Institutional Change and Economic Growth in East Asia after the Asian Financial Crisis, 1997-98

Abstract

Theories on institutional change assert that exogenous shocks are critical in transforming path-dependent institutions. There is not much empiric research, however, that has investigated whether that is indeed the case. To fill this gap, this study investigates the effects of institutional quality on economic growth with a focus on East Asia before and after the 1997-98 Asian financial crisis, which delivered a critical shock in economic activities and institutions in East Asia. Using panel data analysis from 1981 and 2007, I investigate whether the effect of institutional quality on economic growth differed in East Asia compared to rest of the world before the crisis and whether such relationship changed after the crisis. Using two-way fixed effects model, the estimation shows that the effect of institutional quality on economic growth was positive on average for the rest of the world after the crisis but negative for East Asia. The negative coefficient was particularly strong for the three countries—South Korea, Indonesia, and Thailand—that suffered the most during the crisis. However, in the long term, there was no significant change of this negative effect.

Trade patterns and institutional change in East Asia

“…This suggests that the shock of Asian financial crisis did not have a critical impact on the institutional quality and the effect of trade pattern on institutional quality in the region. This finding contributes relevant evidence to the literature on the ways in which the crisis has affected – and continues to affect – the developmental state (Chu, 2016; Chung, 2020a, 2020b; Hundt, 2014; Park, 2011; Pirie, 2016; Uttam, 2019).…”

“…find that institutional quality improves for all countries after the financial crisis, but there is no additional improvement for East Asia and that the effect of IIX on institutional quality is unchanged after the crisis. This suggests that the Asian financial crisis did not effectively bring about institutional change for East Asia, providing additional evidence to the related literature (Chung, 2020a(Chung, , 2020b.…”

“…Chung (2020a, 2020b) empirically examines the effects of institutions on economic growth in East Asia compared to other regions and the changes in their effect after the crisis. They show that the effect is negative for East Asia compared to rest of the world and Western countries, and the negative effect is not significantly changed after the crisis.…”

“…They show that the effect is negative for East Asia compared to rest of the world and Western countries, and the negative effect is not significantly changed after the crisis. Chung (2020a) suggests that institutional design – institutions de jure – may have changed rapidly due to the crisis but that institutional enforcement – institutions de facto – may have experienced limited change. Chung (2020b) finds that the negative effect of institutions on economic growth has not significantly changed since the crisis, both in the short and long term.…”

“…Indeed, the International Monetary Fund (IMF) required institutional reforms for the three most affected countries -Indonesia, South Korea and Thailand -with the intention to liberalize their markets and enhance rule of law in exchange for bailing them out (Chung, 2020b). Chung (2020aChung ( , 2020b empirically examines the effects of institutions on economic growth in East Asia compared to other regions and the changes in their effect after the crisis. They show that the effect is negative for East Asia compared to rest of the world and Western countries, and the negative effect is not significantly changed after the crisis.…”