Political Economy of the Asian Financial Crisis
Some views regarding the political economy of the Asian financial crisis are now outdated, particularly after the Great Recession struck. As the Asian crisis took hold, many analysts at the time viewed the crisis as a product of “crony capitalism,” in which close ties between the business and government sectors created conditions for moral hazard, in which the business community was able to sway the government toward working in its favor. Political leaders were viewed as corrupt and self-interested, opposed to reform. This view was tempered over time, as the “Asian” aspect of the crisis was stripped away to better understand the causes of the crisis. In addition, a diversity of political regimes meant that Asian nations dealt with the crisis politically in different ways, and the stereotype of Asian corruption diminished.
In South Korea, President Kim Dae Jung faced a divided government, but worked with the outgoing government to implement some reforms before taking office in 1998. President Kim had looser ties to the business community than his predecessors, but maintained popularity with labor and was viewed as a populist (Haggard 2000). President Kim turned out to be more in favor of market liberalization than expected, assessing the crisis as stemming from insufficient market regulation and management. Kim was able to successfully foster negotiation between business and labor. Referenda held in June 1998 on the reform process resulted in victory for President Kim, particularly in Seoul, and the President continued his reform path.
In Thailand, the coalition government, which held weak ties to the Democrat Party, was not unified in the response to the crisis. Economic policy making was scattered by October 1997, but a proposal for media censorship and a curfew was blocked by the military. Prime Minister Chuan Leekpai, installed in office in November 1997, faced challenges in maintaining a government coalition and in quelling social unrest from diverse groups. Business opposed the government’s macroeconomic policy position, which was in line with IMF policy. Although the government later reached an agreement with the IMF to relax fiscal policy, the pro-business wing of the cabinet demanded further focus on the financial sector and exchange rate instead of concentration on the real economy (Haggard 2000). Post-crisis policy making in Thailand remained relatively slow-moving as a result.
In Indonesia, Mohamed Suharto was President when the crisis hit. As civil unrest grew, protesters demanded that Suharto step down and a democratic government be installed. Escalating violence and political alienation eventually induced Suharto to step down and B.J. Habibie to take office. Under President Habibie in Indonesia, the government faced challenges to reform in the vested interests of the ruling party and private sector. The reformasi movement that opposed abuses under Suharto created a backlash against the government, resulting in social violence and political confrontations. Habibie instituted political and economic reforms, including those required by the IMF, but was ultimately constrained in reforms instituted due to severe administrative restrictions.
The financial crisis did not produce political crisis in Malaysia, but did result in increased concentration of power in the hands of Prime Minister Mahathir. The government quashed dissent that arose to challenge the Prime Minister’s leadership. Reform was limited.
The Asian financial crisis produced a great deal of economic and political uncertainty, and generated political opposition to varying extents in the affected nations. Next, we briefly examine the Turkish crisis, which was brought about in part as a result of the Asian crisis.