Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : LONDON
Tarikh/Date : 21/07/87
Tajuk/Title : THE ROYAL INSTITUTE OF
INTERNATIONAL AFFAIRS
"THE GLOBAL ECONOMIC CRISIS: WILL 1988
BE ANOTHER 1928?"
Mr. Chairman;
Ladies and Gentlemen,
I am pleased to have been invited to speak at this
Institute today. I am indeed honoured to be able to share my
views with members of this prestigious Institute which has
made a tremendous contribution towards a better
understanding of international affairs.
2. Making speeches is the favourite occupation of
politicians. In the course of years of doing this, one
develops a fondness for certain quotes. For me the favourite
quote is George Santayana's "Those who do not learn the
lessons of history are condemned to repeat their mistakes
over and over again". I would like to repeat this quote in
this speech because it deals mainly with the current
economic situation and for those who have gone through the
recession of the late twenties or at least read about
it, they must have this "deja vu" impression when studying
the present world economic situation and its political
consequences.
3. A great book to read and to remind us about the
Depression or the Great Slump of the late twenties and early
thirties is H.V. Hodson's "Slump and Recovery, 1927 - 1937"
published by your Institute in 1938. Perhaps quoting a few
paragraphs from this book would explain why I said that we
have gone through it all before. I quote:-
" The fall in commodity prices ...... proceeded
with only intermittent relief. The pressure upon
debtor countries to sell at cut prices had been
grievously enhanced by the reduction in lending.
" The abrupt curtailment of international lending -
however wasteful and unjustifiable some of the previous
loans may have been - had dislocated world trade and
depressed commodity prices ......
" The combination of different or harrassed lenders
and weak or even bankrupt borrowers automatically
prevented the revival of international lending on
the scale of earlier years
Let me continue to quote:
" In general, the prices of raw produce fell more
rapidly than those of goods at the later stages of
manufacture, a fact which temporarily assisted
industrial countries ... but which could not do so for
long, since their markets abroad were being
concurrently impoverished.
" The purchasing power of raw-material producing
countries enormously diminished. Markets contracted,
profits fell, production was curtailed, buying of
stocks was restricted, and prices dropped still further
......
" The fluctuations in international lending, the
embarrassments of debtor countries, the fall in prices,
the depressed conditions in the creditor countries, all
naturally had a profound effect upon the volume and
distribution of world trade ......
" The slump, once started, continued a swift and
snowball career. "
Ladies and Gentlemen,
4. One may be excused if on hearing these quotes one gets
the impression that some present-day writer was writing
about the present world economic situation.
5. Mr. Hodson wrote a great deal on the causes and the
course of the Great Depression, not much on the political
consequences. But he did write on the social changes and
political upheavals, including the growth of extremism in
Germany. Writing as he did in 1938, Mr Hodson might be
forgiven for not having a clue at all about the profound
meaning of the ascendancy of Adolf Hitler and the Nazis
in Germany. Mr. Hodson was no specialist on Asia and Latin
America. He can therefore also be forgiven for having
little inkling of the almost immediate effects outside
Europe.
6. Let me make myself perfectly clear. I am not
predicting that the world will enter another global Great
Depression, although I feel that for most of the countries
of the South, that second Great Depression descended quite
some time ago.
7. Some people have seen close parallels between the New
York Stock Market boom of 1929 and recent developments in
Wall Street. Certainly the world has not seen in the last
two years such a bull run or so many American banks going
bankrupt since 1929. I am told that there is this
Kondratieff economic long wave cycle theory which seeks to
explain the great depressions of the 1830's, the 1890's and
the 1930's in terms of a cycle of 45 to 55 years; according
to which we should have a great depression descending upon
us any moment now.
8. But the economy of the world is not governed by the
movements of the stars or the planets. It is created and
managed by men. In this day and age we do not consult
astrologers or astronomers before adopting economic
policies. We study and we plan. Surely no one would plan for
a slump. What has happened is that we have forgotten the
lessons of history and we repeat our mistakes. If the same
people lead for longer periods, perhaps mistakes will not be
repeated. But, of course, there will be other prices to
pay.
9. In the years after the First World War, the victors
forced vanquished Germany to pay huge war reparations.
Obviously if Germany had to pay out so much, it must also
earn so much or borrow the required sum. Thus the beginnings
of economic distortions were set in motion by the leaders
themselves; leaders who had apparently not read history.
10. Germany, perhaps more than any other country was
thoroughly disorganised industrially after the World War.
Hodson pointed out that "the economic history of the whole
of the first post war decade is a tale of attempts to meet
or to defy the disorders that the war had wrought in the
World's economic system." The 1919 boom which was followed
by a collapse in 1920 was symptomatic of the economic
disorder and it must be indicative of the economic disorders
that were to follow. But the leaders of the period continued
with their punitive approach against Germany. The result
was the 1929 slump and the rise of extremism as portrayed by
Nazism.
11. Partly as a result of that experience there was less
desire to punish the defeated countries after the second
World War. Except for dismantling the huge industrial
conglomerates thought to have been responsible for
sustaining the war machines, the Allies adopted a more
liberal attitude towards Japan and Germany. The result was
a very quick recovery for these two dynamic countries, which
in time posed a threat to the economies of the U.S. and
some European countries.
12. So far, so good. The lessons of the post World War One
were well learnt and applied. But the U.S. and the Western
Allies then began to feel threatened by the economic power
of the two former enemies, and an easy solution was looked
for. First interest rates were raised and the American
dollar was effectively revalued upwards. Much money flowed
to the U.S. but, at the same time, U.S. goods and services
became uncompetitive. This in turn resulted in more foreign
goods being imported while American industry declined and
unemployment consequently increased. Shortly after, there
was a contraction in the purchasing power of the Americans
which must affect adversely new investments and production.
The economy deteriorates further. As the American economy
deteriorates, raw material exporters began to lose their
markets. Prices and earnings went down. To earn more the
commodity producers produced more and prices went down
further.
13. Elsewhere the oil producers were smarting over the
minimal royalties they earned from the strategic commodity
they produced. The conduct of the Arab-Israeli War gave them
the excuse for raising oil prices. Suddenly the world
was flooded with petro-dollars. Such huge sums of money
cannot but destabilise the world's financial system.
Extravagant as the oil producers were, they still could not
spend all their money. All kinds of restriction prevented
them from buying into the major industries of Europe and
America. Inevitably the petro-dollars found their way into
the vaults of European and American banks. The stage was
even reached when Arab oil producers had to pay to keep
their money in the bank.
14. The petro-dollars must be lent out. Only nations can
borrow huge sums. And so sovereign loans became the main
business of western banks. Nor were the Arabs allowed to
withdraw their deposits because it would disrupt the
financial stability of the western countries. On the other
hand the fall in commodity prices undermined the capacity of
the borrowing countries to repay their loans.
15. Simultaneously the United States discovered that a
strong dollar and high interest rates was not helping its
economy. The balance of trade was very much in favour of
the old foes -- Germany and Japan. It was decided that it
was better to devalue the U.S. dollar against the Yen and
the Deutschmark in order to reduce Japan's and Germany's
exports to America. The idea did not work for the U.S. as
predicted by many economists and international decision
makers. Japanese and German goods kept pouring into the U.S.
Meanwhile commodity producers, including oil producers, who
sell in dollars suffered as the dollars earn less in terms
of purchasing capacity. The oil producers not only earned
less but find their external reserves much diminished in
value. Of course, countries that borrow in Yen or
Deutschmark suddenly found themselves even more indebted
than before.
16. Since the U.S. is not getting much benefit from the de
facto devaluation of the dollar, protectionism began to look
more and more attractive. The target is Japan but the
developing countries are dragged willy-nilly into the
maelstrom. The U.S. now talks of balanced trade even with
its smaller developing country trading partners.
17. Economic policies cannot be expected to yield only one
desired result. Just as Germany cannot be made to pay
reparations after the First World War without disrupting the
worlds economy, so today there can be no single remedy for
the economic ills of a rich state which will not have
undesirable effects on itself and on other states. The more
drastic the solution, the greater the side-effects on itself
and on others. This being so, it is important that powerful
economies do not devise economic policies in the absence of
the weak.
18. Multilateralism has now become a bad word among
developed countries. The disillusionment with the United
Nations has led to the setting up of exclusive rich men's
club. The Group of Five is an alliance of the rich which
must inevitably work against the interest of the poor. The
five has now become the Group of Seven, again unrepresented
by the poor countries.
19. Although in Venice the seven discussed the problems of
the poor, it is doubtful that they fully appreciate these
problems. It is even doubtful that they take into account
that the increasing poverty of the poor will adversely
affect their own economic performance. It is worth while
remembering that the Third World accounts for 40% of the
exports of the world's biggest economy. As a market the
non-socialists third world is bigger to the U.S. than Westen
Europe, Eastern Europe, the Soviet Union, Australia, New
Zealand and China put together. Economic depression in the
Third World is one reason why the U.S. will continue to have
difficulties in reducing its trade deficit.
20. If we are going to find a solution that will work
somewhat better than the currency manipulation which is the
main result of the Group of Seven meetings so far, we must
return to Multilateralism. If having 150 different countries
sitting together to formulate a solution is impractical,
then there should at least be the presence of a few
representatives of the poorer countries when the Group
of Seven meet. No action should be taken until the
representatives of the poor have been given a hearing.
21. For a long time the South or the developing countries
begged for a New International Economic Order. The North
saw in this another attempt to extract aid from them.
Accordingly they formed the Group of Seven and imposed a New
International Economic Order of their own. It must be
painfully obvious that it is not working. It fails to solve
even the problems between the members of the Group. Why
else should the U.S. clamour for its very own protectionist
policy if the currency manipulation and other measures
adopted by the Group of Seven had worked?
22. Indeed, far from solving the problems, the exchange
rate adjustments have worsened the situation. Developing
countries unable to service debts now simply refuse to pay.
There was much protest by the banks in the North but finally
they are forced to provide for these bad debts. And weak
banks are going bankrupt by the dozens.
Ladies and Gentlemen,
23. The South admits that they cannot do without the North.
But then they cannot hope to be heard if they speak with a
hundred voices. And so the South have decided to set up a
Commission. The South Commision, as it is called, is
presided over by Dr. Julius Nyerere and is given the task of
mapping out the areas and manner of cooperation between the
countries of the South so as to reduce dependence on the
North. But it should be within the scope of the work of the
Commission to formulate effective representation for the
South in any North-South forum intended to correct the
worlds economic problems.
24. Admittedly the record of the attempts to cure the
economic ills of the world is not very encouraging.
Certainly what has been done lately has not had the desired
effects. As we can see strengthening the American dollar and
raising interest rates has been no more effective than
weakening the dollar and lowering interest rates.
Protectionism has not been successful. The EEC economic
policies simply resulted in mountains of butter, sugar and
meat due to artificially high prices and costly subsidies.
25. Yet we have had boom times in the world's economy. The
1960's and 1970's were definitely prosperous years for most
of the world. Even the poorest and least efficient
economies suffered less because prosperous countries were
prepared to give them aid. We must also remember that we
did come out of the massive slump after the First World War.
We must have done something right to be able to prosper
after a period of economic slump. If we study carefully
the situation before and during the prosperous years, there
is bound to be something which happened to help the recovery
and the subsequent boom.
Ladies and Gentlemen,
26. Situations have changed, of course. The solutions of
yesteryear cannot be the solutions of today. But there must
be some lessons from the historical past. Human ingenuity
is such that we cannot just be fatalistic and accept the
theory of 50 year cycles.
27. But how many of the people who determine economic
policies which affect the world really study the depression
of the late twenties and the subsequent recovery?. Is war
the answer? But we know that the economies of all
belligerents suffered as a result of both the first and the
second World Wars.
28. Somewhere in the prosperous years there is a solution
waiting to be found. And it is more likely to be found if
the North can sit with the South and listen to each other.
If the Group of Seven had heard Malaysias views they would
not have forced the value of the Yen up so much that
suddenly our external debt is doubled.
29. I am not saying that the mere listening to the views of
the developing countries would result in a foolproof plan
for economic recovery. Some countries of the South are
possibly irresponsible and extreme. But the participation of
a small representation from the South would help in
highlighting the effect of any policy on the South, and the
subsequent effect on the North if the South prospers or it
is impoverished.
Ladies and Gentlemen,
30. At the beginning of this talk I said something about
not learning from history, implying that the situation now
is like that during the slump of the late twenties. The
fact is, of course, the present situation is not identical
with the late twenties. We do not have a full-blown
depression now. We have a very odd mixture of prosperity
amidst poverty or poverty amidst prosperity within
countries, between countries, and between regions.
31. We see for example economic growth taking place while
unemployment increases. We see countries with massive trade
surpluses yet with high cost of living and high unemployment
rate. Some countries accumulate huge reserves trading with
countries with huge deficits. Where normally prosperity in
developed countries have beneficial effects on poor
countries, now we see rich countries getting richer at the
expense of poor commodity producing countries.
32. In the developed countries, stock market prices go
through the ceiling even as record numbers of banks go
through the floor. Companies make little profit but their
shares go up in value quite independently. Billions of
dollars boost the value of junk bonds while real business
suffer because they are considered not creditworthy.
33. Obviously this is not a slump. It is a case of the
world's economy going haywire. We are in a madhouse. The
need is for sanity. Confrontationism, isolationism or
protectionism are about as helpful as a hole in the head.
More than at any other time we need to sit down and talk to
each other as sane people.
34. Democracy is wonderful. Leaders should be elected by
the people, or at least the majority of the people. But
this need to be popular has resulted in some Governments
losing their political will. European leaders, for example,
have little time for economic principles or historical
lessons. They are busy pandering to the views of the farmers
who are illiterate in economics or history, but whose votes
determine whether the politicians get seats or not. And so,
despite their better judgement they subsidise and protect
farmers; thus giving rise to the butter, meat and sugar
mountains.
35. Democracy is great and we must have it even if it kills
us. I am reminded of the American who said, "I don't agree
with what you said, but I will die to defend your right to
say it" or words to that effect. It is very noble but if
everyone dies, including the person you disagree with, what
is the benefit to be derived? A dead man who is free to
speak is not much use because he cannot exercise that
freedom anyway.
36. We must have democracy. But we must define its limits.
We cannot allow democracy to kill us. If democracy prevents
leaders from doing the right thing for the good of mankind,
then let us redefine it. If we are to save this world from
the economic chaos we are in, leaders must be able to free
themselves from the pressure of the need to be popular and
take the necessary action.
37. This is heresy, of course. But let us remember that
the sacrosanct ideologies we believe in today are the
heresies of yesterday.
Ladies and Gentlemen,
38. Coming from the developing world, I cannot help but be
biased in favour of the Third World. But the fact remains
that we are interdepent, now more than ever before. Just as
the economic performance of the rich North will affect the
performance of the South, so will the prosperity or poverty
in the South affect the North. If I talk for and of the
South, interdependence implies that I am also talking for
and of the North.
39. As Hodson said, "In general the prices of raw produce
fell more rapidly than those of goods at the later stages of
manufacture, a fact which temporarily assisted industrial
countries ....... but which could not do so for long, since
their market abroad (in the raw material producing
countries) were being concurrently impoverished". What
Hodson means is that if there is a slump in the Third World,
sooner or later there will be a slump in the developed
countries.
40. There is a slump in most of the Third World countries
now. The question is, will there be a slump in the
developed countries next year or the year after -- in other
words will there be a Global Recession in 1988 or after?
If we believe in the 50-year cycle, then there must be a
recession soon. But if we don't, then it is imperative that
we -- and here I mean not just the economists but also the
world leaders -- must learn the lessons of past slumps and
booms and devise ways of avoiding the impending recession.
The will to do this must be exhibited and we must get away
from the pressure exerted by narrow sectarian interests
even if it means ignoring some of the current
interpretations of democratic rights.
41. The present recessionary economic situation is man-made
and it must be unmade by man.
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