Mainly in response to intensive external market and political pressures, Korea and Taiwan began to liberalize their financial markets in the early 1980s. While market liberalization in the two economies featured gradual and incremental processes, their respective approaches and outcomes varied systematically in all the major areas of domestic and external financial reforms. Cross-national variations in these areas - interest rate liberalization, bank privatization, entry barrier deregulation, functional de-segmentation and capital decontrol - generated differential effects on the operation of the corporate and financial sectors and the efficiency of macroeconomic policy management. Different micro- and macroeconomic performances resulted in the varying propensity to financial shocks and the contrasting ability to withstand the impact when they struck Korea and Taiwan in late 1997. To account for different liberalization patterns, which is a key to understanding the nature of uneven crises in the two economies, this article suggests an institutional explanation of financial policy choices. It posits that the differences in reform approaches and outcomes stem from fundamental differences in the domestic institutions that shape the aggregation and articulation of private preferences for and public-sector interests in financial liberalization. Empirical evidence to be presented here points to the importance of incorporating political and institutional variables into any model of financial policy change and suggests that national and international policy-makers take a pragmatic and long-term approach to financial market reform, with greater sensitivity to political risks and constraints.
