No Asian country dealt with the fallout of the Asian financial crisis with greater conviction – and obstinacy – than Malaysia. In a defiantly controversial move, Mahathir Mohamad, Malaysia’s then prime minister, imposed wide-reaching capital controls, including a fixed exchange rate for the ringgit, in a bid to slam shut the door on currency speculators. The move flew in the face of orthodoxy and led to almost universal condemnation by market players and mainstream economists alike.
But 10 years on, it is difficult to decide whether the policy itself helped or hindered the East Asian nation; after all, there are countries that avoided such drastic measures and have done much better, like Korea; and countries that didn’t intervene but have fared worse, such as Indonesia.
For his part, Mahathir is unrepentant. When Emerging Markets asks him whether, with hindsight, his approach was correct, the 81-year-old former leader is emphatic: “Yes, it was the right one,” he says.“It still is.”
Mahathir dismisses the idea that Malaysia was simply reactionary in adopting a fixed exchange rate policy. After all, he says, China had one then – and still does. Instead, the decision was a result of considered reflection: “We studied the results of the different policies, and we decided we should fix our exchange rate,” he recalls.
Moreover, Mahathir firmly believes the policies of the late 90s should still be in place today, contrary to the approach of his successor Abdullah Badawi, who has been steadily repealing them. Is Abdullah right to do so? “No, I don’t think so,” Mahathir says.
Critical
The elder statesman is a vocal critic of many elements of Abdullah’s administration: the capital account policy is just one point of contention, along with corruption, infrastructure spending, labour policy, the future of national car maker Proton and myriad other perceived sins.
“I still believe there is a role for fixed exchange rates,” he says. “Today the ringgit is stronger, but we are not getting any benefit from that.” A better outcome for Malaysia, he argues, would have been to allow a 10% appreciation in the ringgit within fixed exchange mechanisms, and then to demand a lower cost of imported goods sold in US dollars. “In effect it would put 10% more money into the pockets of consumers in this country,” he says. “But because it floated, we have no means of ensuring that the strengthening of the ringgit benefits people.”
So are Asian nations – from India to China – wrong to insist on moving to flexible exchange rates? “Floating [currencies] are all right provided you restrict these people who manipulate the market,” says Mahathir, singling out the foe he has consistently blamed for the financial crisis.
“We were not against speculators, because they just bet on trends, but when you allow people with huge amounts of money in their funds to buy and sell against the market ... this is what happened with the currency traders. They were short selling, they were able to force currency to be devalued or revalued, and they profited that way.
“That was where floating went wrong, to allow for people to manipulate the market,” he says. “In order to avoid that we had to fix exchange rates.”
Short-selling standards
While Mahathir does not think all his 1998 measures should remain in place, he nevertheless believes some should. He is scathing about Malaysian stock exchange Bursa Malaysia’s recent decision to allow short selling. “I don’t think that is right,” he says. “Short selling is manipulation; it’s not speculation, or playing trends, or watching the statistics.”
“It benefits the people who are savvy and who have the money to play the market,” he says. “It does not benefit the ordinary serious investor.”
Mahathir views the Asian financial crisis as a personal learning experience, as much as anything: “I learned a lot, because I knew nothing about finance. I had to read up.” He recalls it as “a good learning experience”.
But Asia’s elder statesman warns that yield-hungry investors still pose a profound threat to the region. “They [Asian countries] are more sophisticated, more knowledgeable, but still if there is another concerted attack against their currencies, some of these countries could go down again,” he warns. “That may happen to Malaysia, even.”