Malaysia’s Desperate Gamble

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YVES LOGGHE/AP

Taking Control: Malaysian prime minister Mahathir Mohamad.

Malaysian prime minister Mahathir Muhammed blames it all on the Jews. The rich Western economies. The foreign currency speculators. And of course on George Soros, a rich Western Jewish foreign currency speculator whom Mahathir calls a "criminal" and "a moron." Mahathir believes the IMF, far from wishing the current crop of East Asian leaders a speedy recovery from their current economic crises, engineered Indonesian president Suharto’s fall and would like very much to bring about his own. So it shouldn’t have come as too much of surprise when the defiant Dr. Mahathir threw the switch Tuesday on a plan that has the Western economic establishment covering its eyes in horror -- but also peeking through its fingers: impose strict currency controls and save the embattled Malaysian ringgit simply by removing it from the fray. The theory is attractive, especially to the prickly Mahathir: An inconvertible currency can't come under attack by evil foreign speculators, and that frees the safely walled-in government to take a deep breath, lower its internal interest rates, and pull itself out of recession by stimulating domestic growth -– without subjecting its every move to the brutish vagaries of the global marketplace.

Mahathir's plan, of course, baldly flouts all the IMF's –- and nearly everyone else’s -- current wisdom on saving Asia. According to their formula, a package of stopgap loans and high internal interest rates can protect the currency and attract foreign capital in the short term by restoring investor confidence. Follow that with swift and painful economic reforms, and recovery should be imminent. But for Mahathir, flipping the Western economic establishment the bird is part of his plan’s allure. The West, Mahathir insists, fears a ascendant Asia, with its large Muslim populations and strong governments, and is gleefully exploiting the Asian crisis as an opportunity to tear down the region's governments and replace them with toadies. In Mahathir's play, the pound of flesh has already been torn away. Like its neighbors, Malaysia lies bleeding, but when Korea, Thailand and Indonesia eagerly gulped down $150 billion in IMF bailout loans, Mahathir wanted none of the West's medicine. Shylock, after all, was no healer.

Currency controls aren't anathema to Westerners for nothing: They’re very vulnerable to abuse and corruption; they require massive bureacracies to regulate; and the sheer complexities of a government's implementation of them tends to scare away capital. Because Mahathir’s plan places tight limits on importers and exporters as well as Malaysians who travel abroad, it also means regulatory headaches for the governments of neighboring countries. Currency controls have traditionally resulted in stagnation and recession, and tend to move countries farther away from the reforms they will eventually need to prosper in today’s unforgiving global economy.

But the plan is not without advocates. The IMF’s prescription has so far been a spectacular failure; at this dismal point, what does Asia have to lose? MIT's Paul Krugman wrote in FORTUNE that such an admittedly desperate "Plan B" could be Asia's only way out, and when he learned Mahathir had apparently followed his advice, Krugman even wrote an open letter to the prime minister advising him of the many sinkholes along the path ahead.

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