Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : CAIRO UNIVERSITY, EGYPT
Tarikh/Date : 20/06/2000
Tajuk/Title : "MALAYSIA'S STRATEGIES TO DEAL
WITH THE FINANCIAL CRISIS AS
RELATED TO THE IMPACT OF
GLOBALISATION ON DEVELOPING COUNTRIES"
Malaysia's approach to globalisation in general
and the financial crisis in particular has been guided
by the basic principle that the pace of globalisation
in Malaysia at least must be on Malaysia's terms, based
on its circumstances and priorities. It may not always
be possible of course but it is crucial to ensure that
everybody benefits - both the foreign investors and
Malaysians. A step by step approach is also important
to avoid the excesses and problems associated with all
new ideas, principles or processes including
globalisation. We need as always to be pragmatic and
flexible, not dogmatic in pursuing globalisation. It
cannot be viewed as an end in itself, but as a means to
an end, which is a better life for our people and our
continued freedom from foreign domination.
2. Just as absolute freedom leads to anarchy, so too,
"absolute globalisation " could lead to chaos, as
demonstrated by the recent financial crisis. We must
avoid the tyranny of "free markets ", where power comes
not from the barrel of a gun, but from the checkbook.
We do not subscribe to the view that market discipline
is infallible, because markets have never been perfect
and have a strong tendency to over-react and to be
subjected to manipulations.
3. The industrial countries took more than 100 years
to reach the present stage of their development before
they propose to adopt globalisation and liberalisation.
It is unfair to expect developing countries to
liberalise and do away with the protection of their
borders at the same instant the developed countries do.
4. The Asian Financial crisis has brought to the
forefront the risks and challenges that globalisation
poses to developing countries, particularly small open
economies such as Malaysia. Initial denial has now
been replaced by a reluctant acceptance of the need to
address the problems of destabilising capital flows
often associated with the activities of currency
speculators, hedge funds and short-term investors. The
crisis has also heightened the call for reforms in the
international financial architecture. The so-called
caretaker of the international financial system, the
International Monetary Fund (IMF) has been widely
criticised for its mismanagement of the crisis.
Questions have also been raised about the role of the
World Trade Organisation (WTO) in contributing to
global instability by `encouraging' developing
countries to liberalise too rapidly.
5. After more than two years of painful policy
adjustments and social upheavals, erosion of incomes
and loss of dignity or `face', the crisis-affected
Asian economies of Indonesia, Thailand, Korea and
Malaysia have turned around, a few with growth rates
now exceeding pre-crisis levels. Despite the initial
scepticism, Malaysia's rejection of the IMF formula and
loans and its decision to regain exchange rate control
and regulate the flows of short term capital have now
been reluctantly accepted as a viable alternative in
crisis management.
6. The initial international reaction when on
September 1, 1998 we introduced selective capital and
exchange control was to condemn Malaysia. It was said:
That Malaysia was turning its back on the free market
system;
That capital controls were regressive and will lead to
all sorts of inefficiencies;
That the controls were a case of closing the barn door
after the horse has bolted;
That Malaysia's resort to controls was to avoid
economic and financial restructuring;
That the Malaysian Government feared being overthrown
like the Indonesian Government; and
That Malaysia was inherently against the IMF for no
very good reason.
7. The truth of the matter is that at the beginning
of the crisis, we did adopt policies similar to the IMF
approach. We were told that the IMF policies of tight
fiscal and monetary policies would restore market
confidence and stability. Unfortunately, these
policies not only did not restore confidence, but
actually aggravated the crisis, as the reduction in
Government expenditure reinforced the contraction in
domestic demand, while higher interest rates and a
credit squeeze took their toll on the balance sheets of
the corporate and banking sectors. When we saw that
tight fiscal and monetary policy was deepening the
recession in the IMF-programme countries and in
Malaysia as well, we decided to look for alternative
solutions to restore stability and ensure economic
recovery.
8. The reasons why the IMF policy recipe failed in
Asia are now well-known. The basic problem, of course,
was that the IMF misdiagnosed the problems in Asia and
applied the same remedies that were used in Latin
America before. Because of its background and
expertise, the IMF tends to look at macroeconomic
variables, and missed out the crucial details in the
crisis countries. This led to policies that were not
suitable for the problem at hand. From the beginning,
the IMF viewed the crisis as a small and temporary
problem. It did not believe the information on the
ground of the size of the hedge funds, their staying
power and their unlimited greed. Consequently, the IMF
underestimated the duration and depth of the currency
depreciation.
9. The crisis also worsened because the IMF is
principally concerned with repayments of debts
imprudently made by commercial banks to the countries
concerned. The IMF programmes also did not take into
consideration the specific conditions in individual
crisis countries, such as the degree of foreign
borrowings of both the Governments and the private
sectors. Consequently, the IMF's recommendations of
higher interest rates simply weakened the capacity to
repay loans by and the viability of the indebted
businesses and the Government. The IMF also
underestimated the impact of its recommendations on the
financial system. Forced closure of banks led to loss
of confidence in surviving banks and the breakdown of
the intermediation system. Similarly, policies that
arbitrarily removed monopolies and subsidies in the
existing economic system led to higher costs and the
breakdown of the distribution system. As a result,
inflation soared to levels beyond what was warranted by
the currency depreciation. Another error in judgement
by the IMF was the lack of understanding of the close
links between the foreign exchange market and stock
market, which can reinforce each other in depreciating
the exchange rate and depressing the value of stock
prices. The decline in stock prices made debtors of
previously healthy companies and investors. Non-
performing loans increased and the surviving banks
began to fail. Market capitalisation shrank to a
fraction of its original value resulting in real loss
as margin calls on loans could not be met, further
increasing the percentage of NPLs. The IMF also
shorten from six months to three months the period for
declaring loans as non-performing. The effect on
business and banks was disastrous.
10. It should be remembered that fixed exchange rates
were not incompatible with the free market. The
Bretton Woods agreements to revive world trade was
actually based on the fixed exchange rate. In deciding
to fix the exchange rate of the Malaysian Ringgit with
the U.S. Dollar, Malaysia was therefore not renouncing
the free market. We have always subscribed to and will
continue to believe in the free market. We cannot do
otherwise as we are a trading nation, in fact the 17th
biggest trading nation in the world. Far from being
incompatible with the free market, the fixed exchange
rate actually facilitated trade and contributed towards
recovery and rapid growth. The only thing that the
exchange rate control did was to keep the currency out
of the hands of speculators, who are after all not
necessary for trade or the economy. With the fixed
exchanged rate it was possible to take various measures
to revive the economy without fear of the speculators
deliberately devaluing the currency.
11. Some commentators have suggested that Malaysia
need not have imposed the exchange controls. They
pointed out that the regional currencies were all
beginning to recover in the last quarter of 1998,
suggesting that Malaysia had shut the door after the
horse had bolted. It is easy to say that now, but at
that point in time everyone including the great
economic experts were predicting continued depression
of the Asian economy. They said that we had not struck
bottom yet. What could have caused the Asian economy
to recover was the fear on the part of currency traders
that many Asian countries would have adopted Malaysia's
exchange rate control. This would have resulted in
huge losses for the currency speculators. And so they
reduced their speculations. But a contributory cause
to their reduced activities could be that at about this
time the Long Term Credit Management Fund lost its bet
on the Russian Rouble and threatened to destabilise the
U.S. financial institutions completely. Suddenly
currency speculations became a dangerous game for the
rich countries and it was stopped.
12. In Malaysia's case, instability in the Ringgit
exchange rate was aggravated by outflows of the Ringgit
to offshore markets. The situation in Malaysia was
peculiar in that we had a very liberal foreign exchange
regime, which led to the build up of a large offshore
Ringgit market. While Malaysia had curtailed Ringgit
borrowings to finance currency trading, Ringgit funds
were available from banks in Singapore, which offered
rates as high as 20 to 30 per cent. Although the cost
of borrowing foreign Ringgits was high, the need to
borrow for short selling was only for a brief period
and the profits were very high. Malaysia could not
compete by raising interest rates because this would
adversely affect business in Malaysia. To prevent this
haemorrhage we stopped the movements of the Ringgits
across our border. If the Ringgits held outside the
country was not returned within one month then they
will not be allowed to return at all. Effectively this
meant they will have no value at all after one month.
Foreign holders of the currency had to return it to
Malaysia. This measure stopped the flow of the Ringgit
to Singapore and deprived the currency traders from
access to the Ringgit to speculate with. With the
banks flushed with repatriated money it was possible to
lower interest rates, thus reducing the cost of doing
business. Fortunately Malaysia achieved a huge trade
surplus during the turmoil, earning Malaysia sufficient
foreign exchange to pay for imports.
13. Control over short-term capital was in the form of
a moratorium on expatriation of short-term investment
funds for a period of one year. Profits could be taken
out of the country and so could the receipts from the
sale of assets of Foreign Direct Investments. As a
result of this control on short-term speculative money,
the share market recovered rapidly. By the end of the
moratorium period the market had gained by about 200
per cent and when the moratorium was lifted one year
after the predicted massive outflow of capital did not
take place. The Stock market Index remained high.
14. Malaysia was very conscious that its decision to
control the exchange rate was a move fraught with
danger. In the first place it was going against
accepted current wisdom and it would be faced with a
very hostile reaction by the international financial
community including the IMF, the World Bank and the
most powerful country in the world. Clearly it was
going to frustrate the rich investors who had invested
huge sums of money in the hedge funds and were getting
as much as 30 per cent return on them. If they could
they would try to ensure that Malaysian control failed.
When Malaysia tried to borrow from abroad to finance
local projects the rates shot up so that the loan had
to be aborted. Other actions were also taken to
prevent Malaysia?s economic recovery, including
reporting that Malaysia is dangerous for tourism.
15. Malaysia knew there were dangers but to submit
would bring about a fate that would be worse. We would
lose our independence and our honour. On the other
hand if we succeeded we would remain independent, even
if our economy might not do so well.
16. Still we needed to ensure that there would be a
reasonable chance of success. Despite charges that
Malaysia had been profligate and had expanded too much
on the so-called mega projects, financially Malaysia
was and is very sound. Neither the Government nor the
private sector had borrowed much from foreign sources.
The need for foreign exchange to repay loans was
insignificant. But the greatest strength lie in
Malaysia?s high savings rate of almost 40 per cent of
GDP. We had sufficient internal financial resources to
support our recovery. Even when the foreign rating
agencies downgraded us, it did not hurt. We have huge
amounts of Ringgits and our foreign reserves could at
that time finance more than three months of retained
imports. (Today it is six months). We were therefore
quite confident that if our controls fail we would not
be forced to beg at least not for a long time.
17. As it turned out the signs of recovery appeared
almost immediately after the controls were instituted.
The banking system was flushed with money, which had
been brought back and low interest rates revived the
ailing businesses. The stock market recovered. Trade
surpluses increased and contributed towards higher
reserves. The fixed exchange rate made hedging
unnecessary, reducing the cost of business and
increasing profits.
18. The GDP, which had contracted by seven per cent in
1998, achieved a 5.6 per cent growth in 1999. Domestic
consumption shot up, creating a sense of well-being for
all. Inflation was within manageable levels.
19. Malaysia had no unemployment problem and had
always had to import labour. The downturn affected
foreign labour largely. The few Malaysians who had
been laid off found new jobs. With recovery wages
improved.
20. Still as a result of the economic recession many
companies and individuals had to face financial
difficulties. The Non Performing loans which before
the turmoil was only three per cent rose to 17 per cent
plus. Government set up an asset management company,
which purchased all the big NPLs at a discount. This
enabled the distressed companies to borrow again and
the banks to be back in business. Other less affected
companies had their loans restructured with the help of
the Corporate Debt Restructuring Committee (CDRC).
The banks were refinanced through a Capital Fund set up
by the Government.
21. All these funds helped the distressed companies to
recover, to regain profitability and to contribute to
the Government coffers through corporate taxes.
22. The IMF's principal objective was to prise open
the beleaguered country's market so that foreign
companies could move in to take over local businesses.
The raids by foreign predators are made less costly
because the pull-out of short term capital from the
stock market lowered share prices to rock-bottom level.
Some countries resisted but others have now lost all
their good companies and banks, including the newly
privatised utility companies. Privatisation was
encouraged by the IMF because locals were unable to
participate and foreigners could pick the choicest
items.
23. Since Malaysia is not under the IMF we are able to
keep off the foreign predators. But now the attack is
coming from another direction. Globalisation and the
I.T. are making local companies uncompetitive and their
failure will result in foreign takeovers. We are
trying to find out how to counter these new assaults.
24. The propaganda machine of the West is good at
making everyone feel guilty if he does not accept the
new ideas and ideologies created by the rich to give
them ever more advantage over the poor. Democracy, the
free market, a world without borders, liberalism labour
rights and child labour etc, have all been cooked up in
the rich countries and then forced on the poor. They
all sound great but somehow their acceptance by the
poor invariably destabilise them and put them at the
mercy of the rich.
25. The free market is a case in point. Malaysia
subscribes to the free market but now we are told that
Governments are superfluous, as the free market will
determine the level and the manner of economic growth.
It seems that the free market will actually discipline
Governments, making them more accountable, transparent
and less corrupt. But markets exist in order to enable
investors to make money and maximise profits; not to
cater to a nation's need or society's welfare.
Businessmen are not elected by the people to look after
their welfare. If they are elected at all, it is by
the shareholders. And shareholders are interested in
returns and capital gains for themselves only. It is
therefore ridiculous to think that the free market will
discipline Government for the good of nations or
society. Governments, especially democratic
Governments owe it to their constituents to ensure the
well-being and development of the nations.
26. Yet today people talk of the free market as if it
is a religion that everyone must accept. To question
its role in shaping the economic development of the
world is to commit heresy. The free market must be
embraced and upheld by everyone, rich and poor.
27. However the free market is no more than a new name
for Capitalism, unbridled Capitalism with a capital
`C'. The size of the capital involved today is
unbelievable. It is said that the trade in currency,
which is what capital is about is twenty times bigger
than world trade. Such a huge sum of money cannot but
disrupt businesses wherever it goes. When used to buy
and sell currencies economies can be totally disrupted,
enriching the money movers and impoverishing whole
nations, exploding into riots, violence and wars,
overthrowing Governments and spreading anarchy where
law and order had prevailed. Still the free market or
unbridled capitalism is defended.
28. It is time that we, the poor in particular,
recognise that we are being led up the garden path by
the sweet words and promises of the new slogans, new
systems and new ideologies. We recognise that we
cannot go backwards. We cannot go back to the
centrally planned economy of the Socialist and
Communist. But is it necessary that the way forward
should be the one shown to us by the rich and the
powerful? Cannot the market be free without its
domination by the rich and the powerful. Indeed is a
free market free if it is dominated by the rich?
29. Malaysia has experienced the globalisation of
capital and we were nearly destroyed by it.
Fortunately we were able to develop our own methods to
defend ourselves and rebuild our economy. We know that
our success may be short-lived but we are not going to
allow ourselves to be sold ideas, ideologies and
slogans without carefully examining them. If we find
the slightest suspicion that another agenda is being
promoted we will fight tooth and nail to defend our
country and the prosperity of our people.
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