Political Institutions and the Economic Crisis in Thailand and Indonesia

Abstract

The economic crisis in Southeast Asia has not been driven only by factors such as pegged exchange rates, heavy short-term foreign borrowing, and hopelessly inadequate financial sector regulation; politics has also been important. Indeed, in any case where there is a massive loss of investor confidence it would be difficult for politics not to be involved. In arguing for some attention to be paid to political factors, this article seeks to focus on one particular variable: political structure. In both Thailand and Indonesia, political structure greatly compounded the task of responding to the crisis and thereby served to intensify the economic destruction even though this common problem originated in different ways and stemmed from different institutional problems. When a diverse set of countries is hit by economic crisis at the same time, it would be foolish to suggest that there were not some powerful common factors at work. We know, for instance, that engagement with the global financial system was a critical factor. Vietnam and China both have deep and systemic problems in their banking sectors but were much less hurt by the crisis because their financial systems were only partially opened-up to international capital flows. Deep financial liberalization was a precondition for this crisis. In the context of the highly-liquid global financial markets of the 1990s, this permitted the massive inflow of mostly short-term foreign capital that fuelled the growth of foreign debt, and then created such havoc when it departed even faster than it came. In Thailand and Indonesia these and other problems, such as widespread bad debt among local financial institutions, combined to create serious vulnerabilities. The popular wisdom in both Thailand and Indonesia is that the incumbent governments were responsible for making matters very much worse. I will argue that the popular wisdom is not wrong: governments in both Thailand and Indonesia did greatly compound the economic damage by exacerbating the underlying problem of investor confidence. The key to government mishandling in these two cases lay in the political structure - the institutional configuration - of each country. Nevertheless, the institutional features that caused both governments to make matters much worse were very different; Thailand's political problems were not Indonesia's political problems. Thailand As Thailand sank further and further into economic difficulty through 1997, the recently elected government led by Chavalit Yongchaiyudh was subject to mounting vilification for immobility, indecisiveness, and corruption. Justified though these criticisms were, they were nothing new. Chavalit's government was not unusually incompetent, divided, or corrupt. With some slight differences from one to the next, this broad characterization applies to all fully-elected governments in Thailand. The strong rate of economic growth enjoyed by Thailand from the late 1980s until the mid-1990s owed very little to policy initiatives by any of these governments. Rather it was the two brief post-coup caretaker administrations led by the highly technocratic Anand Panyarachun that were the policy innovators in the 1990s. Unelected and not being a career politician, Anand and the team working with him were subject to few of the normal constraints of Thai Governments. This is not an argument that economic governance in Thailand has declined with democratization; rather it is an argument that the particular institutional configuration Thailand has had in place (until the constitutional overhaul in late 1997) was bound to produce serious problems of policy management and political leadership. Chavalit's government was no more venal or inept than its predecessors, indeed part of the difficulty it faced was the accumulated legacy of reforms not made by previous administrations. The indecisiveness of political leadership in Thailand was fundamentally a function of weak coalition governments. …