COMMENT & ANALYSIS - A Malaysian Lesson In Home Remedies
By Clyde Prestowitz
2 November 1999
(c) 1999 Financial Times Limited. All Rights Reserved
There is much to be gained from studying a strategy for recovery that rejected IMF prescriptions.
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
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
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 -
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
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
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
Clyde Prestowitz is president of the Economic Strategy Institute in Washington, DC.
Copyright Financial Times Limited 1999. All Rights Reserved.