PUBLICATIONS & REPORTS

PUBLICATIONS & REPORTS

The Politics of Moral Hazard: The Origins of Financial Crisis in Indonesia, Korea and Thailand

Author Stephan Haggard, Andrew MacIntyre
Date of Publication 1999. 8
No. 1999-14
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Contents Introduction

This paper has as its objective an evaluation of the claim that moral hazard was at the center of the Asian financial crisis. We found evidence of moral hazard in all three cases: in Thailand's Financial Institutions Development Fund, in Korea's forbearance toward bank excesses, in Indonesia's cronyism. However, we also found that the nature of these guarantees was often highly ambiguous and contested. In Thailand, reformers made efforts to limit government commitments to poorly managed banks and finance companies, but without success. In Korea, both Hanbo and Kia, although for different reasons, thought that they would be supported, but weren't. Similar ambiguities in policy are visible in Indonesia, where Suharto's commitment to protect cronies proved highly uncertain. We argue that this uncertainty is a crucial element in the onset and depth of the financial crises, as investors come to question the nature of government's policy commitments. In the cases just cited, conflicts among claimants, or between claimants and the government, generated this uncertainty. However, in each case we have isolated broader political factors--although not common ones--that induced uncertainty with respect to the government's stance toward the financial sector, ranging from Thailand's party system, to the breakdown of party coherence in Korea due to electoral competition, to the authoritarianism of the Suharto regime.