Why did the East Asian economies make remarkable achievement before the 1990s, but suffer greatly since the foreign exchange crisis of 1997 Current theories of both liberal economics and the developmental state cannot provide a satisfactory answer, nor can they offer effective policy suggestions to solve the current crisis. Tins article suggests that a politico-institutional approach provides a better explanation to the above question and offers more effective prescriptions than current theories. The authors argue that politico-institutional relationships among the state, the ruling party, local factions, and conglomerates in these countries contributed significantly to the massive mobilization of resources but also generated long-term inefficiencies in resource utilization, which ultimately led lo the economic breakdown during the foreign exchange crisis. Thus, solutions to the East Asian recession come not from cosmetic and inflationary Keynesian policies, which, infact, might be counterproductive, hut rather from the readjustment of the politico-institutional relationships among the four institutional actors.