Choosing the Direction: Financial Market Reforms in South Korea and Malaysia
Abstract: The Asian financial crisis in 1997-1998 constituted a major economic shock to the countries in the region. This article seeks to analyze financial market regulation in South Korea ('Korea') and Malaysia after the crisis using the 'most similar systems design' (MSSD) for comparison. Based upon the theoretical pieces 'second image reversed' and 'state-market condominium', the main argument brought forward is that Korea and Malaysia resided in different positions within the international economic system at that time, which resulted in a specific set of feasible policy options in each case. Korean policymakers were forced to agree on an International Monetary Fund (IMF) financial aid package due to high foreign debt exposure. Under that program, market opening was sped up considerably. As political actors in Malaysia primarily had to regard the pivotal role of inward foreign direct investment (FDI) for economic development, their set of feasible policy options was less confined. Malaysia's pattern of market opening was therefore quite erratic, with selective temporary capital controls as a response to the crisis eventually imposed after first unsuccessful attempts to do so and a short 'shadow IMF' phase.
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