Oleh : THE HON. DATO SERI DR
MAHATHIR BIN MOHAMAD
Tempat : CHICAGO, USA
Tarikh : 1-9-2000
Tajuk : AT THE LARIBA LIFE TIME
ACHIEVEMENT AWARD CEREMONY
Penyampai : PM
"MALAYSIA'S EXPERIENCE - LESSONS FOR THE UMMAH"
I wish to express my sincere appreciation to the
American Finance House LARIBA for conferring on me this
Life Time Achievement Award for my role in resolving
the financial crisis in Malaysia. I am particularly
honoured since I understand that I am the first ever to
receive this award.
2. While I accept this recognition with much humility
and appreciation, in reality it is the Malaysians who
truly deserve this award. It was with the sincere
support, deep understanding and full cooperation of the
vast majority of the Malaysians that we succeeded in
defending our economy against the deliberate attempts
by certain forces to destroy it. We had to do it on our
own without resorting to IMF or World Bank or other
countries' help. I would therefore like to accept this
prestigious award from LARIBA as an honour for the
Malaysian people.
3. The Islamic world today is full of paradoxes and
contradictions. Despite being resource rich, we are
economically poor and weak. While some of us live
amidst plenty, the majority of the ummah live in abject
poverty. While there are many breakthroughs in science
and technology, for most of the Muslim ummah the
condition is one of widespread ignorance and
backwardness.
4. This is in stark contrast to the golden age of
Islam, which was a period of temporal as well as
spiritual achievement, an age of conquest and
brilliance. The Persian empire and much of the Roman
Empire fell to the Muslims. Islam quickly
established a new order stretching from the Pyrenees to
the Himalayas, an empire larger than the Roman at its
height.
5. How low have we fallen today, compared to what we
were before. It is time for the Islamic World to take
a hard look at itself and decide whether we want to
move forward and how we can do so. I say whether we
want to move forward because a significant number of us
do not want to do so and many others are afraid to
oppose them because they invoke Islam as the reason for
their stand and everything that they do. Unless we
decide to go forward, it is useless for us to attempt
to do so.
6. Like the early Muslims, who were great traders,
Malaysia believes in free trade. In Malaysia, there are
no restrictions against exports or imports. We also
welcome foreign direct investments (FDIs) into Malaysia
and we do not restrict the repatriation of profits and
capital. We established an Islamic financial system
to enable Muslims to enjoy the benefits of a modern
financial system, but on bases consistent with Islam.
We were prudent in our financial management. We
prepaid our external loans, whenever we had excess
funds. The Government never, in all its history,
resorted to the Central Bank for deficit financing. We
created a viable and vibrant stock exchange to enable
Malaysian companies to raise capital easily. We
embraced privatisation in a big way. We believed
that the Government has to be practical and pragmatic
in its development strategy, and emulate what has been
successfully implemented elsewhere. There was no point
in reinventing the wheel.
7. At the same time, however, we were, like the early
Muslims, original in our approach. The first has to do
with growth. While we did all that is traditionally
required to promote GDP growth, we also ensured that
there was growth with equity, a concept that was
criticised by the West, which believes in the survival
and prosperity of the fittest and the most efficient.
8. The objective of growth with equity has a
particular significance in Malaysia with its multi-
ethnic and multi religious population. The indigenous
population (known as Bumiputeras), make up about 60 per
cent of the population. About 90 per cent of the
Bumiputeras are Muslims. In terms of wealth and
income, the Bumiputeras had always lagged behind the
non-Bumiputeras. In 1970, we embarked on a New
Economic Policy (NEP) to ensure that the Bumiputeras
enjoy their fair share of the economic pie. The NEP
was not to be implemented by taking away from the rich
in order to hand out to the poor. The NEP was to be
implemented by ensuring that a bigger portion of an
expanded economic pie goes to the Bumiputeras. We were
relatively successful in this socio-economic
restructuring and in the process we ensured socio-
political stability in the country. As 90 per cent of
the Bumiputeras are Muslim, the NEP is almost
synonymous with enhancing the economic status of the
ummah in Malaysia.
9. We were also original in the way we implemented
privatisation. While the standard practice in
developing countries is to sell government assets and
entities to foreigners, we sold Government assets and
entities to Malaysians. Since growth with equity
should be at all levels, able Bumiputeras were given
more opportunities from the privatisation process so as
to ensure that the Bumiputeras would be represented at
the topmost levels. As can be expected, this was
criticised by the West which saw the profits from
Malaysia's privatisation slipping from their hands.
They labelled the NEP as cronyism. But we were
successful in balancing the wealth of our multi-ethnic
population even at the highest level.
10. We also implemented a unique system of Islamic
banking, called the dual system, where a full fledged
Islamic banking system functions in parallel with
conventional banking system. Everyone, Muslim or non-
Muslim can avail themselves of the facilities of
Islamic banking. It is an approach which is accepted
by everyone irrespective of religion and it did not
disrupt economic activities or affect growth.
11. We also established bilateral payments
arrangements (BPAs) with 26 developing countries in
order to reduce dependence on hard currencies to
finance trade. As a result our trade with the
developing countries increased by 400 per cent.
12. Our development strategy was successful. At
the end of 1996, real GDP was growing at almost 8.5
percent per annum for 10 consecutive years and it
looked like this rate of growth was going to continue
for many more years. By 1997 total external trade
reached more than 157 billion US Dollars, making
Malaysia the 18th biggest exporting nation and the
17th biggest importing nation in the world, according
to the World Trade Organisation (WTO). The Government
was enjoying a fiscal surplus. The external debt was
generally low, at 40 per cent of GNP. The current
account of the balance of payments had narrowed from a
deficit of 10 per cent to five per cent of GNP, and
was expected to improve further. Inflation was at its
lowest at 2.1 per cent. On the financial front, the
banking system was sound as reflected in the strong
capitalisation and the high asset quality. Malaysia's
saving rate, at about 40 per cent of GDP, was one of
the highest in the world. The national savings was
sufficient to finance 95 per cent of total investment
outlays.
13. Malaysia was clearly on the path of sustained
growth towards achieving a developed country status by
the year 2020 when the financial crisis hit the region
in July 1997. Our currency was devalued to half what
it was. We implemented a number of measures to contain
the downturn, but all these measures failed. Many
expected us to go to the IMF for loans to tide over our
crisis. But we did not do that. Calling in the IMF
would have been a disaster for the Malaysian ummah, as
the NEP policies are not in keeping with the IMF's idea
of free unfettered competition in which the strongest
would take all. Equity is not of concern to the IMF.
Efficiency, maximising profit for the already rich are.
14. We had to rack our brains for a solution which
would still leave us independent. Alhamdulillah, with
the Guidance of Allah S.W.T., we came out with a
formula that saved the nation and the Malaysian ummah.
However, before I go into the formula that we
implemented, namely the selective exchange control
regime, let me describe what happened in July 1997.
15. When the Baht was attacked in July 1997, Malaysia
was not unduly worried. We knew that the Malaysian
financial situation was much healthier than that of
Thailand. In the case of Thailand, the residents had
been borrowing large amounts of short-term off-shore
funds to finance long term domestic projects in
Thailand. This strategy made sense to them since the
interest rate of the US Dollar was much lower than the
Baht interest rate. However, this strategy depended
entirely on a stable Baht exchange rate against the US
Dollar.
16. It was for this reason that the Thai Central Bank
tried to defend the Baht during the initial stages of
the speculative attack on the currency. If the Thai
Baht depreciated, paying debts in foreign currencies
would cost more Bahts. If the Thai borrowers were
unable to earn enough Bahts then a financial crisis
would hit Thailand and the Baht would depreciate
further, deepening the financial crisis. And so the
Central Bank tried defending the Baht until it had
practically no reserves left. Unable to defend further
the Central Bank decided to float the Baht and this
resulted in a more rapid fall. Thailand was in great
financial and economic trouble from which it could not
come out by itself.
17. Although Malaysia was financially sound and could
even prepay its debts, the theory of contagion was
invoked and the Malaysian Ringgit must also depreciate.
The currency traders therefore began to get rid of
their Ringgit in order to save themselves. But
actually they owned no Ringgit at all. They just saw a
plausible excuse for the Ringgit to fall and they
precipitated it in order to make a fast buck for
themselves.
18. As you know currencies do not have their own
sensors to monitor and react to the economic and
financial performance of nations. They do not know
whether a country borrowed too much or too little,
whether they could pay or not pay debts, whether
neighbouring currencies are sick with infectious
disease, whether there is good governance or not,
whether the Governments are not transparent, corrupt,
given to cronyism or nepotism. Currencies do not know
but people do, and currency traders in particular do.
More than that the currency traders knew they could
manipulate the exchange value of currencies simply by
massive selling or buying of the particular currency.
When the rogue traders saw that a currency might fall
all they did was to ensure and hasten the process by
borrowing that currency and selling it repeatedly. It
is the selling by the traders that caused the currency
to fall and to fall lower than justified by the
economic performance of a country.
19. When the crisis hit Thailand, Malaysia's strong
economic fundamentals were totally ignored by the rogue
traders. Screaming `contagion' they then borrowed and
sold the Malaysian Ringgit in a short-selling frenzy.
It was this frenzied selling that caused the Ringgit
exchange rate to depreciate sharply against the US
Dollar. This was accompanied by the pulling out of
foreign short-term capital from the Malaysian stock
market, reducing market capitalisation to a third of
its original value and putting most companies in
distress.
20. The leadership of the country felt helpless. We
correctly identified the currency traders as the
culprits behind the depreciation of the Ringgit. As
can be expected, the Malaysian leaders condemned the
currency traders for the rogues that they were. The
Malaysian leaders were in turn condemned by about
everyone, from the managers of international agencies
to self-proclaimed experts and currency traders. All
these people maintained at that time, that the cause of
the currency devaluation was bad governance and all
that was required to restore confidence and ensure
recovery of the currency was to replace bad governance
with good governance. These experts were convinced
that the turmoil was temporary. At that early stage of
the crisis, only Malaysia saw the real long-term danger
in currency speculation.
21. After implementing a number of traditional
measures, which failed, we decided to implement the
`unorthodox' formula of selective exchange control.
These measures were actually minimal. The most
important were:-
i) The off-shore Ringgit market was eliminated and
currency speculators were prevented from having access
to Ringgit funds. This was done by `freezing' the
external Ringgit accounts of the non-residents in
Malaysian banks. The non-residents can continue to
invest freely in Malaysia using their Ringgit funds,
but they were no longer allowed to lend or sell their
funds to others. Unable to borrow or buy the
Ringgits, the currency traders were forced to stop
their speculation.
ii) The Ringgit exchange rate was fixed against the
US Dollar at 3.80, which was the rate prevailing at the
time control was imposed.
iii) A "12-month rule" was imposed prohibiting the
repatriation of portfolio funds for 12 months. This
"12 month rule" was necessary given the prevailing
instability of the financial market. There was the
possibility that the bad publicity following Malaysia's
`unorthodox' measures could result in massive short-
term capital outflows. A 12 month restriction was
therefore considered necessary. However, when the
situation stabilised 6 months later, this "12-month
rule" was replaced with a levy (for new funds) and
subsequently even this levy was diluted further to
apply only to a minimal tax on dividends in the stock
market. Interestingly, when the 12-month rule expired
in September 1999 there was no massive outflow. The
market perception had obviously changed dramatically
between September 1998 and September 1999. Foreign
investors were happy with the appreciation of their
shares in the KLSE and the general performance of the
Malaysian economy.
22. The primary objective of Malaysia's selective
exchange control regime implemented in September 1998
was for Malaysia to regain control of its economy from
the currency speculators and manipulators so that
Malaysians can decide the destiny of Malaysia. The
measures implemented were very carefully crafted so as
to optimise the positive aspects of globalisation and
remove the negative aspects of globalisation. The
positive aspects of globalisation that were retained
were the complete freedom in matters of international
trade and foreign direct investments. The liberal
regime that governed trade transactions and foreign
direct investment were left unchanged. The negative
aspects of globalisation that were eliminated were the
off-shore market for the trading of Ringgit and the
free flow of short-term funds that easily destabilises
the economy. Hence the selectivity of the controls.
23. How were we able to come up with this formula,
while others could not? The reason is that we took the
trouble to understand how the foreign exchange market
works. We spent months studying the foreign exchange
market, the concept of off-shore Ringgit, the
motivations of the foreign exchange traders (greed and
fear), the mechanism of pricing etc. Once we
understood how the foreign exchange market works, it
was not difficult to come out with a solution to
neutralise the currency speculators.
24. At the same time, we also undertook a thorough
study of how the Central Limit Order Book or CLOB, an
over the counter off-shore share market, was able to
trade in Malaysian securities in Singapore. This was
creating problems in the Malaysian equity market, as
there was much short selling of Malaysian shares
through CLOB in Singapore. As CLOB was outside
Malaysia's jurisdiction, there was nothing we could do
to regulate it. Once we understood the detailed
mechanism, we were able to put a stop to CLOB in
September 1998.
25. Once the selective exchange control measures were
implemented and CLOB was closed, both the currency and
the share market stabilised. The Government then took
several measures to revive the economy. The interest
rates were lowered and credit was increased.
Government expenditure was increased by reviving
projects which had been postponed during the crisis.
Contracts and sub-contracts helped businesses to
recover.
26. We had set up a National Economic Action Council
(NEAC) in 1997, and the NEAC Executive Committee met
everyday during the crisis.
The Executive Committee of the NEAC gave particular
attention to the operations of an asset management
company (Danaharta), a bank recapitalisation company
(Danamodal) and the Corporate Debt Restructuring
Committee (CDRC) which were set up during the crisis to
address the problems of non-performing loans (NPLs) and
bank recapitalisation. Danaharta was to carve out the
NPLs from the banking system so that the banks could
refocus on their function of lending to revive the
economy. Danamodal was to recapitalise the financial
institutions and to bring up the capital strength of
the banking system to a much healthier level. The role
of CDRC was to provide a platform for companies and
banks to come together and work out a debt-
restructuring programme in an informal manner.
27. Once the selective exchange control measures were
implemented, the three organisations went into high
gear. By March 31, 1999 Danaharta had acquired NPLs
amounting to 16 billion Ringgit, Danamodal had
recapitalised 10 banking institutions amounting to 6.2
billion Ringgit, and the CDRC was fully focused on the
restructuring of a number of large companies.
28. The Executive Committee of the NEAC scrutinised
every aspect of the economy daily. Figures on trade
performance, external reserves, interest rates, lending
by banks, sales of property and motor vehicles, retail
sales, tonnage and containers handled by the ports,
passengers and freight at the airports, details of
goods manufactured and exported, details on imports,
new businesses registered and bankruptcies,
unemployment and job vacancies, wages, Government
projects and contracts, electricity consumed etc were
all laid out daily before the Committee for discussion.
Quite often specific actions were immediately taken.
When motor vehicles were not selling well the Committee
decided on special hire-purchase terms and ensured that
the prices were right.
29. Two property ownership campaigns were held to
reduce the large overhang in the property sector. The
developers participated enthusiastically in the
property fairs bringing in their models and brochures
and equipping their booths with many sales people,
while banks, insurance companies, lawyers and
Government officers concerned with registration of
property sales and other legal procedures were all
brought under one roof. A total of 6.4 billion Ringgit
of properties were sold during these two campaigns.
30. Malaysia's experience in handling the economic and
financial turmoil has a number of lessons for other
developing countries, particularly the Organisation of
Islamic Conference countries. The most important
lesson learnt from the experience is the need to know
the true causes of the downturn, how they work and the
inter-relationship between different factors. Once the
details become known, it is not too difficult to design
a strategy to combat the forces causing the problem.
Several solutions may present themselves for any one
problem and these solutions need to be debated and
tried out. Back-up solutions must be ready should the
chosen method fail. The implementation of strategy or
solution requires hands-on action by the decision
makers, at least in overseeing the implementation
process and in taking corrective action.
31. Complete and continuous information on what is
happening on the ground is absolutely essential.
Figures, graphs and charts tell a better story than
wordy reports. Explanations must be made orally by
those reporting. Of course those getting the reports
must be sufficiently knowledgeable on the subjects to
be able to make assessments and to decide on what
action has to be taken. The system is important but
the people working the system are more important. In
fact, the best system by itself will only deliver
partial solutions at most. The people manning the
system are the ones who make the system work.
32. An important lesson is that the Government must
always be careful in the management of its economy. It
must never allow itself to be weakened by carelessness
in the maintenance of its financial and economic
strength. Only with absolute vigilance can we ensure
that Malaysia's rate of growth will be sufficient to
achieve a developed country status as envisaged in our
Vision 2020.
33. The currency crisis is an unnecessary crisis and
need not have happened if the objective of the
international financial system is really to facilitate
trade and other economic interactions between nations,
including foreign direct investments. But the big
capitalist powers want more than that. They want to
promote their political agenda as well, and it is
because of this political agenda that the international
financial system not only permitted but at times even
encouraged currency trading, a totally unnecessary
activity, which destroys more wealth than what is made
by the unscrupulous currency traders themselves.
34. The economic future of the Muslims is in the hands
of the Muslims. True, we live in a world dominated by
non-Muslims economically and politically. True, we live
in a world which is not particularly fond of Muslims.
But there is nothing to prevent the ummah from rising
again, if the ummah wants to.
35. The most important change that the Islamic world
has to make is to accept reality and to adjust to it
without deserting the fundamentals of Islam. I use the
word fundamental deliberately because the fundamentals
of Islam were what created the centuries of the
glorious Islamic civilisation. The so-called Islamic
fundamentalists of today are interested only in the
trappings of Islam and not the true fundamentals.
Their way will only lead to more and deeper schism
among the Muslims, retarding their progress and
perpetuating their oppression by others. True `jihad'
is the struggle for Muslim unity, acquisition of Muslim
statecraft, knowledge and skills so that the Muslims
will be freed of oppression and be able to take their
place as successful members of a regenerated Muslim
civilisation.
36. Once again I thank LARIBA for this award.
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