Crisis, adjustment, and reform in Thailand's industrial firms

New data On Thailand's industrial firms shed light on the origins of the Ea st Asian financial crisis and on the response of the manufacturing sector t o the structural adjustment program supported by the international institut ions. Before the crisis, Thai firms had declining profitability, but they n evertheless maintained high levels of investment, often in domestically ori ented areas (notably the auto sector). Thai firms financed these investment s with short-term borrowing from financial institutions, which in turn borr owed short term on foreign markets. That only 40 percent of firms provided audited financial statements to their banks meant that the financial sector had poor information for assessing the true riskiness of these investments . The financial structure was thus vulnerable even to small shocks. How well did the adjustment program deal with the crisis? Tahai firms had d ifficulty increasing their exports quickly because of investment in the wro ng sectors, a decline in regional demand, and bottlenecks that included red tape and poor customs administration. Because of the poor export response, the brunt of adjustment had to come through compression of demand and of i mports. In retrospect the macroeconomic program-which assumed quick export recovery-was too tight.