Why are There Differences in the Resilience of Malaysia and Taiwan to Financial Crisis? CHIN KOK FAY and KRISTEN NORDHAUG The article compar es the development of the financial system and reform in Malaysia and T aiwan in r elation to their capability to weather the 1997 financial crisis. It is ar gued that their differing performances during the crisis should be explained in terms of their ability to supplement the r eform of financial system with prudent regulation. These policy differ ences ar e explained in terms of institutionalised commitment to the pr omotion of economic transformation and economic security in the two countries. I. INTRODUCTION Several comparative studies have noted that the second generation Southeast Asian newly industrialising countries (NICs) of Thailand, Malaysia and Indonesia, lag behind their predecessors, Singapore, Hong Kong, T aiwan and South Korea in terms of prerequisites for a future economic ‘catching up’ within areas such as education, R&D, infrastructure and state institutions [Jomo et al., 1997 ]. The countries are at risk of being caught in a ‘development trap’ as they are poorly equipped to follow the lead of the first generation into higher value added economic activities. Over the past two decades the task of financial regulation in late- industrialising countries has been complicated by the increasing pace of financial liberalisation and globalisation. Lar ge volumes of volatile foreign short-term credit and portfolio investment have frequently been invested in non-tradables and asset market speculation, while this hot money , and ‘herd behaviour’ of international investors increase the risk of financial crisis. 1 The regulatory authorities then face the tasks of prudently regulating and managing the mobile cross-border capital flows to reduce the risk of financial destabilisation. The ability of late-industrialising countries to perform these tasks does, however, vary widely. During the 1997 East Asian financial crisis, The European Journal of Development Research, Vol.14, No.1, June 2002, pp.77–100 PUBLISHED BY FRANK CASS, LONDON Chin Kok Fay, Strategic Studies and International Relations Program, Center for History , Politics and Strategy, National University of Malaysia (kokfay@pc.jaring.my); Kristen Nordhaug, International Development Studies, Roskilde University , Denmark (knord@ruc.dk). They would like to thank Rajah Rasiah, Ilene Grabel, an anonymous referee and the participants at the GlobAsia conference, Arresødal, 3–5 October 2001 where a preliminary version of this paper was presented, for helpful comments and suggestions.