How Malaysia escaped the crisis

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.