Political structures and financial liberalization in pre-crisis East Asia

East Asian economies differed dramatically in their vulnerability to the financial shocks of 1997–98. In the current literature on the Asian crisis, one key factor commonly adduced to explain the uneven crises is different national approaches to liberalizing the financial market. While extant analyses have yielded important insights into the correlation between divergent liberalization patterns and uneven crises, they have failed to deal with the crucial question of why East Asian economies diverged in their respective paths to financial market liberalization. To account for differences in liberalization approaches, this article develops an institutional explanation of financial policy choices. It posits that variations in liberalization patterns stem from fundamental differences in the organizational structures of the private sector, the bureaucracy, and the party system that shape the economic interests and political behavior of social groups and state agencies in the policy-making process. In making this argument, the article focuses on Korea, Singapore, Taiwan, and Thailand, the four major East Asian economies that pursued different liberalization strategies during the 1980s and 1990s and had contrasting performance in the recent financial crisis. It argues that cross-national differences in the above-mentioned domestic political structures within the four economies are the primary sources of their divergent liberalization approaches and outcomes, which, in turn, impacted financial stability to differing degrees and generated varying abilities to withstand external shocks. The author thanks Benjamin Cohen, Stephan Haggard, Otto Holman, Geoffrey Underhill, and anonymous SCID reviewers for their helpul comments on earlier drafts. Generous financial support from the Amsterdam School for Social Science Research and the Netherlands Fellowship Program is gratefully acknowledged. The usual disclaimers apply. Xiaoke Zhang is research fellow in the Amsterdam School for Social Science Research and the Department of Political Science at the University of Amsterdam. He is the author ofThe Changing Politics of Finance in Korea and Thailand (Routledge, 2002) and the co-editor ofInternational Financial Governance under Stress (Cambridge University Press 2003).