IMF and Malaysia – then and now

SEPARATED by a gap of nearly 15 years, the lectures by two French managing directors of the International Monetary Fund in Kuala Lumpur – Michel Camdessus and Christine Lagarde – underscore the tremendous changes in the IMF and Malaysia.

On Dec 2, 1997, nearly five months after the onset of the Asian crisis, Camdessus strode into the Putra World Trade Centre like a modern-day Louis XIV – the French king who built Versailles and famously declared "I am the state."

Titled "Rebuilding Confidence in Asia", Camdessus's speech enunciated two propositions.

First, the crisis was caused by East Asian countries' flawed economic policies. Camdessus's assertion ignored the IMF's contributory role, in particular, its aggressive advocacy of financial and capital market liberalisation, a policy that allowed the destabilising movement of huge sums of money into and out of this region.

Second, he staunchly defended hedge funds, speculators and global markets.

" ... It would be a mistake to blame hedge funds or other market participants for the turmoil in Asia. Turbulence in the market is only a symptom of more serious underlying problems, which are now being addressed seriously in many countries," he said.

During the question-and-answer session, Camdessus swatted aside criticism of IMF policies.

Martin Khor, then director of Third World Network, pointed out Camdessus was inconsistent in suggesting countries should re-examine and change their policies while failing to require market players and the IMF to do likewise.

Noting financial speculation hadn't been regulated, Khor also suggested financial liberalisation had taken place too fast, before the authorities had the opportunity to understand how liberalisation worked or to put in place the regulatory and human resources infrastructure.

In a stunning rejoinder, Camdessus asserted "Speculation is often only good management and prudent use of our savings."

Camdessus was equally dismissive when a Philippine participant criticised his "blind faith that markets are good and governments are bad."

Several weeks after visiting Kuala Lumpur, Camdessus was featured in an iconic photo that showcased the IMF's unequal relationship with Asian crisis countries. Taken in Jakarta, this photo shows a stern-faced Camdessus, with his arms folded across his chest, standing over a seated President Suharto while the latter signed an agreement with the fund.

In an article titled "Crisis of Credibility: the Declining Power of the IMF", Walden Bellow and Shalmali Guttal noted that within a few weeks, the Asian crisis had impoverished over a million Thais and some 21 million Indonesians.

By the time Christine Lagarde – impeccably dressed to avoid offending Muslim sensibilities – glided into Sasana Kijang on Nov 14, 2012, the Asian crisis had shredded the IMF's credibility, Malaysia's decision to impose selective capital controls in 1998 had been vindicated and Asia was now economically ascendant.

Titled "Asia and the Promise of Economic Cooperation", Lagarde's speech was notable for several reasons.

First, she lauded Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz as one of the world's best and longest-serving central bankers and praised Malaysia as one of Asia's most dynamic and innovative centres. Zeti assumed the top position in the central bank amid the East Asian crisis; today, she faces the challenges posed by the Eurozone crisis.

Second, Lagarde's speech contained several references to this country, including Malaysian author Tan Twan Eng, former Prime Minister Tunku Abdul Rahman and the slogan "Malaysia, Truly Asia".

Third, her speech highlighted Asia's growing global economic clout.

"Over the course of three decades, emerging Asia's share of world GDP jumped from 10% to 30%, living standards rose sixfold, and an incredible half billion people pulled themselves out of poverty. Over the past decade alone, emerging Asia has grown by more than 7.5% a year," she said.

Fourth, Lagarde's was finely nuanced, striking a balance between fulsome praise and outright criticism. For example, she complimented Malaysia for the tremendous fall in poverty over the past few decades but added income inequality is now on the rise. And while great strides have been made to reduce inequality in this country in the 1970s and 1980s, no further reductions have been seen since then, she noted.

Fifth, unlike Camdessus, Lagarde acknowledged capital flows can bring great benefits but conceded "they can also overwhelm countries with damaging cycles of crescendos and crashes."

Sixth, departing slightly from her prepared text, Lagarde gracefully acknowledged the fund's hostility towards Malaysia's selective capital controls was "a mistake". But we all make mistakes, she said.

Seventh, Lagarde acknowledged Malaysia's leading role in boosting the fund's coffers – an act she described as a "vote of confidence in the IMF" and a vote of confidence in partnership.

In short, the two visits encapsulate this country's relationship with the IMF. In 1997, Camdessus was friendly with the then finance minister, Lagarde was warmly received by Malaysia's financial leaders; only some years during the interim was there a lack of amity.

-thesundaily