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How Mahathir overcame the Asian crisis

by Eiichi Furukawa

Starting in September last year, Prime Minister Mahathir Mohamad of Malaysia was strongly criticized by the Western media and some Western governments over the introduction of capital controls and the sacking of his deputy prime minister and finance minister Anwar Ibrahim, who was later tried for alleged criminal acts. It was thought that Mahathir was doomed to be overthrown by student and youth demonstrations. Now, however, the outcry has subsided, the political situation has been stabilized and capital controls have been deemed a success even by the anti-Mahathir Western media and IMF Managing Director Michel Camdessus.

The U.S. government recognizes that its attempt to influence events by having Vice President Al Gore call publicly for Mahathir’s ouster was a mistake. If the attempt had succeeded, it would have strengthened and expanded the power of the Islamic radicals and exacerbated conflicts with the Chinese community, leading to possible Kosovo-type ethnic conflict in Malaysia. Fortunately, such developments were prevented. In Cambodia the coup d’etat staged by the United States in 1970, with the goal of ousting Prince Sihanouk, was the starting point for the tragedies that have engulfed that country for the past 29 years. The U.S. gained nothing from that coup, succeeding only in expanding the power of the Khmer Rouge and contributing to the destruction of the state of Cambodia. This time, in Malaysia, the U.S. government only succeeded in discrediting itself as a partner in the Asian security regime.

Now, even anti-Mahathir Western media speculate that, by taking advantage of the favorable turn in the political situation, the Mahathir-led ruling party, the United Malay National Organization, may win as much as a two-thirds majority in the general election that is expected to be held in August, or at least before April next year, when Parliament’s present term ends. As for the economic situation, exports have increased, foreign-exchange reserves have grown and Malaysian enterprises are enjoying an economic upturn.

How did this happen? The prediction that Mahathir would be overthrown appears to have been a product of wishful thinking. First, the demonstrations were supported by only a small segment of the Malaysian public. Second, it was widely believed that the demonstrations were backed by foreign powers. Gore’s remarks on the occasion of the APEC summit meeting in Kuala Lumpur in November last year, to the effect that “brave people are fighting and seeking reform,” only aroused patriotic feelings and strengthened the spirit of national unity among Malaysians in general.

The Western media interpreted the Malaysian situation as being similar to Indonesia’s. Since Indonesian President Suharto was overthrown by violent demonstrations, they expected Mahathir to be toppled in the same way. However, the Malaysian situation was quite different. Malaysia’s elections are conducted fairly, cleanly and democratically. The “reform” slogan used by the demonstrators was introduced from Indonesia and signified opposition to nepotism and cronyism. Unlike Suharto, however, Mahathir did not practice such things. The only problem with Mahathir was his tendency to engage in outspoken criticism of the West, particularly the U.S. However, his criticisms are generally constructive. While the U.S. claims that it is a democratic country, Americans do not like to be criticized, whether constructively or not. This is the reason for U.S. involvement in the revolt staged by Anwar. In the past, the governments of small Asian countries were allowed to exist only at the pleasure of the U.S. government. But today, as they have grown stronger, they have become more resistant to outside intervention.

The IMF, the U.S. government and the Western media at first strongly condemned the Malaysian policy of capital controls. They subsequently changed their views and recognized its merits. After the collapse of the Russian and Brazilian economies and the crisis of Long-Term Credit Management in the U.S., the IMF and the Japanese and European governments have argued that Malaysian-type controls are necessary for emerging countries. The Malaysian system is superior to the IMF-sponsored economic-recovery plan that was applied to South Korea and Thailand. First, Malaysian enterprises did not suffer from the extremely severe hardships that followed in the wake of tight monetary policy and stringent fiscal policy. Second, business in Malaysia is protected from wild fluctuations in exchange rates and the risk of volatile outflows of capital.

Expectations for the growth rate of Malaysia’s GDP for this year have improved to 2.5 percent, much more favorable than last year’s -6.7 percent and better than that of either Thailand or the Philippines. Hostile predictions that the capital-controls policy would fail and that the Malaysian economy would be devastated have been proved wrong.

When Mahathir visited Japan in late May, he received a rousing welcome. Japan had maintained a neutral stand vis-a-vis political developments in Malaysia. It even expressed its concern to the U.S. over the latter’s policy toward Malaysia. Furthermore, Japan supported the Malaysian policy of capital controls from the beginning. Vice Finance Minister Eisuke Sakakibara, who retired recently, expressed personal satisfaction, since the capital controls he had supported all along were proving a success. Japan’s policy was correct, since it did not stem from anti-Mahathir bias as the views of the U.S. government and Western media did.

Mahathir has other friends, too. The American Chamber of Commerce in Malaysia, the ASEAN Business Council in the U.S. and the Malaysian International Chamber of Commerce and Industry all issued statements expressing their support for capital controls. Malaysian trade with the U.S. and investment flowing from the U.S. have as a result increased particularly over the past year.