Institutions, choices, and outcomes: A comparative analysis of the 1997 financial crisis experience in South Korea and Taiwan

South Korea and Taiwan have similar experiences as to political and economic development, i.e., rapid economic growth and democratization. However, the 1997 financial crisis experiences were quite different South Korea was hit hard by the crisis whereas Taiwan was barely touched. Why were the experiences different between South Korea and Taiwan? We argue that economic fundamentals were differential leading up to the crisis. More importantly, the differences in the pace of financial liberalization and the method that South Korea financed its growth particularly in the 1990s were much different than Taiwan's. We also argue that the differential impact of the crisis on the two countries can be attributed to the institutions of their respective political economy, decentralized vs. concentrated industrial structure, and interest group structure that helped in the creation of an autonomous state. Given the dominance of SMEs (small and medium sized enterprises) and the state's control of critical resources along with dispersed and weak interest group structures, economic technocrats in Taiwan were able to employ tough pre and post-crisis policies to maintain Taiwan's economic viability, whereas South Korea was not able to.