2/8/97 THE ECONOMIST: Malaysia's mi

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/* ---------------" Economist: Malaysia's misdiagnosis "-------------- */

THE ECONOMIST, AUGUST 2, 1997.
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MALAYSIA'S MISDIAGNOSIS

In blaming foreigners for the woes of Asian currencies, the Malaysian prime
minister is avoiding the real issues.

ANALYSES of the Asian economic miracle routinely include tributes to local
leaders, and their shrewd appreciation of how markets work. Oh, really ?
The intemperance with which Mahathir Monamad, Malaysia's prime minister,
has greeted runs on some South-East Asian currencies (see Page 57)
suggests, on the contrary, an alarming level of economic illiteracy at the
top.

According to Dr Mahathir, Asian currencies have suffered at the hands of
"rogue speculators ... wanting to destroy weak countries". The arch-villian
is George Soros, speculator-extraordinary, who Dr Mahathir believes is
trying to ruin South-East Asian countries, because he disapproes of their
governments' decision to admit Myanmar into the regional political club,
ASEAN. Dr Mahathir laments that "most of the work we have done" in
developing Malaysia over the past 30-40 years has been undone "in a period
of two weeks".

The riddle of the ringgit

Leave aside that this may be an unnecessarily gloomy reaction to a currency
depreciation of less than 10%. Dr Mahathir's remarks also display a level
of economic and political analysis that would be unworthy of comment had
they not been made by someone generally taken seriously. Coming from him,
however, they suggest a dangerous (or synical) unwillingness to accept how
capitalism works.

The first point is that it is ridiculous for South-East Asians, of all
people, to complain about the iniquities of global capital flows. No part
of the world has benefited so mush as theirs from globalisation in general
and foreign investment in particular. In 1995, the last year for which
reliable figures are available, almost two-thirds of the $100 billion in
foreign direct investment flowing into the developing world went into East
Asia. After China, Malaysia was the biggest recipient of foreign money,
benefiting to the tune of $5.8 billion. Doubtedless, Dr Mahathir would make
a distinction between long-term investment(welcome) and "hot" money flowing
into the capital market (suspect). But such portfolio investments are also
handy and have driven Asian stockmarkets to record levels. Nor are evil
foreigners the only investors pulling out. Much of the recent fall in the
ringgit and the Thai baht has come as local businesses have rushed to cover
their exposure to debt in dollars.

Point two is that countries like Malaysia are not the blameless victims of
a co-ordinated plot. In fact, many of their troubles can be laid at the
door of their own politicians, even Dr Mahathir. One of the reasons
investors have lost confidence in some ASian currencies is that many
countries are running big current-account deficits -- in other words, they
are investing more than they are saving at home. If the current-account gap
is kept within reasonable bounds, and the investments are productive, this
should present no problem; fast growing countries typically import capital.
But trouble is likely when current-account deficits balloon to potentially
unsustainable levels, as in Thailand, when many investments are in
unproductive prestige projects - as the world's tallest building, being
built in Malaysia, may be - or when property booms and busts expose
antiquated financial systems.

Lastly, a currency depreciation is not always bad news. If, as Dr Mahathir
believes, the run on the ringgit is unjustified, then "speculators" will
lose in the end. But if the markets are right that Malaysia is borrowing
too much, devaluation with domestic belt-tightening is one remedy. In the
region as a whole, exports have been sagging recently, even as markets like
the United States have boomed. This partly reflects the arrival of new
low-cost producers, notably China. The faster South-East Asian improves its
productivity and shifts production to more sophisticated goods, the more
smoothly it will adjust to the newcomer - and, in this eliminating domestic
barriers to growth is crucial. If governments delay that step, there will
be more bumpy times in the markets.

ASIAWEEK AUGUST 8, 1997.
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MAHATHIR VS. SOROS

("I do not believe the cause of freedom in [Myanmar] would be advanced by
linking it to currency speculation" -- George Soros.)

A plan to weaken the region's currencies ?

Was there a conspiracy ? The Association of Southeast Asian Nations
certainly felt under siege. Hence the "serious concerns over
well-coordinated efforts to destabilize ASEAN currencies for self-serving
purposes" expressed in a joint communique issued by the group's foreign
ministers in Kuala Lumpur. It was an unusual comment from primarily a
political group -- and a measure of how frazzled ASEAN governments are by
the regional currency turmoil.

Malaysian Prime Minister Mahathir Mohamad thought he knew who was behind
it all: George Soros, the world's premier currency trader. Dr. M said Soros
was using the wealth under his control to punish ASEAN for welcoming
Myanmar. "There is definite evidence that we cannot disclose," said that
PM. "There is no doubt he did it."

Soros has never hidden his unhappyness with the Yangon government. His
philanthropic Open Society Institute, which promotes democracy worldwide,
has been critical of Myanmar's ruling State Law and Order Restoration
Council (SLORC) for human rights abuses against minorities and political
opponents.

But Soros insists he wasn't involved in the currenty attacks. Except for a
single trade in mid-June, he said he funds had not sold ringgit or baht in
the past two months. Asia-based financial experts agreed Soros's role was
overblown -- though not non-existent. "He was just one of many players in
the market, albeit a bigger player than most," says Desmond Supple of BZW
Securities in Singapore. If he did speculate, Soros was hardly alone. In
the days following the ASEAN conference, Mahathir was even critical of
malaysians who profited by "selling and buying the ringgit for quick
gains".

There is probably bad blood between Soros and Mahathir that goes back to
one of the currency trader's triumphs: his successful attempt to drive down
the value of the British pound in 1992. Betting against Soros at the time:
Bank Negara, Malaysia's central bank. In doing so, the bank reportedly rang
up nearly $6 billion in losses.

Ironically, Mahathir, 71, and his new antagonist have much in common. Both
have strong opinions about how to improve the human condition and are
fearlessly outspoken. One grew up in a village in northern Malaysia and
became a doctor en route to the premiership. The other, a refugee from the
Nazis, fled to the U.S. and made millions on Wall Street. Both are
ambitious and watch markets carefully - one on behalf of his business, the
other on behalf of his nation. --- By Roger Mitton/Kuala Lumpur.

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