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Malaysia Survives Dire Predictions (fwd)
This article from the Washington Post on the Malaysia experience is
remarkable because:
1. It comes from Paul Blustein, a very conservative, pro-globalization
writer. His acknowledgement that Malaysia's capital controls worked, or at
the very least did not apparent harm, is itself noteworthy.
2. It reports on a similar conclusion reached at the IMF.
3. It features IMF officials trying to contain the meaning of the Malaysia
experience: Maybe capital controls can work, they say, but only as a
temporary, desperation move in response to crisis. Why not on a more
permanent basis? Well, because.
Robert Weissman
Essential Information | Internet: rob@essential.org
Malaysia Survives Dire Predictions
By Paul Blustein
Washington Post Staff Writer
Wednesday, May 19, 1999; Page E01
For anyone who recalls the nasty things Malaysia did to
foreign investors
last September, and who believed the predictions that dire
consequences
would befall the country for turning away from global
financial markets,
the latest twist in Malaysia's economic saga may come as
some surprise.
In a remarkable illustration of bygones being bygones,
Malaysia has
announced plans this month to sell as much as $2 billion
in bonds to
international money managers, whose appetite for the bonds
appears to
be reasonably strong. The move comes as the country's main
stock index,
up 30 percent in the past month, yesterday reached its
highest level since
October 1997.
"Private market people always say that if a country
reschedules its debts
or otherwise treats them badly, they'll never go back in,
but as soon as
there's money to be made, it turns out they won't let
those things cloud the
opportunity to make new dough," said Morris Goldstein, a
scholar at the
Institute of International Economics, a Washington think
tank. "So all the
stories saying they won't be back for 10 years tends to be
overdone."
Therein lie some awkward questions for the barons of the
world economy:
Was Malaysia's temperamental prime minister, Mahathir
Mohamed, right
to break with the economic orthodoxy preached by the
International
Monetary Fund and its backers in the Clinton
administration by slapping
controls on foreign capital? And is it really such a
terrible idea for
countries under financial siege to adopt such controls
rather than subject
themselves to the devastating impact of investor
stampedes?
IMF officials say they are studying Malaysia's experience
carefully to see
what lessons may be drawn, and Managing Director Michel
Camdessus
sounded a conciliatory note in recent days.
"Consensus seems to be emerging that controls may have a
place when
there's risk of a crisis," he said Monday in Hong Kong,
"but only as a
breathing space while other fundamental measures can take
effect." In a
separate CNBC interview, he said: "I praise the way in
which Malaysia
has been able to adopt a soft system of controls,"
acknowledging that the
government had minimized the controls' adverse impact on
investors.
That's quite a switch from eight months ago, when Malaysia
was widely
viewed as an international financial pariah after
Mahathir's announcement
that he was taking drastic action against the currency
speculators he had
often denounced for their alleged conspiracies to subvert
his country's
once-thriving economy.
Like neighbors such as Thailand and Indonesia, Malaysia
had suffered a
major sell-off of its currency, the ringgit, by investors
fleeing an economy
that was suddenly branded as loaded with excess real
estate and dodgy
bank loans. With a deep slump already underway, Mahathir
became
convinced that the painful austerity measures recommended
by the IMF
for restoring investor confidence, such as high interest
rates and budget
cuts, weren't going to work.
Indeed, Mahathir wanted to pump up demand, and in order to
do so
without risking a renewed outflow of capital, he
prohibited investors from
taking their money out of the country for one year. He
also fixed the value
of the ringgit at 3.8 per U.S. dollar and effectively
barred trading in the
currency.
In Washington, appalled Treasury officials privately
voiced hopes that the
move would quickly boomerang so other countries wouldn't
be tempted
to follow Malaysia's example. Many foreign analysts and
officials warned
that investors would never return to a country that had
treated them so
shabbily. The perception of a country cutting itself
adrift intensified when
Mahathir's government brought charges of sexual
improprieties and
bribery against Anwar Ibrahim, the former deputy prime
minister who had
supported opening the economy and democratizing the
political system.
But now, with the Malaysian economy projected to grow 1
percent to 2
percent this year -- better than Thailand or Indonesia --
and giant trade
surpluses rolling in, investor enthusiasm has been high
enough for the
government to launch a bond issue, which is being managed
by Salomon
Smith Barney Inc. While some international investors say
they will almost
surely shun the bond, others say they will be watching
closely to see if the
yield is attractive enough to lure them in.
"Changing the rules for investors midstream is not a good
thing, and
people don't ever forget," said Janis McDonough, senior
investment
officer at John Hancock Mutual Life Insurance in Boston.
But she added
of the Malaysian offering: "I'd look at it vis-a-vis some
of the other
opportunities we have in Asia." (Based on current trading
in old bonds,
Malaysia is likely to pay interest of perhaps 2.5
percentage points more
than equivalent U.S. Treasury bonds, which would be
slightly more than
the approximately 2 percentage points above Treasuries
that South Korea
is paying.)
Malaysia's decision to impose controls hasn't been
vindicated, many
analysts and officials insist. In the first place, they
say, the country's
success is attributable mainly to the sound financial
policies it adopted,
especially its moves to restructure its banking system by
getting rid of bad
loans and injecting fresh capital into banks. Had Malaysia
undertaken
those steps without controls, it might have done even
better, critics
contend, noting that Malaysia's Asian neighbors have also
enjoyed solid
rebounds in their stock and currency markets.
"Malaysia has moved very quickly to stabilize its banking
system," said
Gregory Fager, head of Asian research at the Institute of
International
Finance, an organization representing international banks
and securities
firms that invest in emerging markets. "That's the kind of
thing that has
really been the catalyst for recovery in Asia. Capital
controls is a
sideshow."
IMF officials make similar arguments and point out that
Malaysia has also
improved its relations with investors by changing the
absolute prohibition
on withdrawals of funds to a less onerous tax.
"They have certainly moved quite far ahead in terms of
restructuring their
financial sector, and their macroeconomic policies have
been good," said
Margaret Kelly, senior adviser in the IMF's Asia-Pacific
Department.
"They've wisely used the breathing space provided by the
controls."
But whether or not Mahathir can claim his move proved
justified, at the
very least he can say it didn't turn his country into the
perennial financial
pariah some critics expected.
"All of this has to be looked at very carefully," said
John Boorman,
director of the fund's policy development and review
department, who
said historians may conclude that Malaysia might have
emerged even
stronger by sticking to more conventional policies. But,
he added, "I think
there's a sigh of relief that reforms continued."
c Copyright 1999 The Washington Post Company