the Purchasing Power Parity (PPP) model, the

NATREX model does not require that the observed REER and the real equilibrium

rate be stationary and (Edwards and Savastano, 1999). In fact the NATREX will vary

through time depending on the changes in the underlying fundamentals. In other

words, it is a moving equilibrium exchange rate that “is directly amenable to empirical

testing, without making any subjective judgments of what is: anticipated or

unanticipated, permanent or transitory changes. It is based upon the attempt of micro

agents, who make independent saving, investment, import and export decisions, to

optimize when they know that there is significant uncertainty…The NATREX model is

positive not normative..(it)..is precisely the real exchange rate associated with both

internal and external balance” (Stein and Paladino, 1998, pp.1688-89 & 1712).

Since Stein (1994, 1996), Stein and Paladino (1998) and others have extensively

discussed the theoretical background of the NATREX model, we focus instead on a

general working model of the concept (see Appendix A).

3.1 Single Equation Estimation Working Model

The NATREX approach begins with the assumption that there is a vector of

fundamentals (z) which determines an economy’s NATREX or a vector of equilibrium

real exchange rate (ERER):

(1998).
 8

erert = f(zt) (1)

The small letters represent natural logs. Vector erer represents (reer, rerjp, rerus).

Vector z consists of the fundamentals in the economy {g, r*, tot and prd}, where: g is

real government spending; r* is world real interest rate; prd is productivity; and tot is

the terms of trade. Since the erer is not observable, we estimate the following set of

equations9:

reert = β0 + β1 gt + β2 (rthai t - r*t) + β 3 tott + β 4 prdt + β 5 t + εt (2)

rerjpt = α0 + α1 gt + α2 (rthai t – rjpn t) + α3 tott + α4 prdt + α5 t + εt (3)

rerust = γ0 + γ1 gt + γ2 (rthai t - rus t) + γ3 tott + γ4 prdt + γ5 t + εt (4)

Eqs. 2 to 4 seek the best fit of the reer, rerus and rerjp on the economies’

relevant exogenous economic fundamentals. We construct the equilibrium effective

exchange rate for each economy’s currency using the coefficient estimates obtained

from regressing the above three equations. The variables used are summarized in

Table 9. Following Montiel (1997), a time trend (t) is introduced to capture the effects

of missing fundamentals.

3.2 Coefficient Estimates: What Does Theory Tell us?

We briefly highlight the prior signs of the coefficients to be expected based on

the theoretical literature.

9
Such single equation econometric models are commonly used in the literature on the
determination of equilibrium real exchange rates (Edwards and Savastano, 1999).
 9

Government Expenditure (g): Following Obstfeld and Rogoff (1996), we assume that

government expenditure is disproportionately devoted to nontradables. As g rises,

the relative demand for nontradables also goes up, triggering an increase in price of

nontradables or a real appreciation, i.e. β 1 > 0; α1 > 0 and γ1 > 0.

Interest Rate Differentials (rthai - r*), (rthai - rus) and (rthai - rjpn): International interest rate

arbitrage implies that when the return for foreign currency dominated assets (r*, rus

and rjpn) exceeds local currency dominated assets (rthai), investors shift their portfolios

away from local assets to foreign assets. In turn, the local currency will depreciate,

i.e. β2 > 0; α2 > 0 and γ2 > 0

Terms of Trade (tot): An improvement in the terms of trade will cause a capital inflow

into the tradable sector, creating a real appreciation. Thus β 3 > 0; α3 > 0 and γ3 > 0.

Productivity (prd): An increase in productivity is expected to appreciate the domestic

currency via the Balassa-Samuelson condition, i.e. β 4 > 0; α4 > 0; and γ4 > 0.

3.3 Empirics

The data sources used in this study is presented in Table 9. We conduct two

stages of sequential tests. The first is the Unit Root test. If the variables are all found

to be integrated of order 1 (I(1)), the Johansen Cointegration test will be applied to

check for existence of cointegration relationship(s) among all variables in Eqs. 2 - 4.

The Unit Root test

To determine the order of integration of each variable, we use the standard

ADF regression:
 10

k
∆Yt = β0 + β1 Yt-1 + β2 t + αI ∆Yt-i + εt (5)
i =1

where: Y = {reer, rerus, rerjp, tot, g, prd, (r-rus)10, (r-rjp)}, with all variables in logs,

and t denotes a time trend. The ADF test reveals all the variables to be integrated of

order 1 (Table 10). The Akaike Criteria test determines the appropriate number of lag

periods.

Johansen Maximum Likelihood cointegration test

Given all variables are I(1), we proceed to conduct the Johansen

cointegration test procedures on all the single equation models. The trace statistics

(likelihood-ratio) indicate that there is one cointegrating relationship (significant at 5

percent level) in each of the single equation models (Table 11a–11c). More

importantly, all the fundamental variables have significant and theoretically consistent

coefficient estimates. We next construct the equilibrium rate for REER, RERUS and

RERJP by using the estimated coefficients.

3.4 Estimation of Baht Misalignment

We are expressly interested in the question of whether there has been any

misalignment in baht’s REER, RERUS and RERJP during the period of 1980 to

1997/98 just prior to the crisis. We examine whether the degree of misalignment of

the baht‘s RERUS was less than that of the RERJP, which may be expected a priori

in view of the de facto US dollar peg. A currency is overvalued when its observed

real (effective) rate is higher than its equilibrium exchange rate (for example [reer –

erer] > 0). Figures 6-8 plot the actual REER, RERUS and RERJP against the

NATREX rate, respectively. The results reveal that the size of the misalignment for

the REER and the RERUS is relatively smaller than for the RERJP (Figure 9). While

the baht was overvalued in all three cases (REER, RERJP and RERUS) during the

10
(r-rus) equals to (r-r*).
 11

period of 1988-1999, the greatest degree of overvaluation occurred in the case of the

RERJP.

4. Impact of Baht Misalignment on Thailand’s Trade Balance

What were the economic consequences of the baht’s misalignment on

Thailand’s trade balance?

First, a cyclical slow-down in regional export growth due in large part to a

global glut in the semiconductor industry in 1996 and a sharp deterioration in the

terms of trade - mainly caused by falling prices of computer chips and electronic

components - adversely affected the Asian Newly Industrializing Economies (ANIEs),

such as Singapore, South Korea and Taiwan, along with the next-tier ANIEs of

Malaysia and especially Thailand (World Bank, 2000b). Given that a relatively larger

proportion of imports were denominated in yen compared to exports (Table 12), the

weakening of the US dollar against the yen and other currencies in 1994-1996

induced import prices to rise faster than export prices, further deteriorating the terms

of trade. Ito and Ogawa (2000) have noted, “one of the important triggers that caused

sudden reversal of capital (or an attack by speculators) in Thailand was the large

current account deficit…partly caused by the overvalued baht. The trade balance is

important since it affects the confidence of the exchange rate regime” (p.34).

Second, while the trade balance against the US has largely been in surplus,

Thailand experienced a trade deficit against Japan since 1980, with the largest deficit

occurring in late 1995-early 1996 (Figure 10). The widening of the trade deficit

against the Japanese market took place between 1987 and 1996 when the Thai baht

was depreciating against the Japanese yen. The overall deficit of the Thai trade

balance has primarily been a result of a widening bilateral deficit with Japan (Figure

11). In contrast, the Thailand’s bilateral trade vis-à-vis the US has been in persistent

surplus, though this changed in late 1995 and early 1996 as an acute glut in

semiconductor production capacity developed which resulted in an outright collapse

 12

in US dollar prices as noted previously11. In addition to the loss of competitiveness of

Thai exports to Japan, it may have contributed to a loss of export market share of

Thai exports to its competitors in third markets12. To further analyze the effects of the

baht misalignment, we consider data on Thailand’s bilateral merchandise trade with

its two main economic partners in some detail.

4.1 Analysis of Trade Data

Trade Shares

In the decade prior to the crisis, Thailand’s overall merchandise trade slightly

outpaced the growth in trade with the US and Japan (about 12 percent each). As

such, the share of the US in Thailand’s total trade remained at about 15 percent

between 1985 and 1996, while the share of Japan in Thailand’s trade was about 23

percent. However the US trade share has risen between 1995 and 1998, while trade

with Japan has fallen off sharply since 1994. Thus by 1998, Thailand’s trade shares

with both countries were virtually identical at 17-18 percent (Figure 3). As discussed,

Thailand has consistently reported a high trade deficit with Japan and a surplus with

the US.

During the pre-crisis years of 1986-96, the average growth rate of Thai

exports to Japan (24 percent) consistently outpaced that of Thailand’s global exports

and Thailand’s exports to the US (about 20 percent each). Thai exports to Japan

recorded negative growth for three consecutive years from 1996-98, as compared to

exports to the US which recorded a slight negative growth only in 1996. The share of

the US in Thai exports has generally hovered around 20 percent between 1985 and

11
The price of 16-megabyte DRAM chips slumped from US$54 at the end of 1995 to US$13
in 1996 and then US$3 by mid 1997 (World Bank, 2000b).
12
See World Bank (2000b) for a brief discussion of the growing complementarity of trade
structures of East Asian economies. Thailand’s manufactured export structures (at a three
digit SITC level) were highly correlated with all regional economies in East Asia except for
Indonesia.
 13

1994. Having fallen off sharply in 1995, the share of exports to the US relative to

Thailand’s global exports has risen sharply since then. Japan’s export share rose

gradually from about 13 percent in 1985 to about 16 percent over the entire period

until 1996. However the share has since declined13.

In the pre-crisis period, the average growth rates of Thai imports from the US

and Japan were almost identical (15 percent). The share of US imports in Thailand’s

global imports ranged between 10 and 15 percent over the period, with a slightly

upward trend between 1995 and 1998. In comparison, the share of Japan’s imports

was much higher over the period, ranging between 25 and 30 percent, peaking in

1989 but declining sharply from 1994. Regardless, Japan has been a more important

import source for Thailand than the US. This is generally attributed to the high share

of Japanese FDI in Thailand (about 35 percent of total FDI). Much of this Japanese

FDI has been directed towards the manufacturing industry, a major area of Japanese

trade with Thailand, and intermediate inputs have been sourced from their home

country.

To sum up, the stability of the US in Thailand’s overall global trade between

1985 and 1995 was matched by a small but slightly rising bilateral trade balance in

favor of Thailand. The sharp increase in the economic significance of the US in

Thailand’s overall trade between 1995 and 1998 coincided with a major rise in

Thailand’s trade surplus with the US. In contrast, the stability of Japan’s trade share

with Japan between 1987 and 1996 corresponded to a persistent and widening trade

imbalance in favor of Japan14. The marked decline of Japan in Thailand’s overall

13
It is useful to note that manufactured products including chemical, machinery and metal
manufactures were the principal commodities that contributed to a high surplus in Japan’s
trade with Thailand (Table A1). Among the machinery products, electronic and electrical
products viz. Telecom and Electrical equipment and Transportation equipments contributed
significantly to a high deficit for Thailand in its bilateral trade with Japan pre-crisis.
14
Over the period 1986 to 1995, Thailand’s trade deficit with Japan increased continuously
and sharply by nearly US$11 billion (with the exception of 1991). In contrast, Thailand’s trade
surplus with the US increased relatively less by only about US$ 3 billion during 1986-94.
 14

trade since then has coincided with a fall in the size of Thailand’s bilateral deficit with

Japan (Figure 10).

Trade Intensities

Trade shares as measures of the extent of trade linkages could be misleading

as they fail to account for the extent to which each of the Asia-5 economies trade

with the rest of the world (ROW). Accordingly, we have also computed conventional

bilateral trade intensity indices (Appendix B). These indices essentially seek to

establish the relative importance of a trading partner (country j) in relation to country

i’s trade with the ROW. The IMF’s Direction of Trade Statistics is used to calculate

the bilateral trade intensity indices for 1985-99.

We consider the export intensity index first (Figure 12). Thailand’s bilateral

export intensity for Japan declined from its peak of about 3 in 1990 to a trough of

about 2.5 in 1997. In contrast, Thailand’s export intensity for the US remained more

or less stable at just above 1 between 1993 and 1997, though down from the peak of

1.5 between 1990 and 1992. In the case of import intensity indices (Figure 13), while

Thailand’s import intensity with the US remained quite stable at about 1 between

1985 and 1997, that with Japan rose from a trough of about 2.6 in 1986 to a peak of

about 3.7 by 199615. Overall, it can be inferred from the preceding that on average,

Japan has been relatively “over-represented” as Thailand’s trading partner (both as

an export market and import source). While the US has been slightly over-

represented as an export markets, this was far less than the case of Japan. Notably,

Thailand’s bilateral trade intensities in recent years have not changed as discernibly

in comparison to bilateral trade shares. This suggests that the recent variations

(1995/96 to 1998) in Thailand’s bilateral trade shares with the US and Japan were

not unique to Thailand but merely reflected variations in trading patterns and trends

of its two trade partners in general.

15
More precisely, there was a sharp rise in Thailand’s import intensity index between 1986
and 1990, declined sharply between 1990 and 1993, before appreciating since until 1996.
 15

4.2 VAR Tests

To further evaluate the impact of real exchange rate misalignments as a

factor in variations of Thailand’s bilateral trade deficits with Japan and the US, we

conduct an unrestricted vector autoregressive (VAR) Impulse-Response test for the

trade imbalance period (1987-1996). A one standard deviation shock to the

misalignment of the RERJP lead to a larger and more persistent impact than does

the RERUS misalignment on the total trade balance. Between two and five quarters,

the impacts of the RERJP misalignment on Thailand’s overall trade balance (TB) are

much larger than those of the RERUS (Figure 14). Moreover the negative impact of

higher misalignments (overvaluations) of the RERJP on the level of trade balance

lasts for about eight quarters or two years16. We conclude from this that the

overvaluation of the Thai baht against the Japanese yen until late 1992 or early 1993

contributed to the worsening of the Thailand’s trade imbalance pre-crisis.

Unrestricted-VAR Variance Decomposition tests for the same period reveal

that over one-fifth of the variance in the trade deficit variable can be explained by the

variance of the real exchange rate misalignment against the Japanese yen within two

years (or eight quarters) (Table 13). The misalignment in the real exchange rate

against the US dollar contributes to only about one-tenth of the variance in the trade

deficit variable. Equally important, the results indicate that while the share of the

variance of RERUS misalignment has been relatively stable during the eight lags, the

rise in the share of RERJP misalignment is relatively sharp during the first four

quarters (lags), before abating during the last four quarters. Consistent with the

Impulse Response Test results, the Variance-Decomposition test underscores the

importance of the RERJP misalignment in explaining the trade performance of

Thailand.

16
The t-statistics for RERJP and RERUS remain significant at the 5 percent significant level
during the first four lags. However for the rest of the four lags, the t-statistics for both RERJP
 16

5. Conclusion

This paper has examined, in some detail, three key equilibrium exchange

rates for the Thai baht: a) real effective equilibrium exchange rate of the Thai baht

against its twenty two major trading partners; b) bilateral real equilibrium exchange

rates of the baht against the US dollar; and c) and bilateral real equilibrium exchange

rates of the baht against the Japanese yen over the last two decades (Q1: 1981 to

Q3: 1999). While the results suggest moderate misalignments for the real effective

exchange rate case and the bilateral real exchange rate against the US dollar, the

most significant misalignment was found with respect to the bilateral real exchange

rate against the Japanese yen. The misalignment in the bilateral real exchange rate

against the Japanese yen is consistent with a significant widening of the Thai trade

deficits between 1990 and 1996 just prior to the crisis in 1997, which in turn was

primarily due to Thailand’s bilateral trade relations with Japan. To the extent that an

“optimal exchange rate regime” is defined as one that minimizes the volatility of a

country’s trade balance, when the yen-dollar exchange rate fluctuates, Thailand’s de

facto dollar peg was clearly not optimal (Ito et al., 1999). In light of this, the recent

retreat by Thailand and other regional economies to a de facto dollar peg (Calvo and

Reinhart, 2000a,b and McKinnon, 2000) must be cause for some concern.

and RERUS are significant only at 10 percent level.

 17

Appendix A: The NATREX Model in Brief

The basic structural equations of the NATREX model are the followings.

S(k, F; Z, u) - I (k, y, R, r:Z, u) = CA (R, y, F, r:Z, u); u = 0, (A.1)

r + (t) = r*; (t) = E{ R * [Z(t)]}, (A.2)

dF/dt = -A(R, y, F, r:Z, u) = L(R, k, F, r:Z), L = I - S, (A.3)

dK/dt = I (A.4)

where: R = real exchange rate; r = domestic real interest rate; r* = foreign real

interest rate; S = saving; I = investment; k = capital stock; F = foreign debt; CA =

Current Account; y = productivity; u = deviation of rate of capacity utilization;_ (t) =

risk premium; Z = the vector of fundamental variables. This vector Z includes mainly

real exogenous fundamental variables explaining the movements of real exchange

rate and current account variable.

Eq. (A.1) is the macroeconomic balance equation. It simply states that excess

investment over saving (I - S) equals to current account deficit. The equilibrium real

exchange rate will adjust to ensure that the current account deficit equals to

investment (I) less saving (S). (I-S) > 0. Eq. (A.2) is the uncovered interest rate parity

(UIP) model with Asymptotically Rational Expectation a la Stein (1994). It is basically

the portfolio balance equation. Eqs (A.3) and (A.4) capture the changes in the foreign

debt level and the investment level respectively over the period.

Thus the NATREX model adds dynamic stock - flow interactions to the

standard macroeconomic balance model. The inclusion of the dynamic equations

allows the NATREX to vary over time, reflecting the changes on the fundamental

variables. In the medium run, an economy may face a current account imbalance. In

the long run, however, the foreign debt and capital stabilize. The evolution of the real

exchange rate under the NATREX model can therefore be captured as follows:
 18

dR/dt = [Rk dk/dt + RF dF/dt] + Rz dZ/dt (A.5)

where Rk, RF, and Rz are partial derivatives with respect to capital, debt, and

fundamental variables, respectively.

Given k and F are functions of the fundamental variables (Z) - see Eq. A.1

and A.4, the trajectory of the real exchange rate under this model can therefore be

expressed in terms of the fundamental variables.

dR/dZ = ∂ R/ ∂ Z + [ ( ∂ R/ ∂ k) dk/dZ + ( ∂ R/ ∂ F) dF/dZ] (A.6)

where ∂ R/ ∂ Z is direct effect of the fundamental variables to the real exchange rate

variable. [( ∂ R/ ∂ k) dk/dZ] and [( ∂ R/ ∂ F) dF/dZ] are the effects of fundamental

variables to the real exchange rate through their impacts on k and F (indirect effects).

In summary, the impacts of the fundamental variables on the trajectory of the

real exchange rate under the NATREX model can be explained through a direct and

an indirect way. What is important for the empirical application of the model is to find

the appropriate set of fundamental variables included in vector (Zt). For most

applications of the NATREX, the vector (Zt) includes the terms of trade, productivity

variable, world interest rate and saving/expenditure.

 19

Appendix B: Trade Intensity Indices

B.1 Total Trade Intensity

The bilateral trade intensity index for total trade is as follows:

Tij =[(Xij+Mij)/(Xi+Mi)]/{[Xwj+Mwj)-(Xij+Mij)]/[(Xw+Mw)-(Xi+Mi)]}

where: Tij = Total trade intensity index of country i with country j; Xij = Exports of

country i to j ; Mij = Imports of country i from j; Xi =Total exports of country i; Mi= Total

imports of country i; Xwj= Total world exports to country j ; Mwj = Total world imports

from country j; and Xw = Total world exports; Mw = Total world imports

This index is interpreted as a relative measure of two ratios. The numerator

represents the share of bilateral trade between country i and j as a percentage of

total trade of country i. This forms the numerator of the total trade intensity index. The

second ratio in the denominator represents the total trade of country j with the world

excluding country i as a share of total world trade excluding country i. This forms the

denominator of the total trade intensity index.

If the numerator exceeds the denominator, i.e. if the value of Tij > 1, then it

implies that the bilateral trade intensity for country i with country j is greater than in

comparison to country i’s trade with the rest of the world (ROW). Thus for instance, if

Thailand is regarded as country i and country j is represented by its trading partners,

viz. US / Japan, then a value of Tij > 1 implies that Thailand prefers to trade more

intensely with them than trading with the rest of the world.

B.2 Export Intensity Index

The bilateral export intensity index among country i and country j may be

stated as :
 20

Xija = [Xij/Xi]/[( Mj- Mji)/( Mw- Mi)]

where, in addition to the notations in the bilateral trade intensity index, Mj = Total

imports of country j and Mji = Imports of country j from country i. A value of this index

above unity implies that country i’s relative share of exports to country j exceeds

country j’s share of imports from the ROW. This implies an over-representation of

country j in country i’s export market. From country i’s point of view, the value of

greater than one indicates that country i has relatively more intense preference for

exporting to country j as compared to country j’s imports from the ROW.

B.3 Import Intensity Index

The import intensity index may be stated as follows :

Mija = [Mij/Mi]/[( Xj- Xji)/( Xw- Xi)]

where, in addition to the notations in the bilateral trade intensity index, Xj = Total

exports of country j; and Xji = Exports of country j to country i. A value of this index

above unity implies that country i’s relative share of imports to country j exceeds

country j’s share of exports to the ROW. This implies an over-representation of

country j in country i’s import market. From country i’s point of view, the value of

greater than one indicates that country i has relatively more intense preference for

importing from country j as compared to country j’s exports to the ROW.

 21

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Table 1
Selected Thailand Key Macroeconomic Indicators

Average Average 1995 1996 1997 1998 1999

1985-1990 1991-1995
GDP Growth (%) 9.4 8.6 8.8 5.5 -0.4 -10.2 3.3

Inflation Rate (%) 3.7 4.8 5.8 5.8 5.6 8.1 0.3

Trade Balance -2.185 -5.228 -7.968 -9.488 1.551 16.041 13.477

(billion US$)

Trade Balance -1.94 -5.17 -6.73 -6.78 1.39 15.94 12.64

(% of GDP)

Current Account -2.182 -8.375 -13.554 -14.692 -3.024 14.230 10139

(billion US$)
Current Account Balance -3.13 -6.42 -8.07 -8.08 -2.01 12.68 8.03
(% of GDP)
Unemployment Rate (%) 3.3 1.6 1.1 1.1 0.9 3.4 n.a.

Exchange Rate 25.7 25.32 25.19 25.61 47.25 36.69 37.52

(baht/US$)

Exchange Rate 5.14 4.22 4.20 4.27 7.88 6.11 6.25

(baht/100 yen)

n.a. = Not Available

Source: IFS-CD Rom

Table 2
Composition of Capital Flows to Thailand
(percent of GDP)

a
1989-1995 1994 1995 1996 1997

Net Private Capital Flows 10.2 8.6 12.7 9.3 -10.9

Net Direct Investment 1.5 0.7 0.7 0.9 1.3

Net Portfolio Investment 1.3 0.9 1.9 0.6 0.4

Other Net Investment 7.4 7.0 10.0 7.7 -12.6

Net Official Flows 0 0.1 0.7 0.7 4.9

a) Annual averages
Source: IMF
 26

Table 3
Average Real Interest Rate Differentials
(percent)

Q1: 1985 – Q4: 1989 Q1: 1990 – Q4: 1996

rthai - rus 0.53 4.33

rthai - rjpn 5.60 6.92

Source: IFS – CD Roam, IMF

Note: rthai is 3-month Thailand’s real deposit rate; rus is 3-month U.S. real libor rate; rjpn is 3-
month Japanese real deposit rate (see Table 11). The real interest rate is the nominal rate
adjusted by the inflation rate.

Table 4
External Debt in Thailand
(millions of US)

1994 1995 1996 1997 1998 1999

a
Total Oustanding Debt 64,866 82,568 90,536 93,416 86,160 80,655

Oustanding Medium- and 35,687 41,472 52,923 59,158 62,637 63,088

b
Long-term Debt
Oustanding Short-term Debt 29,179 41,096 37,613 34,258 23,523 17,567

Notes: a) First half of the year

b) Excludes loans (estimated at about US$ 4billion at end-1997) contracted by Thai corporations
but not brought into Thailand.
Source: Rajan (2000a)
 27

Table 5
The Southeast Asian Dollar Standard (daily nominal exchange rate)
a
Regression Model :
%(∆Local Currency/SWF) = β 1 + β 2 (%∆USD/SWF) + β 3 (%∆JPY/SWF) + β 4(%∆DEM/SWF) + et

Pre- Crisis Period (January 1994 - May 1997)

Currencies USD coefficient: β 2 R-square

(standard error)
Indonesian Rupiah 0.999 (0.008) 0.965

Malaysian Ringgit 0.886 (0.014) 0.889

Philippines Peso 0.987 (0.018) 0.836

Singapore Dollar 0.817 (0.012) 0.905

Thailand Baht 0.955 (0.012) 0.923

Crisis Period (June 1997 - December 1998)

Currencies USD coefficient: β 2 R-square

(standard error)
Indonesian Rupiah 0.550 (0.388) 0.038

Malaysian Ringgit 0.755 (0.138) 0.161

Philippines Peso 0.788 (0.125) 0.196

Singapore Dollar 0.727 (0.061) 0.447

Thailand Baht 0.688 (0.165) 0.107

Post-Crisis Period (January 1999 - May 2000)

Currencies USD coefficient: β 2 R-square

(standard error)
Indonesian Rupiah 0.848 (0.163) 0.182

Malaysian Ringgit 1.000 (0.000) 1.000

Philippines Peso 0.945 (0.040) 0.741

Singapore Dollar 0.818 (0.026) 0.848

Thailand Baht 0.858 (0.049) 0.639

Notes: USD = US$; JPY = Japanese yen; DEM = German DM and SWF: Swiss Franc
Source: McKinnon (2000)
 28

Table 6
Total Japanese and the U.S. Banking Loans to Thailand
(millions of US dollar)

U.S. Banks Japanese Banks

End June 1997 4008 (5.81%*) 37749 (54.41%*)

End June 1998 1757 (3.75%*) 26120 (55.81%*)

End June 1999 1232 (3.55%*) 18278 (52.68%*)

Notes: ( * ) indicates percentage of the Japanese and the US bank loans in terms of the total foreign
bank loans to Thailand.
Source: Rajan and Siregar (2000)

Table 7
Composition of Thailand’s Long-Term External Debt
(percent of total)

1990 1996

US Dollar 17 32.1

Japanese Yen 43.2 45.4

Others 39.8 22.5

Source: Siregar and Isidoro (1999)

Table 8
Optimal Weights of the Japanese yen in Southeast Asian Currency Baskets

Indonesian Malaysian Philippine Thai baht

rupiah ringitt peso

B-Q (1999) 0.30 0.21 0.23 0.29

a
Ito et al. (1998) 0.56 n.a. 0.72 0.52

Eiji (1999) 0.45 0.40 0.40 0.40

a
Kusukawa (1999) 0.39 0.36 0.31 0.40
a,b
Kusukawa (1999) 0.32 0.32 0.32 0.32
b
Williamson (1999) 0.33 0.33 0.33 0.33

Bird and Rajan (2000b) 0.59 0.46 0.35 0.59

Simple Average 0.42 0.35 0.38 0.41

Notes: a) Based on the simple average of stated ranges

b) Based on a common basket which include the four Southeast Asian countries plus
Singapore, South Korea, Singapore, P.R.C. China, Hong Kong and Taiwan
Source: Rajan (2000b)
 29

Table 9
Variables

Variable Description Source

reer Real Effective Exchange Rate (against around 22 J.P. Morgan Web-Site
Thailand’s major trading partners’ currencies). An
increase in REER implies a real appreciation of the
Thai baht.

rerus Real Exchange Rate of baht against the US dollar: IFS – CD Roam (IMF)

RERUS = [NEXUS$/baht ] * [CPIThai / CPIUS];

where CPI is the consumer price index, and

NEX is the nominal exchange rate. An increase in
RERUS implies a real appreciation of the Thai baht
against the US dollar.

rerjp Real Exchange Rate of baht against the Japanese IFS – CD Roam (IMF)
yen:

RERJP = [NEXJPN Yen/baht ] * [CPIThai / CPIJPN];

where CPI is the consumer price index, and

NEX is the nominal exchange rate. An increase in
RERJP implies a real appreciation of the Thai baht
against the Japanese yen.

Tot Terms of trade = IFS – CD Roam (IMF)

(unit value of export) / (unit value of import)

G Real government spending = IFS – CD Roam (IMF)

Government spending / GDP

Econometric Study Unit-

prod Productivity index (GDP per capita) Data Base of the National
University of Singapore

(rthai – rus) Real interest rate differential: IFS – CD Roam (IMF)

rthai = Thailand three month real deposit-rate.
rus = US$ three month real libor rate.

(rthai – rjpn) Real interest rate differential: IFS – CD Roam (IMF)

rthai = Thailand three month real deposit rate.
rjpn = Japan three month real deposit rate.

Source: Compiled by authors

 30

Table 10
ADF Unit-Root Test
a
Variable Level [I(0)] First-Difference [I(1)]
b
Reer -1.9557 (2) -5.2440 (2)

Rerus -2.6515 (2) -7.0919 (2)

Rerjp -2.4196 (1) -6.0126 (1)

Tot -3.2084 (4) -3.9307 (4)

G -1.8930 (2) -13.2353 (2)

prod -1.2187 (2) -3.7248 (2)

c
(rthai – rus) -2.6289 (3) -10.7782 (3)

(rthai – r jpn) -2.5448 (1) -9.6296 (1)

Notes: 5 percent ADF-critical value = -3.4696

a) All variables are in the log-form.
b) ( ) captures the number of lags based on the Akaike Information Criteria.
c) also represents (rthai – r*)

Table 11a
Cointegration-Test Results for REER

Observation Period: Q1:1981 - Q3: 1999

Eigenvalue Likelihood-Ratio 1 Percent Critical value Hypothesized No. of CE(s)
a
0.4774 114.31 96.58 None

0.3433 65.64 70.05 At most 1

0.1820 34.10 48.45 At most 2

0.1802 19.03 30.45 At most 3

0.0536 4.13 16.26 At most 4

Note: a) Likelihood-Ratio indicates one cointegrating equation at 1 percent significance level

The Nomalized Cointegrating Coefficients:

reer = -3.848 +1.152 gt + 0.102 (rthai(t)-r*(t)) + 0.613 prdt + 0.758 tott - 0.026 t
(0.1813) (0.0384) (0.1563) (0.3329) (0.0032)

( ) represents the standard errors

 31

Table 11b
Cointegration-Test Results for RERUS

Observation Period: Q1: 1981 - Q3: 1999

Eigenvalue Likelihood-Ratio 1 Percent Critical value Hypothesized No. of CE(s)
a
0.4314 108.35 96.58 None

0.3784 67.69 70.05 At most 1

0.2294 33.46 48.45 At most 2

0.1170 14.69 30.45 At most 3

0.0766 5.73 16.26 At most 4

Note: a) Likelihood-Ratio indicates one cointegrating equation at 1 percent significance level

The Nomalized Cointegrating Coefficients:

rerus = -17.32 + 1.298 gt + 0.023 (rthai(t)-rus(t)) + 0.523 prdt + 1.779 tott - 0.017 t
(0.355) (0.053) (0.256) (0.591) (0.004)

( ) represents the standard errors

Table 11c
Cointegration-Test Results for RERJP

Observation Period: Q1: 1981 - Q3: 1999

Eigenvalue Likelihood-Ratio 1 Percent Critical value Hypothesized No. of CE(s)
a
0.4139 102.63 96.58 None

0.3296 62.56 70.05 At most 1

0.2122 32.58 48.45 At most 2

0.1182 14.68 30.45 At most 3

0.0675 5.24 16.26 At most 4

Note: a) Likelihood-Ratio indicates one cointegrating equation at 1 percent significance level

The Nomalized Cointegrating Coefficients:

reer = -16.35 + 2.003 gt + 0.394 (rthai(t)-r jpn(t)) + 0.494 prdt + 1.911 tott - 0.035 t
(0.4094) (0.1192) (0.3450) (0.8368) (0.0071)

( ) represents the standard errors

 32

Table 12
Settlement of Currency Composition of Exports and Imports for Thailand
(percent)

Exports Imports

1996 1997 1996 1997

US Dollar 91.7 91.8 80.1 80.4

Baht 1.3 1.2 0.8 0.8

Yen 4.5 4.5 9.6 9.7

Others 2.5 2.5 9.5 9.1

Source: Bank of Thailand and Siregar and Isidoro (1999)

Table 13
Variance Decomposition of the Total Trade Balance, Q1: 1987 – Q1: 1996
(percent)
a
VAR ordering: (Misalignment RERJP, Misalignment RERUS, and Trade Balance)

Period Misalignment Misalignment Trade Balance

RERJP RERUS
1 8.81 9.73 81.46

2 9.06 9.97 80.97

3 16.91 9.64 73.45

4 20.77 9.48 69.74

5 21.04 9.43 69.53

6 21.55 9.86 68.59

7 21.96 10.39 67.64

8 21.97 10.40 67.63

Note: a) Refer to Hamilton (1994) for the ordering of the VAR (page 323-330). Based on the knowledge
that most of the trade deficit comes from the trade with Japan, the misalignment RERJP (against the
Japanese yen) should therefore be a more dominant force than the misalignment RERUS in explaining
the trade deficits. The more dominant variable is less likely to respond contemporaneously to innovation
in the other variables.
 33

Table A1
Major Commodity Groups of Thailand’s Trade with Japan
(in millions of US$)

Japanese Exports by Major commodity Japanese Imports by major commodity

Group Group

Product group 1993 1995 1996 1997 1998 1993 1995 1996 1997 1998

Agricultural products 122 111 83 107 118 2196 2792 2561 2328 2072

Crude materials excl. 90 160 125 103 82 670 1174 1078 956 657
fuels
Mineral Fuels 38 51 46 40 13 13 16 20 54 6

Chemical manufactures 942 1630 1419 1195 982 201 235 257 288 288

Machinery 8160 13100 12259 9314 5501 1476 3033 3319 3223 2858
manufactures
Office and computing 364 421 426 401 412 375 1047 1262 1118 869

Telcomm & electric 2126 3603 3353 3207 2616 658 1350 1376 1428 1364

Transportation 2436 3644 3385 1719 444 23 32 37 69 105

Other manufactures 2814 4495 4042 3551 2416 1765 2512 2561 2374 1946

Textlies, apparel, etc. 215 237 218 197 171 490 673 680 609 452

Wood, furniture paper, 223 299 262 200 126 309 490 475 462 365
etc.
Metals 1503 2457 2134 1841 1237 291 360 349 319 269

Not classified 138 197 289 274 254 194 361 416 351 351

Total 12304 19744 18263 14583 9366 6515 10121 10212 9574 8178

Source: ICSEAD (2000)

 34

Figure 1
Balance of Payments
(in billions of US$)
30

20

10

-10

-20
80 82 84 86 88 90 92 94 96 98

BOP CA KA

Note: BOP = Balance of Payment; CA = Current Account; KA = Capital Account

Source: IFS, IMF (various years).

Figure 2
Nominal Exchange Rate (foreign currency per baht)
(average 1990 = 100)

200

150

100

50

80 82 84 86 88 90 92 94 96 98

NEER NEXUS NEXJP

Source: Computed by authors from IFS, IMF (various years).

 35

Figure 3
Comparison of Trade Shares of Thailand's Trade with
US and Japan
35

30

25

20
%

15

10

0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Total Trade share (US) Total Trade Share (Japan)
Export share (US) Export Share (Japan)
Import share (US) Import Share (Japan)

Source: IFS, IMF (various issues)

Figure 4
Real Exchange Rate (foreign currency/ baht)
(average 1990 = 100)
180

160

140

120

100

80

60

40
80 82 84 86 88 90 92 94 96 98

REER RERUS RERJP

 36

Figure 5
Volatility Index
(average 1990 = 100)
400

300

200

100

0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

VJP VUS

Computed by authors. VJP is the volatility index of the RERJP. VUS is the volatility index of the
RERUS.

Figure 6
REER and NATREX
(average 1990 = 100)
112

108

104

100

96

92
86 88 90 92 94 96 98

NATREX REER
 37

Figure 7
RERUS and NATREX
(average 1990 = 100)
115

110

105

100

95

90

85
86 88 90 92 94 96 98

NATREX RERUS

Figure 8
RERJP and NATREX
(average 1990 = 100)
160

140

120

100

80

60
86 88 90 92 94 96 98

RERJP NATREX
 38

Figure 9
Misalignments
(percent)
40

20

-20

-40
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

MISJP MISREER MISUS

Note: - MISJP = Misalignment for the real exchange rate of the baht against the yen.
- MISREER = Misalignment for the real effective exchange rate
- MISUS = Misalignment for the real exchange rate of the baht against the US$.
The degree of misalignment is calculated using the following standard formula:
For the case of MISREER = ( (REER – NATREX)/NATREX) * 100
Where a positive (negative) number implies an overvaluation (undervaluation).

Figure 10
Thailand’s Bilateral Trade Balance against Japan (TradeJP) and the US (Trade-US)
(in millions of baht)
100000

50000

-50000

-100000
80 82 84 86 88 90 92 94 96 98

TRADEJP TRADEUS

Source: IFS, IMF (various issues)

 39

Figure 11
Total Trade Balance
(in billions of baht)
300

200

100

-100

-200
82 84 86 88 90 92 94 96 98

TRADE BALANCE

Source: IFS, IMF (various issues)

Figure 12
Comparison of Thailand's Export Intensity with
Japan and the US
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Thailand with US
Thailand with Japan

Source: Computed by authors

 40

Figure 13
Comparison of Thailand's Import Intensity with
Japan and the US
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Thailand with US
Thailand with Japan

Source: Computed by authors

Figure 14
a
Impulse Response Test

Response of Trade Balance (TB) to One S.D. Innovations

0.06

0.04

0.02

0.00

-0.02
1 2 3 4 5 6 7 8

MISJP MISUS TB

Note: a) VAR ordering: (MISJP, MISUS, TB) following Hamilton (1994). This result (larger and more
persistent impacts of the MISJP than of the MISUS on the trade balance (TB)) holds when we switch the
ordering into (MISUS, MISJP, TB). Note: MISJP = misalignment of the bilateral real exchange rate of the
Thai baht against the Japanese yen. MISUS = misalignment of the bilateral real exchange rate of the
Thai baht against the US dollar. TB = Trade Balance (total export – total import) of Thailand.
 CIES DISCUSSION PAPER SERIES
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or write, email or fax to the above address for our List of Publications by CIES
Researchers, 1989 to 1999 plus updates.

0045 Rajan, Ramkishen S., Rahul Sen and Reza Siregar, "Misalignment of the Baht,
Trade Imbalances and the Crisis in Thailand", November 2000.
0044 Graham Bird and Ramkishen S. Rajan, "Financial Crises and the Composition
of International Capital Flows: Does FDI Guarantee Stability?", November
2000.
0043 Graham Bird and Ramkishen S. Rajan, "Recovery or Recession? Post-
Devaluation Output Performance: The Thai Experience", November 2000.
0042 Rajan, Ramkishen S. and Rahul Sen, " Hong Kong, Singapore and the East
Asian Crisis: How Important were Trade Spillovers?", November 2000.
0041 Li Lin, Chang and Ramkishen S. Rajan, "Regional Versus Multilateral Solutions
to Transboundary Environmental Problems: Insights from the Southeast Asian
Haze", November 2000. Forthcoming in The World Economy, 2000.
0040 Rajan, Ramkishen S. " Are Multinational Sales to Affiliates in High Tax
Countries Overpriced? A Simple Illustration", November 2000. Forthcoming in
Economia Internazionale, 2000.
0039 Rajan, Ramkishen S. and Reza Siregar, " Private Capital Flows in East Asia:
Boom, Bust and Beyond", September 2000
0038 Yao, Shunli, "US Permanent Normal Trade Relations with China: What is at
Stake? A Global CGE Analysis", September 2000
0037 Yao, Shunli, "US Trade Sanctions and Global Outsourcing to China",
September 2000
0036 Barnes, Michelle L., "Threshold Relationships among Inflation, Financial
Market Development and Growth", August 2000
0035 Anderson, Kym, Chantal Pohl Nielsen and Sherman Robinson, "Estimating the
Economic Effects of GMOs: the Importance of Policy Choices and
Preferences", August 2000
 1

0034 Anderson, Kym and Chantal Pohl Nielsen, "GMOs, Food Safety and the
Environment: What Role for Trade Policy and the WTO?" August 2000.
Forthcoming in Tomorrow's Agriculture: Incentives, Institutions, Infrastructure
and Innovations, edited by G.H. Peters and P. Pingali, Aldershot: Ashgate for
the IAAE, 2001
0033 Nguyen, Tin, "Foreign Exchange Market Efficiency, Speculators, Arbitrageurs
and International Capital Flows", July 2000
0032 Nielsen, Chantal Pohl and Kym Anderson, "Global Market Effects of
Alternative European Responses to GMOs", July 2000
0031 Rajan, Ramkishen S., and Reza Siregar, "The Vanishing Intermediate Regime
and the Tale of Two Cities: Hong Kong versus Singapore", July 2000
0030 Rajan, Ramkishen S, " (Ir)relevance of Currency Crisis Theory to the
Devaluation and Collapse of the Thai Baht", July 2000. (Forthcoming in
Princeton Studies in International Economics, International Economics Section,
Princeton University, 2000)
0029 Wittwer, Glyn and Kym Anderson, "Accounting for Growth in the Australian
Wine Industry between 1987 and 2003", July 2000
0028 Rajan, Ramkishen S., "Currency Basket Regimes for Southeast Asia: the Worst
System with the Exception of All Others", June 2000
0027 Jones, Ronald W. and Henryk Kierzkowski, "Horizontal Aspects of Vertical
Fragmentation", June 2000
0026 Alston, Julian M., John W Freebairn, and Jennifer S. James, "Beggar-thy-
Neighbour Advertising: Theory and Application to Generic Commodity
Promotion Programs", May 2000
0025 Anderson, Kym, "Lessons for Other Industries from Australia's Booming Wine
Industry", May 2000. Forthcoming in Australian Agribusiness Review, 8, 2000.
0024 Farrell, Roger, "Research Issues in Japanese Foreign Direct Investment", May
2000
0023 Peng, Chao Yang, "Integrating Local, Regional and Global Assessment in
China's Air Pollution Control Policy", May 2000
0022 Maskus, Keith E., "Intellectual Property Rights and Foreign Direct Investment",
May 2000 (Forthcoming in Research Issues in Foreign Direct Investment,
edited by Bijit Bora, London: Routledge)
0021 Nielsen, Chantal and Kym Anderson, "GMOs, Trade Policy, and Welfare in
Rich and Poor Countries", May 2000 (Forthcoming in condensed form in
Standards, Regulation and Trade, edited by Keith Maskus and John Wilson,
Ann Arbor: University of Michigan Press, 2001)
0020 Lall, Sanjaya, "FDI and Development: Research Issues in The Emerging
Context", April 2000 (Forthcoming in Research Issues in Foreign Direct
Investment, edited by Bijit Bora, London: Routledge)
0019 Markusen, James R., "Foreign Direct Investment and Trade", April 2000
(Forthcoming in Research Issues in Foreign Direct Investment, edited by Bijit
Bora, London: Routledge)
0018 Kokko, Ari, "FDI and the Structure of Home Country Production", April 2000
(Forthcoming in Research Issues in Foreign Direct Investment, edited by Bijit
Bora, London: Routledge)
0017 Damania, Richard, and Per G. Fredriksson, "Collective Action and Protection",
March 2000