Global Policy Forum

By Christine Qunta

Malaysian Prime Minister Mahathir Mohamad opened the Bank of Southern Africa in 1998, and commented that in the olden days the west colonised countries of the south with gunboats, but today it uses currency traders.

Malaysia was then in the middle of the economic upheavals commonly referred to as the Asian crisis. After almost a decade of consistent annual growth of 8% to 10%, the economies of Thailand, Hong Kong, Indonesia and Malaysia seemed on the verge of imploding. The "Asian tigers" rapidly became virtual basket cases in the eyes of the west and the media.

A onedimensional view of the crisis blamed the governments of the region for corruption, poor corporate governance and other ill-defined misdeeds, summarised in the term "crony capitalism", which explained everything to those who invented it and nothing to those who tried to understand how things came to be the way they were.

The truth is that several factors contributed to the crisis. Boom conditions which some Asian economists argue overheated these economies were among them. An orderly programme to slow the economies down, starting with a devaluation of currencies, was one solution if the crisis could have been foreseen.

What turned it into an economic meltdown was the action of hedge funds and currency traders, which launched a sustained attack on these economies. Mahathir was one of the most outspoken of the Asian leaders. He made a frontal attack on hedge funds and currency speculators, blaming them in large part for the problems.

Amoral and seemingly invincible, these global fund managers move billions of dollars in and out of countries and can literally crash an economy should they wish to do so. According to Mahathir, this is exactly what they tried to do in his country.

Thailand responded by raising interest rates to discourage speculators, but these steps only worsened the crisis. Malaysia initially adopted measures based on advice from the International Monetary Fund (IMF). Government spending was cut by 21% and it went for another budget surplus. The government also allowed bankruptcies to proceed unchecked.

These steps only encouraged the speculators and the Malaysian ringgit was devalued even further. Like in so many other countries, the IMF prescription did exactly the opposite from what it was meant to do. Mahathir threw the IMF measures out of the window and set up a national economic action council, which was given the job of steering Malaysia out of the crisis.

After intensive deliberation it was decided to introduce selective currency controls so that currency raiders had no access to the ringgit. This was done so that, in the words of Albert Cheok, chairman of the Bangkok Bank, "speculators could no longer play monopoly with the ringgit".

Manipulation of the share market through short-selling was stopped as the measures prevented the repatriation of foreign equity investments until one year after the investments were made. Nominee shareholding was banned and all shares had to be registered in the name of the beneficial owner.

These measures reduced currency market volatility, enabling the government to introduce its own measures for stabilising and reviving the economy. The central bank announced the selective currency controls on September 1, 1998. The announcement was greeted by howls of outrage from economists and others in the west.

Two years later Malaysia's remarkable recovery has silenced the critics. Even a year after the radical steps were taken, they started bearing fruit. In August 1998 the base lending rate was 11,7%. A year later it was below 7%. Similarly, in August 1998, external reserves were $20bn; by end-July last year they had grown to 32bn.

In August 1998 the inflation rate was 5,6%. By June last year it had fallen to 2,1%. While there has been recovery in the other Asian economies, they have paid a price for following the IMF path, not the least of which is increased foreign indebtedness.

George Soros, founder of the world's biggest hedge funds and feared currency trader, in April this year announced his withdrawal from large-scale and aggressive hedge-fund investing. More recently the World Bank and IMF have been forced to concede that their policies can in some instances harm countries.

The increasingly vociferous protests against these institutions have everything to do with this rare public acknowledgment. In the meantime Mahathir is well back on his way to being one of Asia's biggest tigers.

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