The 97-98 Malaysian economic crisis: A mess of Mahathir's making

Mahathir Mohamed has been in the news recently denying that he took loans from the World Bank. He also offered to swear, unsolicited, on the Quran that he had done no such thing.

Presented with documentary evidence that Malaysia had taken a multiple of loans from the World Bank, Mahathir responded that he had not personally asked for the loans. He did not however, say he was unaware of the loans.

As Prime Minister of Malaysia for 22 years, Mahathir would like to be accountable only for those actions which he had ‘personally’ done. Clearly, Mahathir has a different understanding of the word ‘Accountability’ than the rest of the world. Although it may very well explain the culture of irresponsibility that so afflicts Malaysia’s ruling Barisan Nasional today.

Mahathir is also a consistent dealer in untruths which he appears to hope ceaseless repetition will transform into ‘truths’. He may very well convince the uninformed, but only them. Take for example this statement that was published in the Malaysian Insider on December 20 quoting him :

“It is well known that Malaysia refused to seek IMF or World Bank help because the so-called help would worsen the financial situation. Instead, in 1998 Malaysia imposed currency control which helped it to recover”.

Both these sentences are untrue. Mahathir, in fact, refused to seek the IMF’s help because they would never agree to helping to save the inefficient and insolvent companies of his friends in the corporate world.

Nor did the currency controls help Malaysia to recover any better than its neighbours. Thailand, Indonesia, South Korea and the Phillipines accepted IMF funds and they recovered as well, if not better, than Malaysia.

But IMF did not prescribe austerity

In the same article Mahathir appeared to accuse the IMF of practicing ‘austerity’ measures in countries that they assisted. This is patently untrue as all the four countries mentioned were undertaking expansionary macroeconomic policies in 1998 under the direction of the IMF!

Mahathir, though, protected by currency controls, managed to bail out his friends and his son. The loss to Malaysia was that these companies were bailed out with taxpayer funds. It also allowed Mahathir to avoid real reform, for which lack, we are paying with a lacklustre, uncompetitive economy today, among other things.

The NST meanwhile, decided to help Mahathir out of his predicament of being caught in a blatant lie by publishing excerpts from his book, ‘Doctor in the House’. The first part, published on the 23rd of December, exposes both Mahathir’s ignorance and his follies. At one point, he appears disappointed with Anwar for not prevailing on Michel Camdessus, the then head of the IMF, to stop currency trading. Why Mahathir thought Camdessus had the power to do any such thing is unclear.

The IMF was created in Bretton Woods to provide loans to countries that had balance-of-payments difficulties. It could also ensure that nations in deficit pursued contractionary policies by using its ability to extend loans as a stick.

At no time was it envisaged that the IMF would, or could, act as some kind of international financial policeman which would crack down on errant (in Mahathir’s jaundiced view) currency traders. Other than being bewildered by Mahathir’s perplexing request, neither Chirac nor Blair could have done anything about it.

The Daim factor

This leads us to Mahathir’s remarkable statement in his book that “It seemed that despite the soundness of our economy and finances, the ringgit might still come under attack”. Mahathir is not only lying here, but he must very well know at this point, that he is lying. Neither the Malaysian economy nor its finances was sound when the currency crisis hit the country in ‘97/’98.

Malaysia had several serious weaknesses at the time, including inadequacy of foreign reserves, performance deterioration of the financial sector, deterioration of the real exchange rate and, as an aside, a credit-funded stock and real-estate bubble.

Malaysia’s foreign reserves stood at 28 billion in 1997 and had been at about that number since 1993. This despite the fact that mobile capital in the country had increased from 6 billion to 50 billion from 1990 to 1997. In addition Mahathir was, in megalomaniacal fashion, encouraging, even directing, Malaysian companies to invest in projects in third-world countries, thus further draining Malaysia’s reserves.

For the clever reader who wishes to point out that Anwar Ibrahim was the Finance Minister at the time, we must note that Anwar (and Bank Negara) had since 1995, warned Mahathir of the dangers to the economy of his policies, to no avail. Their position papers were ignored by Mahathir. He preferred the self-serving advice of his credit-hungry cronies.

Chief among them of course was Daim Zainuddin, a poisonous gnome of a man, whose flagship Renung was one of the companies badly affected by the crisis. Daim would later be accused of being the key person behind the farcical and fantastical plot that Mahathir would make use of to sack Anwar.

Bad policies, low reserves

The fact that Malaysia’s foreign reserves were low are critical because that is the means with which countries defend their currencies. Buy ringgit and it will appreciate against the dollar. It did not work because the reserves were inadequate and because the speculators could see the weaknesses in Malaysia’s economy. Mahathir, 14 years later, claims he still can’t! When Malaysia’s reserves dropped to 15 billion, Bank Negara had to stop intervening in the currency markets.

The unhealthy state of Malaysia’s financial sector also contributed to the situation by effectively tying BNM’s hands. Raising the domestic interest rate would have helped the ringgit appreciate against the dollar. However this couldn’t be done because Malaysian companies, and individuals, had high levels of domestic debt. It had risen from 85% in 1989 to 160% of GDP in 1997.

Raising the interest rate would have caused further bankruptcies and unemployment. Bank Negara’s attempts to rein this credit growth in earlier were blocked by the powerful business circle around Mahathir who wanted the cheap credit to continue flowing; unmindful, and uncaring, of the danger to the country.

The real exchange rate is the rate at which domestic goods can be exchanged for foreign goods and in 1997 it indicated that Malaysia’s ringgit was overvalued against the dollar. Unlike Mahathir, the currency traders had done their analysis quite correctly.

Currencies of sound economies unaffected

Mahathir of course, refuses to admit his mistakes, even now, when it is plain to the most casual of examiners. He continues to blame everyone else and demonizes, to suit his political needs, the IMF and the World Bank. It is most unfair, of course, as the IMF did a sterling job of helping the economies of, among others, Hungary, Ukraine and Iceland during the subprime financial crisis in 2008.

Today, the IMF is playing a key role in Europe by functioning as a lender of last resort in proxy for the ECB which cannot legally do so. Not, one supposes, that they are concerned with Mahathir’s rabid views and too often lunatic opinions.

George Soros, who ran a fund which engaged in currency trading, came in for particular attack from Mahathir. Mahathir accused Soros of forcing the pound to be devalued in 1992. It was, and Soros was involved in it. But the pound was not devalued because of currency speculators.

The pound had to be devalued because the Bank of England did not wish to pursue a contractionary policy in the midst of high employment even though that was what it needed to do to stay within the European Monetary System (EMS).

The Bundesbank meanwhile was more interested in fighting inflation and refused to pursue an inflationary policy as it needed to. The cause of the problem was the reunification of Germany and the huge cost of rebuilding East Germany, not currency traders.

Contrary to Mahathir’s contention that ‘rogue’ currency speculators could devalue for profit the currencies of sound economies; Singapore, Taiwan and Hong Kong proved immune to speculative attack in 1997/’98. That, if it helps at all to educate Mahathir, is because their economies actually were sound. Quite unlike the vulnerable mess that Mahathir had turned the Malaysia economy into in 1997!

Malaysia Chronicle