Malaysia Boleh or can it Asia Pacific Foundation of Canada

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					                                Commentary
 SEPTEMBER 1998




Canada Asia              In one of the ironies of the Asian               short-term pain rather than with building
                         recession, China has emerged as an               a more healthy economy that can prosper
                         apparent linchpin of regional economic           when the recovery comes. Malaysia has
                         stability. After almost 60 years as a centre     been resentful of the loss of national
                         of political and economic ferment, Beijing       wealth it has suffered as a result of the
                         has stood firm in maintaining the value of       devaluation of its currency and the
                         its currency as those of its regional rivals     collapse of the equity value of its
                         tumbled in the Asia-wide economic                corporations. However, much of this
                         turmoil. China’s resolution has been in          wealth was illusory, based on artificially
                         stark contrast to the procrastination and        inflated asset values. By not accepting the
                         dithering by neighbouring Japan as its           market’s readjustment of these values,
                         economy stumbled and currency sank.              Kuala Lumpur is leaving itself open to a
                         However, the Asian recession is by no            major domestic financial crisis. Banks are
                         means the major force at work in China’s         heavily committed to construction, real
                         economy. By concentrating on China’s             estate and housing. If the local property
                         response to the regional turmoil, it is easy     market, which has so far defied the laws of
                         to overlook significant domestic                 gravity, goes the way of the stock market,
                         developments, like housing reform, that          the financial sector will be in dire straits.
Number 2                 point to new trade and investment                       Kuala Lumpur’s determination to
Published bimonthly by   opportunities opening up in Canada’s             chart its own course through the Asian
                         No. 2 trading partner in Asia.                   recession shows that not everyone sees the
                                 Unlike China, Malaysia has been hit      Asian turmoil in quite the same light.
                         hard by the Asian recession. But also            There is a small but widespread chorus in
                         unlike China, it is choosing to discount         Asia which sees the deliberate hand of the
                         the warning implicit in the downturn —           West behind the currency meltdown
                         that easy access to credit underwrites a         which set off the crisis. In some versions,
                         false prosperity. China is restructuring its     the motive was sheer greed by Western
                         over-extended banks. Malaysia has done           speculators who did not care who they
Canada Asia              little. China is restructuring its inefficient   hurt. In other versions, the meltdown was
Commentary               corporations. Malaysia is not. It has            caused by the US as a way of extending its
is available by fax or   chosen to strike out on its own path of          economic control over Asia. Whatever
E-mail and on the
APFC website:            domestic reflation before it undertakes any      contrarian interpretation is put on the
www.apfc.ca              but the most pressing restructuring of its       cause of the Asian recession,
To request delivery of
this or other APFC
                         financial or corporate sectors. Politics has     businesspeople and policymakers should be
publications contact:    more than a little to do with the situation.     aware of the groundswell of anti-Western,
Publications Dept.       In South Korea and, to a degree, in              and especially anti-US, sentiment
Tel: (604) 684-5986
Fax: (604) 681-1370      Thailand and Indonesia, the political            represented by these views. They could
E-mail:                  beneficiaries of the old economic structure      well impact on new trade or investment
cac@apfc.apfnet.org
                         have been replaced. In Malaysia, this has        plans in countries like Malaysia or South
ISSN No.1481-0433        not happened. The Malaysian                      Korea. To the extent that Canadian
                         government now seems more concerned              business can show it is distinct from the
                         with protecting its corporate allies from        US, companies hold a useful trading card.
                                        Housing Reforms Open a New Door
                                                                      As the Asian meltdown sends most regional economies into
                                                                    recession or stagnation, China stands out as the one country still
                                                                 recording strong growth. Yet China’s economy is slowing down, too.
                                                             In the first half of the year, GDP growth was 7%, down from 9.5% in the
                                                           first six months of 1997 and 8.8% recorded over the full year. While the
                                                          slowdown certainly reflected the impact on exports of the Asian recession
      China’s economy is                                  — export growth in the first half of this year was less than 8% compared
             slowing down                             with 26% in the first half of 1997 — that is only part of the cause. The
                                                  decline continued a slowing trend shown over all but two of the previous 10
                                 quarters. It suggests that even without the impact of the recent massive flooding along the
                                 Yangtze, Beijing may undershoot the 8% growth target set for this year — a target that has
                                 considerable political, if not economic, importance.
   Reform of SOEs and                 Yet, at a time when the economy might be in danger of cooling off rapidly, China is pushing
housing are intended to          ahead with perhaps its most ambitious economic modernizations — reform of state-owned
        boost growth...          enterprises (SOEs) and of its housing sector. Most analysts agree that fundamental restructuring
                                 of these holdovers from its days as a socialist economy are necessary if China is to continue with
                                 the overhaul of its economy and reverse the slowing trend. Still, the timing of these sweeping
                                 changes is problematic. The reforms come just as industry has to find around 100 million jobs
                                 over the next three years for new or displaced workers, or face rising unemployment and the
                                 social instability that goes with it. Chinese economists estimate the economy must find 20 million
                                 jobs a year for the next few years to employ the children of the country’s baby boom of the 1980s.
                                 Another 10 million a year are needed to employ those displaced from rural industry. Finally, some
                                 12 million workers are set to lose their jobs as a result of reform of the SOEs and of the
                                 government bureaucracy. A period of slowing economic growth and an uncertain international
                                 environment is not the ideal time to undertake such disruptive measures. However, Chinese
                                 leaders believe the reforms cannot be delayed if the economic slowdown is to be reversed.
    . . . however China may           There were several forces at work in the first half of 1998 militating against China reaching
             still miss its 8%   its growth target of 8% for 1998. However, unlike slowing exports or the interrupted flow of
                growth target    foreign investment from Hong Kong and Southeast Asia, some of these negative factors are
                                 within the power of policymakers to reverse, though perhaps not as quickly as they would hope.
                                 Domestic demand has stagnated, with the result that the economy has actually moved into a
                                 period of deflation. The consumer price index was down 0.3% in the first half, while the retail
                                 price index was 2.1% below that in the first half of 1998. Industrial production also slowed, while
                                 domestic investment is far below the booming levels of a few years ago. The government has
                                 already moved to counteract some of these negative forces. In a bid to boost domestic demand,
                                 lending rates have been cut to their lowest levels for 40 years and bank reserve requirements
                                 eased, although money supply growth is still slowing. Government spending on infrastructure —
                                 a projected US$750 billion over the next three years — will certainly lift domestic investment,
                                 along with greater corporate investment as a result of a streamlined approval process. The impact
                                 of much of this investment is yet to be felt. Also working against a quick turnaround is the
                                 impact of the devastating floods along the Yangtze, adding another unexpected damper on growth.
                                      On another tack, the government has recapitalized the major Chinese banks with an
                                 infusion of some 270 billion yuan (Can$51 billion). While the large amount of non-performing
                                 loans on their books makes at least some of the Chinese banks technically insolvent, the huge
                                 pool of personal savings flowing into the banks means they are far from illiquid. This is an
                                 important consideration in assessing the potential success of the second major reform now
                                 underway — the housing system.

2
 Housing sector reform           Planners hope to make the housing and real estate industry a new centre of economic
     has been delayed       growth. As a step toward this — and as an essential component of the reform of SOEs which
         several times      have been responsible for providing employee housing along with most other social benefits —
                            the system of government or employer-subsidized housing is being phased out, with people
                            encouraged to buy their own housing or at least pay market rentals. Housing reform was initially
                            seen as offering scope for an immediate boost to the economy, as much as 0.5% to GDP this year.
                            In any event, it has turned out to be a much more difficult exercise than Prime Minister Zhu
                            Rongji or his economic strategists had anticipated. Still, in view of the scope of the reform, the
                            delay in transforming millions of units of urban housing from public to potentially private
                            ownership, is not surprising. In March, Zhu announced the impossible target of ending the
                            allocation of new state-subsidized housing by July 1. This was soon pushed back to the end of
                            the year, and it now seems that the nationwide target is to complete the transformation to a
                            market-based housing system by 2003, with each province setting its own timetable.
     State control of all        The scope of the reform explains the delay. For more than 40 years, state ownership of all
     property began to      property was a core of the socialist system, but since 1979, the central government has been
           ease in 1979     backing away from direct control of housing. SOEs and government departments were handed
                            the responsibility of providing housing for their workers. At the same time, more people living in
                            rural towns and villages were permitted to build and own their own homes, while experiments
                            began in selling both new and existing housing in urban areas. In Beijing, for instance, about
                            20% of the more than two million state-owned apartments had already been sold off by the end
                            of 1997. In recent years, laws have been passed to provide a framework for commercial housing,
                            including private ownership of homes. This led to a boom in construction of commercial
                            apartments, mostly at the higher end of the market, far out of the reach of most Chinese
                            workers. As a result, at the end of 1997, there was an estimated 70 million square metres of
                            vacant housing in China.
    The goal is to have          The core of the current housing reform is to provide workers with increased wages, plus
workers own or pay fair     access to bank mortgages or other lending schemes, to encourage them to buy — and perhaps
   rent for their homes     resell — their now-subsidized apartments. Despite the very low wages of Chinese workers, access
                            to finance may not be a major problem. One goal of the reform is to utilize the very large pool of
                            savings Chinese workers have tied up both inside and outside the banking system. While many
                            urban workers will continue to rent their accommodation, at rates which will be slowly boosted
                            to 15% of household income, there are complex formulas that set the price and conditions of
                            purchase that ensure that many more will buy. Banks have already been authorized to increase
                            their loans for residential construction and mortgages to 15% of total new lending.
                                 So far, the changes have not
                            yielded the quick increase in
                            construction or demand hoped for
                            by planners, although the low and
                            medium-priced residential sector has
                            started to recover. One problem is
                            an overhang of luxury residential
                            property on the market, dampening
                            the enthusiasm of some local
                            developers for new projects. In
                            addition many Chinese city-dwellers,
                            unaccustomed to borrowing and
                            used to paying almost nothing for
                            their housing, are less than
                            enthusiastic about the heavy
                            demand on the family budget

                                                                                                                        3
                              represented by mortgage payments, no matter how willing the banks may be to lend. Still,
                              Canadian manufacturers, exporters, architects and planners should watch carefully the housing
                              reform, especially once it has progressed a little further, the backlog of new properties is taken up
                              and demand for more construction begins to appear, especially in colder areas of northern China.
    Workers will no longer         The key attraction of the reform for potential Canadian involvement is that it will enable the
           be tied to their   average Chinese worker to choose their own housing, rather than remain tied to the properties of
      employers’ housing      their work unit. In the early years of the reform, most households will likely remain in existing
                              apartments originally supplied by their work units, but within a few years, the demand for new,
                              higher-standard housing is certain to rise. Resale of formerly state-owned apartments is generally
                              allowed if the money raised is used to buy another apartment. Buyers of existing apartments are
                              also expected to begin up-grading their properties as maintenance and renovation will no longer
                              be the responsibility of work units. This will generate a growing demand for higher quality
                              components like windows, doors and interior fittings. US building supplies giant Home Depot
                              has apparently spotted this potential as it is moving in with a store due to open in Shanghai in
                              the near future.
     The reforms will open         Horror stories about poor quality in
           up a market for    some of the early commercial housing
        Canadian building     projects have been one of the factors
               technology     holding back many middle-class Chinese
                              from forsaking their cramped subsidized
                              flats. Canadian suppliers, with their
                              reputation for high-quality products, will
                              be well placed to supply skills and
                              components for the expected surge in
                              commercial building if they can take that
                              reputation into China. Local production
                              using imported technology in partnership
                              with a Chinese company could provide a cost-effective way into the market. Advanced
                              Canadian know-how in control of air, heat and moisture in residential construction, especially in
                              the colder areas in northern China, is one area of potential advantage. Insulated construction is
                              largely unknown in China, where energy conservation is becoming an important issue. Canada is
                              a recognized leader in developing and applying thermal energy conservation in housing, a skill
                              that can be transformed into a competitive advantage. However, building technologies like wood
                              frame construction are largely unknown in China, and building design is generally quite different
                              from that familiar in Canada, so entry into China could involve considerable market
                              development. Overall the Chinese market is still costly, competitive and risky. Canadian
                              companies must have the financial and human resources to maintain a long-term commitment.
                              As in many other sectors, the needs are enormous but the financial resources are limited.
      But, beware of rising        So far, China has been only a tiny market for Canadian building products and services, with
    unemployment slowing      commodities like lumber or components like doors and frames, or windows accounting for less
         down the reforms     than 0.5% of total exports in these categories in most years. Exporters of prefabricated buildings
                              had some success in the early 1990s, but have seen little growth since then. While the
                              emergence of a fully market-driven housing sector in China is no “open sesame” for our building
                              products and services, it is a potentially huge market that should be carefully watched. Of course
                              the overall economic situation in China must be watched, too, especially in the short term.
                              While the macroeconomic environment of slowing growth is unlikely to have any direct impact
                              on housing reform, the indirect effect of social unrest arising from mounting unemployment
                              could get in the way. Raising people’s rents or forcing them out of their homes at the same time
                              as taking away their jobs is a sure formula for trouble.


4
                                  Malaysia Boleh — or can it?
                                                               In the hierarchy of economies most affected by the Asian crisis,
                                                        Indonesia, Thailand and South Korea are seen by most observers to
                                                        occupy the top three spots, in large part because they had to turn to the
                                                       International Monetary Fund for support. At the other end of the
                                                      spectrum are China, Taiwan, Singapore and Hong Kong, all hobbling
                                               along, but each with substantial reserves to cushion the pain of slowing exports,
                                               devalued currencies or shrinking asset values. The middle ground has been
                                   occupied by Malaysia, the Philippines and Asia’s smaller economies. Japan is more difficult
                           to place. It is seen variously as the source of the crisis (starting with the yen endaka post-1986),
                           the reason for the crisis dragging on for so long (because of its anemic demand for imports from its
                           troubled neighbours), or as the crisis of all crises still waiting to happen.
Statistics show a major         Even as the focus of the crisis shifts to other regions (first Russia, with Latin America bracing
      contraction in the   for its turn), the Asian “first division” may be about to receive a new member. The economic
   Malaysian economy       outlook in Malaysia is fast deteriorating and a dirty political fight among its leaders which has led
                           to the removal of the heir apparent to aging Prime Minister Dr. Mahathir Mohamad, is adding to
                           the uncertainty, at least to those outside the country.
                                Malaysia certainly has the statistics to back its claim to be a member of Asia’s first team of
                           economic casualties. The economy is shrinking at an alarming rate. GDP was down 2.8% in the
                           first quarter of 1998 followed by a 6.8% implosion in the second quarter, compared with the
                           previous corresponding quarters. The Malaysian currency, the ringgit, now pegged so the market
                           cannot say what it is really worth, has lost about 35% of its value against the US dollar since July
                           1997. International credit rating agencies have slashed the standing of Malaysia’s sovereign debt
                           to just two notches above “junk bond” status. Corporate listings on the Kuala Lumpur Stock
                           Exchange lost about 70% of their value before the government had state-controlled organizations
                           step in and start propping up the market. Non-performing loans in the banking system were
                           10.2% of total bank lending at the end of June, with many analysts forecasting this figure will
                           double by the end of the year — assuming the government does not “ease” the problem by
                           relaxing the definition of a non-performing loan.
   Dr. Mahathir believes        Explanations of how Malaysia got into this mess and what should be done about it depend on
        his country was    who you listen to. According to Dr. Mahathir, now the acting Finance Minister as well as PM,
victimized and misled...   there was an ill-informed and unjust victimization of his country by foreign investors and analysts
                           who wrongly assumed Malaysia suffered from the same economic ailments as its neighbours,
                           Thailand and Indonesia. Things were then made worse, according to Dr. Mahathir, by an ill-
                           advised attempt to follow recovery policies advocated by the International Monetary Fund. Many
                           outside the country see it differently. Malaysia was not, they concede, burdened by massive short-
                           term foreign borrowings as were Thailand or South Korea. However, it has a very high level of
                           domestic bank lending, especially to a speculative property market, huge commitments to
                           infrastructure projects and, before it went into recession, a big current-account deficit.
...so he sets out on his        When the currency turmoil hit, Kuala Lumpur did not turn to the IMF for assistance. It did not
         own economic      face a foreign payments crisis. Besides, the IMF would likely have asked the government to dismantle
          recovery path    the politically sacrosanct reverse discrimination policy it has maintained in favour of ethnic Malays for
                           more than a generation. Nevertheless, after some wavering, Kuala Lumpur adopted most of the
                           policies the IMF imposed on those countries which did seek its emergency support. According to Dr.
                           Mahathir, backed up by his former finance minister and now chief economic adviser, Daim
                           Zainuddin, it is clear that the IMF recipe for recovery has failed. Their prescription to avoid a full-
                           blown depression is to change directions and adopt an easy-money policy, with government
                           support for ailing companies, heavy spending on public works and a government-funded takeover
                           of the banks’ bad debts. They put their plan into effect at the beginning of September when they

                                                                                                                              5
                            had the Malaysian central bank, Bank Negara, slash interest rates, ease lending controls —
                            especially for property, peg the value of the currency and impose strict currency controls. Their
                            reflation policy — “Malaysia Boleh,” or “Malaysia Can,” they call it — worked in 1985-86, the
                            last time Malaysia slipped into recession. It will work again, they insist. Not everyone agrees.
                            Mahathir’s long-time heir apparent, Anwar Ibrahim, was steadfast in his support for a tight
                            monetary policy and adherence to the IMF prescription — until he was politically out-
                            manoeuvred by the Prime Minister, then sacked as Finance Minister and Deputy Prime Minister
                            at the start of September. Also opposed to the Mahathir-Daim prescription were the governor and
                            deputy governor of Bank Negara. They resigned as soon as the new policy was unveiled.
     Easy-money policy           The liquidity squeeze and fiscal austerity advocated by the IMF have a growing chorus of
             ignores the    critics, in both Asia and North America. The dearth of new lending has had a very painful impact
        realities of 1998   on domestic activity in the countries that have followed the IMF path. However, to adopt as an
                            alternative, policies that worked in Malaysia 13 years ago, ignores the profound changes that have
                            taken place in the world economy since then. In the mid-1980s, export markets were strong and
                            foreign investment, especially from Japan, was looking for opportunities in Southeast Asia. Today,
                            export competition is fierce and the flow of FDI has dried up. The advent of global equity markets
                            and the emergence of vast pools of highly liquid portfolio investment funds seeking safe and
                            profitable havens, means countries like Malaysia can no longer safely ignore investor opinion —
                            even by hiding behind currency controls. The markets will turn against governments that are not
                            perceived to be implementing policies which will ensure long-term health and stability to their
                            economies in today’s global environment. Cronyism is no counter to market forces.
    Corporate friends of         The strong suspicion remains that the policies promoted by the prime minister have less to do
        the government      with sound economics and more to do with propping up corporate interests linked to various
          will be helped    segments of Mahathir’s United Malays National Organization. To achieve this, funds are being
                            siphoned out of sound state-controlled companies. This will only postpone the inevitable
                            restructuring of the banking and corporate sectors. Denial and boosterism will not restore the
                            faith of investors, domestic as well as foreign. Sadly, Malaysia now has all the qualifications to take
                            it into the first rank of crisis-hit economies.
     Canadian business           Canadians have not been prominent among those calling for a fundamental house cleaning in
      should avoid new      the Malaysian economy. That is probably because Malaysia has been more of an export market and
           investments      import source than a target for investment for Canadian business. Cumulative Canadian direct
                            investment at the end of 1997 was a very modest Can$128 million. With uncertainty swirling around
                            Malaysian economic policy, for the time being it would probably be wisest to continue the emphasis
                            on trade rather than to increase investment. Policymakers, who always face a dilemma over how to
                            deal with a crisis in the making without appearing to be too judgmental, might seek to move in the
                            opposite direction and increase what has been Canada’s diminishing aid role in Malaysia. Measures
                            to maintain and strengthen the human resource development links Canada has with Malaysia would
                            be one avenue for action. For example, the sharp fall in the Malaysian currency is making it much
                            harder to study overseas for the many Malaysians who cannot find suitable places in overcrowded
                            domestic universities. Creative
                            programs to help Malaysian students
                            continue to attend Canadian
                            universities and colleges will eventually
                            be rewarded in strengthened economic
                            ties and social influence. These will pay
                            off handsomely when Malaysia finds
                            the right policy mix to return to the
                            growth path that made it one of the
                            most successful economies in Asia over
                            the past 20 years.

6
                        Behind the Rhetoric
                             Since the Asian crisis began, there has been a sometimes acrimonious debate over its causes
                        and implications. Some Asian critics blame the recession on greedy Western speculators. Others
                        see the hand of the US at work, reasserting its economic power over an Asia that was becoming
                        too independent. In one form or another, the anti-Western and anti-US analysis can be heard or
                        read in Malaysia, South Korea, Thailand and even Japan. It is colouring public opinion and, in the
                        case of Malaysia, has been used to justify, if not cause, a dramatic government policy switch. To
                        Western observers, these explanations of the currency crisis and its aftermath do not appear to
                        have substance. However, they signal a real backlash to the neo-liberal policy mix that had been
                        applied to control the Asian crisis. To the extent that these analyses are believed, and to the
                        extent that they motivate or are used to justify policy, they help shape the new Asian business
                        environment. They cannot be ignored.
    Asian critics see        One rather strident school of thought in Asia sees the crisis as having been caused and
      Western greed     perpetuated by outsiders by selfish greed. These critics do not speak with one voice, but the
    behind the crisis   general storyline is consistent. Eighteen months ago, the economies of Asia (with the exception of
                        Japan) were humming along with expectations of another year of growth ahead. There were a
                        variety of country-specific problems related to over-investment, non-performing loans and the
                        like, but these problems had existed for years without compromising outstanding economic
                        performance. Then, foreign speculators initiated a concerted attack on the region’s currencies,
                        money managers withdrew their capital, and banks began refusing to roll over their loans to the
                        region. Ratings agencies compounded the problems by slashing much of Asia’s corporate and
                        sovereign debt to junk-bond levels during the latter half of 1997 and early 1998. According to this
                        analysis, these actions were motivated by greed, malice, or both.
 Even the IMF’s role         The currency devaluations and capital outflows forced several countries to turn to the IMF
     is questioned      for help, and the institution responded, according to this theory, with loan packages that were
                        conditional on the adoption of unnecessarily severe and generally ineffective policies. Again,
                        there are a variety of motivations ascribed to the IMF programs. These include the suppression or
                        even depression of Asian asset values so Western firms might acquire them cheaply; the
                        imposition of Western economic institutions (where Asian values once determined economic
                        behavior); or the toppling of Asian leaders who refused to bend to the will of the West. Some
                        have even suggested that the crisis is best understood as a US-led bid at the outright economic
                        subjugation of Asia.
   Some critics claim        The most influential and persistent critic has been Dr. Mahathir. He is articulate, eminently
  foreign domination    quotable, and a shrewd political tactician. From the earliest days of the currency crisis, he has
is the economic goal    been a vocal critic of the speculators and international portfolio investors who he blames for
                        inciting the crisis. He also draws clear linkages between the financial crisis and the ability of
                        “foreign people to influence people in the country, agitate them, and cause them to overthrow the
                        government” — though when pressed directly he demurs from naming the foreign elements or
                        identifying their actions as part of a coordinated plan. Others, including outspoken Japanese
                        writer and former LDP politician Shintaro Ishihara, Malaysian newspaper editors, some NGOs
                        and Thai columnists are less circumspect. Ishihara, for instance, has analyzed the crisis as “the
                        United States’ clever strategy to gain control of the world.” In Korea, where phrases like “IMF era”
                        and “IMF suicide” are now widely used, the June edition of Seoul Sindong-A described the
                        unemployment and other social impacts of the crisis as “the price one must pay for being defeated
                        in an economic and financial war.”
                             Do these sentiments have any basis? To suggest that all markets are driven by the actions of
                        self-interested participants, both foreign and domestic, is stating the obvious. This may be “greed,”
                        but the responsibility for ensuring that the social costs and benefits of trading in any market are
                        appropriately accounted for lies with those who design the market mechanism, and those who

                                                                                                                       7
                                design the social and commercial regulations which affect the market. In other words, national
                                governments. Is it fair to blame traders when the design of the market is flawed? The suggestion
                                that malice was involved is closely aligned with the accusations of manipulation. But is it possible
                                that manipulators have been able to artificially depress the levels of now-floating Asian currencies
                                for over a year? What this argument really expresses is frustration that the system of managed
                                exchange rates, itself a form of state-directed market manipulation, has been overwhelmed by
                                global forces.
         Governments that            Fixed or managed exchange rates and, more broadly, state-directed rather than market-
      “manage” exchange         directed economies, have bred a belief that one could simply tell the world what the price of a
      rates assume others       given asset should be — for example, the ringgit. For people with this belief, it must be confusing
        can do the same...      and frustrating that control was suddenly wrested away by “the market.” It is an easy step to
                                attribute nefarious motives to “the people who did it” — whether it is currency speculators,
                                George Soros, the US government or Wall Street money moguls.
...so Dr. Mahathir turns the         However, the situation moves beyond an exercise in rhetoric when a government bases its
         rhetoric into policy   economic policy on this analysis. Malaysia’s imposition of strict
                                controls on the foreign convertibility of the ringgit and the
                                repatriation of the proceeds of equity sales by foreign investors,           A View from Japan
                                suggests that at least part of its reflationary strategy is intended to      “You will eventually
                                warn off foreign “manipulators.”                                             come to see through
       Other countries are           Will others follow Malaysia’s example and throw orthodox                [the Asian economic
         unlikely to follow     economic policies overboard? Probably not. For one thing,                    crisis] the United
       Malaysia’s example       Malaysia is free of any IMF voice in its policymaking. The other             States’ clever strategy
                                members of Asia’s “first division” economic casualties are under             to gain control of the
                                IMF programs. Whether or not their political leaders agree with              world by controlling
                                the orthodoxy, they at least have the IMF to blame. Also, in South           finances. You will
                                Korea, Thailand and Indonesia, political leadership has changed              even get to see Japan
                                since the crisis erupted. Dr. Mahathir alone has survived the                finding itself in an
                                                                                                             unintended — “piti-
                                turmoil and it is no coincidence that the biggest winners from
                                                                                                             able” may be the more
                                Malaysia’s new easy-money policy will be long-time supporters of
                                                                                                             befitting expression —
                                his administration. Dr Mahathir may or may not believe his
                                                                                                             position of being used
                                rhetoric, but domestic political and business interests are, in the          in that strategy. A
                                end, a more important factor for Malaysia’s departure from                   conclusion you will
                                economic orthodoxy than his theories on the workings of the                  reach from this is that
                                international financial system.                                              Japan as well as the
       Economic pain and             It is not surprising that finding foreign causes of, and easy           Southeast Asian
        nationalism breed       solutions to, the Asian crisis are appealing. The pain that has been         countries are nothing
          illiberal policies    caused by the crisis in Asia goes well beyond writing down the               more than the United
                                value of a few assets. Governments have fallen, and millions are             States’ financial
                                losing their jobs and suddenly facing food, health and personal              slaves.”
                                security concerns they thought were long behind them. This is an             — Shintaro Ishihara
                                incredibly disillusioning event, and will indelibly mark the psyches
                                of those who live through it in much the same way the Great Depression did 65 years ago. While
                                there is no need to accept the theories of those who seek to attribute blame, it is wise to be aware
                                of them and to be sensitive to the pain that they signal. This same disillusionment is transforming
                                domestic political interests and alliances in ways that can be very unpredictable. The anti-
                                Western rhetoric and some of the more bizarre conspiracy theories can always be found, but they
                                are generally benign. It is when this environment of hurt is combined with strongly nationalistic
                                political forces (supported by traditional business elites), that the risk of illiberal economic policies
                                rises sharply.


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