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Institutions and Investors: The Politics of the Economic Crisis in Southeast Asia

Published online by Cambridge University Press:  09 July 2003

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Abstract

I develop a systematic argument about the politics of the 1997–98 Asian economic crisis. I focus on institutions—specifically, the connection linking the institutional framework of national politics, the policy environment, and investment. I seek to resolve the tension between the literatures on credible policy commitment and policy flexibility, arguing that if either is severely undersupplied, the risk associated with the policy environment rises rapidly for investors. Building on a veto player framework, I develop a simple model of a U-shaped relationship between the number of veto players in a political system and policy risk to investors. Institutional vetoes on executive authority lower policy risk for investors but only up to a point, after which additional veto players promote unwelcome policy rigidity. I illustrate this using four cases: Thailand, the Philippines, Malaysia, and Indonesia, the four main Southeast Asian countries involved in the financial crisis. I argue that the institutional framework of national politics had a powerful and predictable influence on policy responses and investor reactions.

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Copyright © The IO Foundation 2001

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