Consumed by the desire to make Malaysia the most modem and technologically advanced country of the Muslim world, Mthathir encouraged his economic advisers to produce economic development plans with maximal targets for growth and included many prestigious projects that utilized cutting-edge technology for their successful implementation. Some of the projects were chosen for their “spinoff” effect into other sectors of the economy. Other projects had a substantial psychological and ego component to demonstrate to Malaysians and the world that Malaysia was at the forefront of technological advancement and was becoming a major player in the global economy. With Malaysia’s fairly rapid economic growth and low inflation rate during Mahathir’s years at the helm,’ this buoyant and optimistic attitude about Malaysia’s economic future spread to the private sector, which also assumed that the economy would zoom to higher and higher levels with only slight adjustments and few risks. This outlook was incorporated into Mahathir’s Vision 2020 and was widely accepted by the private sector as the blueprint for the future.
Part of the reason for this rapid economic expansion was to generate new economic opportunities for Bumiputra.—the indigenous Malay population—as part of the economic restructuring goals of the New Economic Policy. With government sponsorship, B umiputra entrepreneurs gained concessionary loans, favorable licenses, employment quotas, and a host of other programs designed to create a new middle- and upper-class strata in Malay society. The privatization of the NDP became the primary mechanism for the government to transfer government-generated industries and assets to entrepreneurs politically linked to the government at favorable prices and terms. A large propor’ tion of those “privatization” transfers went to Malays having political affiliations with UMNO. In addition, the main political parties within the ruling Barisan National coalition all established party-owned holding companies to own and manage large investment portfolios.45 These holding companies operated by political parties invested in the corporate sector and utilized the political power of their party leaders to gain government concessions and contracts and to promote the economic interests and protect the corporate investments of that political party. In this environment, many of the most successful private sector corporations became dependent on their political linkages with government to gain privileged access to lucrative government contracts and to market shares. The opportunities for making enormous profit were especially evident in the awarding of contracts for the many mega-projects that were initiated during the Mahathir administration.
Inexperienced Bumiputra managers who were recruited and promoted without open competition often headed both party-owned and government- owned corporate bodies. With few controls over lax administration and imprudent investments of easily obtained credit, a culture of inefficiency and reliance on government bailouts affected many enterprises that exploited political linkages and Bumiputra privileges. One economist summarizes the vulnerability of the Malaysian economy prior to the Asian financial crisis with the following assessment: “The main cause of vulnerability originated from the Malaysian government’s affirmative action in correcting racial economic imbalances and promotion of Malay capitalists.
By 1997, all countries in Southeast Asia had balance-of-trade deficits with large foreign debts denominated in US or other foreign currencies. The first symptom of financial crisis began in Thailand in July 1997 when the Thai government lost US$20 billion in a futile effort to maintain the value of the Thai baht, which had come under heavy selling pressure. Rapidly, international markets reacted by a loss of confidence in Asia’s newly industrializing countries that had been previously described as “tiger economies.” As domestic currencies lost their value, their foreign debt could not be repaid, and this created a “stampede effect” of currency depreciation, sale of stock shares, and capital flight. While Malaysia was better situated than most of the other Asian NICs, the Malaysian ringgit was vulnerable, losing more than one-third of its value, and the Malaysian stock market lost about US$175 billion in slightly over one year.
At the time, Anwar Ibrahim was finance minister, and in combination with Bank Negara Malaysia, he was responsible for the overall management of the economy and for government financial transactions. At first, Anwar initiated some reforms to strengthen corporate governance, tighten credit, and cut government spending by 18 percent. However, the large and growing numbers of nonperforming loans and other deteriorating indicators of the economy forced the government to open negotiations with the International Monetary Fund. The conditional terms established by the IMF for its large loans were difficult to accept. The IMF proposed opening the markets to more vigorous competition, initiating foreclosure and bankruptcy proceedings against failed and non- performing banks and corporations, ending uneconomic “mega-projects,” and imposing strict measures to deter corruption and end the patronage system that created market distortions favoring politically connected enterprises.
On these issues, Anwar and Mahathir began to disagree. Anwar was willing to attempt an “IMF lite” version of the recovery package and was willing to consider more liberalized market reforms as a means of recovery. As the crisis unfolded, Mahathir blamed “currency traders” and named the international financier George Soros as part of a “Zionist conspiracy to undermine Muslim progress in Malaysia.” Mahathir favored the idea of “currency controls” to check the flight of capital from Malaysia. He viewed the IMF prescription for an open-market solution as a strategy to defeat and demolish much of what he had worked so hard to construct over his political lifetime. Under his leadership, Malaysia was acquiring an emerging Malay capitalist class, and a political and economic system that generated economic growth, with Malays assuming leading roles in all sectors of the economy. For Mahathir, if the government acted as an active partner with these favored enterprises, that was to his credit, not something that demanded reforms.
As these subtle differences between Malaysia’s two highest leaders became more apparent, the allies and supporters of each leader began making moves and seeing conspiracies in the actions of the other faction. When the foreign press took up the cause of Anwar as the champion of “reform,” the suspicions and animosities of the Mahathir camp became heightened. Mahathir concluded that it was time to take dramatic action.48 In December 1997, he appointed his longtime political ally, Daim Zainuddin, as special functions minister to head a newly created National Economic Action Council to deal with the financial crisis, thus effectively limiting Anwar’s powers. At the UMNO General Assembly in June 1998, the struggle for power between Anwar and Mahathir became more apparent and much more personal.49 All the delegates could discern and interpret the meanings of the muted ambiguity of earlier accusations and thinly veiled threats by those on each side of the widening divide. If there were any doubts about the intensity of the conflict, they were soon dispelled when arriving delegates were offered for sale a book known as 50 Dalil.
This book repeated and expanded on an anonymous poison-pen letter that had circulated the year before accusing Anwar of corruption, adultery, unnatural and homosexual sex, and complicity to murder. During the General Assembly sessions, an associate of Anwar delivered a rousing speech against nepotism, cronyism, and corruption, calling for implementation of social justice. These were themes that Anwar had previously expressed in speeches and interviews, but in more muted form. Behind his smiles and professions of loyalty and support for Mahathir, most delegates interpreted the speech as a tactic to secure Assembly support to force or persuade Mahathir to resign. In response, Mahathir smiled when he accepted Anwar’s assurances of loyalty. Both leaders were adept practitioners of the creative art of hypocrisy.
Finally, on August 29, Mahathir began playing his trump cards. The governor and the deputy governor of Bank Negara resigned over policy differences with Mahathir. Two days later, Malaysia imposed capital controls, pegging the Malaysian ringgit at RM3.80 to US$1. All ringgit deposits outside the country were made illegal tender, but Malaysian holders of outside deposits had one month to repatriate their holdings. Nonresidents wishing to convert Malaysian ringgit to foreign currency had to deposit funds in an authorized account and could not convert those funds to foreign currency until after one r.5l These measures effectively terminated convertibility of currency and further direct foreign investments to Malaysia. This stabilized the economic situation over the short run, but it did not stabilize the political situation.
The day after the imposition of currency controls, Mahathir dismissed Anwar as finance minister, and two days later, on September 4, 1998, Anwar was expelled from UMNO amid allegations that he might be charged with sexual misconduct and other crimes.52 The allegations of personal misconduct against Anwar riveted the attention of the entire country and led to the near spontaneous countermovement that took the name Refot-masi-—inspired in part by the movement that had toppled Suharto in Indonesia some four months previously. It had become a bare knuckle fight to the finish.
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