The "insurance trap," institutional inertia, and structural vulnerability in the developmenal state: the effects of the Asian economic crisis on Hong Kong, Singapore, South Korea, and Taiwan

Date

2001-12

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Texas Tech University

Abstract

The enduring puzzle of the Asian economic crisis is the variation in its effects on Asian nations. Four Asian nations stand out as cases used to explore the variation in economic performance. South Korea, Singapore, Taiwan and Hong Kong. Answers to this puzzle are explored by examining the legacies of state formation and how institutional inertia creates vulnerabilities in the developmental state, and how these institutions resist change, even in the face of a crisis, when liberalization is deemed necessary for resolution and integration into the wider global economy.

Developmental policies shield both public and private firms from competition and create structural vulnerabilities. Such vulnerabilities lead to the "Insurance trap." The "Insurance trap" is the situation faced by developmental states when in the course of their metamorphosis, it creates vulnerabilities through policies that distort markets, such as directed lending, promotion of large industrial conglomerates and repressed financial systems. Institutional Inertia precludes timely reform of this system. The failure to adapt to globalization through reform of the regulatory and economic system will result in an economic crisis. Low crisis performance exposes the "Insurance trap."

This study finds that variation in crisis performance may be explained by the existence of the "Insurance trap." The regulatory regime, exchange rates, transparency and economic structure are all significant variables within the multivariate qualitative model set forth in this work. To be sure, specific institutional and economic structures are important considerations for developing nations if they want to avoid self-fulfilling economic crises.

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