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Monday, 15 November, 1999, 18:50 GMT
Malaysia's economy: The Sinatra Principle
Growth on the horizon: Dr Mahathir seems to have weathered Asia's economic storm

By Economics Correspondent Andrew Walker

Prime Minister Mahathir Mohamad's decision to go to the polls follows some strong improvements in Malaysia's economic performance.

Malaysia's Snap Election
The country was hit hard by the East Asian financial crisis of 1997 - not as hard as its neighbours Indonesia and Thailand, but it was a traumatic experience nonetheless.

The economy had been growing at 8% or more for several years. But the year after the crisis, 1998, it shrank by almost as much. Spending by businesses and consumers in Malaysia fell even more precipitously - by a quarter.


The value of the currency, the ringgit, also dropped sharply. By the end of 1997, it was 35% below its value 12 months earlier. The stock market in Kuala Lumpur fell by just over half.

Now the situation is looking much rosier.

Economic recovery is under way - positive growth has resumed - share prices are well above their lows and the currency is stable.

There are still problems - throughout the region the poor were hit hard by the crisis. But all in all, Dr Mahathir faces the best economic circumstances in more than two years in which to call an election.

Back on track

PM Mahathir Mohamad Mahathir Mohamad: He did it his way
Malaysia's recovery mirrors developments throughout the crisis-hit Asian economies. Thailand, where the crisis really began in July 1997, is getting back on its feet. So is South Korea.

In Indonesia political turmoil has held back the turnaround, but the International Monetary Fund thinks that a return to economic growth is very close there too.

In some respects Malaysia's solution followed what the others did. They put interest rates up sharply in an attempt to persuade foreign and local investors to hold on to Malaysian currency and so prevent it collapsing completely - the risk was of a self-sustained spiral of currency falls and soaring inflation that would drag the economy to its knees.

But in other respects Malaysia followed what Dr Mahathir calls the "Sinatra Principle" - they did it his way.

Unlike Thailand, South Korea, Indonesia and the Philippines, Malaysia did not seek financial assistance from the International Monetary Fund.

Taking control

IMF loans come with conditions on economic policy, so Malaysia was freer to choose its own policies for the crisis.

But the really big departure from orthodoxy and IMF medicine came in September 1998, a year after the crisis first hit, with the introduction of new controls on currency trading:

  • Foreign investors were told they would have to keep their money in Malaysia for a year.
  • All ringgit held abroad would have to be returned within a month.
  • Tight restrictions were imposed on the amount of currency Malaysians could take out of the country.


Such measures amounted to heresy in the eyes of many of the world's financial markets. There were warnings that they would only cause investors to shun the country in future.

Dr Mahathir has been a keen advocate of prestige construction projects
Some critics were also concerned that Malaysia would use the respite afforded by the new controls to put off dealing with other problems - insolvent businesses and weak banks.

But there were other influential voices saying it wasn't such a bad idea.

It was striking, for example, that China had not succumbed to the international financial contagion. It too suffered from many of the problems other Asian countries had, particularly an over-stretched banking sector burdened with loans that would never be repaid.

What China had that others did not was a system of controls on currency trading. So why, the thinking went, shouldn't other countries adopt the same method?

Breathing space

The restrictions have now expired, but more than a year after they were introduced it is hard to see that they caused any real harm.

In its most recent review of Malaysia the IMF's Board concluded that the breathing space afforded by the controls had been used well to push ahead with reforms in the financial sector and strengthen the banking system.

Malaysian stock trader In spite of the furore, currency controls do not appear to have harmed the economy
But equally there is a case for saying that Malaysia's thumbing its nose at economic orthodoxy has made little difference.

Professor Paul Krugman of the Massachusetts Institute of Technology, a leading advocate of controls, says the decision was not well timed. He admits the publication of his own article in the magazine Fortune advocating controls was also ill-judged.

It came just as panic on the region's financial markets was beginning to subside and interest rates were on their way down.

In any event, Malaysia's recovery may also reflect the fact that its banks were relatively well regulated in the first place, and its more modest amount of foreign debt.

One way or another, though, Dr Mahathir goes into this election with a much better economic story to tell his voters than it could so easily have been.
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See also:
12 Nov 99 |  Asia-Pacific
Analysis: Malaysia's electoral showdown
29 Oct 99 |  Asia-Pacific
Malaysia announces 'recovery' budget
09 Sep 99 |  The Economy
Thank you, Asia!
01 Sep 99 |  The Economy
Malaysia lifts cash controls
08 Jul 99 |  Asia-Pacific
Cyberjaya opens for e-business
01 Jul 99 |  The Economy
Asia's crisis: The country breakdown
15 May 99 |  Business
Apec differs over how to recover

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