Malaysia Is Ready to Inflict Its Own Economic Medicine

Malaysia Is Ready to Inflict Its Own Economic Medicine

by Seth Mydans

KUALA LUMPUR, Malaysia -- For months, Malaysia resisted the pain, blaming foreign speculators, playing down its economic problems and leading analysts to brand it a country in denial.

Now, desperate to avoid the ministrations of the International Monetary Fund already under way in Thailand, Indonesia and South Korea, the government has swung into action.

Over the last 10 days, it has announced a program of austerity measures that some Malaysians are calling a home-grown IMF plan -- abandoning the aggressive growth policies the country has pursued for a decade.

The measures are a belated but ambitious effort to rescue the economy. Since the beginning of the year, the currency has dropped by 35 percent, and the stock market has plummeted more than 70 percent in dollar terms -- most of that damage occurring in the last three months. Prices for imported goods, and even for some staples, are starting to rise.

"We must reassure the world that we will carry out what we have undertaken to do at whatever cost," Prime Minister Mahathir Mohamad said this past weekend, dropping his resistance to economic changes.

The challenge now, as for other ailing Asian economies, is to follow through on restructuring plans that challenge an ingrained way of doing business.

Gathering in Kuala Lumpur on Monday, the leaders of nine Southeast Asian nations expressed their frustration with the help they had received so far from the IMF and called on the United States, Europe and Japan to help rescue the region.

"Despite the economic fundamentals of the regional economies being corrected and improved through the support and advice of the IMF, the depreciation of the currencies has continued unabated," said a statement by the leaders, who are meeting to mark the 30th anniversary of the Association of Southeast Asian Nations.

As they met, together with leaders from China, Japan and South Korea, the currencies of Malaysia, Indonesia and Thailand all fell to new lows. Some other Asian currencies also declined.

Malaysia's economic retrenchment has been outlined in a series of statements by Deputy Prime Minister Anwar Ibrahim, who is also finance minister and something of a foil to his aggressive boss, Mahathir.

Government spending is to be cut by 18 percent and officials' salaries, by as much as 10 percent. Several of Mahathir's ambitious building projects will be put on hold, and expensive imports like aircraft and ships will be halted. Military spending will be cut and most lending for construction will be frozen.

"We don't have any choice," Anwar said. "We have to take these tough measures if we want to boost the economy and restore confidence."

Bank credits will be restricted, he said, and there will be "no question of any bailout" for ailing banks and other financial institutions. "I have sympathy," he continued. "I don't want to see these guys go bankrupt. But there is a limit."

Last week, Malaysia's central bank governor, Ahmad Mohd Don, said, "We will not hesitate to close down any banking institution operating in a manner which is detrimental to the interests of its depositors or is insolvent."

In his remarks over the weekend, the prime minister agreed. "What is not viable must be killed outright so the survivors can be free to consolidate their positions," he said. "People unnecessarily employed should be retired."

Anwar acknowledged that these steps meant unemployment -- as many as 200,000 jobs -- and the possibility of social tension with a political cost. "Decisions now have to be purely economic," he said. "Obviously, we will have to undergo a period of slowdown before things get back on track."

In what amounted to a swallowing of national pride, he cut a previous estimate of annual growth in coming years to 4 percent or 5 percent, down from a projection of 7 percent just two months ago. Financial analysts said the figure could be lower still.

In addition to less growth, the analysts said, the austerity measures would probably mean an increase in interest rates, a wave of bankruptcies and a rise in inflation.

Mahathir was out of town at an air show when Anwar made his first announcement on Dec. 5. The new austerity measures are a severe blow to the 72-year-old prime minister's ambitions, which have been expressed in showy and expensive building projects, with a goal of making Malaysia a fully developed nation by the year 2020.

"We must make sure that we no longer spend as we used to," Mahathir conceded in a statement late last week, in which he called on Malaysians to seek economies in their daily lives, "Small things like reducing the consumption of sugar from four spoonfuls to three or two will help," he said.

In spelling out the austerity program Monday, Anwar said it was time to admit that there were serious problems with Malaysia's economy and that currency traders were not to blame for the current crisis. He said -- as economists have repeatedly -- that the country had benefited from foreign investment as its economy soared over the last decade by an average of 8 percent a year.

When currency traders attacked the Malaysian ringgit this fall, touching off a sharp fall in its value, as they had attacked the Thai baht earlier, Mahathir took aim at foreign speculators. He pointed his finger at American financier George Soros and also said that Malaysia might have been the victim of a Jewish "agenda."

Economic analysts said his remarks only heightened the country's problems, raising doubts about its seriousness in dealing with the crisis and contributing to investors' nervousness.

The new measures address some of the causes of Malaysia's problems -- particularly the big infrastructure projects that have been handed out over the years to well-connected companies, without competitive bidding. These have been at the heart of a Malaysian sort of capitalism that has helped cement Mahathir's political control during 16 years as prime minister.

As Anwar said: "There is a perception that government will not allow big players to be touched."

This will have to start to change, he said.