Towards rule-based institutions and economic growth in Asia? Evidence from the Asian Financial Crisis 1997–1998
| DOI | 10.1177/2057891120962575 |
| Published date | 01 September 2021 |
| Author | Kee Hoon Chung |
| Date | 01 September 2021 |
| Subject Matter | Research articles |
Research article
Towards rule-based
institutions and economic
growth in Asia? Evidence
from the Asian Financial
Crisis 1997–1998
Kee Hoon Chung
Seoul National University, South Korea
Abstract
Due to the severity of the Asian Financial Crisis 1997–1998, South Korea, Indonesia, and Thailand
resorted to an International Monetary Fund (IMF) bailout. In exchange, the IMF demanded a series
of reforms intended to promote rule-based institutions generally found in advanced Western
economies, such as the rule of law. Using panel data analysis from 1982 to 2007, we test empirically
whether judicial independence, one of the more fundamental rule-based institutions, can positively
explain the growth of these countries after the crisis, and find the impact of reforms to be limited.
To understand why, we use South Korea as an example to show that top-down reforms by the
government prevented a shift towards a rule-based economy. Due to the government selectively
bailing out big businesses, big businesses that survived the crisis captured market shares once
owned by the dissolved big businesses, becoming too powerful for the government to regulate.
This research uses Soifer’s theoretical framework on critical junctures.
Keywords
Asian Financial Crisis, critical juncture, IMF reform, institutional change
Introduction
Much research has examined different institutional mechanisms of economic growth in Asia and
advanced Western states in a comparative manner. Today, existing comparative studies generally
agree on two findings. First, Asia achieved tremendous growth, despite lacking rule-based insti-
tutions generally found in the advanced West such as protection of property rights, independent
Corresponding author:
Kee Hoon Chung, KDI School of Public Policy & Management, 263 Namsejong-ro, Sejong-si, South Korea.
Email: kh_chung@kdischool.ac.kr
Asian Journal of Comparative Politics
ªThe Author(s) 2020
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DOI: 10.1177/2057891120962575
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2021, Vol. 6(3) 274–292
courts, and the rule of law. Second, in Asia, a strong government characterized by government–
business networks substituted the functions of rule-based institutions (Haggard, 2004; Kohli, 2004;
Wade, 1994).
One question that existing studies have yet to agree on an answer to is whether Asia will
continue to rely on government–business networks for economic growth, or eventually transform
and rely on rule-based institutions to achieve economic growth. Renowned economist Dixit (2009)
posits that transformation towards rule-based institutions is inevitable. As economies grow and
become more complex, they have no choice but to transform to manage the increasing transaction
costs. In Asia’s context, the government–business networks would eventually have no choice but
to change towards rule-based institutions, a system more suitable for managing complex transac-
tions on a larger scale. In sum, for Dixit, rule-based institutions found in the advanced West are the
linear progression of the government–business networks found in Asia.
JS Li (2003) and Rajan and Zingales (1998) use Dixit’s framework to explain the Asian
Financial Crisis 1997–1998. For them, the crisis showed the limits of government–business net-
works – as the complexity of financial flows and investments made it difficult for the government
to control and manipulate its comparative advantage. Based on Dixit’s analogy, transaction costs
for dealing with foreign investors proved too high and thus exposed the limits of Asia’s govern-
ment–business networks.
In this context, one interesting question that has not been examined with empirical rigor is
whether the crisis served as a turning point for progressing Asia’s government–business networks
towards rule-based institutions. Based on existing studies on critical juncture and historical insti-
tutionalism, an exogenous shock such as the Asian Financial Crisis can cause uncertainty and lead
to institutional change (Capoccia and Kelemen, 2007; Steinmo and Thelen, 1992). Reviewing
existing studies, we find that not much research has empirically examined this likelihood in Asia.
Of course, regardless of how devastating an exogenous shock is, institutions are sticky due to
inertia created from path dependency; in Asia, government–business networks have been the key
driver of tremendous growth since the 1960s. But interestingly, since the late 1980s, South Korea,
Indonesia, Thailand, Japan, and Malaysia were already pursuing a rapid financial liberalization,
opening their capital accounts and gaining membership of the World Trade Organization in 1995
(Li, 2003).
These events indicate that before the crisis, constraints were already imposed on the govern-
ment–business networks. On the surface, these constraints, combined with the Asian Financial
Crisis 1997–1998 and the International Monetary Fund (IMF) intervention, may have transformed
Asia’s government–business networks to rule-based institutions found in the advanced West. This
expectation seems particularly applicable to South Korea, Indonesia, and Thailand, the three Asian
states with no choice but to resort to the IMF for a bailout. In return, the IMF demanded significant
reforms aimed at putting an end to the economy centered on government–business networks and
promoting rule-based institutions such as the rule of law. Given that these three countries were
pursuing a rapid liberalization, the IMF intervention and the shock of the crisis may have brought
institutional change.
The aim of this research lies in testing whether such change came about in the three countries.
Specifically, we want to examine whether the states that the IMF intervened in which have
depended on a strong government unconstrained by law – government–business networks – for
economic growth, have transformed towards a model of growth found in advanced Western states,
i.e. rule-based institutions that constrain the government under the law after the crisis. To compare
whether Asia’s strong governments unconstrained under law have become constrained under law,
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Chung
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