Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : THE PALACE OF THE GOLDEN HORSES,
SG. BESI, KUALA LUMPUR
Tarikh/Date : 05/10/98
Tajuk/Title : THE 6TH PRIME MINISTERIAL LECTURE
OF THE HARVARD CLUB
"MANAGEMENT OF AN ECONOMY IN CRISIS"
I am happy to be back for this year's Prime
Ministerial Lecture of the Harvard Club. Harvard of
course is the seat of liberalism. It is where the
struggle against the role of Governments in the market
has been carried out. But I would like to maintain that
Governments are more than just a necessary evil. As I
see it, Governments create the framework, without which
tolerably free markets cannot survive. In addition,
Governments deal with the market's unwanted "excesses" in
order to ensure that society's interest is protected; to
ensure that the impact of what academic economists call
"externalities" arising from the blind pursuit of
individual self-interest does not collectively lead to
panic and contagion; to ensure that the happiness of the
greatest number always prevails. Though Adam Smith talks
of the "invisible hand", it must be remembered that he is
also aware of the crucial significance of the state. I
believe that Adam Smith tried to establish in his work a
balance between the market and Government. Indeed, he
had clearly indicated his willingness to depart from his
laissez faire strategy in the event there were compelling
reasons for Government regulation, as in the case of
banking, currency and even, interest rates. Smith also
argued that by providing defence, social justice and
infrastructure, Governments can create the preconditions
for a market economy and for "that universal opulence
which extends itself to the lowest ranks of the people".
Nor did Smith believe that wealth was all that mattered.
Quite the opposite. He worked to create a society that
would be more stable and more civil, one that tempered
"people's worst passions" for greed and gain. Greater
wealth, by relieving suffering, enabled people to be more
"benevolent". Clearly, Smith's emphasis on the positive
role of government in the "Wealth of Nations" has often
been down played. In this sense, the spirit of Adam
Smith embedded in his lofty vision of a decent society is
not dissimilar with Malaysia's own long term goals. The
market mechanism is but one means to that end. Government
is the other. Not unlike Smith's world, we need to
constantly probe for the best mix of government and the
market so that one does not get the better of the other.
I believe that the markets, and here I do not mean a few
ultra-rich capitalists in a developed country, when well
regulated and prudently supervised, whether domestically
or globally, can be an enormous force for social good.
Much of our own Vision 2020 is dependent upon the
exertions and creative energies of individuals and
enterprises.
2. More than a year has passed since the Asian
financial crisis first began. To be fair, no one at the
beginning envisaged that what started as an isolated
situation in Thailand could be the turmoil that now
engulfs not just most of Asia but Russia and many parts
of Latin America as well, and possibly the world as
recent events seem to indicate. In US dollar terms,
indications are that world output could fall by 2-3
percent in 1998, reflecting the impact of the Russian and
East Asian turmoils, and pressuring debtors and corporate
earnings as well as living standards world-wide. As we
enter the final quarter of 1998, the risks of global
deflation seems more real than ever. Neither the IMF nor
the G-7 have been able to deal effectively with the twin
problems of the artificially strong dollar and the large
and spreading manipulated devaluations. For the affected
nations, the combination of massive short term capital
flight, stock market collapses, sharp devaluations, high
interest rates and austerity programmes had led to a
tragic destruction of hard-earned wealth and a severe
contraction of living standards. Certainly we do not see
market forces creating Smith's "universal opulence which
extends itself to the lowest ranks of the people". In a
world of 6 billion people only about 1000 currency
traders and a few rich investors in their funds seem to
enrich themselves further through the unbridled
manipulation of the free market.
3. The standard IMF prescription for all economic ills
of nations -- high interest rates, balanced budget and
current external payments adjustment -- are shortsighted
and lacking in consideration for the great differences in
the economies of different countries. To these were
added banking reforms calculated to increase failure
rates. To the IMF the means matters while the results
are regarded not just as secondary but quite irrelevant.
Thus after implementing the IMF prescriptions the
economic downturn of their proteges worsened to the point
where recovery may take decades, and that too if some of
the medicine is withdrawn. The IMF has now admitted that
it had made a "slight mistake" in dealing with the Asian
economies. It may be slight for the IMF but the cost to
the countries of Asia is horrendous. Trillions of
dollars of hard-earned assets and economic capacities
have been destroyed, lost forever. In fact lives have
been lost, Governments have fallen and racial animosities
intensified. The partnership between neighbouring
countries has been undermined and regions destabilised.
Clearly the result of the small mistake by the IMF is
anything but small. It has destroyed the work of decades
of a huge chunk of the world.
4. The abuse of the free market by a few capitalists in
the developed countries may have earned them quick and
mind-boggling profits amounting to billions but the
destruction they wreak on their victims is far greater
than what they make for themselves. There is a massive
nett loss for so little gain on the part of the
capitalist manipulators.
5. It may be that their objective is more than just
making profits for themselves. It may be that their
mission is to reform the way Governments of Asia manage
their economy. But even if this is their objective the
cost is indefensible, even unjust. There must be better
ways to promote an economic system than to destroy whole
countries and regions and to cause untold misery for
millions of people.
6. The so-called creative destruction indulged by the
powerful Western countries is not creative at all.
Creative destruction is nothing more than an attempt to
explain away a destructive self-serving act, an attempt
to justify the unjustifiable.
7. The Governments of East Asia may not be the best of
Governments. There is no doubt that there are corrupt
practices. But can America and Europe claim that they
are totally free of Governmental corruption, or crony
capitalism, of lack of transparency? Besides, the level
of corruption of East Asian countries has clearly not
gotten in the way of their economic and social
development. Unlike developing countries in other
regions, East Asian countries had all grown at a rate
well above that of the developed countries of the West.
And their growth can be shown to have benefited their
people as a whole. Only the blind and the prejudiced
would insist that only a few cronies and family members
benefited.
8. Per capita incomes had grown by leaps and bounds,
standards of living had improved for all, employment
rates were high, a huge middle-class had emerged, there
was better housing and ownership of motorcars, and more
money for leisure and even for investments in the booming
economies. Certainly the people as a whole were well-
fed and well-clothed, living in better houses. Contrast
this with the recent picture of a woman boiling a cat for
food, or the food-riots, the return to searching for food
in rubbish dumps.
9. Obviously the devaluation of the currencies and
shares of these economies by the West has resulted in
destroying everything that these supposedly corrupt Asian
Governments had built. From being economic tigers they
are now more impoverished than even the least developed
countries. Decades of hard work by their Governments and
their people to develop their countries have been
destroyed. Their development has been pushed back 20-30
years.
10. Can anyone in his right mind say that the present
situation of these countries is better than before they
were hit by the economic turmoil? Even if the
destruction is intended to change the practices of these
Governments and these practices will lead to a healthier
economic recovery, there can be no justifying the massive
damage that has been wrought. It is certain that
economic recovery if it happens at all will take a very
long time and will cause prolonged sufferings by their
people. Only the distorted in mind will be able to
justify the destruction for a very uncertain recovery.
11. The Western media and their economic and other
experts seem to believe that Asian Governments must all
be corrupt and incompetent. Whatever success that they
may achieve in developing and enriching their countries
must be due to criminal acts involving corruption,
nepotism and crony capitalism. That such practices on a
scale implied will certainly prevent economic development
from becoming successful is ignored. That in fact the
benefits of economic development are clearly enjoyed by
the majority of the people of these Asian nations is
brushed aside. Consistently and repeatedly any mention
of Asian Governments must be accompanied by derogatory
remarks about their corruption etc. Clearly the view
taken by the Western media is racist. But such is their
power that no one dares to state this obvious fact.
Malaysia's New Economic Policy designed to reduce the
economic and social disparities between races and to
achieve a harmonious society is also regarded as cronyism
by Western economists and their press. Obviously they
want to perpetuate economic inequalities and racial
animosities. That this will result in instabilities and
poor development is perhaps their aim. Then they would
be saved from having to compete with these countries.
12. Asian values and Asian ways of doing business are
different from Western ways. That does not mean that
Asian ways and values must be inferior or wrong. Thus
with high savings Asian businesses can borrow much more.
What are savings for if they are not to be put to use
through lending. The important thing is whether the
loans are serviced or repaid. Apparently they were. Such
was their servicing that foreign banks rushed to offer
very attractive terms for them to borrow.
13. But when they borrowed from abroad, the Asians did
not expect that they could have their capacities to repay
foreign loans undercut. When the currency traders
deliberately devalued Asian currencies, the Asian
borrowers found themselves owing more than they borrowed.
And so they could not repay or even service their foreign
loans. Eventually they could not service even local
loans. Is this their fault? Is this the fault of the
Asian way of doing business?
14. High loans to equity ratio are not bad for business
if the projected cash-flow allows the borrowers to
service and repay the loans. The Asian borrowers fully
intended to repay what they borrowed. And indeed they
could for their expected cash-flow would allow them to do
so. However when their currencies are devalued they
would need much more of their own currencies to repay.
With economic recession forced upon them, there is no way
they can make enough money to service their debts.
15. Are the Asians wrong in having high gearing? They
are not. What is wrong is the undermining of the value
of their currencies by the greedy currency traders. Any
business however good will fail if suddenly their
borrowings are increased well above tolerable levels.
16. Matters are made worse when interest rates are
increased and credit lines are withdrawn. Yet the IMF
insists that interest rates must be raised and a tight
money policy imposed in order to help recovery. Far from
helping, the IMF regime not only makes loan repayment
higher than projected but earnings from business actually
diminished.
17. Another common Asian practice is to give life-time
employment in exchange for loyalty to the business entity
concerned. But ethnic Europeans believe in dismissing
employees whenever businesses is bad. The employees have
to be taken care of by the Government through
unemployment benefits. This is the safety net that
Western sociologists boast about. Their people consider
this as their right, as their entitlement. As a result a
large number of workers prefer not to work, but to be on
unemployment allowance instead. They believe that the
Government is paying their allowance but in fact the
other workers and the consumers have to pay their
allowance through taxes and higher prices for goods and
services.
18. To remain competitive the developed countries try to
force their competitors in the developing countries to
raise wages and to pay unemployment allowance. Of course
their explanation is that they care for the unemployed in
the developing countries. The fact that life time
employment obviates the necessity for costly safety nets
is ignored.
19. The Asian system of lifetime employment and low
wages is in fact superior. When workers have a lifetime
income what need is there for employment benefits? When
taxes on incomes are low why is there a need to pay high
wages? The fact is that the Western countries are stuck
with their uneconomical system and want others to be
similarly burdened.
20. But the Europeans are not about to leave Asians,
their values and their systems alone even though these
have proven effective in developing their economies and
have rendered them competitive against the West. The
Asians must be forced to accept Western methods so as to
render them less successful and less competitive. When
attempts to use GATT and the WTO failed, the West found
an effective way through impoverishing the Asian
countries by devaluing their currencies.
21. The West vehemently deny that they conspired to
prevent the Asian countries from developing and catching
up with them. They swear that it is the Asian
Governments and their cronyism, nepotism etc which caused
a loss of confidence on the part of the Western
capitalists, caused them to withdraw their money and
precipitate an economic and financial crisis. But the
fact is that where before they were unable to get the
Asian countries to accept their practices, now, through
the impoverishment of these countries and forcing them to
seek IMF help, the Asian countries have been forced to
adopt the effete and burdensome Western concepts and
practices. More than that the Asian countries have been
forced to open up their markets and to allow Western
takeovers of their businesses and banks.
22. It is not even true that opening up their own
countries is something the ethnic Europeans believe in
and practice. Obstacles have always been put in the way
of Asian businesses wishing to participate in their
economies or taking over their businesses. In one
classic case, a club bought by Asians refuse to allow
Asians to use the facilities of the club. And many brand
name ethnic-European companies were prevented from being
sold to Asians.
23. The so-called loss of confidence resulting in
withdrawal of capital and impoverishing the Asian
countries are not due to the Asian values or practices
but are motivated by Western capitalist greed and a
desire to dominate the Asians and stop them from
developing. The ethnic Europeans will deny this of
course but the fact is that today Asian countries have
become economically emasculated and are definitely being
dominated by the Europeans.
24. Malaysia has been independent only slightly more
than 40 years. Whatever may be the way we achieved this
independence, we still value that independence highly.
25. Our development since independence has been largely
due to our own efforts. We have not been dependent on
handouts from anyone. True our industrialisation
depended to some extent on direct foreign investments.
But we paid for this. We paid through foregoing taxes,
something which we impose upon our people. We paid by
actually providing the larger proportion of the capital
needed for these investments. We accepted low pay to
ensure the profitability of these foreign-owned
industries. We accepted transfer pricing because of the
threat of losing these industries to other low-cost
countries. Even after the pioneer status period is over
hardly any foreign companies pay taxes on their profits.
They somehow manage not to make profits.
26. We are not about to reject direct foreign long term
investment in productive capacities. We will still
welcome them. But let us be truthful. Malaysia pays a
high price for foreign direct investments. With our
shortage of labour much of the money gets expatriated,
leaving us with very little by way of earnings.
27. If Malaysia tends to be prickly about things it is
because we have reasons to be. If Malaysia tends to do
things on its own it is because we have learnt that we
can rely only on ourselves, our own efforts.
28. And so after appealing for international action to
stop the destructive currency trade and short term
investment in the stock market and getting no response,
Malaysia decided to take the bull by the horns and work
out our own solution.
29. When we decided to internalise our currency we were
not doing something unusual. Control of the flow of
money across borders is common even now among the
developed countries. Malaysians have been arrested and
charged in developed countries for failing to declare the
money they carried with them while crossing certain
borders. For the greatest country in the world there are
strict regulations about how much money can be taken in
and out of the country.
30. Malaysia is more liberal than most countries in this
world. You could take any amount of money in and out of
the country without having to fill forms or declaring
anything. It is this excessive freedom which has
resulted in our money flowing out of the country to be
used by currency traders to devalue the currency. Foreign
countries actually offer attractive interest rate in
order to lure the Ringgit, leaving our banks without
funds.
31. To keep the money in the country we tried offering
higher interest rates. But this was not effective at
all. In the meantime the high interest and low liquidity
rendered our companies incapable of servicing debts to
continue to do business, to make any profit. Their
shares plummeted making them even less able to meet
margin calls. Eventually they must fail.
32. They were ripe for plucking by foreigners. Between
the rock-bottom share prices and the devalued Ringgit,
foreigners could literally buy Malaysian companies for a
song. But the Government remained insistent that foreign
shares in local companies be limited to a certain
percentage only. And so the pressure against the
currency and the share prices was kept up so as to force
us to seek IMF help and be subjected to market-opening
conditions imposed by it.
33. It is to avoid this that we decided to enforce
exchange control and to prevent Malaysian shares from
being traded in illegal markets. This way the
manipulation by the so-called "market forces" would be
stopped.
34. By legalising the Ringgit only within Malaysian
borders the Government regained control of the exchange
rate. Today the exchange rate against the US dollar is
fixed at RM3.80. That with other currencies depend on
their cross rates against the US dollar. At the same
time the abuse of the provision for nominees was stopped
by insisting that all shares must be registered with the
KLSE in the names of the beneficial owners. No
transaction by the beneficial owners outside the KLSE
would be recognised.
35. With the Ringgit rendered valueless outside
Malaysia, off-shore Ringgit has been forced to return and
circulate within the country. Much of the liquidity
problem has now been resolved as billions of off-shore
Ringgits return.
36. Interest rates can now be lowered to reasonable
levels without the Ringgit and the share market being
attacked by currency traders and stock-market raiders.
Businesses which could not service loans and could not
borrow because of high interest rates, can now service
loans from their cash-flows and budget with confidence
for the future.
37. Businesses had suffered when Bank Negara reduced the
period for unserviced loans to be classified as Non-
Performing from six months to three months. Even in
normal times this would have increased the number of Non-
Performing Loans (NPL). But at a time when the economy
was being forced into recession and share prices as well
as other collaterals have been devalued, the reduction in
the period by half increased the number of NPL
considerably. Good profitable companies faced with
inflated costs and an impoverished market just failed.
Additionally Bank Negara insisted that if a company has a
non-performing loan with one bank then its loans with
other banks, even if regularly serviced must be regarded
as non-performing as well. With that the number of NPL
and failed businesses increased tremendously.
38. When the Assets Management Company was formed to buy
out these NPL, international rating agencies immediately
lowered the credit-rating of the country, making it
extremely costly to raise funds in foreign markets. That
way they hoped that the Asset Management Company will
fail to resolve the NPL problem. It would be naive to
believe that the rating agencies were only doing a good
service to potential lenders. The timing of their
downgrading bears all the marks of deliberate sabotage.
39. But the problem of the NPL and the liquidity crunch
was initiated largely by Bank Negara's attempt to please
the IMF. Today with the exchange control and a return to
more sensible financial regime, the NPL problem has been
mitigated.
40. As for the stock market and the plummeting share
prices, action was taken to make trading in shares more
transparent. Instead of having a huge number of shares
registered in the name of a few nominee companies, the
KLSE now requires them to be registered in the names of
the beneficial owners. Any trading within the nominee
companies will not be recognised. This has stopped the
operation of illegal share markets and forced the shares
to be returned to the KLSE. The immediate effect is to
cause the share prices to recover to more reasonable
levels.
41. Of course all the things that we have done to revive
the economy have been immediately condemned as attempts
to help members of the leaders' families and their
cronies. It is impossible for our non-Asian foreign
detractors to believe that Asian Government leaders can
be honest at all. If they do anything at all for the
good of their countries it must be because they are
corrupt and want to help their cronies and their
families. These racist views will persist. It must be
remembered that these racists are the descendants of the
old white-supremacist colonialists. They cannot get rid
of their spots and stripes no matter how far their
civilisation has advanced. We cannot expect justice and
fair-play for Asians and Africans from these racists. We
have to ignore them and get on with rebuilding our
country. We have to uphold Asian traditions and values;
traditions and values which are in no way inferior to
those of the ethnic Europeans.
42. It is worth noting though that when the hedge fund
Long Term Capital Management lost almost one trillion
dollars, the Fed (Federal Reserve Board) ordered Western
banks to bail out the Fund. Since the share holders and
directors of the banks actually invest in the fund, they
were actually using the banks' money to bail themselves
out. Of course this is not cronyism in their eyes. But
using public money to bail yourself out is worse than
nepotism or cronyism.
43. It must be admitted though that what Malaysia is
doing is not guaranteed to succeed. There are weaknesses
and flaws and there is every possibility that we
ourselves will undermine what we are doing. Of course
the West will try to break us, to find fault lines which
can be widened and prised apart. We must be prepared for
all these, to protect ourselves and our strategies and to
innovate. We must not be rigid in our approach and in
solving problems.
44. Neither should we be gloating because some people
have already admitted that we have done the right thing,
that it is they who are wrong. We cannot afford to pat
our backs too soon. Difficult days lie ahead, but we
must strengthen our resolve to face and overcome every
move, every attempt to frustrate us and make us fail.
45. Malaysia can prevail. We can succeed. We can
preserve our independence. It is not just on the playing
field that we should shout "Malaysia Boleh". We must
carry this spirit, this faith in our abilities
everywhere. And certainly in the management of our
economy and our politics, we must believe that "Malaysia
Can", "Malaysia Boleh". We must and we can manage our
economy in a crisis.
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