(Dewan Rakyat, Wednesday): The Yang di-Pertuan Agong, in his Royal Address, said:
"We have enjoyed rapid economic growth during the last decade. This is indeed what we reap from the efforts contributed by various parties in the country. The devaluation of our currency which had caused the stock market to crash in such a short time, left the country in shock. Although Malaysia is experiencing a turmoil in its foreign exchange and stock market since mid 1997, We are confident that the people and the Government, under the able leadership of YAB Dato Seri Dr. Mahathir Mohamad will be capable of overcoming the challenges of the current economic situation which took us by surprise. We hope the people will be patient in facing the present economic crisis.
"It is important that the people have full trust in the efforts undertaken by the Government. In a situation such as this, all levels of society must strive to avoid waste, be thrifty, increase savings and invest in sectors which have a profitable future."
Let me firstly congratulate the government as this is the first time that the government has officially admitted to an economic crisis, as some time last year, the mass media, both printed and electronic had been warned not to use the words "economic crisis" probably fearing that this would panic Malaysians, with Ministers going round the country talking about "economic problems" instead. This had been the constant subject of my criticism in the past few months as proof that the government has not completely shaken off the "denial syndrome" to come to grips with what the Executive Director of the National Economic Action Council (NEAC) and Government Economic Adviser, Tun Daim Zainuddin has said in an interview with Far Eastern Economic Review as "the worst crisis since the Second World War" - although this was meant for a foreign rather than local consumption.
The government’s reference to the economic crisis in the Royal Address, however, is quite disconcerting because there is no preparedness to admit that although there are external causes to the economic crisis, internal policy and structural weaknesses have seriously aggravated the economic crisis, making it more painful and even longer than would otherwise be necessary.
The lessons we draw from the crisis depend to a large extent on our understanding of the causes of the crisis itself. In the past nine months, however, the government had made no attempt to explain the larger causes of the economic crisis apart from heaping blame on foreign speculators in contrast to what other governments in the region are doing.
The Ministerial statement by the Deputy Prime Minister and Finance Minister, Datuk Seri Anwar Ibrahim, yesterday - what has been described as the "third 1998 Budget" -had been more forthright and did not flinch from admitting the financial crisis facing the country. Unfortunately, the market had reacted negatively as seen by the weakening of both the currency and the stockmarket at the close of trading yesterday, either because Anwar’s latest package of measures fell short of expectations or his attempt to stimulate the market had been undone by the Prime Minister’s parliamentary performance during question time.
This is one recent explanation by a government in the region on "What Caused the Crisis":
" The speed and severity of contagion caught everyone off-guard. What started off as a devaluation of the Thai Baht led to widespread financial and economic turbulence in the region. One after another, regional currencies and stock markets plummeted as international confidence in the region as a whole fell and global capital flowed out of East Asia…
"The roots of the crisis can be traced back to the huge influx of cheap foreign capital to the region in the early 1990s. With inadequate prudential supervision, regional financial institutions over-extended themselves and lent excessively, often to unproductive sectors and projects. This rapid build up of foreign debt was not sustainable. It created asset bubbles in the property and stock markets. For a time, strong regional economic growth enabled the countries to service their debt obligations through buoyant export revenues.
"Confidence in the region’s export potential began to waver towards the mid-1990s, with various exchange rate realignments. In 1994, China devalued the Yuan. In 1995 the Japanese Yen started depreciating against the greenback. In countries whose currencies were tightly pegged to the US dollar, exports began to lose competitiveness. Economies such as China and Latin America emerged as keen competitors. These developments coincided with a cyclical downturn in the global electronics industry and precipitated a regional export slowdown in 1996.
"With the export engines stalled, investors and creditors grew nervous of the regional countries’ continued ability to service the growing foreign debt burden. Eventually, the market lost faith in the sustainability of the linked exchange rate systems adopted by regional economies.
"Thailand was the first to suffer this loss of investor confidence. Speculative attacks against the Baht mounted as concerns about the Thai economy grew. The breaking point came when Thailand’s foreign reserves dipped below its short-term foreign debt obligations in the middle of 1997. Without sufficient reserves to defend its currency, the Thai Government was forced to allow the Baht to float on 2 July 1997. The contagion effect of this de-facto devaluation of the Thai Baht quickly spread to Malaysia and Indonesia as the market switched its attention to other Southeast Asian economies with similar structural weaknesses in their financial and banking systems.
"By September, the financial crisis extended to North East Asia. Hong Kong’s US dollar peg came under severe pressure, but managed to hold. Long standing structural weaknesses in Japan’s financial and banking system caused some major institutions to fail. South Korea, with weaker fundamentals and large private sector debt, took the biggest hit. A massive US$57 billion IMF-led bail-out package was necessary to stabilise the Won, and to keep the Korean economy on its feet.
"Depending on how successfully Governments manage economic recovery, maintain political and social stability, and restore investor confidence, the regional situation could either gradually stabilise and start to recuperate, or continue to deteriorate before it gets better. Even if regional countries take all the right steps and see through painful but necessary economic reform policies, the recovery process cannot be immediate. Overall, we can therefore expect slower regional growth over the short to medium term."
This was the speech by the Singapore Finance Minister when presenting the 1998 Budget in the Singapore Parliament on February 25.
The Malaysian Government can disagree with the analysis of the Singapore Government as to the causes of the Asian economic crisis, but I have quoted the Singapore 1998 Budget statement at some length to emphasise one point: that the first condition in confidence-restoration is for government leaders to stop giving simplistic reasons for the causes of the economic crisis.
In Malaysia, Government leaders are not only putting the blame of the economic crisis on foreign currency speculators for deliberately depreciating the Malaysian ringgit, they are also trying to make these foreign speculators responsible for the Employees Provident Fund declaring the lowest dividend of 6.7 per cent in 22 years and for creating the troubles of Sime Bank, Bank Bumiputra, Abrar Finance and Cempaka Finance!
This is in sharp contrast to what leaders of other Asian economies are saying. For instance, Thai Prime Minister Chuan Leekpai blamed the recent economic crisis in Thailand on complacency, without any talk of George Soros or international conspiracy to sabotage the Thai economy.
In his speech to the Council of Foreign Relations in New York last week , Chuan said:
"During the period of rapid economic growth, we were too complacent. In the good times, we forgot many important truths and neglected many important tasks.
"We created wealth but were perhaps negligent in creating competitiveness.
"We were successful in our economic performance, so much so that we did not examine the fundamentals of our politics and governance, or tackle issues, such as bureaucratic inefficiency, lack of transparency, and lack of accountability.
"Once the cracks appeared, we compounded the mistakes by committing much of our fiscal reserve to shore up insolvent finance companies and our foreign reserves to defend the baht.
" Naturally, we were quickly and severely disciplined by the market."
Singapore’s Senior Minister, Lee Kuan Yew, in an interview on the East Asian economic crisis in a recent issue of Newsweek said:
"This (economic crisis) was not an act of God. This was a folly of man in making the damage worse by not responding in a way that commands the confidence of the market. The primary weakness was inadequate systems to absorb this huge inflow of funds in the last three years, during the period of euphoria about the Asian miracle."
Speaking at the National Defence College of Thailand, titled "How and when will East Asia recover", Lee Kuan Yew highlighted two key inter-related factors that caused the crisis that has gripped East Asia.
"The first is euphoria which resulted in reckless and excessive private sector borrowing. The second is panic and the subsequent collapse of investor confidence, a contagion that got out of control."
Lee noted that while private companies were the main borrowers, governments were to blame for failing to check excessive borrowing. Indeed, they abetted the process by adopting policies which created a euphoric environment.
"It is a war against ourselves. We failed to see that we had entered into a new global financial market, in which with a computer we are instantly linked up to all the financial centres of the world.
"And not understanding that, we did not take heed, not notice the warning signs, the amber light before it turned red. The amber light was shining and blinking but the governments were too busy expanding to notice that we had reached the danger zone."
On what can be done, Lee said:
"Although the situation looks bleak at the moment, history shows that all financial crises eventually subside and the economies recover."
The question is how long it will take, and whether governments can do anything to speed up the process. While governments have little direct control over market reactions, they can restore confidence by addressing market concerns – in particular, external debt, the soundness of the financial and corporate sectors, and money supply and interest rates.
Warning that pain was unavoidable, he added:
"By pain I mean many bankruptcies of companies which are overexposed (to debt), many bankruptcies of banks which are badly managed. With the bankruptcies come unemployment, many uncompleted projects."
One important reason why Malaysia is still facing the problem of confidence-restoration nine months into the economic crisis is the widespread perception that government leaders are still in denial and are not prepared to face up to the internal weaknesses and causes which have made the economic crisis worse that it should have been. Such unrealistic attitude can only make it very difficult to arrive at a proper diagnosis and remedy of the crisis - dragging out the economic crisis longer than necessary.
This is why the recent pronouncements of the Prime Minister, Datuk Seri Dr. Mahathir Mohamad are very disturbing. In an exclusive interview in the latest issue of Asiaweek, Mahathir said that he had lost his right to free speech.
"But the problem we have now is that we cannot even talk freely. Because if you say something that is not quite right, it will cause what is known as a loss of confidence. And when there is a loss of confidence, we suffer. We have to pay a price. I've been told many times that if I say certain things, the currency will devalue. That will cause poverty for millions of people, not only in Malaysia but also in neighboring countries. . . The prime minister has lost his voice, the right of free speech. I find that I am actually not allowed to explain. I must say the correct things…The sad thing is that now we have some power which stops us from doing what we have been doing all the time, which created all this very real growth and development."
If Mahathir has lost his voice, could he say these things and get them published? Furthermore, when asked who are these powers which have deprived him of his right to free speech, he said:
"We have been doing the same thing all this while. We haven't changed. Suddenly, on a certain day, there was a loss of confidence. I don't know what we did was different from what we had been doing. It's not as if suddenly we say, ‘We reject the free market’ or ‘We reject democracy the way we have been practicing.’ You can look back. What was the difference in June and July? In June everything was fine; in July everything was not. Even before what happened in Thailand, whatever it is that you find under the microscope has been there all the time. Why do you take a microscope and look and then suddenly say, ‘We have no confidence.’"
On IMF, Mahathir said:
"Again, there is this fear that if you don't follow what the IMF tells you, there will be a loss of confidence. These are the critical words, ‘loss of confidence.’ We try to follow not because we think the IMF is right, but because if we don't then there will be a loss of confidence. And the loss of confidence will result in currency devaluation. So we try to show that we are with the IMF"
Last Monday, in Kuala Lumpur, he rebutted allegations of "crony capitalism" with this response:
"What cronies? The whole (of) Malaysia is our cronies. We are politicians and if the people don’t like us, we will lose (in the elections). So we have to help everybody".
Well-known Utusan Malaysia columnist Rustam Sani in his article entitled "Menyelamat Bank" last Wednesday rightly said, with regard to bail-outs of Sime Bank and Bank Bumiputra: "Pada hemat saya, kenyataan-kenyataan separuh berseloroh atau separuh serious - seperti ‘seluroh negara ini merupakan suku sakat kita’ - tidak akan memadai untuk melepaskan diri kita daripada menghadapi tanggungjawab tersebut."
These are among the reasons why Malaysia has not won the battle of confidence-restoration although we are in the ninth month of the worst economic crisis since the Second World War.
Malaysians can understand if the Malaysian ringgit and the Kuala Lumpur stockmarket nosedive because of external developments, but they have a right to demand an end to the long list of self-inflicted wounds caused by bad government and corporate decisions which had aggravated market sentiments resulting in the plunge of shares and the Malaysian ringgit.
I am surprised that on Sunday, the Deputy Prime Minister and Finance Minister, Datuk Seri Anwar Ibrahim, when opening the UMNO Bukit Bintang division meeting, said since the start of the economic crisis, I had ceaselessly made various proposals which would have landed the Malaysian economy in a greater mess if they had been followed.
I do not know what Anwar was referring to, but I stand by my Open Letter to all Cabinet Ministers on January 6 before their first 1998 Cabinet meeting on the 15 measures they should give priority focus to tide the country through the economic crisis in the shortest time possible and with the minimum of avoidable pain, hardships and sufferings to Malaysians.
If the Cabinet had acted on the 15 proposals in the Open Letter in their first Cabinet meeting this year, the Malaysian economy would definitely be in a healthier and stronger state.
The 15 measures which I had recommended the Cabinet to give priority focus, together with reasons which I had given in the Open Letter to all Cabinet Ministers, were as follows: The 15 areas which I had asked the Cabinet to give priority focus are:
It is most unfortunate that the Cabinet had not given all the 15 measures serious attention or the country would have been well on the way towards economic recovery.
At the very least, I am glad that the Prime Minister had taken note of my strong objection to the NEAC being a body which supersedes or is co-equal with the Cabinet in the important areas of economic policy, seriously undermining the principles of Cabinet responsibility and parliamentary democracy, as it would therefore be highly unconstitutional and challengeable in the courts.
Yesterday, when answering my question, the Prime Minister, Datuk Seri Dr. Mahathir Mohamad said for the first time that the NEAC is a consultative council which advises the Cabinet, which is very different from his initial announcement of the NEAC in Nov. 20 last year, when he explained that the NEAC would have emergency powers like those of a National Operations Council without declaration of emergency, or as explained by the Economic Planning Unit after the first meeting of the NEAC on January 22, implying that the NEAC has decision-making and executive powers independent of the Cabinet.
The NEAC has has a five-man executive council, which will "ensure that the current economic problems can be resolved expeditiously and decisions of the NEAC implemented effectively", comprising the Prime Minister, Deputy Prime Minister and Finance Minister, executive director and two members to be appointed by the Prime Minister.
Mahathir announced yesterday that so far only one of the two vacant posts on the NEAC executive council had been filled, i.e. by the Chairman of ISIS, Tan Sri Nordin Sopiee. I would like to know why the government has found it so difficult to fill up the posts in the five-man NEAC Executive Council, if it is serious about the tasks of the NEAC to "restore public and investor confidence, pafticularly that of foreign investors with regard to the economy".
The government does not seem to be very serious about the urgency of counter-measures to deal with the economic crisis, as it taken over two months before the NEAC could be formed and hold its inaugural meeting since its first announcement on Nov. 20. Furthermore, it has taken another two months for its decision at the first NEAC meeting on the establishment of State NEACs to be complied - as some states, like Penang, had only recently announced the formation of State Economic Action Councils and have not yet held their inaugural meetings.
These are all symptoms that the country is still grappling with the problem of confidence restoration as the government has yet to completely shake off the "denial syndrome".