Oleh/By : DATO' SERI DR.
MAHATHIR BIN MOHAMAD
Tempat/Venue : PALACE OF THE GOLDEN HORSES,
SG BESI
Tarikh/Date : 02/11/98
Tajuk/Title : THE INTERNATIONAL CONFERENCE ON
MANAGING THE ASIAN
FINANCIAL CRISIS: LESSONS
AND CHALLENGES
Dismissed initially as an Asian problem when it
began last July, the East Asian financial crisis has
now ballooned into an economic upheaval of global
proportion. The financial crisis has since spread to
Russia -- where the IMF has again failed to rescue.
More recently, the financial shockwaves have reached
the American shores. Several Latin American countries,
facing massive capital outflows and currency
devaluations, may need to resort to the IMF soon. With
the contagion now spread across three continents, the
threat of a global recession looms large. What went
wrong? Is something amiss or different about this
crisis? Or is it just the scale and the speed? Has
technology advanced beyond human control? To know this
we have to know the root causes and the secondary and
even tertiary causes if there are any.
2. We have to remember that the East Asian countries
prior to their financial collapse were among the most
successful economies in the world. The economic
success is real although attributing it to miracles was
quite wrong. These countries grew fast economically
because they had apparently found the formula for
growth. The formula is not the same but certain
elements were common.
3. South Korea was ultra-nationalistic. It did not
want foreign companies to invest and develop its
industries. It preferred buying technologies and
breeding its own entrepreneurs and industrialists.
Japan was its model and a source of its technologies.
Koreans with any potential at all were given protection
and funds by the Government to go into practically any
industry they chose to. Those who succeeded would get
even more help. Very quickly huge counterparts of the
Japanese trading houses emerged.
4. Although these chaebols were largely privately
owned, it did not prevent them from contributing
tremendously to the rapid development and
industrialisation of Korea. They may be considered as
cronies of the Government but the cronyism came mostly
after the Government recognised their potential to
succeed and to help propel the country's
industrialisation. Besides, their success brought
employment for the Korean workforce and helped the
small and medium industries. It would be wrong to say
that nobody except themselves gained from their
success. It is also doubtful if public limited
companies were floated in order to venture into the
unknown territory of the large-scale industries, such
public limited companies would succeed. Certainly
rapid success would not have been possible as the
management and decision making process of public
companies are complex, tedious and cautious. Companies
with strong leadership by the proprietor chief
executive are much more able to make forays into
unknown territories and to take bold actions to
overcome obstacles.
5. Obviously any lack of skill would result in early
failure and dropping out. So a few would survive and
succeed. And these would grow very rapidly, especially
as the Government with nationalist objectives extending
helping hands.
6. Within a very short space of time a number of
chaebols emerged which seem capable of unlimited growth
in every direction.
7. Rapid growth necessitates borrowing huge funds,
first from domestic sources and then from foreign
sources. Cash-flow for the servicing of loans was
important. Profits were not too important. The
Koreans were in the game of catching up. They had to
grow. All earnings must go into expansion. In no time
at all the Koreans emerged as an economic powerhouse.
8. The foundation may seem weak but as long as they
can grow and generate cash-flow they were safe. As the
chaebols grew and expanded Korea prospered. The per
capita income qualified Korea for membership of the
OECD.
9. There was no doubt that Korea was a success story.
Its way of doing business is obviously not the same as
the mature economies of the West or even of Japan but
it was an economic success. The people as a whole
prospered, were well educated and quickly became highly
skilled. There was no reason to think that if they
continued to employ their strategy they would become a
developed country fairly soon.
10. The Koreans may be said to be practising crony-
capitalism par excellence. Apparently only a selected
few benefited and emerged as great tycoons owning
chaebols. But if others are given the same kind of
selective support by the Government would they not be
regarded as the Government cronies also? If a great
many were to get the same support indiscriminately
would the strategy work? The capacity of the
Government would be much stretched and it is likely
that none would really succeed. They would all be
small or midsize companies which would not contribute
towards Korean nationalistic developmental targets.
Korea would be just like any other developing country,
struggling for years to feed its people. The most
talented or adventurous would migrate. The less
enterprising would stay home in a perpetually
developing country. But Korea created the tycoons and
the chaebols and achieved tremendous growth to become a
Newly Industrialising Country. It must be remembered
that Japan did the same even more thoroughly during the
Meiji Restoration.
11. In Southeast Asia the ASEAN countries decided to
depend on foreign investments for their development and
industrialisation. Unless the domestic markets are
involved, the foreigners were free to do anything,
including owning 100 percent of the industries. Their
gains were less and slower in coming than in the Korean
case. It took them a long time to acquire the
technologies and the skills of industrial management
and investments. It took them a long time to build up
the capital they needed to grow big.
12. But eventually they did produce their smaller
versions of the chaebols. Certain industries mainly
those serving the local markets, were kept out of the
hands of foreigners. When privatisation became
acceptable the state enterprises and the big utilities
were handed over to those local businesses which had
grown big enough to handle these state-owned entities.
13. It must be remembered that most of the state-run
businesses were moribund. They were regarded as the
services to be provided by the state due to the taxes
paid by the people. Thus the roads were built and
maintained by the state for the use free of charge
mainly, by the tax payers. No return was expected by
the state. Since the state had inadequate funds the
roads were badly constructed and even more badly
maintained.
14. Privatisation removed most of the responsibility
of the state to build and maintain roads. But since
the state continues to collect taxes, the state must
return the taxes to the people in some way. And so the
state subsidises the construction and maintenance of
the public utilities by selling off at a much
discounted price. That way the charges, road tolls in
the case of some of the highways, would remain low.
15. Again some people have to be selected for whatever
enterprise or industry that the Government wished to
promote. It does not matter who was selected, whether
they are friends of the Government leaders or not;
whoever gets selected for anything at all, will be
labelled cronies of the Government. Even when public
companies are selected the charges of cronyism would
still be made. Just about any businessman who benefits
in anyway from Government decision would be labelled a
Government crony. That the selections were made
through open tenders made no difference. They would
still be considered as cronies.
16. Only if foreigners get the project
unconditionally, without regard for national benefits
would the accusation of cronyism not be made. The
foreigners must be allowed to take everything for
themselves without any restriction. Their claim is
that they, because of their absolute superiority, were
doing a favour to the countries concerned because they
would provide the best services and goods at the best
cost, not necessarily the lowest cost of course. That
they make huge profits for themselves is totally
acceptable even though they provide unfair competition
for the locals.
17. In both Korea and Southeast Asian countries there
is probably some degree of true cronyism and nepotism.
There must be some who have been given opportunities
and help because they were cronies or members of the
families or connected. But it is not correct or fair
to assume that everyone who had been 'favoured' were
cronies. Even members of the families may have
legitimacy in their dealings involving the Government.
18. Whether the practices and the strategies of these
countries were good or bad, no one can say that they
had failed to develop their countries well and fast,
have given their people ever higher standards of
living, increased their technological, educational and
other skills and generally put them and their countries
strongly on the path of progress way ahead of other
developing countries. In fact left to themselves these
countries would catch up with the developed countries
in a relatively short-space of time.
19. Would these countries practising what they have
been practising collapse economically? They may not be
able to keep up the pace, they will have hiccups. Some
of their businesses and their banks would fail. But it
is doubtful that they will suffer total collapse.
Certainly not suddenly and simultaneously -- one moment
hale and hearty and the next moment tottering aimlessly
about in a state of total collapse.
20. Should anything happen to their bank or
institution or business, no matter how big, efforts
could be made to turn them around. Rescuing companies
is something that everyone does. The idea that
companies which fail must not be rescued is not a
matter of religious injunction. Too many innocent
people would be punished if businesses are allowed to
fail. Punish the wrong doers by all means but killing
the company serves no good purpose. The innocents
would be the one to suffer most. And so if there are
failures, the companies could be resuscitated and the
country go on prospering. The countries of East Asia
would not collapse suddenly and simultaneously. There
would be no massive contagion, only some temporary flu.
21. But we know that the countries of East Asia
suddenly collapsed together. If it is not because of
their bad Governments, their corruption, their crony-
capitalism and nepotism, then what?
22. They collapsed because their wealth was taken away
from them, through their money being devalued. They
collapsed because they were suddenly made extremely
poor. They were not able to pay their debts, not able
to borrow, not able to finance their business
activities, not able to do anything. They were
financially paralysed.
23. When their currency is devalued the cost of buying
foreign currency to pay debts or to buy raw materials,
components or services became unaffordable. Interest
rates and credit squeezes do not help either.
Simultaneous attacks on the share markets render the
companies insolvent as banks call for margins. Non
Performing Loans (NPL) increased.
24. The collapse is caused by currency being devalued.
There may be other excuses but it is devaluation which
precipitated the collapse. How does the currency get
devalued? Did the currency sense that the Government
was corrupt etc and decide to devalue itself?
Obviously not. Did the Government devalue the
currency? The Government obviously did not. Then who
did? The currency traders did.
25. Why did they do it? Is it because they feared
they would lose money? No. There is no evidence that
they were holding large quantities of the currencies
concerned. So a fall in the value of the currency was
not going to cost them anything, neither would a
revaluation give them any profit. But by borrowing the
currency and then selling it they could cause the
currency to depreciate. And when it had depreciated
sufficiently they could buy the currency and deliver to
those who had bought at the higher prices and so make
handsome profits. No lack of confidence or fear of
losing money on their investments are involved. It was
the possibility of making huge profits through short
selling that motivated the currency traders. It was
greed; a kind of greed that cares nothing for the
destruction caused, for the collapse of perfectly
healthy and prosperous economies, greed that thrives on
the misery of others.
26. These currency traders control and manage huge
funds invested in by the very rich in the very rich
countries. On top of that they could leverage by, in
the case of the Long-Term Capital Management Fund, up
to 200 times. They are well connected. They are the
cronies of the bankers who manage huge funds belonging
to the public. They believe that if they are big no
one can stop them from manipulating the market any way
they wish. The Central Banks of developing countries
with their puny reserves would be bankrupt long before
they, the funds, have risked even a fraction of the
huge sums at their disposal.
27. The fact that by devaluing the currencies they
create financial turmoil, impoverish the countries and
their people, throw millions out of jobs and deprived
them of food, medicine etc, cause them to riot and
destabilise previously stable Governments and even
cause these Governments to be overthrown -- all these
bothered them not a bit. They merely claim that these
Governments were bad and they had lost confidence in
them and so pulled out their money. That they had not
invested at all in these countries and really did not
have anything to pull out, did not bother them. That
their loss of confidence would not cause them to lose
anything also did not bother them. If the act of
pulling out their money would earn them handsome
profits, then they would borrow the money in order to
pull it out. The important thing is to make money from
the opportunity which they could create based on their
alleged lack of confidence. If the fundamentals are
good and there is no reason for losing confidence, then
contagion can be a good reason for loss of confidence.
Any reason is good enough for borrowing the currencies
in order to pull out, to short-sell and to reap huge
profits.
28. And so one after another the tiger economies of
Asia had their currencies devalued by the currency
traders and all their Governments were accused of
corruption, nepotism, crony capitalism and
mismanagement. Everything they had done before which
enriched and developed their countries were now blamed
for creating the loss of confidence, and the
devaluation of their currencies. The whole world
joined in the chorus, accusing the Governments of East
Asian countries of causing their countries to descend
into financial and economic turmoil.
29. No mention was made of the role of the currency
traders except that they had lost confidence and like
herds of cattle they rushed off with their money. This
is their right. Why should they put their money at
risk? They invested in order to make money, not to
prop up corrupt Government. But one might point out
that they never really invested in these currencies.
That is irrelevant. Since they saw an opportunity to
make money by borrowing the currency, selling it down
and profiting by it, why not?
30. They also attack the stock market, selling off the
shares they hold or the share they borrowed. The share
indices plummeted. The companies lost their capital and
became unable to meet margin calls or pay debts. The
share value went below the asset value. These companies
can be bought for a song. They no longer pay the
Government any tax on their profits. They were not
making any profits. They were losing. The Government
cannot make ends meet now.
31. Here is where the IMF comes in. Loans are offered
on condition the countries allow foreign companies to
acquire businesses or start businesses without any
condition. Other conditions imposed such as higher
interest rates and credit squeezes ensured that more
banks and companies go into failure. The turmoil
worsened. But not to worry. The companies and banks
failed because they were bad and should be got rid off.
Only good companies would remain and when the economy
recovers it would be healthier. But the currency
refused to recover. It became worse instead.
32. Eventually the IMF is blamed. Still the currency
traders are not blamed. They were left free to rape
other countries. So long as they do not disturb the
economies of the rich countries no blame was attached
to them.
33. Feeling safe and not being conscience-striken by
the tragedies they have wrought all over the world, the
fund managers grew bolder. They borrowed more and they
directed their attacks against every country that they
could make profits from. Only the countries where
their main investors like were left free.
34. But then Russia collapsed totally under their
attacks and the Russian Rouble became totally useless.
The Long-Term Capital Management Fund lost a huge sum
of money. Nobody really knows how much they lost as
transparency is demanded by them only of others but not
of themselves.
35. But transparent or not the lenders to the fund
cannot hide the huge losses they had sustained. We
know some of these individual losses by banks and
various funds exceed billions. We know that the Fed
had to force banks to bail out the LTCM with some 3.5
billion dollars. But we will never learn the full
story because surreptitious rescues are being mounted
to bail out the others. The investors in the LTCM are
VIPs and unlike the millions who are starving in the
poor countries raped by the funds, they must be saved.
36. Cronyism is extensive in the operations of the
banks and the funds. They all know each other and they
talk all the time to each other. In many instances
they had previously worked together in the same
institutions or companies. Subscription to the funds
are by invitation only and obviously those invited are
known to the managers of the funds. Although the funds
may compete with each other, there are enough
indication that they also collude.
37. Whenever any currency is sold, there must be
someone who bought. If buying a currency would revalue
it, then it should be revalued as often as it is
devalued. There cannot be any sale without any
purchase. There must always be a willing buyer and a
willing seller. They would neutralize each other. But
it would seem that sometimes there were only sellers
who devalue the currency without there being any buyers
to revalue the currency.
38. Sometimes the market is thin i.e only very small
amounts were being bought or sold. Yet on the basis of
these small deals the whole currency gets devalued or
revalued. How can such small transaction result in
billions being lost or gained by whole nations.?
People, millions of them get impoverished, starved,
lost access to medical treatment because a few people
sold a small amount of currency in some faraway place.
39. The Governments of many East Asian countries may
be bad, may practise cronyism, nepotism etc. They may
provide an excuse for loss of confidence by the so-
called market force. But these Governments did not
devalue their currencies nor did the currencies sense
the wickedness of the Governments and devalue
themselves. The currency traders devalued the
currencies by their speculation and manipulation. The
IMF did not devalue but they helped the process and
they provide additional excuses for the currency
traders to devalue the currencies further. If the
countries failed to implement the strictures of the
IMF, then the currency traders would cause the
currencies to devalue further. The IMF is not quite
culpable but it used the threats of the currency
traders to extract the maximum compliance from the
subject Governments.
40. The currency traders are no doubt the people
responsible for devaluing the currencies. They are the
cause of the currency turmoil. They spread it
worldwide. They precipitated the current recession in
every country. They are well on the way to bringing
about a worldwide recession.
41. If we are going to manage the Asian Financial
crisis with any possibility of success we have to deal
with currency speculation and manipulations.
42. It is said that the volume of currency trading is
20 times that of world trade. It is perhaps even
bigger now. But what is there to show for the amount
of money involved? World trade creates wealth and jobs
and industries and all and every kind of economic
activities. Without world trade good growth for any
country would not be possible. The transportation
industry, the shipping, air freighting, land transport
of every kind, insurance, stevedoring and a host of
other commercial activities would not be there without
world trade. The world is as developed as it is today
because of world trade in goods and services of every
conceivable kind.
43. If world trade is 20 times its present value, then
the wealth and the well-being it creates would be
unimaginable. Every country, rich or poor, backward or
advanced would be considerably enriched. But we know
that the wealth of the world is due largely to the
trade in goods and services, while currency trading
despite being 20 times bigger has not contributed
anything to the well-being of the world, to economic
development. Indeed we know for a fact that currency
trading has destroyed the economies that world trade
had built, has impoverished millions and now threatens
to cause a world depression. A few very rich investors
may have made huge profits for themselves from the
trading in currencies by the so-called hedge funds but
their combined profits could add up to only a fraction
of the amount of wealth they have destroyed. And now
we see that they can fail too and drag down with them
the rich investors, the banks and other hedge funds.
Despite bailouts the collapse of just one hedge fund
involved in currency trading is likely to cause
worldwide recession.
44. It is clear that currency trading has not done any
good for the world, in fact has been the cause of the
present financial and economic turmoil, has
impoverished the world. Unless currency trading is
recognised as the root cause of the present problem,
corrective actions cannot be made. Cosmetic
adjustments, correcting peripheral causes etc will not
do any good at all. Nor would an admission that
currency trading is too big and too powerful to be
regulated help overcome the problem.
45. Exchanging one currency for another is necessary
for world trade. But currency trading in the present
form is not essential. If currency trading cannot be
done away with, then it should be properly supervised
and regulated. This is possible if the big rich
economic powers are willing to cooperate, to enact laws
and rules and to enforce them.
46. Currency trading must be forced into the open. The
world acted in concert to prevent money laundering.
There is no reason why the world cannot act in concert
to regulate currency trading.
47. Such trading must be registered and licensed in
the countries where they operate. Banks must be made
to reduce the money they lend to these funds to
reasonable multiples. The basis for changing the
exchange rate must be regularised. So long as there
are buyers, there should be no change in the rates.
Only a certain percentage in the change of exchange
rates should be allowed for a given time. Any rate
exceeding the percentage allowed should result in
stoppage of trading. The sellers must deliver within a
specified period the money sold. An amount not
exceeding a certain percentage of the trade of the
country concerned must be fixed as the maximum limit
for any deal on any day.
48. Obviously the rules and regulations and laws will
prevent the traders from making the kind of profit they
are used to making. But if trade in goods and services
are limited by what the market can bear, why should it
not limit trade in currencies? Must we protect the
excessive profitability of currency trading to the
extent of plunging countries, regions and the world
into economic turmoil and recession?
49. Free trade is good only if it brings about wealth
and benefits to the peoples and the countries involved.
Free trade is not meant to profit one at the cost of
the destruction of the other partner. If free trade
means that the rich can rape the poor, then we might as
well resort to conquest and colonisation of the poor by
the rich and the powerful. If this is what the world
economic order is going to be like, then we might as
well not talk about the independence of nations and
human rights. It would be the height of hypocrisy if
we accept the exploitation of the poor by the rich as
the norm, when we all talk about a brave, humane new
global society. We are actually backsliding and
returning to the Dark Ages, the age of superstition in
which economic and political exploitation must be
subscribed to by everyone on pain of being declared a
non-believer and being burnt at the stake.
50. You are going to discuss the management of the
Financial Crisis. You are going to identify the
lessons and the challenges. I am sure you are not
indulging in an academic exercise. Pussy footing
around will get us nowhere. You will have to face the
problems squarely and be willing to accept the
condemnation of the rich and the powerful if your
conference is to contribute anything at all to the
solution of the financial crisis faced by the world. I
hope you are willing to face up to the challenge.