Korea, Taiwan, and the Asian financial crisis: Domestic institutional differences and impact of external pressure for liberalization

Prior to the Asian financial crisis of 1997, South Korea and Taiwan were often cited as paragons of the developmental state model of economic development, characterized by the government's strong intervention in the economy. However, the disparate impact of the Asian financial crisis on the two economies—i.e., widespread corporate bankruptcies and severe recession in Korea as compared to a minor decline in growth rate in Taiwan—exposed significant domestic institutional differences and external constraints that affected these two countries.;Using a comparative historical institutionalist approach, this dissertation explores the causal mechanism of institutional developments that produced varying levels of financial difficulties experienced by Korea and Taiwan during the Asian financial crisis. Comparative historical institutional approach explains political and economic developments through institutional factors, which over time and in relation to one another, mediate social interactions and shape individual preferences. This thesis focuses on three interrelated domestic institutional factors of the economic bureaucracy, the industrial structure, and the financial system in Korea and Taiwan, which produced varying levels of underlying structural vulnerabilities and institutional predilection for external financing. Moreover, pressures from external actors, namely demands for financial liberalization applied by the U.S. and the OECD on Korea and by the U.S. and the WTO on Taiwan, resulted in disparate degree of capital market liberalization in the 1990s.;Financial liberalization was a triggering event that set off a self-enforcing, feedback process that invited unregulated foreign capital and magnified institutional vulnerabilities present in the system. Capital market opening led to sudden and large increases in foreign capital to Korean financial institutions. At the same time, deregulation of foreign borrowing fueled Korea's institutional predilection for foreign capital, further encouraging chaebols' expansionary tendencies and exacerbating indebtedness among financial institutions to dangerous levels. As a result, the Korean economy became highly vulnerable to an exogenous shock in the form of a region-wide financial crisis. As for Taiwan, relative absence of institutional need for foreign money and foreign pressure to open its financial market led to a cautious financial liberalization program that kept in place stringent restrictions against foreign capital inflows. Consequently, the country escaped the Asian contagion relatively unscathed.