Mahatir Demonstrates an Alternative Asian Solution
The focus of the Asian crisis is shifting to Malaysia, where the
political consequences of economic meltdown are now being played
out The overt crisis revolves around the decision of Prime
Minister Mahatir Mohamad to fire and then arrest his Deputy Prime
Minister, who also served as his Finance Minister and heir
apparent. The deeper issue, transcending both personality and
politics, concerns how Malaysia will respond to its own version
of the general Asian crisis. Mahathir, who has long been an
advocate of Asian solidarity, has charted a course that is both
idiosyncratic and, in our mind, a model of the direction Asia is
going to be moving in the coming months. Thus, the political
crisis points in an interesting and revealing direction.
The split between Mahathir and Deputy Prime Minister Anwar
Ibrahim began over differences of opinion as to the best way to
achieve economic stability in Malaysia. Anwar favored a Western-
style financial reform package, similar to the IMF packages being
put in place all over Asia. Mahathir, however, was more in favor
of a national approach to solving the problems, one which relied
more on Kuala Lumpur than on multilateral agencies. Mahathir,
who had carefully observed events in neighboring Indonesia,
including the fall of Suharto in May, became increasingly
convinced that the IMF solution to the Indonesian problem was not
only ineffective, but that it had directly led to the fall of the
Suharto government and the resulting disorder in Indonesia.
Since he was convinced that the IMF did not have any workable
solutions in hand, he was not prepared to risk his regime by
following IMF dictates.
After Suharto's fall, Mahathir became concerned about the support
his erstwhile protege, Anwar, had been developing in the ruling
party, the United Malays National Organization (UMNO). Anwar and
one of his deputies made remarks in June suggesting that the
Malaysian situation was analogous to that of Indonesia, with the
clear implication that Mahathir's fate ought to be the same as
Suharto's. Needless to say, Mahathir vigorously disagreed with
this analysis.
With the UMNO becoming divided over the ability of Mahathir to
lead Malaysia out of its economic turmoil, Mahathir needed to act
swiftly. In July he brought in his friend Daim Zainuddin as
Special Functions Minister, removing much of the control Anwar
had over Malaysia's financial decisions. A campaign of
vilification against Anwar was launched, including the
interesting charge by his brother in law that he had been
sodomized by Anwar.
Apart from personality and power, the struggle between Mahathir
and Anwar represents a struggle between two visions of how
Malaysia and Asia are to recover from their shared economic
crisis. Anwar and his allies represent the conventional view on
how to solve Malaysia's crisis. Their focus is on external aid,
particularly from multilateral organizations like the IMF. Since
the price for IMF support is austerity at home, the imposition of
market reforms and a decrease in protection, this faction is
prepared to make fundamental changes in Malaysia's economy. Of
course, since economic liberalization runs counter to Mahathir's
more authoritarian, less liberal economic strategy, it followed
that Mahathir had to go.
Mahathir's own analysis was fundamentally different. In his
view, the IMF offered no solution at all. The amount of money
and credit being offered was completely insufficient to solve
Malaysia's problems. Moreover, the IMF's price would create
social chaos in Malaysia. For example, the IMF required a
rigorous program of closing insolvent banks, writing off bad
loans and decreasing available credit accordingly. Having seen
the consequences of these policies in Indonesia, Mahathir's
position was that, since the IMF provided no real solution
anyway, it followed that it made no sense to pay the price.
Mahathir has pursued a radically different course. On September
1, Mahathir announced new foreign exchange controls, effectively
limiting the convertibility of the Ringgit. In addition, earlier
this week, Mahathir's government introduced new banking
regulations that provided banks with more time in which to write
off bad loans, reduced reserve requirements, and generally
allowed Malaysian banks, at least internally, more room for
maneuver. In addition, Mahathir had Anwar arrested in the midst
of the Commonwealth Games and Queen Elizabeth's visit.
What is important about events in Malaysia is that they
demonstrate a new economic response to the crisis emerging. The
previous response has been to look to the outside for support.
Malaysia's response to is cast itself free from the outside, on
the theory that the outside world not only doesn't hold open a
solution but that the solutions it offers will be more harmful.
Since Malaysian exports have declined precipitously, the inflow
of investment into Malaysia has collapsed altogether, and outside
aid is completely insufficient to solve any problems, Mahathir
has clearly decided that economic nationalism no longer bears
much of a cost.
Naturally his neighbors are appalled, and none more so than
Singapore. Singapore, one of the healthiest economies in the
region, is intimately tied to a liberal trade regime, given its
role as financial center and exporter. Prime Minister Goh Chok
Tong warned yesterday that Malaysia's model, if followed by the
rest of Asia, could trigger U.S. protectionism and a collapse of
interregional trade. Mahathir's position, of course, is that
with or without formal protectionism, Malaysia's economy has
already been smashed, and there is little hope in looking for
salvation in trade with the United States. Punctuating this
exchange on economic theory, Malaysia banned overflights by
Singapore aircraft, disputes over minor border issues have begun
to flare again, and Malaysia has threatened to ban exports by
Malaysian companies through the port of Singapore.
Thus, Malaysia's internal political argument has important
international ramifications. One of the most interesting was the
decision by Japan to loan Mahathir's government about $1 billion
after Anwar's arrest and the announcement of a nationalist
economic policy. So while Australia condemns Mahathir's
suppression of Anwar and Singapore warns of dire consequences,
the Japanese are lending him money. Interesting.
Nothing is decided in Malaysia. The Central Bank moves back and
forth on regulations and the situation is fluid. Our sense,
however, is that Mahathir will carry the day both because of his
entrenched power and because his economic policies promise,
albeit only in the short run, some relief from economic pressure.
The debate between Singapore and Malaysia sets the stage between
the two great camps forming up in Asia: Asianists and
Internationalists, those looking to the West for answers and
those arguing that answers are national and regional.
This debate, of course, takes place on the Straits of Malacca,
one of the most strategic waterways of the world. Should the
debate adjourn from the theoretical and political, it would have
extraordinarily important consequences for nations outside the
region. We are far from that point, of course. But then, just
two years ago today's events would have been unthinkable.
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