DATO SERI DR. MAHATHIR BIN MOHAMAD
PLACE           :
DATE             : 02/06/1998
                          INTERNATIONAL MONETARY AFFAIRS

   Let me begin by noting what a difference a year makes.
   2.    Last  year,  at  this time, there was  some  concern
   about  the  Thai economy, which had successfully  repulsed
   two  attacks  on its currency.  But there was  still  much
   talk  about  `the  East Asian Miracle', a characterisation
   invented,  if  I  am  not mistaken, in the  impressionable
   West.   All  of  us,  we thought, were `not  Thailand',  a
   unique, special case.
   3.    Many  foreigners -- including the most tough,  hard-
   nosed personalities and organisations -- told us the  most
   flattering   things,   which  strengthened   us   in   our
   conviction  that  our  `fundamentals'  were  very   strong
   4.    The annual World Competitiveness Yearbook, issued by
   the  prestigious  International Institute  for  Management
   Development  (IMD) told Malaysians, for example,  that  we
   had  some problems here and there, some quite serious. But
   on  the basis of what it called the `overall evaluation of
   the  strength of the domestic economy at the macro level',
   Malaysia was the second most competitive economy  in   the
   world.   We  were in the best of company.  At  number  one
   was  the  United  States.  At number three was  Singapore.
   At number four was Luxembourg.
   5.    Most  of  the  other economies which  have  been  so
   severely  hit since the IMD  issued its 1997  report  also
   scored   highly   according  to  the  244   criteria,   or
   fundamental  factors, that were used.  I wait  with  great
   interest  their  annual report for 1998  which  should  be
   issued later this month.
   6.    I  hope  the IMD will stand by its analysis  of  the
   fundamentals  and not change its analysis of the  200-plus
   fundamentals,  which  so  convincingly  argue   that   the
   turmoil   of  the  last  year  are  not  the   result   of
   fundamentals  but of forces that have very  little  to  do
   with  the economic fundamentals.  I hope the IMD will  not
   alter  the  facts so that they will fit into  some  sacred
   truth, some hallowed theology.
   7.    It  is  so easy for some analysts to slip  into  the
   view  that  currency movements are purely the function  of
   fundamentals.  The market fundamentalists tell us this  is
   so  with incredibly sincere conviction, however loudly the
   speculators  chuckle  all the way  to  the  bank.   Since,
   according  to the theology, currencies cannot fall  unless
   the  fundamentals are weak, and since the Asian currencies
   have   fallen  so  dramatically,  then  ipso   facto   the
   fundamentals must be weak even if you have said that  they
   were  strong immediately before.   The truth is  that  the
   currencies  plummeted  even though our  fundamentals  were
   very  strong.  The truth is that, ipso facto, the fall  of
   our   currencies  were  not  a  function  of   our   basic
   8.    The  IMD  was  not the only one  with  such  a  good
   impression of my country one year ago.  In mid June,  1997
   --  in fact, on June 17, 1997 -- just two weeks before the
   July  2  collapse  of the Thai Baht which  resulted  in  a
   horrendous collapse of the regional currencies, Mr  Michel
   Camdessus,  Managing  Director  of  the  IMF  was  handing
   bouquets  to  Malaysia for our sound economic  management,
   for   our  superb  economic  fundamentals.   He  told   an
   international conference on Global Capital  Flows  in  Los
   Angeles:   and  I quote `Malaysia is a good example  of  a
   country  where  the  authorities are  well  aware  of  the
   challenges  of  managing the pressures  that  result  from
   high  growth  and of maintaining a sound financial  system
   amid  substantial  capital flows and  a  booming  property
   9.    He  noted:  `Over the last year, output  growth  has
   moderated  to  a more sustainable rate, and inflation  has
   remained  low.  The current account deficit  --  which  is
   primarily the result of strong investment spending --  has
   narrowed  substantially.   The  increase  in   the  fiscal
   surplus  targeted  for this year is expected  to  make  an
   important   contribution   towards   consolidating   these

   10.   There  had been complaints that we were growing  too
   fast.    So   we  brought  our  growth  rate   down   very
   substantially.   There  had  been  complaints   that   our
   current  account deficit was too high.  So we  halved  it,
   to  the  obvious delight of the IMF, which  rightly  noted
   that in any case our high current account deficit was  not
   because  of  excessive consumption but was the result,  in
   Mr. Camdessus' words, `of strong investment spending'.
   11.   You  may say there is no need for more testimonials.
   But  how about the banking and financial sector?   If  you
   can  believe  Mr Camdessus, again I quote: `The  Malaysian
   authorities   have   also  emphasised   maintaining   high
   standards  of bank soundness.  Non-performing loan  ratios
   of  financial institutions have fallen markedly in  recent
   years;  risk-weighted  capital  ratios  are  above   Basle
   12.    You might just wish to note that in 1988, the  non-
   performing  loans  in  the Malaysian  banking  system  had
   stood  at  32.5 percent.  In June 1997, just  eight  years
   later,  as  luck  and a tremendous amount of  sweat  would
   have it, our non-performing loans stood at a historic  low
   of  3.5  percent.  This is as dramatic a   performance  as
   you  can  get.   Perhaps  this was  why  the  IMF  was  so
   impressed and so complimentary.
   13.    Today,   there  are  all  sorts  of   talks   about
   transparency.   I agree  that  transparency is  important.
   But  I suspect that when so many complain about a lack  of
   transparency,  what they are complaining about  is  simply
   their  own  lack of knowledge, which is not so  surprising
   because  five years ago or even five months  ago  some  of
   the  younger money movers might have thought that Malaysia
   was  somewhere in the Himalayas.  As for the  transparency
   of  the Malaysian financial system, let Mr Camdessus speak
   for  Malaysia.   In  the  same  Los  Angeles  speech,   Mr
   Camdessus  said:  `In an effort to increase  the  flow  of
   comprehensive  up-to-date  and  reliable  information   to
   markets,  Malaysia was also among the first  to  subscribe
   to the IMF's Special Data Dissemination Standard'.
   14.   So, ladies and gentlemen, on June 17, 1997, just two
   weeks  before the currency hurricane struck, the IMF  gave
   Malaysia not just a clean bill of health but  the  IMF  in
   fact  praised Malaysia's economic fundamentals.   The  IMF
   had  the  best  of  things  to say   about   our  economic
   management.    And   the   IMF   commended   Malaysia   to
   investors as an economy that `justifies the confidence  of
   the markets'.
   15.   I  cite  all  this  in order to  address  all  those
   extremist  `market fundamentalists' who believe  that  the
   market is always right and that the reason why so many  of
   us   are   in  desperate  straits  today  is  because   we
   mismanaged   our   economies   and   because    all    our
   `fundamentals' were rotten to the core.
   16.   If   all our fundamentals were wrong, why  were  the
   foreign  investors  so eager and so  foolish  as  to  pour
   billions  upon  billions  of  investment  dollars  in  our
   region?   Of  course all the international banks  kept  on
   lowering interest rates in order to persuade us to  borrow
   even  when  we  were  without need for  additional  funds.
   Obviously  they, as the definitive market, had  a  lot  of
   confidence  in Malaysia, its economic management  and  its
   17.   If our fundamentals were rotten to the core, why did
   all the clever analysts not say so?  Why is it that not  a
   single    economist,   financial   analyst   or   economic
   soothsayer  has dared to come out to say that  he  or  she
   had  predicted what has happened?  Not a single one.   And
   yet  these same people continue to predict, to be believed
   in  and  to  influence the market.  If  it  is  wrong  for
   insiders  to  leak  information  which  can  affect  share
   prices,  why  is it not wrong for forecasters to  forecast
   something which influences the market to their advantage.
   18.   Professor  Paul Krugman has for years  been  arguing
   that  the East Asian miracle was not a miracle at all  and
   was  bound  to hit a brick wall.  Many Western journalists
   credit  him with forecasting the Asian Crash of  '97.   He
   has  in  fact  publicly stated that he did no such  thing;
   that  he  could  not in his wildest dreams  have  imagined
   anything  like  it.  In Hong Kong on March 26  this  year,
   Professor Krugman admitted: `I was 90 percent wrong  about
   Asia's  future.   The only  consolation is  that  everyone
   else was 150 percent wrong'.

   19.    The  analysts  and  all  those  who  are  obviously
   cleverer than us simple elected leaders must know that  we
   have  had  not  ten  years but forty  years  of   economic
   growth unparalleled in human history.  Since some of  them
   are  young  enough  to be our grand children,  perhaps  we
   should  remind  them  that many of the  things  that  they
   complain about and which they say are the reasons  why  we
   are  in  such  difficulties  today  were  things  that  we
   ourselves  started  complaining about  when  we  ourselves
   were  their  age.  So  many of the so-called  fundamentals
   which  are  now listed as the main causes of the  currency
   and   financial  turmoil  of  the  last   12   months   --
   corruption,  monopoly, crony capitalism, inadequate  human
   resources,  very  far  from perfect  banking  systems  and
   practices  -- have always been with us.  Yet we were  able
   to  grow  faster  and longer than anyone before  in  human
   20.   All  of  Asia  must obviously work on  our  numerous
   weaknesses, to get rid of the stones around our necks  and
   the  chains  on  our feet.  We must do this   not  because
   they  are  the causes of our economic turmoil but  because
   they  are bad and they weaken our capacity to compete  and
   to  succeed.   We  must do this because  we  cannot  allow
   corruptive  influences to determine who supplies  us  with
   what.  But  the true causes of why our currency  plummeted
   and  why  we are facing an economic crisis must be  sought
   21.   Our meeting today is not focused on the causes.   It
   is  also  not  focused on the consequences,  the  terrible
   consequences.   Our task is to focus on the remedies,  the
   things  which  must  be  done if  we  are  to  re-vitalise
   ourselves, if we are to ensure the re-vitalisation of  all
   of   Asia.  So let me concentrate on the things that  must
   be  done in order to ensure the quickest, most healthy and
   sustainable re-vitalisation.
   22.   Quite  obviously, there is a  need  for  short  term
   imperatives  as  well as medium term measures  and  longer
   term  strategies.   At this stage, although  we  must  not
   neglect  the medium and longer term, we must remember  the
   admonition  of  Keynes that in the long  run  we  are  all
   dead.  Seldom has the short term been as important.   This
   is why I speak of  the `short run imperatives'.
   23.   Quite  obviously  also, there  are  three  principal
   theatres of operation:
        *     the  things  that we should aspire  to  achieve
        *     the  things  that  we  should  try  to  achieve
   regionally;  and
        *          the  things that we must achieve at  home,
   within the confines of our own borders.
   24.   Given the nature of this meeting, I will concentrate
   on  only  a  few areas.  I will focus on some issues  that
   should  be  of  primary  interest to  this  Institute  for
   International   Monetary   Affairs   and   its   strategic
   intellectual constituency.
   25.   At the international level, I believe that the  time
   has  come to deal with the entire issue of reform  of  the
   international   financial  system  to   ensure    currency
   stability and to contain the activities of those  who  buy
   and  sell money for no other purpose than to make profits.
   Let   me say once again that currencies need to be changed
   if  there is going to be international trade.  That is why
   the  leaders  of the Western nations met to  draw  up  the
   Bretton  Woods  Agreement, the purpose  of  which  was  to
   agree  on  a  mechanism for determining the value  of  one
   currency  against  another.  The system worked  very  well
   and  enabled the countries bankrupted by the war not  only
   to  recover  but  to  prosper  as  well.   Of  course  the
   Marshall  Plan  and the opening up of the American  market
   to  Japan played a role.  But if there had been no  system
   for  stabilising  currency values, all the  plans  in  the
   world would not have succeeded.
   26.   But  then  some  countries in the  West  decided  to
   devalue    their   currencies   in   order   to    enhance
   competitiveness.  Very quickly a currency  market  emerged
   which  took  advantage  of  the mildly  unstable  exchange
   rate.  True speculation took place because the funds  were
   relatively small and depended on intelligent guesswork  as
   to the movements of the exchange rates.
   27.   But  soon the funds grew huge and were in fact  able
   to  move  the  exchange rates through their interventions.
   The  famous herd instincts replaced economic fundamentals.
   With  the invention of arbitrage and futures trading,  the
   need  for  exchange  rate stability  for  the  purpose  of
   trading  gave  way  to the desire of currency  traders  to
   make  massive  amounts of money in the  shortest  possible
   time.  An artificial system of devaluation and revaluation
   of  currencies was devised which enabled currencies to  be
   appreciated or depreciated literally within seconds.  Thus
   the  Indonesian  Rupiah was at one time devalued  by  more
   than  600  percent,  then  in the  space  of  a  few  days
   recovered by 200 percent.  It is still moving up and  down
   by  100 percent to 200 percent in the space of one day  or
   even half a day.
   28.   Mr  Volcker   in a speech in Hong  Kong  stated  "An
   exchange  rate system that produces a 60 percent swing  in
   the  yen/dollar  rate over a period of  18  months  cannot
   reflect  the  fundamentals in any sensible  sense".   Well
   the  Indonesian Rupiah moved 600 percent in the  space  of
   five  months.  Can it be that all the assets of that  huge
   country  with 220 million hardworking people are  suddenly
   worth  only one-sixth of its previous value?  What  indeed
   is  the  worth of a nation if suddenly someone can devalue
   and even bankrupt it?
   29.   If  currencies can be made useless so  easily  then,
   what is the point in a country issuing its own money?   We
   should go back to barter trading.
   30.   It  is  said  that the currency will  strengthen  if
   confidence is restored.  But there is no certainty  as  to
   what  will bring back confidence.  Who is monitoring  what
   and  who  determines whether confidence should  return  or
   not.   There  is a lot of talk about market  forces.   But
   who  constitute  market forces and how  do  market  forces
   determine  what value to give to each act of a  Government
   or an economy under attack.
   31.   All in all, the present system, if there is a system
   at  all, is messy, unreliable and destructive.  Can  world
   trade  depend on these shadowy market forces whose methods
   are  not known to anyone except themselves?  True, through
   hedging  the  effect of the fluctuation  in  the  exchange
   rates  can be minimised.  But again, this hedging  profits
   only  the  hedge funds, adding to the cost  of  goods  and
   services.   If  exchange  rates  are  minimally  volatile,
   hedging and the profits for the hedge funds, would not  be
   necessary at all.
   32.   There  is nothing to indicate the need for  currency
   trading  other than the vast profits that can be  made  by
   currency  traders.   On the other hand  we  now  know  the
   extent  of  the damage to the economies of whole countries
   and regions that currency trading can inflict.
   33.   The  excuse  that currency trading  provides  market
   forces  with  the  means  to  discipline  Governments   is
   totally unacceptable.
   34.  Currency traders thrive on unstable currency.  It  is
   ridiculous   to   suggest  that  they   would   discipline
   Governments  and reward them with exchange rate  stability
   when  such  stability  will deprive  the  traders  of  the
   opportunities to make money.  Governments do  need  to  be
   disciplined  but the international financial  regime  must
   be  bankrupt of ideas if it cannot find other  ways  which
   are less desructive to discipline Governments.
   35.   Everything  points to the need for an  international
   financial  system  which  will bring  about  stability  of
   exchange  rates among other things.  Admittedly we  cannot
   bring  back the Gold Standard or the Bretton Woods system.
   It  would  be  a  sad  commentary on the  ability  of  the
   world's  financial  and economic experts  if  they  cannot
   come  up  with proposals on a new international  financial
   system.   Their  habit  of merely trying  to  explain  the
   present  turmoil  as  being due to bad  practices  by  the
   Governments concerned sounds too much like an apology  and
   a  defence  of  currency traders.   Money  does  not  know
   whether  a  Government  is  good  or  bad  and  react   by
   adjusting  their  rates of exchange.   Somebody  is  doing
   that  and is evidently making a lot of profit.  Do we need
   to  protect  these  people's interest at  the  expense  of
   world trade?
   36.   Fixed  exchange  rate  is  no  longer  possible   or
   realistic.   Obviously the political, economic and  social
   performance of a country will have an effect on the  value
   of  its currency.  If a country is having a revolution  it
   is  likely that its currency would be less acceptable  and
   therefore  should be devalued.  As for the  economy  there
   are  various indices which can be given points  indicating
   the  strength  of the economy and therefore the  currency.
   It  is  not  beyond  the  capacity of  the  world's  great
   economists  to  devise  a  measurement  of  the   economic
   performance  of  a  country using the political,  economic
   and  social  indicators  and then determine  the  relative
   values  of  currencies.  The currency  traders  can  still
   speculate  but whether they buy or sell should not  affect
   the value of a currency.
   37.   This  is of course only a suggestion.  The financial
   experts and the economists may laugh but it will stop  the
   currency  traders  from laughing  all  the  way  to  their
   38.   There is a belief that when currency depreciates the
   goods  produced  by the country concerned  become  cheaper
   and  more competitive in the world market.  It may  do  so
   but  the  reduction in cost is always far  less  than  the
   percentage of depreciation.  This is because all  imported
   inputs  will  cost more in local currency and will  negate
   the  devaluation of the currency.  Imported inflation will
   push  wages  and other domestic costs up reducing  further
   the  advantage of currency depreciation. In  the  end  the
   lowered  cost  is  hardly  detectable.   The  products  of
   countries  with  a  depreciated  currency  are   no   more
   competitive than they were before.  In at least  one  case
   the  capacity to import foreign inputs is lost  altogether
   because of the extreme depreciation of the currency.
   39.   Devaluation or revaluation are not  the  answers  to
   the    world's   economic   problem.    Improvements    in
   productivity  are and such improvements  can  be  achieved
   through  greater skills, better management and  continuous
   technological improvements.
   40.   Nations  depend on different factors for competitive
   advantage.    Low   labour  cost  is  one,  but   capital,
   management  skills  and  technology  are  more  important.
   While   those  with  capital,  technology  and  management
   skills  are  loath to share these advantages freely,  they
   are demanding that low labour cost should be nullified  by
   raising wages.
   41.   We are moving inexorably towards globalisation. Like
   the  proposal  to  link human rights, the environment  and
   labour  practices to trade, globalisation,  liberalisation
   and  deregulation are ideas which originate  in  the  rich
   countries  ostensibly in order to enrich the  world.   But
   so  far  the advantages seem to accrue only to  the  rich.
   True the poor countries can gain access to the markets  of
   the  rich, but then they do not have many things to export
   to  these  markets.  The raw materials which they  produce
   are   controlled  by  commodity  markets   in   the   rich
   countries.   The  terms  of  trade  for  these   keep   on
   42.   In preparation for globalisation the pace of mergers
   and  acquisitions have been stepped up.  Super large banks
   and   corporations  are  being  formed  in  the  developed
   countries  which will dominate the world.  There  will  be
   no  room for the small companies in the poor countries  to
   exist,  much  less  to  expand and spread  into  the  rich
   markets now opened to them.
   43.   Perhaps  the  peoples  in the  developing  countries
   should  be happy because they will be served by  the  most
   efficient  and the biggest companies of the  world.   They
   will  have the choice of three giant banks, four makes  of
   cars,  five hotel chains, ten fast food chains  etc.   But
   it  is  going to be a dull world and I suspect some people
   would  be stupidly nationalistic and feel unhappy  without
   their poor quality national brands.
   44.   In  a  globalised  world should  there  be  national
   Governments?  We have seen that market forces  can  change
   Governments.  What is the need for national  elections  if
   the results have to be approved by the market?
   45.   These  are  some of the international  issues  which
   have  either  to be attended to immediately  or  at  least
   debated  seriously.   Far  too often  decisions  on  these
   issues  are  far  from  democratic, yet  the  same  people
   insist  on democracy for everyone.  It is about time  that
   international  democracy  be  recognised   as   being   as
   important as national democracy.
   46.   Whether  we  acknowledge it or not East  Asia  is  a
   region,  a  closely linked region.  It is not an  accident
   that  the  fastest  growing economies are  found  in  this
   region.   Nor  is  it an accident that  the  most  serious
   economic  crisis  the  world  has  seen  since  the  Great
   Depression  involves this region. The fact  is  that  this
   region  grew together because we worked together.   It  is
   reasonable  to  expect  us  to  get  out  of  our  present
   economic morass by working together.
   47.   Japan is the richest depressed country in the world.
   The  capacity to grow and to be the locomotive  of  growth
   for  the  region  is still there in Japan.   You  need  to
   clean  up  the bad practices of the past and  largely  you
   have  done so.  Your Government, your businessmen and your
   people   should  now  rehabilitate  your  confidence   and
   rebuild your economy quickly.
   48.   You have the capital, the technology, the skills and
   everything  else needed to grow your economy.  You  should
   employ  all  these assets and provide the  lead  that  the
   region needs.  You should invest in the countries of  East
   Asia as you did before.  You should buy their products  in
   order  to  enrich them.  You should help  in  making  East
   Asia a market for itself and the world.
   49.   In  Malaysia  we are still looking East.  Many  have
   asked  us  why,  when  it  is so obvious  that  Japan  has
   failed.  We admit that in several areas Japan has  failed.
   But  even  failures  provide lessons for  us.   There  are
   still   many   things  we  can  learn  from   you.    Your
   exceptional  skills, your technology, your discipline  and
   work ethics are still worth copying.
   50.   What Malaysia and the rest of the region needs is  a
   revival  of  Japanese  investments,  to  create  jobs,  to
   enrich   the   people,  stimulate  economic   growth   and
   incidentally  to create good markets for Japan.   Some  of
   the  money  the Japanese Government is pumping  into  your
   economy  could  very  well  be pumped  into  the  troubled
   economies   of   East  Asia.   As  before  when   Japanese
   invesments  created prosperity for East Asia and  in  turn
   provided  good  markets  for  Japan's  products,  Japanese
   money  to revive East Asian economies would benefit  these
   countries  and Japan.  Japan has the means to  resuscitate
   East  Asia, if only it thinks less about what others  will
   say if Japan frustrates them.
   51.   As  for  Malaysia, the only way we can overcome  the
   instability  in  the  Exchange Rate  and  to  rebuild  our
   economy, is to do away with currency in trade as  much  as
   possible.  We will revert to bartering. We would  want  to
   balance  our  trade  with countries  which  have  a  trade
   surplus  with us and Japan is the country with the biggest
   trade  surplus.  Where we have to pay we will pay  in  the
   currency of the trading partner concerned.
   52.   Regionally  we have agreed with the ASEAN  countries
   that   trade  between  us  should  be  enhanced   as   the
   devaluation  of  our  currencies is approximately  at  the
   same  rate.   We  will  also use our  own  currencies  and
   balance  our  trade.  This arrangement  will  probably  be
   permanent, unless of course a new international  financial
   system   is  put  in  place  which  will  reduce   violent
   fluctuations of exchange rate.
   53.   Malaysia  intends  to  revitalise  its  own  economy
   through several local measures.  It will take note of  the
   various  criticisms directed at it by  market  forces  and
   will  study  their  alleged effect  on  Malaysian  economy
   including the recent devaluation of the Ringgit.
   54.  I have tried to itemise the factors which need to  be
   corrected  in order to revitalise the economies  of  Japan
   and  East  Asia.  I am no expert in this area but  I  have
   had  some success in my own country.  I think I know  what
   I  am  talking about more than the theorists who had never
   run  any  country,  much  less  help  it  grow.   Left  to
   themselves  the  economies of East Asia will  grow  again.
   But   the   chances  are  they  will  never  be  left   to
   themselves.  And so the revitalisation will not be easy.

Source : Prime Minister's Office