When Do Institutions Stick?Institutional Adoption and Adaptation in the Indonesian FinancialSector.

The wave of financial crises that hit emerging market countries in the 1990s highlighted the risks of global financial integration in the absence of a strong domestic institutional infrastructure. Drawing on the perceived lessons of the crises and models of international best practice, domestic reformers and international agencies alike have made financial sector institution-building a key priority. At one level the extent of institutional transformation has been extensive, from insolvency system reforms to improved banking regulation and supervision to the creation of new monetary instruments allowing for greater risk diversification. Yet, for all the evident change in emerging market financial sectors, there is significant variation in the extent to which formal institutional changes have affected actual practice and outcomes. Formal institutional change may be enforced to the letter, shelved and ignored, or modified to fit with extant institutions and domestic political realities. Given the possibility of multiple outcomes, this paper asks under what conditions and in what ways formal institutional change becomes consequential. In other words, when do institutions stick? The paper examines financial sector institutional reform in post-crisis Indonesia, the most severely affected of the emerging market crisis countries and the target of sustained institution-building efforts. I argue that for adopted institutions to "stick" they must be incentive-compatible with distinct "national systems of political economy." The paper elucidates the features of the Indonesian system of political economy and its effects on financial sector reform efforts. [ABSTRACT FROM AUTHOR]