Political Economy of IMF Policy Implementation: The Cases of 1997-1998 Economic Crises of Korea and Indonesia.

Abstract

The 1997 Asian financial crisis that hit Southeast and East Asian countries began in Thailand with the devaluation of the Thai Bath, which spread a sudden panic to neighboring countries, included South Korea and Indonesia. Thus, it caused a loss of market confidence and led to a massive capital outflow from Korea and Indonesia. Governments in both countries responded by requesting for International Monetary Fund (IMF) assistance which was followed by several economic recovery prescriptions focusing on macroeconomic, monetary and fiscal, banking system and management improvement plans, and corporate restructuring initiatives. The IMF plan was created to restore market confidence and return the countries to a state of economic development. However, the recoveries in the two countries were very different and had different impacts on both countries economic and political conditions. After a three-year period of policies implementation, South Korea showed more positive results and recovered faster than Indonesia. In comparison to South Korea, the impact of the IMF programs in Indonesia was slow, and even to this day the country has not been able to recover from all the aftereffects of the crisis. There is scholarly debate on the causes of this issue, but this paper will analyze deeply the obstacles and differences between South Korean and Indonesias experiences in regards to implementation of IMF programs and why did they differ, using the framework of institutional capacity and good governance on the economic development in such crisis. From this thesis, we can see that Indonesia faced several difficulties and challenges due to its political transition which induced by social and political instability, that influenced the capacity and capability of its new and weak cabinet, caused the new governance system to be unable to restore its economic downturn. This will further validate the theory of institutional capacity and good governance through a new comparative case.