Institutions, strongEconomic Recoverystrong, and Macroeconomic.pdf

Institutions, Economic Recovery, and Macroeconomic Vulnerability in Indonesia and Malaysia Thomas Pepinsky Department of Political Science Yale University P.O. Box 208301 New Haven, CT 06511 thomas.pepinsky@ This version: October 24, 2006 8500 words (including notes) Prepared for the workshop East Asia Ten Years After the Crisis The University of California-Berkeley November 3-4, 2006 DRAFT: Comments welcome! Please do not cite without permission Institutions, Economic Recovery, and Macroeconomic * Vulnerability in Indonesia and Malaysia 1. Introduction In Indonesia and Malaysia, the Asian Financial Crisis was as much a political crisis as an economic one. Policies adopted by the respective governments had fostered over a decade of strong economic growth, but this growth came with structural weaknesses that left each country vulnerable to the vagaries of investor confidence and cross-border capital movements. These weaknesses arose from each country’s political economy: in each country an autocratic government used economic policy and political favoritism to reward its supporters with little regard for their potential downstream costs. The Asian Financial Crisis led each country to take extraordinary adjustment measures, and ignited distributional conflicts that ultimately drove Soeharto from power and severely tested the ruling coalition in Malaysia. Subsequently, the years since the crisis have seen political contests in each country over the implementation of reforms designed to fost