International Financial Institutions, Corporate Governance and the Asian Financial Crisis

Abstract

As a part of Asian governments' responses to the financial crisis of 1997-2000, corporate governance reform became an important element of the reform agenda in the crisis economies (Korea, Thailand and Indonesia) and among their neighbors. The international financial institutions (IFIs) which organized the emergency financial assistance for the crisis economies - the International Monetary Fund, World Bank and Asian Development Bank - were instrumental in the inclusion of corporate governance on the reform agenda. Yet prior to the crisis, corporate governance had not been a part of these institutions' crisis response programs, and the institutions had only limited familiarity with the issue. It was largely in response to the Korean crisis that corporate governance found its way onto the reform agenda. The dominance of the chaebol (family controlled corporate groups) had long been recognized as both a strength and as a structural weakness of the Korean economy, but previously the issue had been addressed principally through anti-monopoly and fair trade legislation and regulations. In placing corporate governance on the reform agenda in response to the financial crisis, this was the first time that corporate governance issues at the firm level were viewed as being capable of making a material contribution to the chaebol problem through greater transparency and accountability to the investing public. Such an approach also appealed to the IFIs and was consistent with the approach of the prevailing Washington consensus, in its reliance on market-driven forces rather than greater government regulation. The reform program in Korea then served as a model for comparable reforms introduced by the IFIs into the emergency assistance programs in the other crisis countries.