International Financial Governance under Stress: Global Structures versus National Imperatives

By Geoffrey R.D Underhill; Xiaoke Zhang | Go to book overview

12

Private capture, policy failures and
financial crisis: evidence and lessons
from South Korea and Thailand

Two sets of explanations have dominated academic discussions of the causes of the Asian financial crisis. One has attributed the crisis to external factors,1 and the other has converged on weaknesses of economic fundamentals as the major causal factors.2 What has largely been neglected in these explanations, however, is the role of domestic political factors. This chapter examines how one such variable – the changing balance of power between private interests and public authority – contributed to the onset of the financial crisis and affected its management. Focusing on South Korea and Thailand, we argue that the growing private capture of public policy processes not only led to an unsuccessful process of financial reform and to structural weaknesses which sowed the seeds of the crisis, but also generated serious problems of policy management in the lead-up to the outbreak of the crisis.

We begin by briefly outlining the argument concerning the institutional variables which shape the balance of private preferences and power versus public interests and authority with regard to public policy making in the domain of the financial system. We then develop this argument through a more detailed comparative examination of the financial crises in South Korea and Thailand. Our purpose is not to provide comprehensive accounts of what occurred in the two countries during the 1997–8 period, as such accounts can be found in more synoptic studies in this volume, but to explore the impact of institutional variables on the process of financial reforms and crisis management. We argue that if these variables were better understood, our expectations of financial reform and of global market integration would be more limited and realistic, and more caution would be exercised in financial liberalisation.

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