Malaysian Maverick: Mahathir Mohamad in Turbulent Times Page 16
The dream turned into a nightmare in 1997, the tenth year of Malaysia's boom. As Thailand capitulated to market pressure and allowed the baht to float on 2 July, other Southeast Asian currencies pegged to the dollar also came under speculative attack. They were targets because, like the baht, they were overvalued, and these countries had long maintained large current account deficits. The pegs, which made the economies more competitive as the dollar declined for a decade after the Plaza Accord, became a growing liability from the mid-1990s as the yen began depreciating again.[77] Almost no one, however, could have predicted that the baht's collapse would reverberate throughout East Asia, devastating Malaysia, Indonesia and South Korea as well as Thailand.
Herd-like panic by currency traders and inexperienced fund managers based in London and New York, treating the region as one instead of a series of quite distinct economies, created a contagion that spread rapidly. As investors abruptly withdrew their funds, share and property market bubbles in Malaysia burst, undermining the country's heavily exposed banking system. Having traded as high as RM2.493 to US$l in April 1997, the ringgit crumbled to RM4.595 in January 1998, as the Malaysian authorities abandoned its loose peg to a dollar-dominated basket of currencies. The Kuala Lumpur Stock Exchange's market capitalization plunged from RM806.77 billion in 1996 to RM375.8 billion in 1997. The exchange's composite index, which stood at 1300 in February 1997, touched a low of 262 in September 1998.
Dr. Mahathir's Vision 2020 was imperiled as more than RM30 billion net in portfolio investments fled Malaysia in the last nine months of 1997, much more than net inflows since 1995.[78] Elaborate symbols of the vision then under construction — among them Putrajaya, a new administrative capital for the country, the Bakun hydroelectric dam in Sarawak and the high-tech Multimedia Super Corridor — would have to be postponed, downsized, or abandoned with the end of the high-growth era. More seriously, international financial forces that had intruded so dramatically would almost certainly require the sort of structural and market reforms in Malaysia that might compel Dr. Mahathir to dismantle his entire development project.
Initially, Malaysia followed Thailand's example in trying to defend its currency, with similar results. Bank Negara intervened in the market, wasting more than RM9 billion in foreign exchange vainly attempting to maintain the value of the ringgit.[79] Government spending was cut drastically, interest rates were raised and the definition of non-performing loans was tightened to three months in arrears from six months. All this was conventional wisdom, standard prescriptions urged by the IMF — and it aggravated the situation. Such contractionary measures helped turn what began as a currency and financial crisis into a more general economic crisis for the country.[80]
In August 1997, Malaysian authorities banned the short selling of 100 indexed-linked stocks, but rather than arrest the slide in share prices it sent them skidding further. Similarly, the creation of a RM60 billion fund in early September, to buy stocks selectively from Malaysian companies or shareholders, was interpreted negatively, as a move to bail out cronies. Although the use of the special fund was never fully explained or implemented, government-controlled public funds were deployed to begin rescuing some of the most influential groups.
Particularly vulnerable were the UMNO-connected conglomerates, formed around privatized projects and nurtured by government policies and patronage, which had found it easy to fund their often frenzied expansion by raising capital in the local stock market, or by borrowing abroad. They had evolved into politically protected market leaders, oozing wealth and power, but not distinguished by productivity or innovation and were completely untested in export markets. With the onset of the crisis, they seemed to be "living on borrowed time and not just borrowed money".[81]
The most damaging case, in terms of loss of investor confidence, was the protracted RM2.34 billion bailout, from November 1997, of Renong Bhd., UMNO's own holding company. After takeover rules were bent in January 1998 to permit United Engineers (Malaysia) Bhd. to acquire 32.6 per cent of Renong, its parent company, at the expense of minority shareholders, the stock exchange lost RM70 billion in market capitalization over the next three days.[82] In another noteworthy case, Petronas took control of Malaysian International Shipping Corporation, after MISC acquired the shipping assets and debts of Konsortium Perkapalan Bhd., which was 51 per cent owed by Dr. Mahathir's son, Mirzan Mahathir. When further plans were announced to save well-connected debt-ridden banks and companies, "capital flight hardened into a capital strike: the market would not return if the state, under Mahathir, could not be disciplined".[83]
Investors were unnerved just as much by Dr. Mahathir's vitriolic attacks on the foreigners he held responsible for Malaysia's pain. Assuming a more direct role in policy-making as the crisis deepened, Dr. Mahathir branded foreign currency traders as "international criminals" led by American financier George Soros, a "moron...with a lot of money".[84] He accused the IMF of wanting to "subvert" Malaysia's economy after an IMF official suggested the government go easy on its giant infrastructure projects. The more he insinuated a Western conspiracy to sabotage Southeast Asia, hinted at a Jewish plot against Muslim Malaysia and railed against "an international dictatorship of manipulators", the faster capital departed Malaysia and neighbouring countries. His remarks "continued to undermine confidence and to exacerbate the situation until he was finally reined in by other government leaders in the region", and no doubt by some of his own advisers.[85]
Another aggravating factor was the perception that Dr. Mahathir and Daim had taken over economic policy making from Finance Minister Anwar Ibrahim, who had endeared himself over the years to the international financial community.[86] Daim reappeared on the scene in late 1997, being named executive director of the National Economic Action Council, chaired by Dr. Mahathir, which was established to manage the crisis. When Dr. Mahathir announced the commitment of state funds to defend the stock market, Anwar was nowhere in sight. Dr. Mahathir felt compelled to quash rumours of policy differences with Anwar and to deny that he had taken over Malaysia's economic management. "I am responsible because I am the head of government," he told reporters. "I can't let just everybody carry on their responsibility without myself helping."[87]
Malaysia's lower exposure to private bank borrowings, serious though it was, meant it did not have to run to the IMF for emergency credit facilities, a humiliation suffered by Thailand, Indonesia and South Korea. A typical IMF package, which involved submitting to deflationary "conditionalities", would have crippled Dr. Mahathir's grand plans. Still, Malaysia had to contend with an increasingly shrill international clamour for reform, including transparency, good governance and allowing foreign investors to buy into and even control local corporations. Domestically, Dr. Mahathir faced what he considered an even more urgent threat. He was convinced that Anwar, his deputy and heir apparent, was plotting amidst the economic dislocation to topple him. Dr. Mahathir's solution, which put him at the centre of a worldwide controversy, was selective capital controls, introduced on 1 September 1998, 14 months after the crisis hit. He sacked Anwar the next day, declaring him morally unfit to hold office.
In an effort to further loosen credit and increase government spending to boost the economy while keeping the currency steady — the easing of monetary and fiscal policy began earlier — Dr. Mahathir banned the trading of the ringgit abroad. Holders of offshore deposits, including currency traders and stock market investors, were given a month to repatriate ringgit to Malaysia. With the country's external account frozen, currency traders were no longer able to short-sell the ringgit, by borrowing it offshore to finance dollar purchases in anticipation of a crash in the ringgit's value. The government fixed the exchange rate at RM3.8 to US$1. Portfolio investment — only the principal, not interest or dividends — had to remain in Malaysia for a year. The offshore market in Malaysian shares, conducted in Singapore, was shut down. Longer-term foreign direct investment was unaffected, as was international trade.
Behind wh
at officials viewed as an economic shield, which itself was a defiance of the IMF, the Malaysian government carried out a programme of recapitalization, rescue and reflation that was also at odds with IMF and international money market thinking. Bank Negara lowered interest rates further, redefined non-performing loans at six months instead of three, set targets for loan growth and directed more credit to the property market, auto industry and other key sectors. The government established three institutions to deal with the financial system. Danaharta removed non-performing loans from the balance sheets of financial institutions, allowing debt-strapped banks to resume lending. Danamodal recapitalized the banks, while the Corporate Debt Restructuring Committee did as it was titled.
Contrary to many forecasts, Malaysia did not commit economic suicide by resorting to a fixed exchange rate and capital controls. The currency turmoil in most of the region, with the exception of Indonesia, subsided by the end of 1998, due mainly to external factors. Thailand and South Korea, subjected to onerous IMF conditionality, showed signs of recovery from the final quarter of 1998, while Malaysia's turnaround began early in 1999. Malaysia rebounded more strongly in 1999 and 2000 than Thailand and Indonesia, though not as impressively as South Korea. In addition to proving wrong the pundits who predicted Malaysia's demise, Dr. Mahathir could take satisfaction in the tarnished reputation of the IMF. He helped discredit the IMF's austerity fix, the one-sized-fits-all solution that the fund misguidedly — and arrogantly — tried to impose in East Asia.
Eminent economists continued to argue inconclusively about the efficacy of Malaysia's action, which was entangled in a global debate about the timing of full-scale capital account liberalization for emerging market economies. But in practice Kuala Lumpur's example meant little. No other country subsequently opted for capital controls, until the military-installed government in Thailand was tempted to intervene to curb the rapid appreciation of the baht in late 2006. The measure — requiring foreign investors to deposit 30 per cent of the funds sent into Thailand to buy shares or bonds in a non-interest bearing account with the central bank — triggered a stock market meltdown in Bangkok and rattled other Asian markets. Just 24 hours after being imposed, the provision applying to the purchase of shares was lifted, though the controls remained on bonds and other debt instruments. The lesson from the botched exercise was that the use of capital controls continued to carry enormous risks.
By focusing on defects in the international system, however, Dr. Mahathir succeeded in diverting attention from domestic flaws and his problems with Anwar. Almost desperate by his own later admission, he was forced to contemplate the elimination of the state-supported conglomerates, the heart of his cherished vision for the Malays and Malaysia. Capital controls for him were both a political and economic solution. As political scientist Khoo Boo Teik observed, "He had no orthodoxy to defend, only interests to protect. He had no theories to prove, only a project to preserve. And, if it needed saying at all, he had his career and reputation to save."[88]
By locking in foreign funds for a year, Dr. Mahathir prevented any fresh flight of capital that might be unsettled by the shock of Anwar's dismissal. The restriction was eased after six months to allow funds to leave on payment of a graduated exit tax, before expiring on 1 September 1999. Dr. Mahathir's insistence on blaming greedy currency traders and stock market manipulators alone for the regional crisis strained credulity. The government tried to hold Anwar responsible for all inappropriate Malaysian responses, when clearly they were mostly collective decisions until his ouster. Dr. Mahathir and Daim were primarily responsible for the nepotism and other types of cronyism, involving the use of public funds to resuscitate local business, which undermined investor confidence in Malaysia.
The personalized way business and politics intertwined under the Mahathir administration was highlighted when Daim abruptly resigned from the government and as UMNO treasurer in June 2001. Although nothing was said officially, it was known that a rupture had occurred between him and Dr. Mahathir.[89] Daim's protégés came under immediate financial pressure, just as did those owing allegiance to Anwar Ibrahim when he was sacked in 1998. With Daim's departure, Dr. Mahathir "exercised the political will to tackle the problem of corporate debt" among formerly protected companies. In quick succession, three of Daim's closest associates lost control of their conglomerates, which were taken over at public expense and restructured. "The targets, timing and remarkable haste of the takeovers" implied that Dr. Mahathir "was politically rather than economically motivated".[90]
Affirmative action in combination with Dr. Mahathir's distinctive economic policies, including breakneck growth, had a profound affect on Malaysia and Malaysians. The results were mixed, although a growing band of critics argued that the NEP should be modified or scrapped altogether. During the general election in 2008, the opposition led by Anwar Ibrahim made unprecedented gains, drawing support from all communities by proposing a Malaysian Economic Agenda that focused on needs, rather than ethnicity, to replace the NEP.
Absolute poverty, which claimed half the population in 1970, was reduced enormously, plunging to 5.1 per cent in 2002. Rural poverty fell to 11.4 per cent while urban poverty shrank to 2 per cent. Malay poverty, much of it in rural areas, dropped from 64.8 per cent to 7.3 per cent in the same period. The incidence of poverty among Chinese and Indians also declined markedly.[91] Altogether, it was an outstanding achievement for one of the NEP's two main aims, even though the income threshold used for the poverty line was unrealistically low and underestimated the residual problem.
Considerable progress was also recorded in another key objective, to enhance bumiputra participation in the economy and reduce the gap between the Malay and Chinese communities. The ethnic income disparity ratio in peninsular Malaysia narrowed from 2.29 in 1970 to 1.74 in 1999, though it widened again during the boom years before resuming its positive trend. By its own reckoning, the government failed to boost bumiputra ownership of share capital, just 2.4 per cent in 1970, to the 30 per cent target by 1990. Officially, it rose to 19.2 per cent in 1990, before dipping slightly to 19.1 per cent in 1999. But the government's methodology underestimated the amount — for example, by using the par rather than market value of shares and excluding stakes held in trust for bumiputras — which made it easier to argue for a continuation of affirmative action. According to one independent academic assessment, the 30 per cent bumiputra equity target was achieved as early as 1997.[92] The 30 per cent figure had become so politically charged that a serious study showing the bumiputra corporate share was about 45 per cent in 2004, rather than the official 18.7 per cent, caused a national uproar and prompted the resignation of the director of the group that produced the figure.[93]
Affirmative action, however, also sharpened inequality in Malaysian society, and risked a backlash the longer it stayed in place. As the gap between bumiputras and others was closing, fissures were opening within indigenous ranks. As one analyst put it, bumiputra gains "have not been widely shared", and inequality had "reared its ugly head again".[94] In 1999, the average monthly income of the bottom 40 per cent of bumiputra households was RM742, with the corresponding figure for rural areas RM670, compared with RM865 for the bottom 40 per cent of all Malaysian households.[95] Individual inequality in Malaysia, as measured by the World Bank using the common Gini Coefficient, was the worst in Southeast Asia,[96] widening from 0.452 in 1999 to 0.462 in 2004.[97]
Malay dissatisfaction was starting to build as better-off and better-connected Malays benefited disproportionately. The majority resented the use of public funds to rescue wealthy Malay cronies during the regional economic crisis. It was also a source of anger that Malay millionaires, for example, could take advantage of a 5 per cent housing discount for bumiputras. Small-scale, mostly Malay farmers and fishermen, who did not fit into Dr. Mahathir's idea of a modernized economy, were being comparatively marginalized in a countryside where pockets persisted without water and electricity.[98] And the children of newly minted mi
ddle-class Malays were best placed to capitalize on ethnic preferences in future, leaving their country cousins and poorer city relatives further behind.
Non-Malay bumiputras, predominantly in Borneo, were also being left in the dust, along with lower-class Indians. They constituted the new poor. Although other bumiputras were supposed to be accorded the same preferential treatment as Malays, in fact they suffered a higher incidence of poverty and lagged in equity ownership and enrolment in higher education.[99] Several studies indicated that the overall plight of the Orang Asli had worsened over the years, despite their status as bumiputras.[100] Significant numbers of Indian labourers, displaced by the influx of foreign workers and the development of plantations for industrial and residential use, joined the ranks of the unemployed in urban squatter areas. Not being bumiputras, they lacked the support needed to acquire skills and obtain jobs.
Ethnic preferential policies in education and employment went a long way towards ending identification of race with job. Where more than 62 per cent of Malays had been employed in agriculture in 1970, most found work in manufacturing. More Malays had jobs even in services, if government agencies were included, than on the farm. With all public universities reserving a majority of places for bumiputras until 2001,[101] Malays joined Chinese and Indians in the professions and filled the ranks of Malaysia's burgeoning middle class. Measured by jobs and income levels, the middle class more than doubled to encompass 26.3 per cent of the population.[102] By 2000, about one in three dentists, doctors and lawyers and one in four architects and engineers, along with a sprinkling of accountants, were Malay, whereas there had been few 30 years earlier.[103] More than one-third of the entire Malay community was in middle-class occupations — professionals, technicians, teachers, nurses, administrators, managers and clerks.[104]