Malaysia Response in Financial Crisis 1997

Topics: Mahathir bin Mohamad, Malaysia, Macroeconomics Pages: 7 (2422 words) Published: August 21, 2011
The Response for Malaysia during Financial Crisis in 1997-1998

If we went back to the dark ages of financial crisis in Asia, we should thank our forth prime minister Tun Dr Mahathir Bin Mohamad for the decision that he have done. When all of the Asian countries’ face this problem, some countries do response to solve the crisis. The traditional policy response to financial difficulties has been to seek assistance from the IMF for improving the situation. For such assistance the countries in trouble invariably have to undertake economic and financial reforms, impart more transparency to government spending, and make the necessary macroeconomic adjustments. They must initiate measures to revitalize their economic and monetary systems. Thailand and Indonesia took steps to remedy their weaknesses. Korea too joined in. But these countries soon found the crisis beyond their control, and decided to seek assistance from the IMF. Following the IMF conditions for the help, these countries had to implement tight monetary and fiscal policies, and had to enforce the prescribed structural reformations, particularly in the financial sector. The appointment of Tan Sri Nor Mohamed  Yakcop as Finance Minister II brought back to mind the innovative package of policy measures that Malaysia embarked upon in the dark days of the financial crisis of 1997-2000. The then Prime Minster Tun Mahathir Mohamed took the bold political decisions to introduce and enforce the measures.  It was politically and technically a courageous act, as the policies flew in the face of orthodoxy and Dr Mahathir and Malaysia were condemned by the global establishment when they were introduced. Nor Mohammed is credited for explaining the mechanics of the international currency trade to Dr Mahathir and for working out the details and mechanisms of important parts of the policy package, especially the fixing of the ringgit peg to the US dollar, the selective foreign exchange controls and de-internationalisation of the ringgit. Today, the Malaysian measures are widely praised for being innovative and effective.  The same International Monetary Fund that heaped skepticism on them has acknowledged that useful lessons can be learnt from the Malaysian experience. History will recognize the Malaysian measures as a landmark as they posed a systematic challenge and a practical alternative to the orthodox policies promoted by the “Washington Consensus”, or the group of powerful institutions like the IMF, the World Bank and the US Treasury. Many people today point to the Malaysian measures to show that alternative ways of resolving financial and economic crises are possible, do exist and can work even better than the orthodox policies. Malaysia was luckier than other countries affected by the crisis, like Thailand, Indonesia and South Korea.  We were not in a debt default situation, and thus did not have to turn to the IMF for loans.  Those countries had to obey the IMF, and lost their policy autonomy.  The result was high interest rates, continued currency depreciation, and deregulation of foreign ownership that led to the foreign takeover of many local assets. Initially Malaysia also voluntarily took on IMF-type policies.  But this did not work, as the high interest rates added to the corporate and banking crisis; the flexible exchange policy enabled the ringgit to depreciate (at one time almost touching five ringgit to the dollar);  the freedom of capital mobility allowed funds to flow out;  and the cutbacks in government expenditure added to recessionary pressures. In 1998, a year after the start of the crisis, the Malaysian model was introduced.  This package comprised: * The core macroeconomic measures of interest rates, monetary and fiscal policies.  Interest rates were significantly reduced, allowing firms and consumers to breathe again and then to borrow, thus improving investment and consumption conditions.  The statutory reserve requirement was reduced to increase...

References: 4. Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis: Origins, Implications and Solutions. Springer. ISBN 0-7923-8472-5
Retrieved on 14th August 2011
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