By Walden Bello*
KUALA LUMPUR. The realities of contemporary Malaysia were driven home to me when I opened the New Straits Times, the country's leading newspaper, a few days ago. On page 2 , with a photo no less, was a long account of a talk I gave the previous day in downtown KL, where I was quoted as praising Prime Minister Mahathir Mohamad's capital controls.
There was, however, no mention of my denunciation in the very same speech of the current trial of Mahathir's erstwhile deputy Anwar Ibrahim as a kangaroo court. Nor of my urging the prime minister to retire, so the political system could open up.
Interestingly, however, the article ended by citing my opposition to the use of public funds to bail out severely indebted private enterprises-no doubt, the writer's way of registering his opposition to the government's controversial use of public money to bail out conglomerates linked to the ruling party, UMNO.
Clear on Politics, Ambivalent on Economics
The local press is no guide to people's sentiments. So, to get the lay of the land, one must talk to as many Malaysians as possible. Fortunately, Malaysians are loquacious these days, though most would prefer not to be quoted. After a few days of meeting with a variety of people here, it is clear that there are very few Malaysians who support Mahathir's treatment of Anwar. Indeed, one poll conducted for UMNO is said to have shown that 80 per cent of party members do not believe Mahathir's charges against Anwar. The kindest comment for Mahathir came from one analyst who likened him to a vengeful father venting his wrath on a son who is in a hurry to push him into retirement in order to inherit the realm.
It is quite a different case with Mahathir's economic policies. There is hardly anybody that condemns them outright, with most people lining up on a spectrum from those who see more good than bad in them to those who see more bad than good. Unlike the passionate condemnations evoked by Anwar's trial, there is uncertainty and ambiguity when the discussion shifts to economics.
Mahathir stunned the world when, on September 1, he did the unthinkable in a world that appeared to be running on fifth gear toward globalised financial markets. He imposed capital controls. These included fixing the value of the Malaysian currency, the ringgit, at 3.8 to the US dollar; setting a 30-day deadline for ringgit held abroad to re-enter Malaysia, after which they would be considered worthless; and locking in speculative capital playing the stock market for one year before allowing it to leave the country.
Capital Controls: Surprisingly Non-Controversial
Surprisingly, except for condemnation by diehard free-market ideologues like US Treasury Undersecretary Larry Summers and Philippine Central Bank Governor Gabriel Singson, the international response, even from business, has paralleled the ambiguous domestic reaction to these measures. Massachusetts Institute of Technology Professor Paul Krugman gave them guarded endorsement, while the Financial Times encouraged its readers to keep an open mind. As one Malaysian financial expert put it, "Most businesses outside seem to be saying, 'We don't like them, but then we realise you folks had no other option. So we'll wait and see.'"
What most Malaysian analysts we spoke to seemed to agree on is that the controls have stopped overseas speculation in the ringgit, which had been carried out by hedge funds based in Singapore. Where there is disagreement is how much of the 25 billion ringgit held in overseas accounts has really flowed back into the country, with estimates ranging from the official 20 billion to 3 billion. There is also some scepticism on whether the locking in of speculative investment for a year has really made a difference, since, as one academic put it, "Most portfolio investment had already left, so this was like locking the barn door after the horse had escaped."
Some people who support the withdrawal of the ringgit from international circulation nevertheless have their doubts as to whether the fixing of the ringgit is a positive move, though fears that the currency would be overvalued and encourage a black market have receded. Government sources, in fact, claim that the ringgit is not only stable but undervalued. Its true level, they assert, is 3.5 to the dollar rather than 3.8, but say they will keep it at 3.8 to make Malaysia's exports competitive.
Perhaps the key point of consensus is that, while necessary, capital and currency controls have to be temporary, to gain a "breathing space" during which "reforms" can be implemented. And it is precisely those fiscal and monetary measures in the National Economic Recovery Program (NREP) that have accompanied the capital controls which have elicited controversy.
The most important of these moves are the adoption of an expansionary budget whose deficit runs to over three per cent of GDP; the government's buying up of the banks' non-performing loans coupled with a directive to them to increase their lending; and the government's bailing out of key corporations on the grounds of their "strategic character."
Sustainable Growth?
Deficit spending, coupled with the return of significant amounts of ringgit from overseas and the push on banks to increase their lending by eight per cent by the end of 1998, is introducing a lot of liquidity into the economy. "It may even grow by more than the one per cent projected by the government for 1999," concedes one critic. "The question is, is this growth sustainable in the medium term?"
The government's focusing on infrastructure spending, on the grounds that this has a multiplier effect on the rest of the economy, draws little opposition. It is the accompanying measure of jump-starting the stagnant property sector by pushing banks to raise their lending while eliminating the rule limiting their proportion of their portfolio in real estate loans to 20 per cent that is drawing fire. "Banks are calling up developers and asking if they want a loan," says one analyst. "Sure, construction on real estate projects will resume, but who will buy them once they are completed in two to three years' time. You're simply postponing the day of reckoning."
There is also fear that while the stimulus package will place ringgit in the hands of local consumers, they may decide, like Japanese consumers, not to spend it, saving it instead owing to fears for the future. This would defeat the purpose of the economic package and lead to a descent back to stagnation after a brief recovery.
Controversial Bailouts
Where objections are greatest though are in the bailouts of the banks and key corporations. In the case of the banks, a government agency, Danaharta, has been set up to buy up, at a significant discount, an estimated 57 per cent of the non-performing loans of 11 key financial institutions through the issue of government-guaranteed bonds. Similar government mechanisms have been used to bail out enterprises such as the Konsortium Perkapalan Berhad (KPB), which is owned by Mahathir's eldest son, Mirzan, and the giant conglomerate Renong, which belongs to people very close to UMNO. Public money-be it in the form of cash transfers or as the guarantee for government-issued bonds--is the main instrument of the bailouts of the banks and conglomerates. These public funds are either drawn from tax revenues or from the EPF, the employees' retirement fund.
Much public attention has centred on Renong, the conglomerate that built the famous North-South Highway extending from Penang to Singapore. Renong has been billed as too big to fail, accounting as it does for 8 per cent of the outstanding loans in the financial system. Indeed, the government has compared it to the recent bailout of Long-Term Capital at the direction of the US Federal Reserve owing to fears of the global consequences should this New York-based hedge fund go under.
The bailout of Renong and other UMNO-linked enterprises and banks is also said to be necessary to prevent a social backlash from the dominant Malay community. The tottering Malay-owned firms are seen as the epitome of the New Economic Policy (NEP) of the 1970's and 1980's, which sought to transfer control of the bulk of the country's real and financial resources to Malays from foreigners and the Chinese minority. To allow these enterprises to fail, the government warns, would mean a regression to the pre-NEP days.
Economics in the Service of Politics
However, for economist Subramanian Pillay, the problem is not the government bailout of strategic firms like Renong per se but the fact that their managements and shareholders are not being made to take the consequences for making the wrong decisions. "At a minimum," he insisted, "their managements should be replaced and their shareholders should live with depreciated assets."
As in the case of the capital controls, this stance of approving in principle the bailing out of strategic firms but disapproving its actual implementation is common. "At the end of the day," said Subramanian, "the real issue for Malaysians is: Do they believe the government is sincere, that it's working for the population at large? Or is it working just for the interests of a few. This government has a credibility problem."
Indeed, cynicism about Mahathir is the order of the day, and most share the view that economics now is in the service of politics. Mahathir is said to be really worried by the erosion of his base of support within UMNO. The only way of recapturing this is by "engineering an economic recovery," according to another expert. "And once you see things seeming to pick up, you call elections. Whatever happens to the economy after the elections is something else-the important thing is that Mahathir would have won another electoral mandate from the Malays."
But can he pull it off? "Never underestimate the old man, " said our informant, before he excused himself to attend a pro-Anwar meeting.
*Dr. Walden Bello is professor of sociology and public administration at the University of the Philippines, co-director of the Bangkok-based Focus on the Global South, and the author of several books on Asian economic and political issues.