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By Ronald D. Palmer


Preparations for renewed Multilateral Trade Negotiations began early in the 1981-1988 Reagan Administration. U. S. embassies were instructed to facilitate GATT efforts to harmonize customs procedures, tariff categories, etc. GATT launched its drive from Geneva in 1986 to implement the Uruguay Round. The then-European Community launched its drive for EC-92 from Brussels. This began in 1986, in the early years of the Reagan Administration, as preparations began for the launching of the GATT Uruguay Round. As the Reagan Administration was ending, a series of market opening concepts was pushed. The 1989-1992 Bush Administration continued the Reagan Administration's promotion of free trade and put powerful energies into the launching of the free trade-oriented Asia Pacific Economic Forum (APEC) in 1989 at Canberra and subsequently in Singapore, Bangkok, and Seoul.

The Bush Administration's eager advocacy of APEC provoked a strong reaction from Malaysia's Mahathir, who feared that the United States might use APEC to usurp ASEAN's hitherto leading role in Asian policymaking. To counter what he conceived as a U. S. neocolonial strategy, Mahathir proposed the establishment of an East Asian Economic Caucus that would exclude the United States. There were angry exchanges between Washington and Kuala Lumpur on the EAEC issue that reached a point where Mahathir would not accept a phone call from President Bush. Mahathir's opposition to the APEC was based on mistrust of the United States. He believed that Southeast Asia was a minor factor in U. S. worldwide interests and that America would sacrifice Southeast Asia to those interests if necessary.

When the Clinton Administration came to power in 1993, Washington made a concerted effort to improve bilateral relations with Malaysia. However, Mahathir spurned participation in President Clinton's APEC Leaders Summit in Seattle. Meanwhile, Mahathir and Lee Kuan Yew began clamoring for the primacy of Asian Values. Mahathir and Clinton had a highly successful meeting in 1994; Mahathir also attended the 1994 APEC Summit at Bogor in Indonesia and subsequent meetings. He and Clinton had another good meeting in 1995.

Although Southeast Asia was booming and growing rapidly in the mid-1990s and registering seven and eight percent growth, Paul Krugman of the Massachusetts Intitute of Technology was one of the first to question the reality of that growth. His 1994 Foreign Affairs essay, "The Myth of Asia's Miracle," emphasized that growth was more a result of increased inputs than increased productivity: "Mere increases in inputs," he wrote, "without an increase in the efficiency with which those inputs are used—investing in more machinery and infrastructure—must run into diminishing returns; input growth is inevitably limited." The era of growth would end. (My own essay on this topic, entitled "End of an Era," was posted in the previously-cited Autumn 1998 issue of
American Diplomacy.)

It was a coincidence that the journal Foreign Policy devoted its summer issue of 1997 to the globalization issue, just at the time when the flow of capital to Southeast Asia was overwhelming the capacity of local banking and financial institutions to absorb it. Thailand had $9.1 billion in net capital inflows in 1990, $13.3 billion in 1994, $10.5 billion in 1995, and only $168 million in 1996. There was a net outflow in 1997 when the Thai currency was floated and lost forty-five percent of its value by December 31,1997; the stock market lost seventy-six percent of its value in the same period.

The $17.0 billion IMF rescue plan for Thailand called for higher taxes and other measures to strengthen the economy, but also focused on repairing the banking system. It called for, as examples, faster liquidation of non-performing assets, higher capital requirements, greater transparency, and greater opportunities for foreign participation in commercial bank ownership. These provisions were aimed at reducing the capability of influential politicians to make rent-seeking deals (the exchange of political influence for economic gain).

Perhaps it was these provisions of IMF policy that were least attractive to Malaysia. It has been official Malaysian government policy since 1971 to favor Malay interests, by any means necessary or possible, literally in Mahathir's words, "to create Malay millionaires." Some of the Prime Minister's protégés and political supporters suffered grave losses when the financial contagion swept from Thailand to Malaysia. Finance Minister Anwar Ibrahim began gingerly to apply "virtual IMF" measures without actually negotiating an IMF agreement. This was in the period July 1997 to August 1998 and the result was that Mahathir's protégés, including his bankrupt son, got little government help or sympathy. Anwar and his supporters appeared all too eager to push Mahathir and his supporters from center stage. It was this perceived direct political threat, as well as the fact that unorthodox, even questionable, means would be necessary to help the Malay entrepreneurs, that led Mahathir on September 1, 1998, to impose a fixed exchange rate and currency controls, restrict repatriation of profits, ease monetary policy, require local banks to be accommodating with regard to non-performing loans, reform the financial and corporate sectors, and demand that banks increase their new loans. Meanwhile, Anwar was arrested under apparently false charges. Mahathir had sufficient control over the judiciary system that Anwar was found guilty and imprisoned.

The results of Mahathir's economic nationalist measures as of March 9, 1999, had shown success. Seventy-five percent of the lost value of the Kuala Lumpur stock market had been recovered. Malaysia had a trade surplus of 58.4 billion ringgit in 1998, in contrast with the deficit of forty-five billion in 1997. The international reserves of the central bank have increased to six months of imports. Non-performing loans had been reduced to 9.0 percent on the six-month classification and 14.9 percent on the three-month classification. Consumption was up. Sales of automobiles increased to 19,081 units in November 1998 alone, in contrast with the 12,517 sold in the previous ten months. Total bank loans rose from 2.7 billion ringgit in May 1998 to 9.9 billion in December 1998. Inflation was down. The economy has apparently bottomed out.

Nevertheless, the current growth rate estimate for 1999 is one or possibly two percent. Malaysia will need inputs of foreign investment to increase its growth rate. Malaysia eased capital controls on February 15, 1999. New capital can exit at any time, although profit will be subjected to a thirty percent levy if repatriated within twelve months and ten percent thereafter. Capital already in Malaysia before February 15 would be subjected to a graduated levy on repatriation. This favors investors with a longer term view of the economy.

Malaysian policies under Mahathir have been established to retain local freedom of action, to protect Malay gains, and to protect the prime minister's own political position. Abstract values of economic correctness or cooperation with the IMF have little meaning for those like Mahathir who are pursuing goals of political survival. The Malaysian strategy has created unease among advocates of free market ideology because it suggest that an alternative exists to the deflation, reduced government spending and inflation controls of the IMF prescription. The Malaysian strategy does not attack the underlying political problems of corruption, lack of transparency, and poor governance. Malaysia will still have to install such reforms eventually to achieve greater efficiency in the use of resources. Efficiency is not the present Malaysian goal, but rather that of political survival. Mahathir and his cohorts, like their counterparts elsewhere, will do whatever it takes to retain political power. 



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