Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : ZIMBABWE
Tarikh/Date : 04/10/99
Tajuk/Title : THE SMART PARTNERSHIP DINNER
IN VICTORIA FALLS
"MALAYSIA'S EXPERIENCE IN MANAGING ECONOMIC RECOVERY
WHILE SAFEGUARDING THE SOCIO-ECONOMIC RESPONSIBILITIES"
In July last year at Swakopmund, President Thabo
Mbeki (he was not President yet at that time) in his
speech "Stop the Laughter" called me a rebel.
2. I had always thought of rebels as people with guns
who fight against Governments. I was and I am still in
the Government of my country - so I could't be fighting
against myself.
3. But President Mbeki labelled me a rebel not
because I shoot at my Government but because I
"challenge the orthodoxies of modern economic
dialogue". I feel honoured that by doing this I
qualify as a rebel. In Malaysia the shooting is over
but rebellion against orthodoxy is still possible.
4. My talk tonight is about that kind of rebellion.
I would like to warn you that this rebellion is very
dull. So I hope you will bear with me.
5. I believe you are all aware that Malaysia is a
multiracial country. More than that the racial
differences are heightened because the different races
believe in different religions, the indigenous Malays,
the biggest group are Muslims, the Chinese are
Buddhists, and the Indians are Hindus. These religions
are usually incompatible.
6. But to make matters worse their shares of the
wealth of the country are also linked to their racial
origins. The indigenous Malays are the poorest, owning
only one percent of the economic wealth when we gained
independence, the Chinese and Indians had 30 percent,
the rest being with the British and other expatriates.
7. Despite these differences the three major races
managed to work together to obtain independence. There
was a kind of social contract in which, in exchange for
citizenship for most of the Chinese and Indians, the
Malays should have a bigger portion of the economic
wealth.
8. A decade into independence it became obvious that
the indigenous people were not getting a fair share of
the wealth. They began to condemn Chinese economic
domination. Tension rose and in 1969 race riots broke
out in Kuala Lumpur following an acrimonious election
campaign. More than 100 people were killed, motor
vehicles and buildings were razed to the ground.
9. The Government declared an emergency, suspended
Parliament and quickly put a stop to the riots. But
the Government also studied the causes of the racial
animosities and decided that the Malays must be given a
greater share of the economic wealth while the Chinese
and Indians should be given bigger participation in the
Government.
10. An affirmative action programme was initiated to
bring the indigenous people into the economic
mainstream while the Government invited more Chinese
and Indians, largely from the opposition parties to
join the Government.
11. The scheme worked out so well that racial tension
was practically eliminated and Malaysians enjoyed
almost three decades of stability and economic growth.
So successful was the handling of race relations in
Malaysia that even the recent recession caused by the
currency devaluation and the collapse of the share
market failed to spark racial fights as they did
elsewhere in Southeast Asia.
12. But the attacks on Malaysia's currency and share
markets nevertheless damaged the carefully planned
redistribution of economic wealth. The still young and
friable indigenous business community suffered the
most. If the economy is not resuscitated quickly and
put back on the growth path, racial antagonism would
return and Malaysia would be politically unstable. And
political instability in turn would make economic
revival difficult.
13. The Government is acutely aware of this danger of
racial tensions, riots and consequent political
instability recurring and have to resolve the economic
problems caused by currency and share devaluation
without disturbing the delicate balance in term of race
relations.
14. Other countries faced with economic turmoil
quickly resorted to IMF help. Unfortunately the IMF
wants to use the loans given by it to force through its
so-called economic reforms. For the IMF affirmative
action, the active Government intervention in the
distribution of economic wealth between races, is
unacceptable. The economy must be completely free of
Government interference and furthermore it must be open
to total and unrestricted foreign participation.
15. The result would be to deprive the indigenous
people in particular of their share in the business
sector and the wealth accruing from it. The Chinese on
the other hand might still retain or even enhance their
share.
16. The IMF solution is therefore not for Malaysia.
We have to devise our own solution so that the
Government can continue with the eradication of poverty
among all races and elimination of the identification
of race with economic function - the so-called New
Economic Policy which had so successfully created a
stable and prosperous Malaysia.
17. To restore the economy in the face of attacks by
currency traders and share market manipulators, the
Government set up the National Economic Action Council
(NEAC). The NEAC studied the impact of the devaluation
on the economy and came up with numerous proposals on
resuscitating the economy. The banking and corporate
sectors had to be reformed so as to be more resilient.
Imports were curtailed while exports were stimulated.
Consumption of imported sugar, milk and wheat flour was
reduced. Price control was fully enforced to prevent
undue inflation. Retail prices of food and goods were
monitored closely so as to ensure no profiteering takes
place. The retrenchment and unemployment figures were
scrutinised for sign of recession.
18. Statutory reserves of banks which stood at 13
percent were reduced by four percent to improve banking
liquidity. Hire-purchase terms were also improved.
Property, vehicles and retail sales were boosted
through foregoing taxes during Government-endorsed
sales carnivals. Studies were made to improve food
production as the biggest import item for the country
is food.
19. The performance of the Stock Market and invidual
companies were also studied so as to know the effect of
the downturn on them and to help them if necessary. An
asset management company was set up to buy over Non-
Performing Loans in order to relieve the banks and to
help the companies to turn around. A company was also
set up to refinance banks.
20. Mergers of banks and of stock broking companies
were encouraged.
21. Sources of funds within the country were
identified and assessed so as to reduce the need to
raise funds abroad. Malaysia has one of the highest
savings rates in the world i.e. 40 percent. This money
could of course be put to better use so as to maximise
returns. In the end it was found that domestic funds
were sufficient to finance much of the recovery process
and borrowing abroad became less urgent.
22. Many more studies and actions were undertaken so
as to minimise the impact of currency devaluation and
the fall in share prices. However despite all that was
done or could be done, the devaluation of the currency
and stock-market's near collapse placed the country in
a very difficult position. In all the country lost
about 50 billion US Dollars in terms of purchasing
power of imports and 150 billion US Dollars in market
capitalisation. If the currency devalued further the
economy could be so weakened that we would have to turn
to the IMF and accept its terms.
23. A solution had to be found which would protect the
country from the rapacious currency traders and stock
market manipulators. Malaysia actually had some
experience in currency trading. In the early 80's the
Central Bank traded extensively in the currencies of
Europe, America and Japan. It was pure speculation and
the funds available were not adequate to move the
market. In the end Malaysia lost a lot of money and
decided to get out of the business. But the knowledge
gained was useful nevertheless.
24. Malaysia studied the mechanism of currency trading
thoroughly. It became obvious that the free
convertibility of the local currency, the Ringgit,
which facilitate trade is also the Achilles heel which
exposed us to the attacks of currency traders. We have
to stop the free convertibility of the Ringgit and to
reassert the sovereignty of the Government over our
currency.
25. Apparently no cash is involved in currency
trading. When money is sold or bought the figures on
the bank's computers move and the buyer gets the
figures representing the amount of money credited to
him. Since the money is only legal tender in the
issuing country, the actual money is held in banks in
the issuing country. The foreign bank would instruct
the domestic bank to credit the money to the buyer's
account. Clearly the buyer can only have the money if
the domestic bank credits it to his account.
26. To stop the trade in currency the local banks were
instructed by the Central Bank not to transfer any
foreign-owned Ringgit held by foreigners except during
the first month of the control. Effectively this made
the foreign-owned Ringgit worthless unless it is
transfered to a local account in the first month.
After that no more transfers would be allowed.
27. Thus money belonging to foreigners held in their
accounts in domestic banks would be useless after one
month if it is not already transfered. If it is
transfered it means that foreign-owned Ringgits would
have been repatriated and would be available for banks
to lend. Billions of Ringgits were repatriated in this
way. Once repatriated it cannot be taken out of the
country again as it would not be allowed to return.
Taking out the Ringgit would render it useless as it
cannot be legal tender in any other country. And no
one would accept it in exchange for other currencies.
28. This means no Ringgits would be available outside
the country for currency traders to borrow and sell.
Trading in the Ringgit stopped and the Government was
then able to fix the exchange rate within the country.
Anyone needing foreign currency to pay for imports can
change their Ringgits for foreign currency at the
Central Bank or agent banks. On the other hand if
exporters earn foreign currency they can change for
Malaysian Ringgit at the Government fixed rate at the
Central Bank or authorised bank. All the while the
Government would keep track of all incoming or outgoing
money in whatever currency.
29. Had the Government fixed a high rate for the
Ringgit, exports would be costly and there would be a
black market in foreign currencies. A low exchange
rate would make import more costly and result in
inflation. The Government fixed a rate that is neither
too high nor too low.
30. Once the rate is fixed businesses can operate
without the uncertainties of fluctuating exchange rates
and the need to hedge. The return of all the Ringgits
from abroad meant the banks have plenty of money to
lend. Interest rates could therefore be reduced
without fear of traders devaluing the currency further.
Businesses could borrow and could repay loans. The
rapid rise in Non Performing Loans was reversed.
Debtors became solvent and could borrow again.
31. To recover fully the slide in the price of shares
must also be stopped. Initially, the Government
disallowed short-selling on the Kuala Lumpur Stock
Exchange. But the short-selling went on as Singapore
had opened a market in Malaysian shares without the
consent of the Malaysian Government. They were able to
continue short-selling and consequently the share
prices kept on dropping. As a result our companies and
banks were in distress as margin calls could not be
met, and debts could not be paid.
32. Malaysia had to stop the operation of the so-
called Central Limit Order Book (CLOB) in Singapore in
order to make currency control effective. To avoid
reporting changes in ownership of shares through sales
on the CLOB, all shares were registered in the name of
nominee companies on the Malaysian Stock Exchange. We
could not track the transactions on the CLOB and so
short-selling went on, depressing our share prices.
33. To stop CLOB we made it necessary for all shares
to be registered directly in the name of the
substantive owner. Transactions not so registered will
not be legal and recognised. Nominees were not
recognised. Trade on the CLOB stopped immediately and
the Composite Index of the KLSE climbed rapidly. It is
now almost 150 percent higher than when CLOB was
operating.
34. We also stopped repatriation of the proceeds from
the sale of shares on the KLSE for one year. Thus we
stopped the possible sudden massive withdrawal of
capital from the KLSE by the foreign investors which
would have caused a severe plunge in the index and
serious loss of market capitalisation.
35. It was believed that when one year was up there
would be a massive outflow of capital. But so good is
the performance of the Malaysian economy after controls
that when the year was up there was only a little
outflow. The stock market remained sound and the banks
and companies were released from the pressure of bad
loans. Besides, the asset management company and the
bank recapitalisation exercise helped the banks and the
companies to deal with their non-performing loans.
36. The efforts to revive the economy did not end with
the stoppage of currency trading and shares short-
selling. As I pointed out numerous other steps were
taken to bring back the growth performance of the
Malaysian economy. But the most important steps were
the frustrating of Currency Traders and the short-
selling on the CLOB.
37. Once selective control of capital flows were put
in place the effect was quite dramatic and immediate.
The Executive Committee of the NEAC watched the data
daily, and what we saw was very encouraging. Firstly
the foreign reserves went up rapidly until it is now
about 32 billion US Dollars against 20 billion when we
started. Loans given out by banks picked up fairly
well; vehicle and property sales went up,
infrastructure work started again. The contraction of
the GDP slowed down and we achieved a growth of 4.1
percent in the 2nd Quarter of 1999. We are on target
to achieve one percent growth in 1999 although various
experts predict a bigger growth of up to four percent.
38. The Stock Market index rose from 262 points on
September 1st 1998 to over 800 at one time. It has now
come down to around 700, relieving both the banks and
the companies of much of the NPL.
39. While most of the indicators are positive, the
economic turmoil precipitated by the currency traders
and stock market manipulators destroyed much of our
achievement in correcting the imbalance between the
economic performance of our multiracial population.
While everyone was hit by the downturn, the indigenous
businessmen were hit most badly. The big corporations
they had successfully set up were unable to withstand
the burden of debts they carried. They were forced to
sell off to the non-indigenous people and this of
course undid much of the redistribution we had
achieved. The indigenous middle class, small compared
to the non-indigenous, practically disappeared. And
once again we find the indigenous people only among the
low-paid workers, hawkers and petty traders.
40. Now we have to start all over again and it is not
going to be easy. Already our affirmative action has
been labelled cronyism. To our foreign detractors
affirmative action only benefits the family and friends
of the members of the Government, in particular the
Prime Minister. Explanations given to prove that it is
not so have been totally ignored. The Western press,
the IMF and other agencies in the West kept on
repeating that our New Economic Policy directed at
restructuring our multiracial society benefits only the
rich friends and families of the Government members.
41. Yet in truth the New Economic Policy benefits
every single indigenous people and even a fair number
of non-indigenous people. Obviously the policy cannot
make everyone of these deprived people millionaires.
They benefit according to their own capability. Thus
although everyone could get free education and
scholarships some could not progress beyond secondary
schools, while others could go to the universities at
home and abroad. Others went into business as a result
of the opportunities, licences, premises and capital
made available by the Government. Some could only
manage small businesses while others went out to
acquire and manage billion-dollar enterprises and were
even able to venture abroad. That some indigenous
businessmen could rise to such levels depended on their
abilities. Opportunities are created by the Government
for all but obviously not everyone would be able to
avail themselves of these opportunities and profit from
them.
42. But the foreign detractors and their local
supporters see everyone of the successful indigenous
businessmen as cronies of the Government. That many of
these people failed miserably and some of them were
actually members of the families of Government members
or their friends is ignored. Those who succeed were
all regarded as cronies and families of the Government
members. Even members and strong well-known supporters
of the opposition were regarded as cronies or families
of the Government members if they succeed. If they
fail then they are not.
43. Because the affirmative action had produced very
successful and therefore very rich indigenous
businessmen and they were alleged to be cronies of the
Government, the foreigners demand that affirmative
action should be stopped. This would create
disparities between the races as among the very rich
and successful there would not be a single indigenous
person.
44. The real reason for foreign dislike of affirmative
action is because most of the highly profitable
privatised projects went to the indigenous
entrepreneurs in order to balance the surfeit of very
rich and very successful non-indigenous entrepreneurs.
This policy cuts off the foreigners from getting the
privatised projects for themselves. And these are
areas which they are particularly interested in as they
aim to monopolise them worldwide. The impoverishment
and subsequent submission of the country to the IMF
would have provided the foreign companies with this
opportunity. But the Malaysian Government has not
submitted to the IMF. We are under no obligation to
jettison our New Economic Policy, our affirmative
action programme.
45. Economic management of the country is not about
enriching it only. A country can be made wealthy
without the wealth being evenly distributed. It was
the extreme disparity between rich and poor in the old
Capitalist system that brought about the Socialist and
Communist revolution.
46. In Malaysia it would have been easy to give a free
hand to the very dynamic and business oriented non-
indigenous Chinese Malaysian to develop and enrich the
country. But then the indigenous people would remain
poor and have a sense of deprivation. They would be
bitter and angry and would rise against people whom
they would regard as foreigners who had stolen wealth
that rightly belongs to them. They would destroy the
wealth which had been created and the country would
fail to develop. In the end everyone would lose and
the country would have to beg for foreign aid and
accept the conditions imposed.
47. After our traumatic race riots in 1969 we in
Malaysia are determined to have growth with equity.
Our New Economic Policy was successful in achieving
this. We are not about to give up this formula simply
because the IMF and the Western media think we should
do so. Our growth had not been stunted because we had
a political and social agenda intricately bound with
our economic agenda. We think we can continue to grow
with equity by adhering to the objectives of our New
Economic Policy, now that we have been able to defeat
the attempt to destroy our economy and political
independence by devaluing our currency and
impoverishing us.
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