Malaysia: A lesson in home remedies - Financial Times, November 2
There is much to be gained from studying a strategy for
recovery that rejected IMF prescriptions, argues Clyde
Prestowitz, president of the Economic Strategy
Institute in Washington, DC.
They said he was crazy, but Mahathir Mohamad, prime minister
of Malaysia, is having the last laugh. His government has been
criticised in the US for harassing political opponents, but it is
hard to dismiss his country's economic achievements.
After the crash of the Thai baht precipitated the Asian
economic crisis in July 1997, George Soros, the global
investor, called Mr Mahathir "a threat to his own country".
And when Mr Mahathir rejected International Monetary Fund
policies and imposed capital controls in 1998, critics said
Malaysia might never recover.
In fact, not only is Malaysia recovering nicely, it is arguably
doing better than any other Asian country, with the possible
exceptions of Singapore and Taiwan. Growth forecasts for
the year have just been pushed above 4 per cent, and the
stock market is up 180 per cent since September 1998.
Meanwhile, unemployment is falling and the trade surplus
has boosted the country's reserves to $31.7bn - the
equivalent of seven months of imports.
Others can point to higher growth rates and bigger trade
surpluses. But what sets Malaysia apart is the greater
speed and extent of its reforms, and the strength of its
economic structure. Before the crisis struck, Malaysia had
recognised the risk of a bubble and had taken steps to limit
speculative bank lending. In the wake of the crisis, it moved
quickly to establish two institutions to dispose of bad loans
and recapitalise banks.
Although it implemented some industry-targeting policies
such as those for cars and steel, Malaysia had always been
open to foreign investment, and thus to a high degree of
international competition. Its civil service, which was
relatively clean and competent, used the crisis as an
opportunity to introduce even greater transparency and
market discipline. At the same time, care was taken to
maintain key elements of an economic safety net that was
lacking in other crisis-hit countries.
The results speak for themselves. More importantly, they
suggest that Mr Mahathir's views on future developments in
Asia might be instructive. He has long been unpopular in
official US circles because of his resistance to US
hegemony in Asia. Yet he has been engaged for most of his
career in an effort of which many Americans would approve -
affirmative action.
Like the US, Malaysia is a multi-ethnic society with a
history of racial tension. For 30 years, the country has not
only experienced rapid economic growth, it has also
distributed the fruits of that growth relatively broadly through
affirmative action. That has enabled it to achieve a degree of
social harmony not evident in many other parts of Asia.
As a result, the economic crisis not only posed a threat to
growth, but menaced the integrity of the country. According
to Mr Mahathir in a recent interview, the austerity measures
proposed by the IMF had a fundamental flaw. They failed to
recognise the potential for social disintegration and ethnic
unrest in Malaysia. The example of Indonesia - where a
financial crisis eventually led to unrest and political
instability - supports Mr Mahathir's scepticism about IMF
policies.
When it became clear that austerity could tear apart the
social fabric of the country, Malaysia rejected IMF
prescriptions. It turned instead to traditional fiscal and
monetary stimulus policies to resuscitate the economy.
Soon afterwards, capital controls were imposed to prevent
currency speculation by hedge funds that could have
undermined stimulus efforts.
While these policies initially elicited a storm of criticism, Mr
Mahathir notes that they were eventually endorsed and
imitated by other crisis-hit countries, helping to renew Asian
economic growth. Capital controls were a particular object of
criticism, and Malaysia was the only country formally to
introduce them.
But Mr Mahathir suggests that Hong Kong's intervention in
the domestic stock market and pressure from the US and
the IMF on banks not to withdraw capital from Korea were
both forms of capital control. Indeed, the IMF has
acknowledged the usefulness of controls in some
circumstances.
According to Mr Mahathir, the lesson from the episode is
the need for a full understanding of a country's
circumstances when it is in crisis. It may be wiser to
swallow a recommended dose of aspirin, and forsake the
risks that attend a bout of radical market surgery.
For the future, Mr Mahathir emphasises the importance of
developing human capital to compete on the basis of skills,
instead of low labour costs. He says investment in
infrastructure - such as Malaysia's multimedia corridor
around the new capital of Putrajaya - is important. But it is
hollow without the development of human skills.
Mr Mahathir also believes that Asian countries must wean
themselves off an over-reliance on exports, and develop
stronger internal and intra-regional demand. Everyone in
Asia cannot be an exporter indefinitely. |
