By Nhlanhla Nyathi
THE economic challenges that ensued in the Asiatic region due to the financial crisis of 1997 were difficult to accept for the Asian Tigers, who had w
itnessed several decades of outstanding economic performance.
It was even worse for the Malaysian economy that had experienced phenomenal growth and was in the midst of implementing its seventh economic development plan when the crisis struck.
The then Malaysian Prime Minister, Mahathir Mohamed, indicated that if they were to keep their appointment with destiny — of being a fully developed nation by year 2020 — radical measures of the proportion never seen before in Asia nor any other part of the world would need to be diligently structured and implemented.
Initially, due to mounting pressure from orthodox economic proponents and traditionally accepted international financial institutions, the Malaysian government initially voluntarily implemented IMF inspired policies along with the other Asian Tigers that were affected by the same crisis.
This however did not work, as high interest rates added to the corporate and banking crisis; the flexible foreign exchange rate policy depreciated the Malaysian ringgit to unprecedented levels against the US dollar. The freedom of capital mobility allowed funds to flow out and the cutbacks in government expenditure aided recessionary pressures.
In 1998, a year after the start of the crisis, Mohamed, against all traditionally accepted economic reform advice took a bold political decision to introduce controversial economic reform measures.
It was politically and technically a courageous act, as the policies flew in the face of orthodoxy. Mahathir and his government were condemned by the global establishment.
Under the auspices of the newly formed National Economic Action Council, the government initiated the National Economic Recovery Plan which was the economic blue print designed to restore confidence in the Malaysian economy and strengthen its economic base. The monumental economic recovery reforms started at the hub of the nation’s financial system through the systematic restructuring and recapitalisation of the financial services sector. With sizable financial support from Japan, the Malaysian government managed to source funding amounting to 21,8 billion ringgit through Danarhata Asset Management for the purpose of taking over non-performing loans from financial institutions to allow them to refocus on lending activities to the productive sector.
At the same time, funding amounting to five billion ringgit was provided for the recapitalisation of 10 banks through Danamodal Agency, a government special purpose vehicle set up with technical assistance of American investment banking firms, JP Morgan, and Goldman Sachs.
As at September 30, 2001, only three remaining banking institutions were still recapitalised by Danamodal out of an initial 10. Danaharta had successfully restructured 82,1% of gross loans acquired and managed as at August 31, 2001.
Subsequent to the successful recapitalisation of the financial services sector, monetary policy was eased. Interest rates were reduced to encourage productive sector development. Statutory reserve requirements were also reduced to increase liquidity, and banks were encouraged to increase the size of their lending books to the productive sector.
The government also expanded its expenditure to get the economy going when the private sector was in the doldrums. Lowering interest rates was essential for rescuing the macro-economy and reviving the real economy, but doing so would have depreciated the ringgit under a flexible foreign exchange policy.
To prevent such depreciation, government with major input from the central bank decoupled the interest rate from the exchange rate by fixing the ringgit at 3,80 to the US dollar.
In addition, to prevent speculative tendencies and the emergence of a black market, international trade in the ringgit was banned and all outstanding ringgits in external markets were repatriated back to the country.
Fixing the exchange rate ended fluctuations and allowed the macro-economic policies to be implemented. This also prevented a possible debt servicing crisis, which could have occurred had the ringgit depreciated below 1997 levels.
The manipulation of the foreign exchange system was combined with controversial controls on capital inflows and outflows. The measures introduced through a decree by Prime Minister Mahathir Mohamed required foreign portfolio capital and foreign owned financial assets denominated in ringgit to remain in the country for a year, although the controls were subsequently relaxed to an exit tax calculated on the basis of the length of stay.
Restrictions were placed on capital transfers by local citizens and companies. The restrictions however did not apply to the flow of funds relating to foreign direct investments and trade.
Three weeks after the introduction of the controls, Malaysia’s reserves went up by US$90 million while the amount of ringgit repatriated totaled 11 billion after two weeks.
The current account balance for 1998 improved to a surplus of 34 billion ringgit from a deficit of 14 billion ringgit in 1997. And unlike the Indonesian economy which had chosen the IMF austerity measures and remained mired in crisis, the Malaysian economy began to recover during 1999, growing by 4,3%, about half the rate it had averaged over the previous decade.
Although this might not be an exhaustive step by step account of how the Malaysian economy reformed, it however shows the general broad strategies that led to the modern day Malaysia that boasts of an export driven economy; has good foreign currency reserves; healthy inflows of foreign direct investment; is technologically driven, and can be counted among the advanced emerging markets on a global scale.
The initial objective during the crisis of reviving local companies and the local economy led to maze of policy tools and goals.
To appreciate the brilliance of the Malaysian model it is vital to see the role played by each element, and to recognise that each of the measures was part of an integral policy package.
Admittedly, the peculiar manner in which the Malaysian economy reformed seems far removed from reality.
If these controversial economic mechanisms were not successfully implemented, no scholar of economics or finance would have given these deceivingly confused set of economic strategies consideration. The point however remains that no matter how outlandish the set of reforms seem, they worked extremely well to avoid the collapse of the Malaysian economy.
This apparent freak occurrence has brought back strong arguments from critics of IMF that the straight jacket austerity measures always preferred by the institution are not always a panacea.
Maybe this can be categorised in the realm of constructive criticism of the IMF lobbying for its reform to allow some level of independence to be exercised by recipients of their economic structural adjustment funding.
After digesting parts of this article, hardliners in the Zimbabwean setting that have always been quick to dismiss the relevance of the IMF in reviving the economy, must be finally feeling hopeful and vindicated.
It appears in the past 10 years of economic recession in Zimbabwe, snippets of the application of the Malaysian model can be identified here and there. The question still remains: after all these years of experiencing an economic recession, is Zimbabwe still trying to follow the Malaysian model and will it work?
* Nyathi is an independent financial analyst. He can be contacted on 0912 250 092.