The first condition to restore confidence is for government leaders to stop giving simplistic reasons for the economic crisis
(Petaling Jaya, Tuesday): At the opening of the People's Progressive Party annual general meeting on Saturday, the Prime Minister, Datuk Seri Dr. Mahathir Mohamad reiterated that Malaysia's "economic problems were actually caused by the deliberate depreciation of the currency by foreigners".
The National Economic Action Council (NEAC) executive director recently told the Far Eastern Economic Review that the country's "primary task is to restore confidence".
The first condition in restoration-confidence is for government leaders to stop giving simplistic reasons for the economic crisis, as blaming speculators like George Soros for being the cause of the country's economic turmoils.
Was Mahathir right when he blamed George Soros and the currency speculators as chiefly responsible for Malaysia's economic and financial crisis and the depreciation of the Malaysian ringgit?
Mahathir should be more attentive to the views of others on this issue, including his "Strategy Guru", Kenichi Ohmae, who is also a member of the International Advisory Panel (IAP) on the Multimedia Super Corridor which is chaired by Mahathir himself. Ohmae does not subscribe to Mahathir's theory that the George Soros are the culprits of the economic crisis. In the Asiaweek 1997 Special Collectors' Edition, Ohmae said that the Southeast currencies including the ringgit were overvalued and whether there was George Soros or no George Soros, the currency adjustments would have taken place.
Ohmae wrote:
"Asian countries which have to deal with both yen and dollars have had to adjust somewhere in between. Thus, as the dollar has strengthened by 50% or so vis-à-vis the yen, the most comfortable zone for the ASEAN currencies would be 25% less than the dollar and 25% more than the yen. That is what this round of currency adjustment has achieved.
"While George Soros and his Quantum Fund may have triggered this adjustment, from the perspective of the global currency market the process was quite a natural one. If he hadn't, someone else would have done the same thing. And in fact, many others may have played a part in the process - some of whom may have reacted to domestic troubles in the affected economies. The fact that Soros was apparently involved confused people because he seemed to have had a political agenda to prevent Myanmar's entry to ASEAN"
In the latest publication entitled "The Current Crisis in Southeast Asia" by Manuel F. Montes, published by the Institute of South East Asian Studies, Singapore, the author, who is a co-director of a project of the United Nations University/World Institute for Development Economics Research (UNU/WIDER) in Helsinki, Finland, said there are at least four competing explanations for the onset of the economic crisis in South East Asia.
Stated in stark, mutually exclusive terms, these four explanations are:
1. With the entry of China, India and other low-cost producers into international export markets, the Southeast Asian economies had lost their competitive advantage, which could only be restored with drastic adjustments in their exchange rates.
2. With about a half-decade of significant current account deficits behind them, there was a common macro-economic weakness in all the economies which only a drastic devaluation and public sector expenditure cutbacks could have resolved.
3. Despite the large current accounts deficits, the macro-economic situation of the countries, was basically sound. However, the locus of the crisis came from the banking sector because of undisciplined expansion and diversification in the domestic financial markets, financed by short-term private borrowing.
4. The economic situation in each of the countries is acutely different, in terms of either their international competitiveness, their macro-economic situation, or the state of their financial sector. The shared currency crisis is only a reflection of the contagion effect.
Manuel Montes wrote that a combination of these factors is undoubtedly more accurate, though it is important to identify the key factors and prioritize these explanations in order to recognise how they are related to each other and to identify which of these explanations apply to which country and to what extent.
In focussing the cause of the economic crisis on George Soros and the currency speculators, was Mahathir doing justice to the gravity of the crisis as well as to his own credibility?
Professor Dr. Walden Bello, Co-director of Focus on the Global South at the Chulalongkorn University, Bangkok as well as Professor of Public Administration and Sociology at the University of Philippines, in his article "Addicted to Capital: The Ten-Year High and Present-Day Withdrawal Trauma of Southeast Asia's Economies" also referred to the Mahathir-Soros debate, where he wrote:
"Malaysian Prime Minister Mahathir Mohamad angrily attributed the debauching of the region's currencies to speculators, singling out the controversial American currency trader George Soros, whom he described as a 'moron.' At the World Bank-IMF annual meeting held in Hong Kong in the third week of September, Mahathir branded currency trading as immoral, demanded that it be criminalized, and advocated capital controls. Soros also took the podium at the same conference and called Mahathir a 'menace' to his own country, asserting that Malaysia's currency problems were of its own making. Probably the only clear signal that came out of this highly publicized debate was that everytime Mahathir opened his mouth and demanded curbs on capital, foreign capital would scamper out of Malaysia and Southeast Asia, forcing down the value of the ringgit and its sister currencies.
"Informed observers refused to be drawn into the Mahathir-Soros debate on whether the currency crisis had been provoked by 'internal' factors or 'external' agents. The speculative activities of Soros vis a vis the Thai baht are well known, and there is evidence that his traders also targeted the Philippine peso. However, as an editorial in The Nation in Bangkok pointed out, Mahathir was on less than firm ground when he targeted outside speculators as the problem for three reasons.First, many of the speculators were Southeast Asian in nationality. Second, the Bank Negara, Malaysia's central bank, had acquired a reputation of trying to profit from speculative activities, including betting on the pound sterling and the US dollar. Third, and most important, "'To blame Soros for the crises sweeping through the currency markets of Southeast Asia is not addressing the real issue.' And the real issue was that
"When Southeast Asia jumped on the global bandwagon, it should have prepared for the downs as well as the ups. Instead, many have allowed the region's spectacular economic growth to lull them into a false sense of invincibility and security. By pegging its currencies, Southeast Asian economies have ensured a certain degree of stability to help lure foreign funds. But such easy money is too often splurged on non-productive property markets and wasteful mega-projects. To add to the woes, billions are squandered through unmitigated corruption. Such excesses are now being ruthlessly punished by the currency market."
While it is agreed that there is urgent need for international agreement on controls of the capital flows, whether it be in the form of the "Tobin Tax", a transaction tax imposed on all cross-border flows of capital that are not clearly earmarked as direct investment to help slow down the frenzied and increasingly irrational movements of finance capital, or any other form, the government should stop giving simplistic explanations for the cause of the economic crisis to safeguard its own credibility and enable a quick restoration of confidence.
(24/2/98)
*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong