(Petaling Jaya, Saturday): The Deputy Director-General of the Institute of Strategic and International Studies, Dr. Zainal Aznam Yusof started his newspaper column on the Malaysian economy today, under the heading "Will IMF's medicine cure economic ills of Asia?", with the following:
"This will go down in history as probably one of the most unsettled and painful years in post-war Malaysia, and probably for many other Asian economies.
"The currency problem which was unleashed in the second half of the year following the devaluation of the Thai baht in July, looks unlikely to abate as this year winds to a close and 1998 looks like a year when we will be biting the bullet and tightening our belts.
"Malaysia's fundamentals still look good, but confidence needs to be nursed back.
"We are learning just how difficult it is to improve confidence, it is a case of the flesh is willing but the spirit is weak."
Zainal's four-paragraph start to his column highlights two critical points about the six-month-long economic and financial crisis and Malaysia's response to it, namely:
Malaysians will only be "biting the bullet and tightening our belts" next year, largely because of the prolonged and overhanging "denial syndrome" which still permeates all sections of government and society;
The failure to win the battle to restore confidence because "the flesh is willing but the spirit is weak", or in simpler terms, the lack of political will to carry out wide-ranging political, economic and financial reforms to resolve the crisis of confidence.
Malaysia has lot six precious months to come to grips with the economic and financial crisis and address the central issue of restoring confidence. DAP calls for a new and bold strategy to resolve the information deficit in the country, which is one important cause for the failure to restore confidence, by sharing with the people all the bad news about the economy as well as allowing the people a full say in the options before the country, including a full debate whether Malaysia should seek IMF assistance.
I am very concerned that as Malaysians prepare to usher in the new year, the country is not ready to completely shake off the "denial syndrome" and the culture of not wanting to take Malaysians fully into its confidence, sharing all information with the people, including all the bad news about the economy as well as allowing Malaysians to participate meaningfully in opinion and decision-making, is still the dominant culture of officialdom in 1998.
For instance, there is no widespread - in fact hardly any - public discussion, whether through the media or by government leaders and opinion makers, about the International Monetary Fund (IMF)'s Interim World Economic Outlook released in Washington last Saturday which revised drastically downwards its forecast for Malaysia's real GDP growth next year to 2.5 per cent, as compared to the IMF's projection of 8 per cent in May and 7.5 per cent in October in the earlier editions of the IMF's World Economic Outlook.
It would appear that everyone is pretending that such an IMF 2.5 per cent economic growth forecast for Malaysia next year was never made, when it should be the subject of intense public debate as the IMF forecast was made two weeks after the Deputy Prime Minister and Finance Minister, Datuk Seri Anwar Ibrahim, had revised the original 7 per cent economic growth forecast in his 1998 budget to 4-5 per cent in his second budget on December 5.
This is a very serious matter for it would seem to indicate that the IMF has no confidence whether in the first 1998 budget of Oct. 17 or the second 1998 budget of December 5 to address the economic and financial crisis, which should concern all Malaysians.
It is also most disconcerting that the government and mass media in Malaysia had ignored the IMF's preliminary finding that the hedge fund investors were not to blame for the financial markets crisis engulfing Asia, and that speculators may have incurred some losses themselves.
As the Malaysian Government had been in the forefront asking that IMF make a study of the role of the speculators in the Asian financial crisis, is the IMF right when it disagreed with the Prime Minister, Datuk Seri Dr. Mahathir Mohamad and concluded in its preliminary assessment in the IMF Interim World Economic Outlook that that speculators appear to have played only a minor role in the crisis, and that domestic investor sentiment was the principle "driving force".
The IMF would publish a more comprehensive report of the causes of the financial crisis in Asia in the May 1998 World Economic Outlook, but Asian finance ministers will have received an inkling of its contents, after IMF managing director Michel Camdessus, briefed ministers at the last regional finance ministers meeting in Kuala Lumpur early this month.
The IMF Interim Economic Outlook gave this preliminary assessment of the role hedge funds may have played in the Asian financial crisis:
"Speculators appear to have played a relatively limited role in the crises. Perhaps they determined the timing of the eruption of crisis in some countries, but investors who profited did so primarily by correctly perceiving unsustainable and inconsistent economic policies, financial sector fragilities, and overvalued property and stock markets. Some speculators, however, appear to have made large losses in some operations. More generally, foreign investors in Asian emerging markets have taken substantial losses."
The IMF preliminary assessment did concede, however, that hedge funds may have played a role in specific currency pressure applied on the Thai baht:
"International investors - commercial banks, investment banks and hedge funds - appear to have played a role alongside domestic investors in taking short positions against the baht, which they viewed as providing a one-way bet given the exchange rate peg, weak fundamentals, and relatively low funding costs."
The IMF maintained that the turmoil has been principally due to macroeconomic weaknesses in several Asian countries, and structural microeconomic deficiencies, particularly in the finance sector.
This is the IMF's preliminary findings on the causes of the Asian financial crisis:
"In the countries most affected by the crisis, the key domestic factors that led to the present difficulties appear to have been: first, the failure to dampen overheating pressures that increasingly had become evident in Thailand and many other countries in the region, pressures that had manifested themselves in large external deficits and property and stock market bubbles; second, the maintenance for too long of pegged exchange rate regimes that encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors; and third, lax prudential rules and financial oversight that led to a sharp deterioration in the quality of the banks' loan portfolios. All of these factors eventually led to repeated attacks on the Thai baht and subsequently on other currencies in the region. As the crises unfolded, political uncertainties and doubts about the authorities' commitment and ability to implement the necessary adjustment and reforms exacerbated pressures on currencies and stock markets both in Asia and in other emerging market countries. In particular, reluctance to tighten monetary conditions and to close insolvent financial institutions has clearly added to the turbulence in financial markets."
The IMF said hedge funds could shoulder some of the blame for the crisis, particularly in Thailand, but concluded that "they do not appear to have been a major driving force on the downward pressure on the currencies of the Asean countries during this period.
"Rather, domestic investors, residents seeking to hedge their foreign currency exposures, and, in some cases, international commercial and investment banks, appeared to have played the most important roles in driving domestic currencies lower."
As Malaysia had been in the forefront in blaming currency speculators for the Asian financial crisis, the IMF preliminary finding of the causes of the Asian financial crisis cannot be allowed to pass unnoticed, and this is why I find the silence in the Malaysian mass media on the IMF preliminary finding so eerie, unreal and unhealthy.
Shouldn't Malaysia be leading the world in initiating an international debate on the IMF preliminary findings on the causes of the Asian financial crisis, whether the IMF was right in concluding that speculators appear to have played only a minor role in the crisis, and that domestic investor sentiment was the principle "driving force"?
Was Mahathir right when he blamed George Soros and the currency speculators as chiefly responsible for Malaysia's economic and financial crisis and the depreciation of the Malaysian ringgit?
It would appear that Mahathir's own "Strategy Guru", Kenichi Ohmae, who is also a member of the International Advisory Panel (IAP) on the Multimedia Super Corridor which is chaired by Mahathir himself, does not think so. Writing in the Asiaweek 1997 Special Collectors' Edition, Ohmae has this to say about the volatile currency situation:
"Asian countries which have to deal with both yen and dollars have had to adjust somewhere in between. Thus, as the dollar has strengthened by 50% or so vis-à-vis the yen, the most comfortable zone for the ASEAN currencies would be 25% less than the dollar and 25% more than the yen. That is what this round of currency adjustment has achieved. While George Soros and his Quantum Fund may have triggered this adjustment, from the perspective of the global currency market the process was quite a natural one. If he hadn't, someone else would have done the same thing. And in fact, many others may have played a part in the process - some of whom may have reacted to domestic troubles in the affected economies. The fact that Soros was apparently involved confused people because he seemed to have had a political agenda to prevent Myanmar's entry to ASEAN"
The prolonged inability of the Malaysian government to shake out of the "denial syndrome" and to have the political will to carry out sweeping political, economic and financial reforms is one important reason why there is not only information deficit but increasing credibility gap as reflected by the growing discussion among the people as to whether Malaysia should follow the example of Thailand, Indonesia and South Korea and seek International Monetary Fund bail-out.
I have no doubt that public interest in the question as to whether Malaysia should seek IMF aid will grow in inverse proportion to the inability of the government to restore confidence and resolve the credibility gap of the official mass media policy.
The Government must take note of the growing body of Malaysians who feel that in the circumstances, the IMF option may be the best solution for Malaysia's economic and financial crisis.
This view is not to be found in the mass media because of a climate of fear that those who made them would be accused of being anti-national, disloyal and even traitors of the country. All that had appeared in one newspaper column last Tuesday was that the IMF option was not all that bad.
This is unhealthy, and although I have declared more than once, giving reasons, why I am opposed to Malaysia seeking aid from the IMF, the government must allow and even encourage a free and full debate among Malaysians in the press and over radio and television on whether Malaysia should seek IMF aid - without smearing those who support the IMF option as anti-national, disloyal or treacherous elements in our country.
I believe such a national debate would be useful in focussing government and public attention on the worries and concerns of Malaysians and the areas which need to be addressed immediately if the government is to restore confidence and galvanise Malaysians as one unit to tide through the economic crisis, which will get worse before they get better, and effect an economic revival and turnaround in the shortest time possible.
Such a debate would not only be useful for Malaysia, but also for the international community, at a time when there is growing criticism of the relevance of IMF solutions as to whether the time has come for the 181-nation Washington-based organization to change its approach for rescuing troubled economies.
The IMF's credibility is on the line in the Asian mega-bailouts as Harvard University professor Jeffrey Sachs has rightly pointed out, "Since the time the IMF has signed each Asian bailout program, the respective Asian currencies have continued to plummet".
Another equally important question is whether the Asian crisis has enabled the US to use the "IMF crowbar" to give it an opportunity to force the opening of Asian domestic markets for its goods, investors and entrepreneurs. One report suggested that the US was "actually the negotiator in South Korea" in the IMF bailout negotiations setting out the conditions for the rescue of the South Korean economy.