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WORLD POLICY JOURNAL
Malaysian Capital Controls & The Iranian Coup To the editor: Miller understandably warns against giving up capital controls, implying that I favor doing so. While I too am critical of capital account liberalization, it should be pointed out that the 1998 Malaysian controls have been largely dismantled, except for the currency peg to the greenback and some related restrictions. In fact, since 1999, the Malaysian government has tried to attract the very portfolio investments that precipitated the 1993–94 and 1997–98 stock market collapses, and the country’s subsequent financial crisis. Our book shows that Malaysian banking regulations had been more prudent than those of other East Asian victims of the 1997–98 regional crisis, and that Malaysia’s vulnerability was due to earlier success in attracting massive foreign portfolio investments into its stock market. Controls on such inflows can be described as prudential regulations—as the International Monetary Fund has glossed the now dismantled Chilean controls. Considering the power of Wall Street, the IMF, and the financial media, such subterfuge may be necessary for developing countries wishing to obtain finance from international capital markets. Despite Miller’s criticisms, however, I remain recalcitrant about the effectiveness of the Malaysian controls in light of the empirical record. After the U.S. Fed lowered interest rates in September 1998, East Asian currencies strengthened and stabilized. Interest rates went down throughout the region, with Thai rates even falling below Malaysia’s, as the book shows. To be fair to the Malaysian authorities, and to Paul Krugman (Fortune, September 1998), who coincidentally advocated such controls as part of "Plan B," there was no way of knowing in August 1998 that this would happen. The controls may well have "worked"—and been recognized to have "worked"—in the previously anticipated international circumstances, but developments in September 1998—after the LTCM hedge fund and Russian crises in the previous month—rendered them almost irrelevant. While continuing its insistence on restrictive monetary measures and open capital accounts, the IMF no longer stood in the way of expansionary "pump-priming"— involving countercyclical budget deficits in East Asia—after belatedly recognizing that most of the region’s governments had maintained fiscal surpluses before the crisis. Increased demand for electronics—partly in anticipation of the Y2K threat—particularly boosted the strong recoveries in South Korea and Malaysia in 1999. However, I am more sympathetic to the position developed by Harvard economists Ethan Kaplan and Dani Rodrik in their 2001 National Bureau of Economic Research paper. Although criticized by Rudiger Dornbusch, the late (pro-IMF) MIT economist, among others, there is evidence for Kaplan and Rodrik’s argument that the September 1998 measures enabled the Malaysian ringgit to evade sustained speculative pressure from the offshore currency market, mainly in neighboring Singapore (which has steadfastly refused to internationalize its own currency), in order to adopt more independent monetary policies conducive to reflating the economy. The big challenges for Malaysia today are quite different, however. These now include uncertainties about the world economy (especially about financial volatility in the North, particularly in the United States and Japan) and external demand on the one hand, and how to face up to the China challenge of lower costs, a much larger domestic market and comparable capabilities and productivity (though we may have to add India and others to the list of challengers soon). As for Prime Minister Mahathir, after successfully reinventing himself as a moderate Muslim since 9/11, he has almost completely turned off his previously critical rhetoric, embarrassing many of his anti-globalization enthusiasts except, of course, for the loyalists. Malaysia’s sovereign credit rating has risen as Western governments and financial markets embrace the return of the prodigal son, who has announced his retirement in late 2003. Perhaps the false debate generated by Malaysia’s 1998 capital controls will now give way to more considered attention to the difficult and complex issues involved, with perspectives from the South given more serious consideration. Many of these issues are further explored on the website of International Development Economics Associates (www.networkideas.org), a new South-based network of critical development economists. Jomo K.
S.
To the editor: Although the author doesn’t say so, I believe the essay has an important lesson for President Bush’s "regime change" doctrine today. But the policy community in America does not seem to learn much from past experience. In Cicero’s memorable terms, to be ignorant of what happened before you were born is to remain always a child. R. K. Ramazani
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