He's The Boss

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ANTHONY SPAETHThe two landmark homes in Kuala Lumpur's upscale Daman-sara Heights section lie just a few hundred meters apart. One is the residence of Malaysian Prime Minister Mahathir Mohamad. The other, until last week, was the official home of Anwar Ibrahim, Mahathir's long-time deputy and heir apparent. For years, the cozy proximity symbolized the closeness of the two men: the Prime Minister trusted Anwar so much that he let him run Malaysia's government when he took a two-month vacation last year. Anwar, 51, fondly referred to Mahathir, 73, as the Old Man.Last week, that formerly placid neighborhood became symbolic of a country descending into economic turmoil and political instability. A police helicopter hovered threateningly over Anwar's house after the Deputy Prime Minister refused his boss' demand that he quit. Police blocked the road leading to both residences. Mahathir then sacked Anwar, shortly after thumbing his nose at the outside world by announcing currency controls and other measures to shield Malaysia from the vicissitudes of the global economy. Anwar packed his family off to his private residence and lashed out, saying he was the victim of a conspiracy at the highest level supported by corrupt political cronies and pampered relatives of the high and mighty, whom he compared to worms under the sun. His party expelled him amid yet unproven but well-publicized allegations of treason, corruption, adultery, a homosexual dalliance and holding a suggestive phone conversation with the wife of a colleague.Calm amid the chaos was the Old Man, triumphant as usual in a political battle and gracious enough not to gloat. I wish it hadn't happened, not at this point, he was quoted as saying. But these things have gone out of my control. Mahathir is now firmly in charge, but his victory was accomplished through heavy-handed and risky tactics. They now have a currency crisis, a banking crisis, an economic crisis and a political crisis all at once, says Chia Yew Boon, research director of Santander Investment Securities in Singapore. It's horrible. Adds Peter Tan, a Bangkok-based businessman: One man with a chip on his shoulder and the country is screwed. Even friendly neighboring countries mourned Anwar's political evisceration and edged close to naming Mahathir the Captain Queeg of Asian politics. People looked to Anwar as the voice of reason, says a sorrowful Foreign Ministry spokesman in Thailand. It is very disappointing, sighs Burhan Usar, a parliamentarian in Indonesia, where Malaysia was seen as a model for orderly political succession, especially from one generation of leader to the next. Observes a Philippine cabinet secretary: Any leader going downhill needs a scapegoat. Anwar happened to be the most convenient.PAGE 1  |    |    |    |  
 
The radical economic measures Mahathir announced helped to obscure last week's biggest picture: a political putsch, albeit from above, not below. Much was made of the triumph of Mahathir over Anwar in economic policy. (By decree Malaysia's currency suddenly has become pretty much non-convertible, and foreign investors have been blocked from making short-term gains on the local stock market, moves Anwar would have opposed.) But Mahathir's ultimate goal may well have been spoiling Anwar's chance of challenging him as president of the United Malays National Organization, or UMNO, and succeeding him anytime soon as Prime Minister--a post Mahathir clings to in the hope, friends say, that history will honor him both as the builder of modern Malaysia and its deliverer from the current economic crisis. Anwar saw himself, too, in the savior role: he plainly stated that a turnaround for Malaysia required younger blood, a crackdown on corruption and the kind of basic civic liberties (such as press freedom and judicial independence) that Mahathir has long disdained. When an Anwar supporter proclaimed that platform at a June annual meeting of UMNO, it was the first volley in Anwar's own uprising--a fact hardly lost on his boss, or the businessmen and cronies behind him. Mahathir's counterattack began almost immediately; with last week's coup de grace, Anwar's attempt at rebellion and change was stopped in its tracks.And what an attack it was. Mahathir threw the book at Anwar, invoking Malaysia's draconian Internal Security Act, the Official Secrets Act and the Women and Girls Protection Act. Anwar vowed to fight both the allegations and his expulsion from UMNO and came out rhetorically swinging, hoping that diatribes against corruption, nepotism and authoritarianism would rally his supporters, which include Muslim and youth groups. But Mahathir's brass knuckles had clearly done their work: analysts were torn only on whether the former whiz kid might have a political role in some distant, post-Mahathir era.There was a lively debate, however, on what things will look like in the wake of Mahathir's counter-coup. Some believe that with care, judiciousness and flexibility--attributes not often associated with the mercurial Mahathir--the new economic policy measures might just stabilize Malaysia, albeit at the cost of insulation. Others pointed out that cutting off financial flows is a peculiar tack for a nation that owes its past growth to easy money from outside and free trade. Many were reminded of Mahathir's crackdown against political foes in 1987, when his grip on UMNO was last threatened. More than 100 people were jailed, and social freedoms that would likely have expanded over the succeeding years of economic growth were indefinitely put on hold. I'm scared, says a political activist in Kuala Lumpur. The Malaysian state is quite relentless and unforgiving if you criticize it. Even a Deputy Prime Minister cannot stand up to this system. Ahmad Azam Abdul Rahman, president of the Muslim Youth Movement of Malaysia, was bolder. He released a statement suggesting that Anwar's enemies had destroyed him to shield themselves from the winds of political reform--which, in Malaysia, is the kind of charge made by people who aren't afraid of doing time in the Mahathir Marriott, a.k.a. Kuala Lumpur's Kamunting Prison. They have to silence Anwar by all means for their Pandora's Box to remain safely sealed, Ahmad Azam said. We believe this decision is not only a big mistake but a national disaster.In hindsight, a rift was inevitable between Mahathir, a post-colonial nationalist who has never hidden his resentment of the West, and Anwar, a former Muslim radical who became the West's model for appealing leaders in the world's emerging-market nations. Anwar counts as friends U.S. Secretary of State Madeleine Albright and Defense Secretary William Cohen. Not long ago, he planned to co-author a book with Michel Camdessus, managing director of the International Monetary Fund.  |  PAGE 2  |    |    |  
 
But hindsight is misleading. Without the Asian economic crisis, Mahathir might well have bequeathed his prospering nation to a deputy committed to ushering in a kinder and more democratic era. That plan jumped the tracks when Asia's currencies performed a serial collapse last year. Mahathir, it is assumed, didn't want to retire under a cloud and have his legacy sullied. Moreover, he genuinely believed that Malaysia didn't deserve its reversal of fortune. He loudly blamed the West, pointing his finger at currency traders, foreign correspondents and Jews. At the same time, it was Anwar who managed for a time to retain control of the country's economic levers. He maintained that Malaysia would remain open, and he voluntarily instituted the kind of strict regimen prescribed by the IMF for Indonesia and South Korea--though Malaysia received no IMF pump money--hoping to restore international confidence.Unfortunately, the IMF's short-term prescriptions have failed to deliver quickly anywhere in Asia. High interest rates have choked businesses, and budget cuts have deflated economies. Indonesia and South Korea still resemble car crash victims, badly in shock and in danger of losing limbs, but placed on radically low cholesterol diets. The treatment seems virtuous, and might do good in the long run, but it hardly helps the patients out of the economic intensive-care ward. In Malaysia, well-connected companies have been unable to pay back loans, and banks can't get their money back. Mahathir favored helping those firms, many of which he had nurtured through the years with government contracts and funding. Anwar believed bailouts represented the worst side of the Asian economic miracle: cronyism and collusion a la Marcos or Suharto.Some big bailouts were approved--among them for Halim Saad, an UMNO big shot, and Mirzan Mahathir, the PM's eldest son. In recent months, Anwar became increasingly aggressive in describing the path of recovery for Malaysia that he favored as more virtuous. His supporters, emboldened by the fall of Suharto in May, tried to hijack UMNO's annual assembly in June by having the leader of the youth wing give a blistering first-day speech about party corruption. But Mahathir, or his aides, were ready for Anwar's attack. Delegates to the meeting found in their conference kits copies of a book entitled 50 Reasons Why Anwar Cannot Become Prime Minister. Among the reasons were allegations that Anwar had indulged in sexual affairs with his chauffeur and an aide's sister-in-law, stories that had circulated for 10 months and been dismissed by Mahathir previously. The book also accused Anwar of ordering the murder of the chauffeur's wife.Anwar's pedestal kept crumbling. Former Finance Minister Daim Zainuddin was appointed economic czar; two newspaper editors loyal to Anwar were sacked on orders from above; his tennis partner (and alleged pimp) was arrested for having revolver bullets in his home, which didn't match his current, registered gun. (His lawyers say it was a simple oversight because he forgot to turn the bullets in at the police station when he surrendered his old gun.) On Aug. 24, Mahathir lowered the boom. According to Anwar, the Prime Minister confronted him, saying he had new, credible evidence of Anwar's sexual improprieties and asked him to resign--sweetening the deal by offering not to press charges against him. Anwar refused and accused the Prime Minister of trying to blackmail him into resigning. Two days later, Mahathir's son Mokhzani made a call and asked Anwar to find a compromise solution before both men were damaged. Anwar, still not believing he would be sacked, paid no heed.  |    |  PAGE 3  |    |  
 
But last Tuesday, Mahathir gathered UMNO state party chiefs at his residence, across the road from Anwar's own, and reportedly presented the allegations against Anwar. He also detailed some of the charges against the former tennis partner, businessman Solaimalai Nallakaruppan. He has been held in custody for five weeks and interrogated mainly on personal matters. According to an affidavit released by his lawyer, Nallakaruppan has been continuously reminded that I would hang under the ISA [Internal Security Act] for the bullets, that my wife, too, would be arrested and that my children would be neglected and would be homeless. In exchange for my freedom I was asked to agree to such statements as the police would place before me.Last Wednesday, according to Anwar, Mahathir gave him a choice: resign or be sacked--and, if he chose the latter, the Prime Minister said he should be prepared to face charges. I made it clear in no uncertain terms, Anwar told the press last week, that I'm not prepared to submit to this political conspiracy to undermine my position and defeat me through nasty deeds. I challenged him to use democratic means to unseat me. At the end of their discussion, Anwar says, he told Mahathir that he respected him as much as his own father. (Although, he added, not all fathers treat their children very fairly.) That night Mahathir dismissed him in a three-sentence missive, and hundreds of Anwar's supporters surrounded his official residence chanting slogans in his favor.With Mahathir firmly in control of UMNO, Anwar's challenge may well be short-lived. The political obituaries of Anwar, a mere Deputy Prime Minister, were striking in their despairing tone. He was a link between Western civilization and Asia's, announced Thailand's deputy Foreign Minister Sukhumbhand Paribatra. I am sorry and regret it. News-papers in Asia took an even harder line. The current political crisis in Malaysia, thundered The Nation, a Bangkok daily, is about the struggle between the authoritarian rule of one man and his cronies and democracy and civil society.While the average citizen was grabbed by the political headlines--Anwar Implicated in Sexual Misconduct trumpeted Friday's New Straits Times--Malaysia's businessmen and the neighboring countries struggled to figure out Mahathir's new economic program. The Prime Minister said earlier he was prepared to announce something shocking--and that's what he did. In an attempt to stop the outside world from dictating the fate of his currency, Kuala Lumpur announced that all ringgits held outside of Malaysia had to be returned: ringgit trading would be done entirely within the country's own borders, except with permission from the central bank. Foreigners would no longer be allowed to sell stocks and repatriate funds unless a year has passed since the purchase. And the ringgit was officially fixed at an exchange rate of 3.8 to the U.S. dollar--its strongest rate in several months.  |    |    |  PAGE 4  |  
 
The financial community reacted in general horror, fearing yet another rusty wrench thrown into Asia's unsettled markets. Mahathir is turning Malaysia into a Burma, says a Bangkok-based official of a Malaysian bank. It will create a black market for the currency, and there will be panic in the country to buy U.S. dollars. Says a Clinton Administration official: We tell everyone in the region that you'll do best by getting your system in shape to participate in a globalized economy. Mahathir clearly has chosen a different path.But as the days went on, some saw wisdom of a limited sort. Currency controls clearly cut Malaysia out of the investment loop for international mutual funds, part of the so-called hot money that once gave the country some of the highest growth rates in the world. Direct investment by foreigners, though technically not affected, will probably stay away for more general reasons. I know some banks that were seriously considering Malaysia to locate their back-room operations, says Bruce Gale, director of the Political and Economic Risk Consultancy in Singapore. They will do some rethinking. There's a feeling you can't be sure about the government's policy. But nothing else was helping to stabilize the ringgit, including very high interest rates, and without that no economy can get on its feet. According to economic guru Paul Krugman, who argues the virtues of limited capital controls: When you have a natural disaster in a city, you impose a curfew to prevent looting and disorder. Late last week, Krugman judiciously proposed some limitations to such tinkering in an open letter to Mahathir posted on the Internet. Currency controls must be temporary, he said, and accompanied by a real cleaning up of the financial system. A fixed exchange rate can't be used as a tool of national pride. If genuine market forces aren't allowed to ultimately work, he argued, the whole economy will suffer.Mahathir's moves last week conformed to the first part of Krugman's prescription. The question now is whether Malaysia will take the rest of the medicine. What is the breathing room going to be used for? asks the head of a Wall Street trading firm's Singapore branch. If it's used to further Mahathir's political agenda, then the whole thing will come apart and we will see collapse. A top Malaysian government official told TIME last week that the currency controls were necessary to prevent a ringgit meltdown following the collapse of Russia and the drop in the Dow. Krugman can write about ideas, he said. We have to implement them. We know it is risky. But he revealed that Malaysia's moves were also directed against Singapore, where an estimated 35 billion ringgit is held in banks, trading accounts and in Singapore's Government Investment Corp. Relations with Singapore have gotten testy lately, and Mahathir wanted to remove Singapore's control over its currency. As long as Singapore is trying to benefit from our problems, the official warned darkly, we have to isolate ourselves.Currency controls ... tales of seduction by a Deputy Prime Minister ... sinister plots by Singapore ... isolation. The pieces are confusing, but they build to a familiar, if disturbing mosaic: of Old Man Mahathir, gathering the reins of power in his grip and lashing out in all directions.  |    |    |    |  PAGE 5