The Politics of the Asian Financial Crisis

The Asian financial crisis of 1997-99 came as a shock to both the economics profession and the international policy community. Few inside or outside the region had foreseen the depth of the economic problems that followed, and a rich body of writing quickly emerged to offer competing post-mortems. Much of this analysis, however, was limited to purely economic factors. Beyond some references to moral hazard and cronyism, the political dimensions of the crisis were largely ignored. ¹ Yet political factors are crucial to understanding the course of the crisis as well as the ways in which governments responded to it.

Here I want to explore three issues posed by the crisis that are also of broader relevance in assessing how developing countries with open economies cope with the political challenges of increased capital mobility. First, how did different types of government (democracies, dictatorships, and varieties of each) fare in managing the crisis? Second, how did the crisis affect the relationship between business and government? Will East Asian governments, even after enacting reforms in the wake of the crisis, have the political capacity to provide an effective counterweight to private business power? And third, how will these governments manage the social consequences of their countries' integration into the world economy? Answering these questions may also provide some insight into the future of the "Asian model."

When countries exhibit signs of financial vulnerability, the reaction of markets is based in part on expectations of how governments will respond. When crises actually break, an even wider array of actors sit in direct judgment on a country's adjustment efforts, including international financial institutions, ratings agencies, financial analysts, banks, and institutional investors. Their assessments also are influenced by political expectations. They are concerned, above all, with the ability of governments to act decisively, coherently, and predictably.

We can gain some insight into how different types of governments react to severe policy challenges by focusing on six administrations in four East Asian countries. Four of these were in democratic regimes, two in Korea's presidential system (the administrations of Kim Young Sam and Kim Dae Jung) and two in Thailand's parliamentary system (those of Chavalit Yongchaiyudh and Chuan Leekpai); one was in a semi-democratic, dominant-party parliamentary system (that of Mahathir Mohamad in Malaysia); and one was in an authoritarian system (that of Suharto in Indonesia). This sample is clearly too small to say anything definitive about the politics of crisis management, but it is useful for revisiting some longstanding issues about the economic and policy performance of different types of regimes and governments.

Thailand and Korea

There can be little question that certain features of democratic politics in Thailand and Korea diminished the capacity of their governments to respond effectively to warning signals and increased uncertainty, although the reasons were different in each case. In Thailand, the problems were more fundamental. ² All of Thailand's democratically elected governments prior to the crisis rested on shaky multiparty coalitions. These were composed of internally weak and fragmented parties that allowed private interests to gain access to the policy process and made that process extraordinarily contentious. Party leaders constructed parliamentary majorities from a pool of approximately a dozen parties, and coalitions typically consisted of six or more parties. Cabinet instability was a chronic problem. Prime ministers were vulnerable to policy blackmail by coalition partners (and in some cases, by individual ministers) threatening to defect to another coalition in pursuit of better deals. The parties, in turn, relied heavily on businessmen who had strong personal interests in financial-market and other economic policies.

The Chavalit government (1996-97), a six-party coalition that included some of the parties from the previous government, attracted a highly regarded team of technocrats. The Central Bank succeeded in staving off two speculative attacks on the baht prior to its final collapse in July, but the Chavalit government failed to initiate fiscal-policy adjustments or to change...