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Malaysian débâcle: whose fault?
*University of Malaya
Abstract
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.
Manuscript received May 6, 1998; final version received June 17, 1998.
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