Thai policy-makers and financial regulators have generally come to an understanding that the 1997 crisis represented a crisis of the banking system and foreign-exchange regime.

When the crisis erupted in early 1997, Thai finance companies and banks witnessed a sharp deterioration in their asset quality. A run on finance and bank deposits aggravated the financial system, forcing the banking authorities to inject liquidity to bail them out while interest rates shot sky-high due to massive capital outflows.

Investors also lost confidence in the Thai foreign-exchange rate, fixed tightly to the US dollar. Instead of letting the baht float, the banking authorities decided to defend the baht until they ran out of foreign-exchange reserves, thus plunging the country into financial meltdown.

Thailand had to seek a bailout from the International Monetary Fund after devaluating the baht. Initially adopting a tough programme to stabilise the economy, the country gradually recovered through the exceptional performance of exports. Now Thailand has recovered totally from the 1997 financial malaise.

"In the banking system, we have moved to improve the soundness of the system and strengthen risk management," said Kosit. "We have also harmonised the definitions of capital, non-performing loans and capital adequacy rules and introduced other tools to strengthen the stability of the banking system.

"In foreign-exchange management, we understand that we have our limitations in managing currency stability. We have to adopt a flexible exchange-rate system by allowing the currency to move with market forces."

Moreover, the Thai thinking on gross domestic product has also changed. High growth does not necessarily lead to prosperity because it can also lead to another crisis, said Kosit.  "We can't go against market forces for too long. You may say that this represents the most significant macroeconomic adjustment of Thailand," he added.

Kosit, a former executive chairman of Bangkok Bank who spent most of his earlier career at the National Economic and Social Development Board, is now the economic tsar of the Surayud government. Looking ahead, he would like Thailand to focus more on productivity growth rather than populist policy-driven growth.

One of the controversial legacies that ousted prime minister Thaksin Shinawatra has left behind is a debate between economic populism and productivity.

Supporters of Thaksinomics believe that injecting capital into the economy will help growth and provide jobs to underprivileged people, while the modern economy can take care of itself.

Critics of Thaksinomics argue that economic populism, such as the village fund programme or the SME project, works only temporarily. For longer or more sustainable growth, Thais must work smarter as measured by productivity growth.

Kosit said he belongs to the circle of people who believe in productivity growth more than financial handouts.

This will be the way to rebuild Thailand, which is now no longer a "low-wage country". Foreign direct investment is not pouring into Thailand like previous decades because Thailand has moved up to become a middle-income nation. Rather, foreign direct investment is targeting emerging economies such as China, Vietnam and India, which are now experiencing the high growth rates Thailand did in previous decades.

Kosit said Thailand cannot chase after foreign direct investment but will need to develop intellectual properties instead.

New investment projects under the Board of Investment also have to pass a stringent test of environmental protection, otherwise they won't be allowed to receive tax privileges or establish their plants in Thailand.

Kosit said that to rely on productivity as the paradigm of the Thai growth, Thailand needs to adjust its learning model - as has been successfully practised by the medical community.

"In the medical community, we can see linkages from the doctors to the hospitals that treat patients and to the medical schools where professors teach medical students. They all form part of the same productivity process," he said.

"But I don't understand why we do not have this similar connection in other industries. The engineering community does not have this kind of linkages. The lecturers teach one way. The market wants another way. And the final products go yet another way."

Many people are becoming worried about the rise of China and Vietnam, whose growth might come at the expense of Thailand.

Kosit thinks otherwise. He believes that if Vietnam grows its economy strongly, it will also benefit Thailand as a neighbour because both share the same technological network and regional economic structure.

"Technology will force us to raise standards. For example, Thai Airways International and other airlines needed to upgrade their technologies to the same standard in order to form the Star Alliance," Kosit said.

At the same time, he said, the Thai economy is witnessing a significant transformation. New small and medium-scale industries are popping up all the time. Big companies are facing fierce competition from these new SMEs.

Kosit said big companies were reporting a sharp drop of sales and blaming the economic slowdown or the downturn in the economic cycle. But, in fact, Thai customers have shifted to buy consumer products from the SMEs, which are quicker than the bigger companies to perceive changing consumer behaviour. The SMEs mostly operate in the informal economy.

"From now on, companies can't invest by looking at the business cycle alone. They have to pay more attention to changing consumer behaviour, which counts for more," Kosit said.

Somluck Srimalee

Thanong Khanthong

The Nation