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Crisis and Recovery in Malaysia: the role of capital controls
... However, if the controls were not the disaster its critics claimed, did they contribute to Malaysia's recovery? Jomo's (2002) assertion that these controls were ineffective because they were tantamount to "bolting the stable doors after the horses have fled" missed the point. By the time Malaysian controls were imposed, conditions in the rest of the Crisis-hit countries had stabilized and recovery begun. ...
Objective evaluation of evidence about Malaysia's experience during the Asian Crisis a decade ago reveals widely held Malaysian perceptions to be misleading if not downright erroneous. Most importantly, while turning its back on the IMF did not bring Malaysia the disaster many predicted, neither could this approach be credited with saving Malaysia's economy. Countries that bit the IMF bullet recovered as quickly as Malaysia did. The similarity of policies adopted by Malaysia and IMF-assisted countries may account for this lack of differentiation. The credit given to capital controls is likewise exaggerated. When it came to proximate cause, blaming speculators may be politically convenient, but makes little sense given that short-term speculation is part and parcel of well functioning capital markets, contributing both to booms as well as busts. Finally, the belief that Malaysia fared better than other Crisis-hit Asians is based on the presumptions that other countries suffered greater collateral damage and that Malaysia's fundamentals were sounder, both of which are not well supported by existing data.
Drawing on the behavioral equilibrium exchange rate and the fundamental equilibrium exchange rate approaches, this paper assesses the equilibrium value of the real effective exchange rate of the Malaysian ringgit over the past 25 years. For 2005, when the Malaysian authorities exited from the peg with the US dollar, both models determine a slight undervaluation of the currency. Openness and real GDP per capita have been the main drivers of real exchange rate movements in the past, although non-tradable productivity, government consumption, and net foreign assets have also had a sizable impact. The paper also highlights the limitations of applying the two approaches in the context of emerging countries. Copyright 2008 The Author. Journal compilation 2008 East Asian Economic Association and Blackwell Publishing Ltd.
Except for a large current-account deficit, Malaysia's macroeconomic fundamentals were in order before the crisis beginning in mid-1997. The current-account deficit-covered by short-term capital inflows into Malaysia's emerging stock market as well as private sector short-term US dollar borrowing from foreign banks-was deemed acceptable with the 8+% export-led growth achieved during the period 1988-96. The virtual pegging of the Malaysian ringgit and other South-east Asian currencies to the US dollar from the mid-1980s enhanced export competitiveness until the yen began to depreciate from mid-1995. This eventually disastrous exchange rate policy was favoured by the politically influential financial interests which have dominated the South-east Asian economies, whose manufacturing sectors have been dominated by foreign direct investment. The collapse of the Thai baht and the contagion effect exacerbated by herd behaviour resulted in the collapse of the asset price bubble that had been encouraged by financial liberalisation and sustained by the very high investment rate which exceeded the Malaysian high savings rate. Poor policy responses by the Malaysian authorities as well as a defiantly dissenting executive have undermined the confidence necessary for recovery. Contractionary policies-demanded by financial markets and the IMF, and introduced from the end of 1997-have brought the Malaysian economy into recession in the first half of 1998 after over 7% growth in 1997.
- Kaplan and Rodrik