World Bank lauds Mahathir’s capital controls that ‘saved’ Malaysia

By Cordoba.Ali

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Tun Dr Mahathir Mohamad
Tun Dr Mahathir Mohamad

IN a rare splash of praise, the World Bank has profusely lauded the Mahathir Mohamad government for its brainiac moves in the aftermath of the Asian Financial Crisis or AFC.

While saying the Mahathir government took the classic steps to prevent the economy from sinking further after the financial crisis started to bite hard into the country, the World Bank said with high regards to the then regime that its gambit worked.

It further said the rest of the world should have learned from the government of Mahathir on how it handled the catastrophe bravely and with wisdom, in order to prevent such happenings again.

The report is entitled ‘Turmoil to Transformation: 20 Years after the Asian Financial Crisis’.

Only parts and parcels related to the current government at Putrajaya in the report is published in pro-government newspapers and portals.

But in the report, the World Bank said the Mahathir government quickly learned that the stabilization of the ringgit was crucial to the success of the Government’s plan.

At that time, in 1998, the ringgit had plunged to its lowest rate versus the US Dollar.

But Mahathir made a bold move by fixing the exchange rate at RM 3.8 to US$ 1.

This was “Perhaps Malaysia’s most controversial measure was to introduce selective capital controls.” said the WB in its report.

To explain it plainly for the laymen, the World Bank is saying the move by Mahathir salvaged the country and this move might have saved the country to be what it is today.

The World Bank said during the first months of the crisis, Malaysia saw a huge amount of capital leaving the country. It is called capital outflow. This resulted in the ringgit depreciating significantly (that is losing its value rapidly).

To stabilize the currency and to create a higher degree of certainty for exporters and importers, which will enable them to more accurately forecast revenues and costs, the Government fixed the exchange rate at RM 3.8 to US$ 1.

The world was on the move, but Mahathir pressed on. And the gambit paid out for the country, until today!

The World Bank said the implementation of this measure was intended to enable Malaysia to regain monetary independence.

To control interest rates and to facilitate economic recovery while at the same time stabilizing the exchange rate, the Malaysian Government introduced capital controls against the will of the IMF, the WB itself and the rest of the world.

In this manner, the Malaysian Government tried to address the so-called “impossibility trilemma,” which refers to the supposed impossibility of achieving more than two out of three of exchange rate stability; free international capital mobility; and national monetary- policy independence.

This “trilemma” is premised on the concept that with no barriers to capital movement, an interest rate that is lower than the international interest rate, adjusted by country risk, would encourage outward capital outflows and hence a lower exchange rate, and vice versa.

In general, the international financial community responded skeptically to the selective capital controls, with many observers expecting negative economic consequences.

At the time of their implementation, the measures were highly controversial. Many observers predicted that the measures would scare off foreign investors; that they would have a long-term negative impact on foreign investments and so on.

3 COMMENTS

  1. He had a crash course on how the forex market worked and gave the green light to launch capital control. That saved the day then. Anwar was keen to go along with the IMF prescription then. The rest was history between these two.

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