Institutions and investors: The politics of the economic crisis in southeast Asia

I develop a systematic argument about the politics of the 1997-98 Asian eco nomic crisis. I focus on institutions-specifically, the connection linking the institutional framework of national politics, the policy environment, a nd investment. I seek to resolve the tension between the literatures on cre dible policy commitment and policy flexibility, arguing that if either is s everely undersupplied, the risk associated with the policy environment rise s rapidly for investors. Building on a veto player framework, I develop a s imple model of a U-shaped relationship between the number of veto players i n a political system and policy risk to investors. Institutional vetoes on executive authority lower policy risk for investors but only up to a point, after which additional veto players promote unwelcome policy rigidity. I i llustrate this using four cases: Thailand, the Philippines, Malaysia, and I ndonesia, the four main Southeast Asian countries involved in the financial crisis. I argue that the institutional framework of national politics had a powerful and predictable influence on policy responses and investor react ions.