The Asian Wall Street Journal
September 2, 1999
Malaysia's Dubious Recovery
Policy makers in Malaysia are proclaiming victory this week as quarterly GDP
figures register the first period of growth since the Asian crisis struck more
than two years ago. To top it off, the anniversary of the imposition of
capital controls came and went yesterday without event, putting to rest any
fears of a mass exodus of capital on the day that the exit tax was lifted on
investments made before Sept. 1, 1998.
While Prime Minister Mahathir Mohamad argues that the controls, and the
fixed exchange rate, have allowed his government to "kick start" the economy
into recovery, there is a broad consensus among Malaysia watchers that the
controls had little to do with the recent growth, one way or the other. Even
economist and one-time capital-controls cheerleader Paul Krugman acknowledges
this, saying "[t]he controls turned out to be irrelevant because the pain was
already subsiding when they were introduced."
However, while most analysts are quick to agree that the controls had
little to do with Malaysia's recovery, the fact that the measures have not
wreaked immediate havoc with that country's economy seems to have put a damper
on any serious criticism of them.
That's too bad. Because serious criticism of the restrictions has never
claimed that they would lead to immediate economic disaster. All along, critics
have argued that, while capital controls might provide some short-term relief
from the harsh judgments of the global economy, the long-term damage would more
than wipe away these gains. These criticisms still stand. Indeed, the
imposition of capital controls has only worsened the problems that led foreign
investors to judge the Malaysian economy so harshly two years ago.
Apart from the obvious consequence of discouraging foreign investment,
Malaysia's capital controls are having other, more serious effects. By cutting
itself off from the judgments of the international marketplace, the government
of Malaysia has shielded itself from the consequences of bad policymaking.
Not surprisingly, a raft of ill-advised policies followed on the heels of capital
controls, beginning with Dr. Mahathir's 65.1 billion ringgit ($12 billion)
"stimulus" package, dramatic cuts in interest rates, instructions to banks to
raise lending by 8%, and the 1998 bail-out of the ruling party's investment
More recently, the government has taken the opportunity to further consolidate
the financial sector, with the forced merger of the country's 58 financial
institutions into six banking groups. Along with this consolidation, no doubt,
will come a consolidation of government influence in that sector. In other words,
stay tuned for further selective rescue packages.
The Malaysian government knows that these policies would have had the effect
of inciting further capital flight had capital remained free to flee, which is
why it claims the controls have been a success. Without them, there could have
been no massive public works spending, no monetary expansion, and no impressive
GDP figures within only a year.
But GDP figures alone are not proof of a healthy economy, any more than
artificial stimulus can lead to real recovery. Real reform needs to happen
before we can call this recovery solid. And that means allowing bad companies
to fail, and bad lending and investment decisions to be punished by the
marketplace. As long as capital controls remain in place, that remains highly
Copyright Dow Jones & Co. 1999