Of all the nations hit by Asia’s financial crisis a decade ago, none reacted with more conviction – or stubbornness – than Malaysia.
In a move as controversial as it was defiant, Mahathir Mohamad, Malaysia’s then prime minister, imposed extensive capital controls, including a fixed exchange rate for the currency, in a bid to slam shut the door on currency speculators.
The action flew in the face of orthodoxy and led to widespread condemnation from market players and mainstream economists alike. But it also cemented Mahathir’s image – at least among developing countries – as an economic nationalist who took a stand against financial globalization and its apparent ill effects.
Ten years on, it’s 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, for example, Korea; and countries that didn’t intervene but fared, for a time, worse, such as Indonesia.
For his part, Mahathir is unrepentant. When Emerging Markets asks him whether, in hindsight, his approach was correct, the 82-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 different policies, and we decided we should fix our exchange rate,” he recalls.
“I learned a lot [at the time], because I knew nothing about finance,” he admits. “I had to read up, I got people to brief me. I had to understand how banks work, how their accounts are kept, so it was a good learning experience.”
Etched in history
Mahathir will always be remembered for his reaction to the Asia crisis, but his outspokenness stretches back at least two decades earlier. “He earned this reputation before the Asian crisis with his bold anti-western rhetoric on a variety of contemporary issues,” says KS Jomo, a noted Mahathir scholar now at the UN Department of Economic and Social Affairs, who argues the crisis just reinforced the image.
An economist at a leading bank recalls that, as early as the 1980s, Mahathir’s policies and statements reflected a view that he could “stick two fingers up at the IMF”.
Today, almost all the restrictions he put in place are gone. Even short selling has been introduced, in a limited sense, to Bursa Malaysia, the local stock exchange. Foreign exchange restrictions were axed in March.
“I still believe there is a role for fixed exchange rates,” he laments. “Today the ringgit is stronger, but we are not getting any benefit from that... We have no means of ensuring the strengthening of the ringgit benefits people.”
“Floating [exchange rates] are all right, provided you restrict these people who manipulate the market,” says Mahathir, singling out the foe – currency speculators – 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 the currency to be devalued or revalued, and they profited that way.”
“That was where floating went wrong, to allow people to manipulate the market,” he says. “In order to avoid that we had to fix exchange rates.”
Never much of a believer in free markets, he still maintains that short selling is immoral and should be prevented. “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 money to play the market. It does not benefit the ordinary serious investor. It is something that, because you have power and a lot of money, you can go in and buy, and buy, and push up the value of shares, and then dump them.”
Still angry
The striking thing about Mahathir now is the sheer range of issues on which he remains outraged. The removal of capital controls is one. But beyond this, he rails at a list of perceived domestic failings: the handling of national car manufacturer Proton – an iconic venture whose creation he was responsible for; the behaviour of Khazanah, the state agency tasked with improving the performance of government-linked companies; the gradual shift away from affirmative action policies to protect ethnic Malays; the return of his former deputy and now nemesis, Anwar Ibrahim, into Malaysian political life.
“[We have] regressed a bit, I’m afraid,” he says. “Before, foreign direct investment into Malaysia was always bigger than to most other Asean countries. I was shocked to find Indonesia attracted more foreign direct investment than Malaysia.”
But his anger should come as no surprise. This is how the world will always think of Mahathir, denouncing western power, condemning investor George Soros as well as foreign conspiracies to devalue the ringgit, doing his own thing no matter what.
Critics point out that Malaysia under Mahathir grew at the expense of freedom of speech, an independent judiciary, global competitiveness and true democracy. But grow it did, particularly in the pre-crisis golden era from 1988 to 1997 when growth averaged over 10% and standards of living improved considerably – for most citizens at least. In an era that included the Philippines’ Ferdinand Marcos and Indonesia’s Suharto as his fellow long-term autocrats, his legacy appears reasonably strong.
“Despite his actual chequered record, he will be remembered and appreciated in many developing countries as an economic nationalist at a time when the western media continues to be dominated by cheerleaders of globalization,” says KS Jomo.
But Asia’s elder statesman’s final warning may yet prove prescient. The threat of currency speculation still looms over Asia. “[Traders] 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 even to Malaysia.”
This profile is one in a series of twenty, published in a special commemorative edition to mark the 20th birthday of Emerging Markets newspaper. The profiles canvass twenty of the figures who have had the most impact on the rise of the emerging markets over the past two decades.