How Malaysia escaped the crisis

Veeramalla Anjaiah, The Jakarta Post, Jakarta

The Tragedy That Didn't Happen: Malaysia's crisis Management and Capital Controls
Marie-Aimee Tourres
Institute of Strategic and International Studies (ISIS) Malaysia 2003 (Launched August 2004)
338 pp (hardback, US$23.50, paperback, US$13)

In the years preceding the 1997 Asian financial crisis, Malaysia, a middle-income developing nation that enjoyed an average annual growth of 9 percent during the last decade, had been far more careful about "hot money" flows into the country than many of its neighbors.

In 1996 alone, the total net private capital inflow to Asia -- the darling of both Western and regional investors in the 1990s -- reached US$102 billion. Most of this money was disbursed to politically favored groups, individuals or investment projects.

Compared to Indonesia and Thailand (where there was recourse to unbridled short-term private sector offshore borrowing), capital inflows to Malaysia were mostly dominated by foreign direct investment (FDI) and portfolio investment. External borrowing was strictly regulated by Bank Negara, the country's central bank, which sought to ensure that with the exception of mostly very large infrastructure projects, borrowing was done in the Malaysian currency, ringgit.

Still, Malaysia was not immune to the sudden financial free- fall in July 1997. Yet it was the only country among the crisis- hit nations that didn't knock on the door of the International Monetary Fund (IMF) and it mostly escaped the horrible financial collapse across the region, including Indonesia -- perhaps worst of all -- and in Thailand.

How did it do that? What kind of lessons can one learn from the Malaysian experience?

Tourres, a young, talented French economist, makes an attempt to answer the above questions in her book.

Basically, this book -- which was published in late 2003 but released only on Aug. 25, 2004 -- is the inside story told by an impartial outsider. However, Tourres' position as a visiting fellow at the Institute of Strategic and International Studies (ISIS) Malaysia, the publisher and sponsor of the book, with close links to the government, does not undermine the credibility of the work.

The alumni of CERDI, Clemont-Ferrand, France, has written an authentic, enlightening and provocative book in which she presents a comprehensive account of Malaysia's response to the crisis.

The book, in the own words of Tourres, is a bird's-eye view of the economic crisis management period and its experience with capital controls.

The crisis in Malaysia -- like in other affected countries -- started in July 1997 with a plunge in its currency. The ringgit depreciated by 35 percent from July 1997 to December 1997 against the greenback. This plunge not only severely affected the Malaysian stock market but also destroyed investor confidence.

Tourres reviews the events and policies in Asian countries that led to the much trumpeted Asian miracle and then the crisis in 1997, including how Malaysia fell into the cauldron despite its strong economic fundamentals.

She provides clues toward understanding the Malaysian case with the other crisis-hit countries, including Indonesia, where the Soeharto regime collapsed after 32 years in power and hundreds of thousands became unemployed overnight.

Initially, a stunned Malaysia advocated regional solutions, which were similar to the IMF. But the dominance of the U.S. and the so-called Washington consensus in the decision-making process, and enormous pressure from the IMF, pushed Mahathir to find means to act nationally.

"We were strongly criticized by the Western countries, but we never bowed to them in any field, because we are responsible to our country, to our people," Mahathir said in 2002 in looking back at his decision not to follow the route taken by Indonesia, Thailand and South Korea, all of which came under the IMF programs.

"They are not responsible for our country. To them, if our people suffer, it is not their problem. But we are responsible. We are elected by the people. And it is our responsibility to look after the people's security and well-being."

After the failure of the "IMF without IMF" measures, Malaysia was forced to take extreme measures, including capital control actions and pegging of the ringgit to the US dollar.

Malaysia's "think globally, plan regionally, act nationally" approach might have worked well in dealing with the crisis, but it made it a renegade of the region, and led it to be accused of being "panicky, shortsighted and stupid". The IMF, Western governments, free-market gurus and the Western press were united in attacking Malaysia and Mahathir for his unconventional measures.

Some of them even pronounced Malaysia dead and called for Mahathir's ouster.

But all of them now have to admit that they were wrong. The imposition of much-feared capital controls, which were achieved in economic conditions, and averted political and instability like in Indonesia, according to Tourres, was a significant achievement for a multiracial country like Malaysia and proof that the much-feared tragedy was not realized.

Tourres does not offer much explanation if Malaysia was able to succeed because of three main factors -- its size (25 million population), low foreign debt and Mahathir. Many others consider that these three factors contributed to the success of Malaysia. It would be beneficial to compare Malaysia with other crisis-hit countries like Indonesia and Thailand and South Korea, which are far bigger, or apply Kuala Lumpur's model in those countries.

It would also have been interesting to compare Malaysia's experience with relatively rich countries like Singapore and Taiwan, who were also affected by the crisis.

Malaysia stood alone and persevered with the success of its own policies, though they were bitter pills to swallow. Ultimately, it proved to the world that it could manage its own house without losing its dignity and economic sovereignty.