Of all the geopolitical shifts in the post-Sept. 11 world, the rehabilitation of Mahathir Mohamad is among the most unexpected. It's not all it seems.
By playing his cards right, Malaysia's prime minister went from pariah to statesman in the eyes of Washington -- all in the space of eight months. Elder statesman, in fact, since the 76-year old is Asia's longest serving leader and an influential moderate in the Muslim world. This week, Mahathir visits the White House for the first time since 1996.
Investors shouldn't let revisionist history cloud a few realities here. It's true Malaysia's economy is booming these days. Even financier George Soros, blamed by Mahathir for the country's problems in 1997 and 1998, and Calpers, the California Public Employee's Retirement System pension fund that this year withdrew from the country, have been stepping back into its markets.
Mahathir in 1998, let's remember, essentially declared war on global markets and imposed capital controls to shield his economy from investors. Now that the global economy is snapping back, Mahathir has reined in his anti-capitalism rhetoric and policies.
But if things go awry again, there's no guarantee Mahathir won't clamp down on markets once more.
In 1998, with Asia's financial crisis slamming Malaysia's economy and currency, the ringgit, Mahathir became impatient with the market-oriented views of his finance minister, Anwar Ibrahim.
Anwar, as fate would have it, was also seen as Mahathir's heir apparent. That year, he was unceremoniously sacked and imprisoned.
Mahathir also implemented capital controls.
The move did more than spook investors, who fled Malaysia en masse. It also shoulder-checked Kuala Lumpur's diplomatic relations with the West, especially Washington. Then US President Bill Clinton boycotted a meeting of Asia-Pacific leaders in Malaysia. Vice President Al Gore went instead and criticized Mahathir on his own soil.
Gore warned of a "backward drift" in democracy and human rights. He enraged Malaysia's political establishment by saying it "must engage dissenting voices -- not stifle them -- if it is to develop into a more prosperous, democratic and stable society in the years to come."
Malaysian officials hit back, criticizing the US for interfering in their domestic affairs.
Why Mahathir wants to make nice with Washington is no mystery. He's an economic realist who knows the US is Malaysia's biggest customer. Mahathir also is thinking about retirement -- and his legacy. What better way to do so than by raising his -- and Malaysia's -- stature? Washington wants better relations with the moderate Muslim nation to aid its war against terrorism. With criticism in the Arab world growing by the day, the George W. Bush administration needs all the friends it can find. Not surprisingly, Bush wants the outspoken Mahathir -- who's arguing for a more modernist interpretation of the Koran -- on his side.
For Mahathir, now is a perfect opportunity to bolster his image on the global stage and by so doing, help increase investment into his economy. By presenting himself as a voice of reason and stability, Mahathir may hope to convince more foreign companies to set up shop in Kuala Lumpur, and also discourage those already in Malaysia from moving to China.
But there's a dark side here that investors should keep in mind. Washington applauds Malaysia's efforts to crack down on terrorists, but many worry the government has used its broad security laws to stifle legitimate political opposition. Many fear Mahathir is using the war on terrorism to strengthen his authoritarian rule.
For strategic reasons, the Bush administration has looked the other way -- a move it may live to regret one day. By saying nothing, even indirectly, the White House is giving tacit approval to Mahathir's post-Sept. 11 policies.
The bigger issue for investors, though, involves economic policies. Here, too, the reality isn't all it seems. Sure, Malaysia has managed to shore up its economy. However, the economy isn't thriving because of Mahathir's controversial policies during the Asian crisis. Rather, the success comes in spite of those policies. Remember, most other Southeast Asian countries recovered too.
Malaysia's recovery left Mahathir with the mistaken impression that his 1998 efforts worked. Given that belief, why wouldn't he clamp down on markets again if things went bad? To this day, many pundits miss that point. It wasn't Mahathir's decision to eschew the policy orthodoxy favored by the IMF that spooked investors, but his attempts to demonize market activities. He said currency trading was "immoral" and should be made illegal and condemned investors. He even blamed Jews for Malaysia's woes.
For better or worse, Mahathir has become famous for blaming everyone and everything for Malaysia's troubles, except himself and his policies. Bank Negara Malaysia, the country's central bank, for example, was one of the world's most active currency traders prior to the Asian currency crisis. In fact, Nor Mohamed Yakcop, the current central bank adviser, was a central banker in 1994 when Bank Negara Malaysia lost billions in foreign exchange transactions.
Nowadays, observers talk about other nations whose leaders risk "Mahathiring" their economies.
At the same time, some of the optimism over Malaysia's post-crisis reforms and recovery is overdone. Many returning investors rightly point out that great strides have been made in cleaning up the banking system, forcing banks to write down bad loans, for example. Others point to Kuala Lumpur's success in corporate governance.
In reality, the government has moved more aggressively against companies associated with Mahathir's political adversaries than those friendly with the prime minister. Malaysia Inc may be trying to do away with crony capitalism, but it's doing so selectively.
If Mahathir wants to attract investors and keep them engaged in his country, sound economic policies will do the trick. Solid banking systems, transparency and sober leadership are what attracts capital. Without them, investors leave. And many know it's time to go when politicians and policy makers begin railing against markets. Investors know officials tend to blame markets for their own failures out of desperation.
Perhaps, as some argue, we are indeed seeing a changed Mahathir these days. Investors may still want to be wary of the one they know too well re-emerging when things in the global economy go bad.
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