Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : TOKYO, JAPAN
Tarikh/Date : 02/06/98
Tajuk/Title : THE FIFTH SYMPOSIUM OF THE
INSTITUTE FOR INTERNATIONAL
MONETARY AFFAIRS
" REVITALISATION OF JAPANESE AND EAST ASIAN ECONOMIES "
Let me begin by noting what a difference a year makes.
2. Last year, at this time, there was some concern
about the Thai economy, which had successfully repulsed
two attacks on its currency. But there was still much
talk about `the East Asian Miracle', a characterisation
invented, if I am not mistaken, in the impressionable
West. All of us, we thought, were `not Thailand', a
unique, special case.
3. Many foreigners -- including the most tough, hard-
nosed personalities and organisations -- told us the most
flattering things, which strengthened us in our
conviction that our `fundamentals' were very strong
indeed.
4. The annual World Competitiveness Yearbook, issued by
the prestigious International Institute for Management
Development (IMD) told Malaysians, for example, that we
had some problems here and there, some quite serious. But
on the basis of what it called the `overall evaluation of
the strength of the domestic economy at the macro level',
Malaysia was the second most competitive economy in the
world. We were in the best of company. At number one
was the United States. At number three was Singapore.
At number four was Luxembourg.
5. Most of the other economies which have been so
severely hit since the IMD issued its 1997 report also
scored highly according to the 244 criteria, or
fundamental factors, that were used. I wait with great
interest their annual report for 1998 which should be
issued later this month.
6. I hope the IMD will stand by its analysis of the
fundamentals and not change its analysis of the 200-plus
fundamentals, which so convincingly argue that the
turmoil of the last year are not the result of
fundamentals but of forces that have very little to do
with the economic fundamentals. I hope the IMD will not
alter the facts so that they will fit into some sacred
truth, some hallowed theology.
7. It is so easy for some analysts to slip into the
view that currency movements are purely the function of
fundamentals. The market fundamentalists tell us this is
so with incredibly sincere conviction, however loudly the
speculators chuckle all the way to the bank. Since,
according to the theology, currencies cannot fall unless
the fundamentals are weak, and since the Asian currencies
have fallen so dramatically, then ipso facto the
fundamentals must be weak even if you have said that they
were strong immediately before. The truth is that the
currencies plummeted even though our fundamentals were
very strong. The truth is that, ipso facto, the fall of
our currencies were not a function of our basic
fundamentals.
8. The IMD was not the only one with such a good
impression of my country one year ago. In mid June, 1997
-- in fact, on June 17, 1997 -- just two weeks before the
July 2 collapse of the Thai Baht which resulted in a
horrendous collapse of the regional currencies, Mr Michel
Camdessus, Managing Director of the IMF was handing
bouquets to Malaysia for our sound economic management,
for our superb economic fundamentals. He told an
international conference on Global Capital Flows in Los
Angeles: and I quote `Malaysia is a good example of a
country where the authorities are well aware of the
challenges of managing the pressures that result from
high growth and of maintaining a sound financial system
amid substantial capital flows and a booming property
market.'
9. He noted: `Over the last year, output growth has
moderated to a more sustainable rate, and inflation has
remained low. The current account deficit -- which is
primarily the result of strong investment spending -- has
narrowed substantially. The increase in the fiscal
surplus targeted for this year is expected to make an
important contribution towards consolidating these
achievements'.
10. There had been complaints that we were growing too
fast. So we brought our growth rate down very
substantially. There had been complaints that our
current account deficit was too high. So we halved it,
to the obvious delight of the IMF, which rightly noted
that in any case our high current account deficit was not
because of excessive consumption but was the result, in
Mr. Camdessus' words, `of strong investment spending'.
11. You may say there is no need for more testimonials.
But how about the banking and financial sector? If you
can believe Mr Camdessus, again I quote: `The Malaysian
authorities have also emphasised maintaining high
standards of bank soundness. Non-performing loan ratios
of financial institutions have fallen markedly in recent
years; risk-weighted capital ratios are above Basle
recommendations'.
12. You might just wish to note that in 1988, the non-
performing loans in the Malaysian banking system had
stood at 32.5 percent. In June 1997, just eight years
later, as luck and a tremendous amount of sweat would
have it, our non-performing loans stood at a historic low
of 3.5 percent. This is as dramatic a performance as
you can get. Perhaps this was why the IMF was so
impressed and so complimentary.
13. Today, there are all sorts of talks about
transparency. I agree that transparency is important.
But I suspect that when so many complain about a lack of
transparency, what they are complaining about is simply
their own lack of knowledge, which is not so surprising
because five years ago or even five months ago some of
the younger money movers might have thought that Malaysia
was somewhere in the Himalayas. As for the transparency
of the Malaysian financial system, let Mr Camdessus speak
for Malaysia. In the same Los Angeles speech, Mr
Camdessus said: `In an effort to increase the flow of
comprehensive up-to-date and reliable information to
markets, Malaysia was also among the first to subscribe
to the IMF's Special Data Dissemination Standard'.
14. So, ladies and gentlemen, on June 17, 1997, just two
weeks before the currency hurricane struck, the IMF gave
Malaysia not just a clean bill of health but the IMF in
fact praised Malaysia's economic fundamentals. The IMF
had the best of things to say about our economic
management. And the IMF commended Malaysia to
investors as an economy that `justifies the confidence of
the markets'.
15. I cite all this in order to address all those
extremist `market fundamentalists' who believe that the
market is always right and that the reason why so many of
us are in desperate straits today is because we
mismanaged our economies and because all our
`fundamentals' were rotten to the core.
16. If all our fundamentals were wrong, why were the
foreign investors so eager and so foolish as to pour
billions upon billions of investment dollars in our
region? Of course all the international banks kept on
lowering interest rates in order to persuade us to borrow
even when we were without need for additional funds.
Obviously they, as the definitive market, had a lot of
confidence in Malaysia, its economic management and its
future.
17. If our fundamentals were rotten to the core, why did
all the clever analysts not say so? Why is it that not a
single economist, financial analyst or economic
soothsayer has dared to come out to say that he or she
had predicted what has happened? Not a single one. And
yet these same people continue to predict, to be believed
in and to influence the market. If it is wrong for
insiders to leak information which can affect share
prices, why is it not wrong for forecasters to forecast
something which influences the market to their advantage.
18. Professor Paul Krugman has for years been arguing
that the East Asian miracle was not a miracle at all and
was bound to hit a brick wall. Many Western journalists
credit him with forecasting the Asian Crash of '97. He
has in fact publicly stated that he did no such thing;
that he could not in his wildest dreams have imagined
anything like it. In Hong Kong on March 26 this year,
Professor Krugman admitted: `I was 90 percent wrong about
Asia's future. The only consolation is that everyone
else was 150 percent wrong'.
19. The analysts and all those who are obviously
cleverer than us simple elected leaders must know that we
have had not ten years but forty years of economic
growth unparalleled in human history. Since some of them
are young enough to be our grand children, perhaps we
should remind them that many of the things that they
complain about and which they say are the reasons why we
are in such difficulties today were things that we
ourselves started complaining about when we ourselves
were their age. So many of the so-called fundamentals
which are now listed as the main causes of the currency
and financial turmoil of the last 12 months --
corruption, monopoly, crony capitalism, inadequate human
resources, very far from perfect banking systems and
practices -- have always been with us. Yet we were able
to grow faster and longer than anyone before in human
history.
20. All of Asia must obviously work on our numerous
weaknesses, to get rid of the stones around our necks and
the chains on our feet. We must do this not because
they are the causes of our economic turmoil but because
they are bad and they weaken our capacity to compete and
to succeed. We must do this because we cannot allow
corruptive influences to determine who supplies us with
what. But the true causes of why our currency plummeted
and why we are facing an economic crisis must be sought
elsewhere.
21. Our meeting today is not focused on the causes. It
is also not focused on the consequences, the terrible
consequences. Our task is to focus on the remedies, the
things which must be done if we are to re-vitalise
ourselves, if we are to ensure the re-vitalisation of all
of Asia. So let me concentrate on the things that must
be done in order to ensure the quickest, most healthy and
sustainable re-vitalisation.
22. Quite obviously, there is a need for short term
imperatives as well as medium term measures and longer
term strategies. At this stage, although we must not
neglect the medium and longer term, we must remember the
admonition of Keynes that in the long run we are all
dead. Seldom has the short term been as important. This
is why I speak of the `short run imperatives'.
23. Quite obviously also, there are three principal
theatres of operation:
* the things that we should aspire to achieve
internationally;
* the things that we should try to achieve
regionally; and
* the things that we must achieve at home,
within the confines of our own borders.
24. Given the nature of this meeting, I will concentrate
on only a few areas. I will focus on some issues that
should be of primary interest to this Institute for
International Monetary Affairs and its strategic
intellectual constituency.
25. At the international level, I believe that the time
has come to deal with the entire issue of reform of the
international financial system to ensure currency
stability and to contain the activities of those who buy
and sell money for no other purpose than to make profits.
Let me say once again that currencies need to be changed
if there is going to be international trade. That is why
the leaders of the Western nations met to draw up the
Bretton Woods Agreement, the purpose of which was to
agree on a mechanism for determining the value of one
currency against another. The system worked very well
and enabled the countries bankrupted by the war not only
to recover but to prosper as well. Of course the
Marshall Plan and the opening up of the American market
to Japan played a role. But if there had been no system
for stabilising currency values, all the plans in the
world would not have succeeded.
26. But then some countries in the West decided to
devalue their currencies in order to enhance
competitiveness. Very quickly a currency market emerged
which took advantage of the mildly unstable exchange
rate. True speculation took place because the funds were
relatively small and depended on intelligent guesswork as
to the movements of the exchange rates.
27. But soon the funds grew huge and were in fact able
to move the exchange rates through their interventions.
The famous herd instincts replaced economic fundamentals.
With the invention of arbitrage and futures trading, the
need for exchange rate stability for the purpose of
trading gave way to the desire of currency traders to
make massive amounts of money in the shortest possible
time. An artificial system of devaluation and revaluation
of currencies was devised which enabled currencies to be
appreciated or depreciated literally within seconds. Thus
the Indonesian Rupiah was at one time devalued by more
than 600 percent, then in the space of a few days
recovered by 200 percent. It is still moving up and down
by 100 percent to 200 percent in the space of one day or
even half a day.
28. Mr Volcker in a speech in Hong Kong stated "An
exchange rate system that produces a 60 percent swing in
the yen/dollar rate over a period of 18 months cannot
reflect the fundamentals in any sensible sense". Well
the Indonesian Rupiah moved 600 percent in the space of
five months. Can it be that all the assets of that huge
country with 220 million hardworking people are suddenly
worth only one-sixth of its previous value? What indeed
is the worth of a nation if suddenly someone can devalue
and even bankrupt it?
29. If currencies can be made useless so easily then,
what is the point in a country issuing its own money? We
should go back to barter trading.
30. It is said that the currency will strengthen if
confidence is restored. But there is no certainty as to
what will bring back confidence. Who is monitoring what
and who determines whether confidence should return or
not. There is a lot of talk about market forces. But
who constitute market forces and how do market forces
determine what value to give to each act of a Government
or an economy under attack.
31. All in all, the present system, if there is a system
at all, is messy, unreliable and destructive. Can world
trade depend on these shadowy market forces whose methods
are not known to anyone except themselves? True, through
hedging the effect of the fluctuation in the exchange
rates can be minimised. But again, this hedging profits
only the hedge funds, adding to the cost of goods and
services. If exchange rates are minimally volatile,
hedging and the profits for the hedge funds, would not be
necessary at all.
32. There is nothing to indicate the need for currency
trading other than the vast profits that can be made by
currency traders. On the other hand we now know the
extent of the damage to the economies of whole countries
and regions that currency trading can inflict.
33. The excuse that currency trading provides market
forces with the means to discipline Governments is
totally unacceptable.
34. Currency traders thrive on unstable currency. It is
ridiculous to suggest that they would discipline
Governments and reward them with exchange rate stability
when such stability will deprive the traders of the
opportunities to make money. Governments do need to be
disciplined but the international financial regime must
be bankrupt of ideas if it cannot find other ways which
are less desructive to discipline Governments.
35. Everything points to the need for an international
financial system which will bring about stability of
exchange rates among other things. Admittedly we cannot
bring back the Gold Standard or the Bretton Woods system.
It would be a sad commentary on the ability of the
world's financial and economic experts if they cannot
come up with proposals on a new international financial
system. Their habit of merely trying to explain the
present turmoil as being due to bad practices by the
Governments concerned sounds too much like an apology and
a defence of currency traders. Money does not know
whether a Government is good or bad and react by
adjusting their rates of exchange. Somebody is doing
that and is evidently making a lot of profit. Do we need
to protect these people's interest at the expense of
world trade?
36. Fixed exchange rate is no longer possible or
realistic. Obviously the political, economic and social
performance of a country will have an effect on the value
of its currency. If a country is having a revolution it
is likely that its currency would be less acceptable and
therefore should be devalued. As for the economy there
are various indices which can be given points indicating
the strength of the economy and therefore the currency.
It is not beyond the capacity of the world's great
economists to devise a measurement of the economic
performance of a country using the political, economic
and social indicators and then determine the relative
values of currencies. The currency traders can still
speculate but whether they buy or sell should not affect
the value of a currency.
37. This is of course only a suggestion. The financial
experts and the economists may laugh but it will stop the
currency traders from laughing all the way to their
banks.
38. There is a belief that when currency depreciates the
goods produced by the country concerned become cheaper
and more competitive in the world market. It may do so
but the reduction in cost is always far less than the
percentage of depreciation. This is because all imported
inputs will cost more in local currency and will negate
the devaluation of the currency. Imported inflation will
push wages and other domestic costs up reducing further
the advantage of currency depreciation. In the end the
lowered cost is hardly detectable. The products of
countries with a depreciated currency are no more
competitive than they were before. In at least one case
the capacity to import foreign inputs is lost altogether
because of the extreme depreciation of the currency.
39. Devaluation or revaluation are not the answers to
the world's economic problem. Improvements in
productivity are and such improvements can be achieved
through greater skills, better management and continuous
technological improvements.
40. Nations depend on different factors for competitive
advantage. Low labour cost is one, but capital,
management skills and technology are more important.
While those with capital, technology and management
skills are loath to share these advantages freely, they
are demanding that low labour cost should be nullified by
raising wages.
41. We are moving inexorably towards globalisation. Like
the proposal to link human rights, the environment and
labour practices to trade, globalisation, liberalisation
and deregulation are ideas which originate in the rich
countries ostensibly in order to enrich the world. But
so far the advantages seem to accrue only to the rich.
True the poor countries can gain access to the markets of
the rich, but then they do not have many things to export
to these markets. The raw materials which they produce
are controlled by commodity markets in the rich
countries. The terms of trade for these keep on
deteriorating.
42. In preparation for globalisation the pace of mergers
and acquisitions have been stepped up. Super large banks
and corporations are being formed in the developed
countries which will dominate the world. There will be
no room for the small companies in the poor countries to
exist, much less to expand and spread into the rich
markets now opened to them.
43. Perhaps the peoples in the developing countries
should be happy because they will be served by the most
efficient and the biggest companies of the world. They
will have the choice of three giant banks, four makes of
cars, five hotel chains, ten fast food chains etc. But
it is going to be a dull world and I suspect some people
would be stupidly nationalistic and feel unhappy without
their poor quality national brands.
44. In a globalised world should there be national
Governments? We have seen that market forces can change
Governments. What is the need for national elections if
the results have to be approved by the market?
45. These are some of the international issues which
have either to be attended to immediately or at least
debated seriously. Far too often decisions on these
issues are far from democratic, yet the same people
insist on democracy for everyone. It is about time that
international democracy be recognised as being as
important as national democracy.
46. Whether we acknowledge it or not East Asia is a
region, a closely linked region. It is not an accident
that the fastest growing economies are found in this
region. Nor is it an accident that the most serious
economic crisis the world has seen since the Great
Depression involves this region. The fact is that this
region grew together because we worked together. It is
reasonable to expect us to get out of our present
economic morass by working together.
47. Japan is the richest depressed country in the world.
The capacity to grow and to be the locomotive of growth
for the region is still there in Japan. You need to
clean up the bad practices of the past and largely you
have done so. Your Government, your businessmen and your
people should now rehabilitate your confidence and
rebuild your economy quickly.
48. You have the capital, the technology, the skills and
everything else needed to grow your economy. You should
employ all these assets and provide the lead that the
region needs. You should invest in the countries of East
Asia as you did before. You should buy their products in
order to enrich them. You should help in making East
Asia a market for itself and the world.
49. In Malaysia we are still looking East. Many have
asked us why, when it is so obvious that Japan has
failed. We admit that in several areas Japan has failed.
But even failures provide lessons for us. There are
still many things we can learn from you. Your
exceptional skills, your technology, your discipline and
work ethics are still worth copying.
50. What Malaysia and the rest of the region needs is a
revival of Japanese investments, to create jobs, to
enrich the people, stimulate economic growth and
incidentally to create good markets for Japan. Some of
the money the Japanese Government is pumping into your
economy could very well be pumped into the troubled
economies of East Asia. As before when Japanese
invesments created prosperity for East Asia and in turn
provided good markets for Japan's products, Japanese
money to revive East Asian economies would benefit these
countries and Japan. Japan has the means to resuscitate
East Asia, if only it thinks less about what others will
say if Japan frustrates them.
51. As for Malaysia, the only way we can overcome the
instability in the Exchange Rate and to rebuild our
economy, is to do away with currency in trade as much as
possible. We will revert to bartering. We would want to
balance our trade with countries which have a trade
surplus with us and Japan is the country with the biggest
trade surplus. Where we have to pay we will pay in the
currency of the trading partner concerned.
52. Regionally we have agreed with the ASEAN countries
that trade between us should be enhanced as the
devaluation of our currencies is approximately at the
same rate. We will also use our own currencies and
balance our trade. This arrangement will probably be
permanent, unless of course a new international financial
system is put in place which will reduce violent
fluctuations of exchange rate.
53. Malaysia intends to revitalise its own economy
through several local measures. It will take note of the
various criticisms directed at it by market forces and
will study their alleged effect on Malaysian economy
including the recent devaluation of the Ringgit.
54. I have tried to itemise the factors which need to be
corrected in order to revitalise the economies of Japan
and East Asia. I am no expert in this area but I have
had some success in my own country. I think I know what
I am talking about more than the theorists who had never
run any country, much less help it grow. Left to
themselves the economies of East Asia will grow again.
But the chances are they will never be left to
themselves. And so the revitalisation will not be easy.
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