New data on Thailand's industrial firms shed light on the origins of the East Asian financial crisis and on the response of the manufacturing sector to the structural adjustment program supported by the international financial institutions. Before the crisis, Thai firms had declining profitability, but they nevertheless maintained high levels of investment, often in domestically oriented areas (notably the auto sector). Thai firms financed these investments with short-term borrowing from financial institutions, which in turn borrowed short tenn on foreign markets. That only 40 percent offirms 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? Thaifirms had difficulty increasing their exports quickly because of investment in the wrong 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 imports. In retrospect, the macroeconomic program which assumed quick export recoveiy-was too tight.