PUBLICATIONS & REPORTS

Contents Introduction

Much of the literature on Asia's financial crisis has focussed on international on region-wide economic weakness in the afflicted countries. While not disagreeing with such arguments, this paper focuses our attention in another direction: domestic political constraints. Taking Thailand and Indonesia as case studies, it examines the way in which political institutions, that is, the basic structure of government, had an important bearing on the way in which political leaders responded to the crisis and that this in turn had a powerful negative effect on investor confidence. In many respects, Thailand and Indonesia (as their political institutions were configured in prior to 1998) represent opposite ends of a spectrum, with Thailand having a highly decentralized political system which tended to produce policy paralysis and Indonesia, by contrast, having a massively centralized system which highly abritrary and variable policy behavior. At one extreme, investor confidence in Thailand was undermined by the fact timely policy reform was all but impossible, whereas at the other extreme, investor confidence in Indonesia was undermined by the fact that policy could move in any direction at a moment's notice. The key to these two diverse political maladies was the institutional framework of government then in place.