The Political Power of Economic Ideas: Comparative Policy Responses to the East Asian Financial Crisis in Sonth Korea and Malaysia

London School of Economic and Political Science The Political Power of Economic Ideas: Comparative Policy Responses to the East Asian Financial Crisis in Sonth Korea and Malaysia A Thesis Submitted by Wang Hwi Lee Thesis Submitted for the Degree of Doctor of Philosophy in International Relations University of London May 2004 UMI Number: U194925 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Disscrrlation Publishing UMI U194925 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 HWCHlOOgpUE' tBOOMOH lO (MMQn AiHiQH CONTENT Chapter I. Introduction 1. Main Question 2. The Washington Consensus and Policy Convergence: Definitions 3. Research Design and Case Selection 4. Outline of the Thesis Part I Theoretical and Historical Backgrounds Chapter II. The Politics of Economic Adjustment: A Theoretical Background 1. Introduction 2. Competing Approaches to Economic Adjustment in the Post-crisis East Asia 1) Interest-oriented Approaches 2) Institution-oriented Approaches 3) Ideas-oriented Approaches 3. An Ideational Explanation of Policy Change 4. Conclusion Chapter III. The Political Power of the Washington Consensus: A Historical Background 1. Introduction 2. Ideological Shift from Keynesianism to Neoliberalism in Industrial Countries 3. The East Asian Financial Crisis and the Triumph of the Washington Consensus 4. The Emergence of the Post-Washington Consensus after the Financial Crisis 5. Conclusion Part II Case Studies Chapter IV. Macroeconomic Stabilisation 1. Introduction 2. Korea 1) The Causes and Consequences of the Financial Crisis 2) The Collapse of Developmentalism and the Triumph of Neoliberalism 3) Macroeconomic Adjustment 3. Malaysia 1) The Causes and Consequences of the Financial Crisis 2) Legacies of the New Economic Policy 3) Macroeconomic Adjustment 4. Conclusion Chapter V. Financial Reform 1. Introduction 2. Korea 1) Financial Liberalisation in the Early 1990s 2) Financial Restructuring after the Crisis 3) Capital Account Liberalisation 3. Malaysia 1) Financial Liberalisation in the Early 1990s 2) Financial Restructuring after the Crisis 3) Capital Controls 4. Conclusion Chapter VI, Corporate Reform 1. Introduction 2. Korea 1) The Chaebol System 2) Restructuring of Corporate Finance 3) Overhaul of Corporate Governance 3. Malaysia 1) The Bumiputera Business Community 2) Restructuring of Corporate Finance 3) Overhaul of Corporate Governance 4. Conclusion Chapter VII. Labour Market Reform and Social Policy 1. Introduction 2. Korea 1 ) Political Backlash against Labour Sector Reform 2) Productive Welfare 3. Malaysia 1) Employment Policy 2) Social Policy for Bumiputera 4. Conclusion Chapter VIII. Conclusion 1. Main Argument 2. The Political Power of the Washington Consensus and Policy Convergence 3. Explaining Divergence between Korea and Malaysia: Ideas, Interests and Institutions ABSTRACT This thesis explores the politics of economic adjustment in South Korea and Malaysia. Empirically, it examines how Korea and Malaysia responded to the East Asian financial crisis. A widespread perception is that Korea pursued orthodox policies (the Washington consensus) while Malaysia used unorthodox policies (the post-Washington consensus). However, this interpretation exaggerates the divergence in macroeconomic adjustment policies (e.g., different exchange rate regime policy and their relationship with the IMF), thereby underestimating the ‘policy’ convergence in macroeconomic stabilisation and structural reform at least from late 1997 to mid-1998. For this reason, this thesis explores the convergence and divergence in a balanced perspective. Theoretically, it interprets why the ‘policy’ convergence emerged between Korea and Malaysia from an ideational perspective. The convergence was caused, in part, by economic ideas - the Washington consensus or neoliberalism - that prevailed among both the international financial institutions (IFIs) and national policy makers. The consensus de legitimised the existing economic system by attributing the underlying causes of the financial crisis to structural weaknesses in the financial and corporate sectors. In addition, the consensus provided a far-reaching blueprint for institutional change. This is why both countries embraced neoliberal policies particularly in structural reform, irrespective of IMF interventions. The emphasis on economic ideas does not mean that ideational approaches overlook the role of interests and institutions. Vested interests - big business and organised labour - and state capacity had a considerable impact on policy-making. Thus ideas-oriented approaches are complementary to - rather than conflicting with - interest-oriented and institution-oriented approaches. Key Words: East Asian Financial Crisis, South Korea, Malaysia, Washington Consensus Policy Convergence LIST OF TABLES [Table 1-1 A Comparison of Neoliberalism, the Washington consensus and Orthodoxy [Table 1-2 A Brief Comparison of Korea and Malaysia [Table 2-1 Types of Ideas and Their Effects on Policy-making [Table 3-1 Net Private Capital Flows to Emerging Markets [Table 3-2 IMF Quotas and the Shares of the World Economy [Table 3-3 Welfare State around 2000 [Table 3-4 A Comparison of the Washington Consensus and the Post-Washington Consensus [Table 4-1 Competing Views on the Financial Crisis [Table 4-2 Presidential Election Results (December 1997) [Table 4-3 Changes in the IMF’s Macroeconomic Projections [Table 4-4 Concentration of Top Four Chaebols: Hyundai, Samsung, LG & SK [Table 4-5 Changes in the Major Economic Index (year-end basis) [Table 4-6 Refinancing Plan [Table 4-7 National Economic Action Plan [Table 4-8 Fiscal Operations (Percentage of GDP) [Table 4-9 Changes to BNM Intervention Rate and Statutory Reserve Requirement (SRR) [Table 4-10] Changes in the Major Economic Index [Table 5-1] Third-Stage Blueprint for the Liberalisation & Opening of the Financial Sector [Table 5-2] NPL Breakdown by Financial Sector (Ratio of NPLs / Total loans) [Table 5-3] Financial Institutions (as of March 2001) [Table 5-4] Expenditures on Financial Sector Restructuring [Table 5-5] Numbers of Branches and Staff, and Operational Expenses [Table 5-6] Standards in Prudential Regulations and Supervision [Table 5-7] Two Stage of Foreign Exchange Liberalisation [Table 5-8] Measures to Prevent a Foreign Exchange Crisis [Table 5-9] Financial Liberalisation and Deregulation [Table 5-10] Preventive Measures undertaken in 1997-98 [Table 5-11] Performance of Danaharta (As of the end of 2000) [Table 5-12] Malaysia’s Commercial Banks by Asset Size (1997) [Table 5-13] Result of Bank Restructuring [Table 5-14] Selective Capital and Foreign Exchange Controls [Table 5-15] Malaysia’s Exit Tax on Foreign Capital (15 February 1999) [Table 6-1] Characteristics of Relationship-based and Market-based System [Table 6-2] Industrial Restructuring and Rationalisation [Table 6-3] Five Principles for Corporate Reform [Table 6-4] Profitability of Manufacturing Companies [Table 6-5] Number of NBFIs Owned by Top 70 Chaebols (as of the end of 1997) [Table 6-6] Business Restructuring Plan for the Top Five Chaebols [Table 6-7] Corporate Workout Programme (as of the end of 2000) [Table 6-8] Cross Debt Guarantee [Table 6-9] Corporate Governance Reform [Table 6-10] Additional Measures for Chaebol Reforms (August 1999) [Table 6-11] Ownership of Share Capital (at par value) of Listed Companies (percent) [Table 6-12] Key Corporate Elites Closely Linked to UMNO [Table 6-13] Performance of CDRC (as of the end of 2000) [Table 7-1] Employment Policies [Table 7-2] Unemployment by Reason [Table 7-3] Changes in the Income Distribution [Table 7-4] Extension of EIS Coverage [Table 7-5] Productive Welfare [Table 7-6] Employment Policy [Table 7-7] Social Safety Nets LIST OF FIGURES [Figure 1-1 How much Cross-Cutting Ideas Matters [Figure 2-1 Veto Player and Policy Risk [Figure 2-2 An Ideational Model of Policy Change [Figure 2-3 An Ideational Model of Policy Convergence [Figure 4-1 Blueprint for Economic Restructuring [Figure 5-1 Comparing Financial System [Figure 5-2 Re-organisation of Regulatory Framework [Figure 5-3 Objectives of the Banking Sector Restructuring Plan [Figure 5-4 Re-organisation of Regulatory Framework [Figure 5-5 Different Effects of Capital Controls on the Manufacturing Sector [Figure 6-1 Political Patronage in Malaysia [Figure 6-2 Mechanisms of Corporate Restructuring [Figure 7-1 Unemployment Trend [Figure 7-2 Unemployment Trend LIST OF APPENDICES [Appendix 5-1] Korea: Financial Liberalisation and Deregulation during the 1980s [Appendix 5-2] Korea: Equity Participation in Domestic Banks by Foreigners [Appendix 5-3] Malaysia: Merger Programme for Domestic Banking Institutions [Appendix 5-4] Malaysia: Change in Capital Account Regulations in 1994-97 [Appendix 5-5] Malaysia: Capital and Exchange Control Measures in 1997-99 [Appendix 5-6] Malaysia: Modifications to the Exchange Control Rules in 2000 [Appendix 6-1] Korea: The Big Deal - Business Swap Agreements between Top Five Chaebols [Appendix 6-2] Korea: Minority Shareholders

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