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| Malaysian
Eclipse: Economic Crisis and Recovery |
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| Edited
by: Jomo K. S. |
Published
by: Zed Books, London and New York, 2001. |
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| Malaysia and
the Myth of Self-Regulating Markets |
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| Review by
John
A. Miller* |
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Click to Enlarge
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It seems altogether
fitting that Malaysian Eclipse edited by Jomo
K.S., the Malaysian political economist and long-time
critic of Kuala Lumpur officialdom, would appear
in the same year that Beacon Press reissued The
Great Transformation. In his forward to this new
edition of the renowned economic historian Karl
Polanyi's classic study of the myth of self-regulating
markets, Joseph Stiglitz, the Nobel-prize-winning
former chief economist of the World Bank, calls
the East Asian economic crisis of 1997–98
"the most dramatic illustration of the fail-ure
of self-regulating markets."[1] |
The myth of self-regulating
markets is the topic of the Malaysian Eclipse
as well. What Jomo and his coauthors write about
the Malaysian experience with the neoliberal agenda,
especially financial and capital market liberalization,
will be instructive to those who study economic
development in East Asia and elsewhere.
Malaysia is especially well suited for the study
of the effects of financial liberalization and
of "self-regulating" markets on economic
development. First, as the World Bank's East Asian
miracle report pointed out nearly a decade ago,
Malaysia, Thailand, and Indonesia, the second-generation
NICs (newly industrializing countries) of Southeast
Asia, relied more heavily on markets and less
heavily on government interventions than had the
first generation of East Asian NICs, especially
South Korea.[2]
Second, Malaysia was a favorite destination of
financial capital, capturing more of the capital
that flowed into the newly emerging markets during
the 1990s than any other developing economy.
Third, Malaysia oversaw its recovery not with
International Monetary Fund–administered
austerity measures but with its own policies that
included a highly controversial experiment with
capital controls. That move made Malaysia, and
especially its firebrand prime minister Mohammed
Mahathir, an object of derision in orthodox financial
circles but a champion for others seeking an alternative
to financial-market-dictated economic development.
Jomo is a well-established voice in the Malaysian
political debate. He is the author of a veritable
bookshelf full of studies of Malaysian economic
development that seemingly cover each turn in
Malaysian public policy since the mid-1980s. Economic
journalists and researchers regularly seek him
out for a critical assessment of Malaysian economic
policy. That was certainly true for economic journalist
James Goodno and myself when we were conducting
research on the limits of poverty alleviation
in Malaysia for the book we are writing about
rapid growth, economic crisis, and poverty in
Southeast Asia.
This collection of essays, all but one authored
or coauthored by Jomo, provides the kind of convincing
and nuanced analysis that journalists and economists
have come to expect from him. To be sure, Malaysian
Eclipse is critical of the free-market ideology
of the International Monetary Fund (IMF), the
U.S. Treasury, and the economics profession. But
it is also damning of the conspiracy theories
and self-serving rhetoric of economic nationalism
offered up by Prime Minister Mahathir, frank in
its assessment of the limits of capital controls,
and fully cognizant of the corroding effect of
cronyism on the Malaysian economy.
Mahathir has served as Malaysia's prime minister
for two decades now. Through skillful political
manipulation, he has held together a coalition
of ethnic Malays, the majority population, and
the ethnic Chinese business class in a national
alliance dominated by the United Malays National
Organization (UMNO). While fairly regular multiparty
elections have forced some accountability upon
him, Mahathir's authoritarian rule has amassed
power in the executive branch and used an internal
security act to jail opponents. An emerging Malay
bourgeoisie has benefited from his political patronage.
At the same time, Mahathir has been a long-time
advocate of privatization, a fact that should
not be obscured by his railing against international
speculators during the 1997–98 economic
crisis or Malaysia's experiment with capital controls.
Jomo's determination to strike out on an independent
path is clear even in his acknowledgements. Jomo
dedicates Malaysian Eclipse to Anwar Ibrahim,
the now-jailed former finance minister and opposition
leader. Jomo met with Anwar in May 1998, in the
midst of the crisis and just four months before
Anwar was ousted from office on sexual misconduct
charges. The dedication is a bold move and a politically
risky one given the arrests that have taken place
since Anwar was jailed. Jomo's ability to get
away with it underscores his prominence in Malaysia
as well as the limits of Malaysian authoritarianism.
The dedication alone challenges the usual reading
of Malaysian economic policy debate as pitting
Anwar's neoliberal leanings against the economic
nationalism of Mahathir. That view was one Mahathir
was only too happy to promote. After Anwar's dismissal
and arrest, the Mahathir camp branded him an "ill-informed
stooge of the IMF and other foreign interests"
and made him the scapegoat for the austerity programs
the government undertook in the initial months
of the crisis. And those charges stuck. For instance,
at the time, a friend of mine and fellow political
economist was fond of referring to Anwar as "the
Wall Street Journal's favorite Asian leader."
Jomo came away from his meeting with Anwar with
quite a different impression of the finance minister.
Anwar, as Jomo remembers him, was in command of
the economic issues and open to criticism. In
fact, shortly after their meeting, Anwar announced
policies intended to reflate the economy, a policy
Jomo had advocated during their May get-together.
Anwar, Jomo argues, had been no more an advocate
of privatization than Mahathir, who had championed
those policies throughout the 1990s. On top of
that, Anwar had actually administered Malaysia's
1994 experiment in capital controls. And at the
onset of the crisis, Anwar had favored smaller
cuts in the government budget than those pushed
for by Daim Zainuddin, the long-time Mahathir
ally, who took Anwar's place as finance minister.
The chapters that follow offer a direct challenge
to the neoliberal agenda of financial liberalization
in the developing world. Jomo and his coauthors
identify an "ill-timed and ill-sequenced"
liberalization of Malaysia's banking system and
financial markets as the "root cause"
of Malaysia's economic crisis. They make their
case in chapters that recount the story of the
transformation of the Thai currency crisis to
a regional financial crisis and then an economic
crisis with the help of IMF-imposed austerity
policies; document the breakdown of prudential
oversight of Malaysia's banking sector and the
rush to liberalize Malaysia's financial markets
beginning in the late 1980s; and trace the unprecedented
inflow of portfolio investment in Malaysia and
its reversal during the crisis.
In the fall of 1997, the currency crisis that
began in Thailand reached Malaysia. The ringgit,
the Malaysian currency, would lose nearly two-fifths
of its value by August 1998. The stock market
fell even more severely, with the main Kuala Lumpur
Stock Exchange composite index losing three-quarters
of its value over the same period. The net inflow
of capital into Malaysia was cut in half as net
portfolio investment turned highly negative and
remained negative through 1998. The Malaysian
economy slowed during the second half of 1997,
then crashed in 1998, contracting by 6.7 percent.
Construction, real estate, and manufacturing were
all hard hit. Employment contracted across the
economy and jobs for foreign workers disappeared.
Still, all told, the economic crisis did less
damage in Malaysia than in either Thailand or
Indonesia. And unlike the Indonesian economy,
which remained mired in crisis, the Malaysian
economy began to recover during 1999, growing
4.3 percent, about one-half the rate it had averaged
over the previous decade.
These chapters dispute the IMF contention that
the Malaysian crisis was "homegrown"
and could be chalked up to faulty macroeconomic
management. Jomo and Rajah Rasiah, a Malaysian
economist who has written extensively about foreign
capital flows into Malaysia, establish that at
the onset of the crisis Malaysia's "first
order macroeconomic conditions" were in good
shape and were characterized by sustained rapid
growth, relatively mild inflation, and fiscal
discipline. What plagued the Malaysian economy
was a persistent current account deficit dangerously
financed by short-term capital flows. Unlike Thailand
and Indonesia, which relied on borrowing from
foreign banks to cover much of their current account
deficits, Malaysia turned to the capital markets
to finance its current account deficit, for prudential
regulation limited bank borrowing from abroad.
When the crisis hit, both types of short-term
capital flows - foreign bank lending and stock
buying - reversed themselves with little regard
for the actual strength of these economies. But,
as Jomo and his colleagues establish, Malaysia's
closer regulation left its banking sector in better
shape and thereby muted the impact of the crisis
in Malaysia.
Nor are Jomo and his coauthors willing to attribute
Malaysia's record of rapid growth before the crisis
to financial liberalization. As they point out,
much of Malaysia's rapid growth predates the deluge
of foreign portfolio investment during the 1990s.
These authors fully recognize that economic growth
in Malaysia has always been highly dependent on
long-term foreign direct investment (FDI), whose
levels are well above the average for developing
countries, especially in the export-oriented manufacturing
sector. But their econometric analysis fingers
portfolio investment, not FDI, as the footloose
culprit in the Malaysian crisis. In their findings,
foreign portfolio investment is more volatile
than FDI and even foreign bank borrowing. Furthermore,
"unexpected drops" in the Kuala Lumpur
Stock Exchange composite index were not followed
by sudden pullouts of FDI in their study, adding
to the mounting evidence that developing countries
need to treat FDI and short-term capital flows
differently.
Cronyism
Malaysia provides an equally good testing ground
for the neoliberal contention that cronyism, not
market failure, is the root cause of the East
Asian crisis. Cronyism provided the financial
establishment with a ready-made explanation of
how politically connected investment and bailouts
of the politically powerful had caused the Asian
crisis. Federal Reserve Board chairman Alan Greenspan
went so far as to suggest that the Asian crisis
would be eventually viewed as a milestone in the
triumph of market capitalism because it rooted
out these "last vestiges of mercantilism
in credit allocation."
In Malaysia, cronyism is indeed widespread, if
not unusually high, according to international
studies. Nonetheless, cronyism provides a less
than satisfactory explanation of the crisis. Jomo
marshals the usual counterarguments: cronyism
was a constant practice during Malaysia's four
decades of rapid growth and had never before produced
a financial crisis of similar magnitude. Prior
to the crisis, Western financial analysts had
praised these exact same practices as a source
of stability for these economies.
But Jomo does not stop with a critique of the
cronyism explanation of the crisis. He acknowledges
cronyism eroded the sustainability of Malaysian
economic growth and made its economic crisis worse.
Also, drawing on Jomo's early work, completed
with his fellow economist at the University of
Malaya, Edmund Gomez,[3] the authors of Malaysian
Eclipse argue that cronyism is best understood
as nondevelopmental rent-seeking. Cronyism awards
government contracts to (or bails out) politically
connected friends, but the payment of those rents
does little to contribute to the country's productive
capacity or economic development. In Malaysia,
cronyistic rent seeking is often part and parcel
of government-supported, large-scale infrastructure
projects and other ventures that are "sometimes
unnecessary and often unviable," fueling
rampant real estate speculation. Malaysia's government
interventions, in Jomo's estimation, were far
less successful than the practice of industrial
policy in the first-generation NICs of Northeast
Asia. In South Korea and Taiwan Province of China, government support
for corporate investors was more often tied to
performance standards and the potential international
competitiveness of their investments.
Capital Controls
On September 14, 1998, Malaysia imposed capital
controls. The decree issued by the government
of Prime Minister Mahathir required portfolio
investment funds to remain in the country for
a year, although the controls were subsequently
revised to an exit tax (with rates that varied
depending on the length of stay).
For Jomo, Malaysian capital controls "remind[ed]
the world that there are alternatives to capital
account liberalization." He might even agree
with Martin Khor, director of Third World Network,
a Penang-based nongovernmental organization, that
the introduction of capital controls in Malaysia
were "the biggest blow so far against the
orthodoxy of laissez-faire and total freedom for
financial markets."[4] But unlike Khor, Jomo
is not prepared to declare Malaysia's experiment
with capital controls a successful example of
"what developing countries can do to protect
themselves against predatory speculators and against
financial volatility."[5]
Jomo warns that the Malaysian experience with
capital controls was not the unbridled success
proclaimed by the Mahathir administration. While
surely not "the unmitigated disaster"
predicted by market fundamentalists, the evidence,
according to Jomo, suggests that the contribution
of capital controls to Malaysia's recovery was
"ambiguous." In the wake of the imposition
of capital controls, the Malaysian stock market
stabilized. Foreign direct investment dropped
off, although Jomo says that was due in part to
the "hostile official rhetoric" of the
Mahathir government. Still the Malaysian economy
recovered no more slowly than the neighboring
crisis-economy, Thailand, which labored under
an IMF-imposed austerity program.
Much of the problem with evaluating Malaysia's
capital controls is their timing. By September
1998, the crisis was already 14 months old, and
the bulk of foreign portfolio investment had already
left the country. Malaysian capital controls,
as Jomo puts it, "closed the stable door
long after the horses had bolted." The controls
had the perverse effect of restricting the movement
of the capital that had remained in the country.
In addition, while capital controls allowed the
Malaysian authorities to bring down interest rates,
those interest rate cuts had only a limited effect
on the recovery because interest rates across
the region had dropped by then.
Jomo seems convinced that "there is little
to gain from maintaining the current regime of
[capital] controls," and favors instead a
system of closer prudential regulation intended
to moderate capital inflows and deter speculative
surges. These measures would include limits on
foreign borrowing and a managed float of the currency
with convertibility. In addition, Jomo insists
that these measures need to be accompanied by
greater cooperation among monetary authorities
in the region. He sees this as the first step
toward establishing an East Asian monetary facility
dedicated, unlike the IMF, to providing needed
liquidity to economies experiencing crisis. While
these proposals would surely promote a new, more
progressive financial architecture, abandoning
Malaysian capital controls, even allowing that
their effectiveness remains a matter of controversy,
would surely be a mistake. Reinstating capital
controls, once abandoned, especially prior to
the onset of an economic crisis (when they might
act effectively to avoid financial crisis) would
face serious political impediments. The most powerful
actors in the international economy - from
international financial institutions such as the
World Bank and the IMF, to the governments of
the wealthy nations of the world, to the largest
financial and nonfinancial corporations - all
vehemently oppose the use of capital controls.[6]
Malaysian Eclipse provides the reader with important
insights into how a developing country might best
engage with the world economy. Emerging economies
must avoid the ill-considered financial liberalization
pushed by international organizations in favor
of regulating short-term capital flows and limiting
bank lending through prudential oversight; push
the inflow of international capital away from
such nontradables as real estate speculation and
portfolio investment toward more long-term foreign
investment; and stand ready to provide needed
liquidity during economic downturns even as international
investors and agencies call for corporate reforms
and belt tightening.
Still, at times the reader must work hard to gain
the insights offered here. Much of the problem
is that as a collection of essays, the volume
does not possess a single narrative. Most of the
essays are derived from the contributions Jomo
and his coauthors made to several well-respected
studies of the East Asian crisis. As chapters,
these essays are written with varying degrees
of accessibility and are sometimes repetitive.
Combining some chapters (e.g., the third or fourth
chapters on the regulation of the banking sector
and financial liberalization) and reducing others
to an appendix (e.g., the technical sixth chapter
on capital flows volatility) would have gone a
long way toward establishing a single narrative
of the Malaysian experience.
Malaysian Eclipse also never directly addresses
the critics from nongovernmental organizations,
such as Martin Khor, who hold a more positive
view of Mahathir's policies, especially capital
controls. That is in part a by-product of cobbling
together a volume of essays from agency reports
focused on official policy and mainstream economic
analysis. Jomo's own analysis of the Malaysian
crisis and recovery would have been stronger yet
had he been forced to differentiate his views
from those of more economic nationalist critics
of neoliberalism.
Still, whatever its shortcomings, this volume
does much to foster the open debate Jomo rightly
says Malaysian economic policymaking desperately
needs. Beyond that, Malaysian Eclipse does yeoman-like
service for all those concerned with "the
great transformation" under way in the developing
world. Its fact finding and analysis puncture
the myth of self-regulating markets perpetuated
by the advocates of financial liberalization,
honestly assess attempts to institute economic
nationalism through mechanisms such as capital
controls, and point the way toward more promising
alternative policies.
[1]
Karl Polanyi, The Great Transformation: The Political
and Economic Origins of Our Time (Boston: Beacon
Press, 2001).
[2] The World Bank, The East Asian Miracle: Economic
Growth and Public Policy (New York: Oxford University
Press, 1993).
[3] Edmund Terence Gomez and Jomo K. S., Malaysia's
Political Economy: Politics, Patronage, and Profits
(Cambridge, U.K.: Cambridge University Press,
1997).
[4] Martin Khor, "Currency Trade and Capital
Controls Get Limelight" (Penang, Malaysia:
Third World Network, 1999), at www.twnside.org.sg/crsis_5.htm.
[5] Martin Khor, "Tide Turning on Financial
'Free Market'" (Penang, Malaysia: Third
World Network, 1998) at www.twnside.org.sg/crsis_5.htm.
[6] See Arthur MacEwan, Neo-Liberalism or Democracy?
Economic Strategy, Markets, and Alternatives for
the 21st Century (New York: Zed Books, 1999).
* John A. Miller is Williams Professor
of Economics at Wheaton College, and the coauthor,
with James Goodno, of the forthcoming Which Way
to Grow? Globalization and the Economies of Southeast
Asia, a study of rapid growth, economic crisis,
and poverty in Thailand, Malaysia, and Indonesia. |
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| January 30, 2003. |
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