Malaysia Policy Is Bust to Foreigners but Boon to Home-Grown Businesses

As global leaders gather here for a trade conference and protesters convene in the streets, one of the many things that have angered the world about Prime Minister Mahathir Mohamad is his snubbing of the free-trade mantra.

However, September’s controversial decision by Mahathir to slam the door on currency trading was an unexpected blessing for Articulate Corp., a high-tech start-up firm.

The prime minister’s decision to erect a wall around his battered economy--coupled with his decision to throw his former deputy prime minister in jail on charges of corruption and sodomy--might well have made him a pariah in most circles.

Yet many businesspeople here believe that their prime minister made the right decision by stepping in to keep their once-thriving economy from sliding further into disarray.

“It prevented us from going into bankruptcy,” Articulate’s chief executive, N. Gunananthan, said of the measures designed to prevent speculation in the currency and stock markets.

To be sure, the penalty for such policies is steep. It frightens off the very investors the nation needs.

“Malaysia will experience some growth next year, but it will be a false dawn,” said Paul Chertkow, head of global currency research at the London office of the Bank of Tokyo-Mitsubishi. “The appetite to invest in Malaysia will diminish over time.”

However, Mahathir is the leader of Malaysians, not of foreign investors, and his blasphemous economic policies, at least for now, are helping hometown businesses.

It is a prime example of his “Asia first” approach to governing.

Malaysia’s experiment is sure to be discussed when U.S. Vice President Al Gore, Secretary of State Madeleine Albright and the other leaders meet here this week for the annual gathering of the Asia-Pacific Economic Cooperation forum.

Mahathir wants the regional economic organization to consider ways to better track and control the hedge funds that he blames for triggering last year’s financial collapse.

But Mahathir is playing with a weakened hand. In the past, the savvy politician was able to speak his mind and still persuade some of the world’s biggest names to use Malaysia as a production base for high-tech manufacturing.

Selling Malaysia is much harder since its head cheerleader has become a symbol of authoritarian rule and anti-free-trade forces.

In a speech last week at an APEC trade fair, Mahathir pleaded with members of his foreign business audience to evaluate Malaysia’s economy for themselves and not be swayed by the media or international rating agencies.

“It is worthwhile noting that none of the rating agencies or the media predicted the current economic turmoil,” he said.

A closer look at the Malaysian economy shows a mixed picture.

After abandoning a tight monetary policy similar to the one advocated by the International Monetary Fund, Mahathir announced plans to reflate the economy by running a huge deficit and pumping millions of dollars into infrastructure projects.

The government has also been criticized for using public funds to bail out several of the country’s largest--and most politically connected--companies on the ground that their failure would have a devastating effect on employment levels and suppliers.

Malaysians argue that the government’s spending program has started the wheels of commerce moving again and has given people confidence to spend their money on cars, cellular phones and software.

Sales of the Proton, the national car, are expected to hit 9,000 this month after dropping as low as 3,000 a month earlier this year.

Since the capital controls were implemented, the nation’s currency, the ringgit, has stabilized, and interest rates have dropped, easing the liquidity crunch that was strangling the economy. Having a stable currency has made it easier for Malaysian-based companies to set prices for foreign customers and estimate costs. Exports are on the rise.

Currency controls mean more paperwork because every transfer of money must be tracked.

People entering or leaving the country are required to declare all their money. Malaysians holding ringgit accounts overseas had to bring their money home or change it into other currencies.

Investors who own ringgit-backed securities must keep them for at least one year. However, that market was not very large even before Mahathir clamped down.

“Who would want to own ringgit-backed securities anyway?” one Western diplomat asked.

When Charles Adams first learned of Malaysia’s currency crackdown, he immediately began scrambling to figure out how his company’s operations in the Southeast Asian country would be affected.

“I was quite upset, to say the very least,” he said. “No one likes uncertainty.”

But Adams, UPS’ senior vice president for Asia, said his company has seen little change in the months since. Most of the money it earns in Malaysia goes back into the country to keep the business operating. The company has had no problem repatriating any excess profit.

“This is one way of solving the problem,” he said of the controls. “We can’t say if it’s right or wrong.”

Others fear that the measures will end up distorting prices and blunting the competitiveness of Malaysian firms if they are protected from global market forces for too long.

“The great danger is that instead of insulating the Malaysian economy, it isolates the Malaysian economy,” said Shaun Chan, managing director of Phileo Asset Management, a fund management firm based in Kuala Lumpur.

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Demonstrators seek U.S. support in ousting Mahathir. A10