Malaysian Economy Recovery: Rhetoric and Reality

Over the last two months, I have noted that the Malaysian economy is bottoming out and should recover soon, but that Malaysia and Thailand were the only two of the crisis-hit economies to continue to be in recession during the first quarter of 1999.

I was wrong.  Earlier this week, Thailand finally announced its economic figures for the first quarter of 1999, registering a mild recovery of +0.9%, which makes Malaysia the only one of the five East Asian economies to continue to contract early this year.

However, it is likely that the Malaysian economy will be in the positive zone for the just completed second quarter, which will mean that the economy has bottomed out, and we may  be on our way to a modest recovery if we ignore continued population growth.

However, it is intellectually dishonest to start changing definitions to suit our propaganda needs.  Last year, the government insisted that we were not in recession until the economy registered two consecutive quarters (six months) of contraction.  Now, we are told that the three months of growth constitute recovery!

In his press conference with the Department of Statistics last week, the central bank governor chose to personally attack me, ostensibly for always negatively viewing all government efforts to revive the national economy.  Tan Sri Ali is entitled to his view and has every right to criticize me, but he should take some trouble to get his facts right.

He may not remember that I was one of the few Malaysian economists in 1997 who defended some of Prime Minister Mahathir’s early criticisms of the international financial system, currency speculation and hedge funds.

He may also have forgotten that I was among the first to criticize the cuts in government spending in late 1997, although I had called for the cancellation of the mega-projects in favour of alternative counter-cyclical measures benefiting the less well-off, such as low-cost housing.

His colleagues in the central bank know very well that in early and mid-1998, I called for tough measures to bring down the interest rate. They also know that I have called for flexible and market-friendly capital controls from early 1994 - and again after the Mexican crisis in early 1995 - to contain the adverse consequences of financial panic.

Although too late and partially inappropriate, I supported some of the 1 September 1998 policies as emergency measures to facilitate recovery, but also warned against likely abuses of the temporary window of opportunity thus created - which, unfortunately, has turned out to be the case.

It is now clear for all to see that Malaysia is the regional laggard in terms of economic recovery, regardless of what he and other
spin-doctors of the regime may wish to claim.

Many would claim that this has been due to Malaysia’s capital controls, though I would insist that this cannot be proven, even though circumstantial evidence lends itself to such a view.

I must compliment Tan Sri Ali for acknowledging that the controls cannot be credited for the imminent economic recovery in Malaysia since the rest of the region has also recovered without such controls.

This contradicts his colleague’s ridiculous claim that the region’s economic recovery has been due to the Malaysian control measures.

Instead of making such misleading politically-motivated comments, central bank officials should return to its tradition of making sober analysis.  And when we disagree, we should at least be honest and professional in our disagreements.

Jomo K. S.
Professor, Applied Economics Department
University of Malaya

2 July 1999