Malaysian Maverick: Mahathir Mohamad in Turbulent Times Barry Wain (grave mercy .TXT) 📖

shareholders, the stock exchange lost RM70 billion in market capitalization over the next three days.[82] In another noteworthy case, Petronas took control of Malaysian International Shipping Corporation, after MISC acquired the shipping assets and debts of Konsortium Perkapalan Bhd., which was 51 per cent owed by Dr. Mahathir's son, Mirzan Mahathir. When further plans were announced to save well-connected debt-ridden banks and companies, "capital flight hardened into a capital strike: the market would not return if the state, under Mahathir, could not be disciplined".[83]

Investors were unnerved just as much by Dr. Mahathir's vitriolic attacks on the foreigners he held responsible for Malaysia's pain. Assuming a more direct role in policy-making as the crisis deepened, Dr. Mahathir branded foreign currency traders as "international criminals" led by American financier George Soros, a "moron...with a lot of money".[84] He accused the IMF of wanting to "subvert" Malaysia's economy after an IMF official suggested the government go easy on its giant infrastructure projects. The more he insinuated a Western conspiracy to sabotage Southeast Asia, hinted at a Jewish plot against Muslim Malaysia and railed against "an international dictatorship of manipulators", the faster capital departed Malaysia and neighbouring countries. His remarks "continued to undermine confidence and to exacerbate the situation until he was finally reined in by other government leaders in the region", and no doubt by some of his own advisers.[85]

Another aggravating factor was the perception that Dr. Mahathir and Daim had taken over economic policy making from Finance Minister Anwar Ibrahim, who had endeared himself over the years to the international financial community.[86] Daim reappeared on the scene in late 1997, being named executive director of the National Economic Action Council, chaired by Dr. Mahathir, which was established to manage the crisis. When Dr. Mahathir announced the commitment of state funds to defend the stock market, Anwar was nowhere in sight. Dr. Mahathir felt compelled to quash rumours of policy differences with Anwar and to deny that he had taken over Malaysia's economic management. "I am responsible because I am the head of government," he told reporters. "I can't let just everybody carry on their responsibility without myself helping."[87]

Malaysia's lower exposure to private bank borrowings, serious though it was, meant it did not have to run to the IMF for emergency credit facilities, a humiliation suffered by Thailand, Indonesia and South Korea. A typical IMF package, which involved submitting to deflationary "conditionalities", would have crippled Dr. Mahathir's grand plans. Still, Malaysia had to contend with an increasingly shrill international clamour for reform, including transparency, good governance and allowing foreign investors to buy into and even control local corporations. Domestically, Dr. Mahathir faced what he considered an even more urgent threat. He was convinced that Anwar, his deputy and heir apparent, was plotting amidst the economic dislocation to topple him. Dr. Mahathir's solution, which put him at the centre of a worldwide controversy, was selective capital controls, introduced on 1 September 1998, 14 months after the crisis hit. He sacked Anwar the next day, declaring him morally unfit to hold office.

In an effort to further loosen credit and increase government spending to boost the economy while keeping the currency steady — the easing of monetary and fiscal policy began earlier — Dr. Mahathir banned the trading of the ringgit abroad. Holders of offshore deposits, including currency traders and stock market investors, were given a month to repatriate ringgit to Malaysia. With the country's external account frozen, currency traders were no longer able to short-sell the ringgit, by borrowing it offshore to finance dollar purchases in anticipation of a crash in the ringgit's value. The government fixed the exchange rate at RM3.8 to US$1. Portfolio investment — only the principal, not interest or dividends — had to remain in Malaysia for a year. The offshore market in Malaysian shares, conducted in Singapore, was shut down. Longer-term foreign direct investment was unaffected, as was international trade.

Behind what officials viewed as an economic shield, which itself was a defiance of the IMF, the Malaysian government carried out a programme of recapitalization, rescue and reflation that was also at odds with IMF and international money market thinking. Bank Negara lowered interest rates further, redefined non-performing loans at six months instead of three, set targets for loan growth and directed more credit to the property market, auto industry and other key sectors. The government established three institutions to deal with the financial system. Danaharta removed non-performing loans from the balance sheets of financial institutions, allowing debt-strapped banks to resume lending. Danamodal recapitalized the banks, while the Corporate Debt Restructuring Committee did as it was titled.

Contrary to many forecasts, Malaysia did not commit economic suicide by resorting to a fixed exchange rate and capital controls. The currency turmoil in most of the region, with the exception of Indonesia, subsided by the end of 1998, due mainly to external factors. Thailand and South Korea, subjected to onerous IMF conditionality, showed signs of recovery from the final quarter of 1998, while Malaysia's turnaround began early in 1999. Malaysia rebounded more strongly in 1999 and 2000 than Thailand and Indonesia, though not as impressively as South Korea. In addition to proving wrong the pundits who predicted Malaysia's demise, Dr. Mahathir could take satisfaction in the tarnished reputation of the IMF. He helped discredit the IMF's austerity fix, the one-sized-fits-all solution that the fund misguidedly — and arrogantly — tried to impose in East Asia.

Eminent economists continued to argue inconclusively about the efficacy of Malaysia's action, which was entangled in a global debate about the timing of full-scale capital account liberalization for emerging market economies. But in practice Kuala Lumpur's example meant little. No other country subsequently opted for capital controls, until the military-installed government in Thailand was tempted to intervene to curb the rapid appreciation of the baht in late 2006. The measure — requiring foreign investors to deposit 30 per cent of the funds sent into Thailand to buy shares or bonds in a non-interest bearing account with the central bank —