Towards rule-based institutions and economic growth in Asia? Evidence from the Asian Financial Crisis 1997–1998

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.