Malaysian Prime Minister Mahathir Mohamad is defying the global economy. On Tuesday, his government announced that it was imposing capital controls and establishing a fixed exchange rate for the national currency, the ringgit. He then fired his deputy prime minister, Anwar Ibrahim, a leading Malaysian liberal. In taking these actions, Mahathir has boldly rejected the course that other crisis-torn Asian countries have followed. Instead of maintaining free financial and trade flows and restructuring domestic economic institutions, he is turning toward protectionism and insularity. But can old-fashioned economic nationalism succeed in the new global economy? Probably not.
This is not to suggest that economic nationalism has never worked. Clearly, the "miracle economies" of East Asia, with the possible exception of Hong Kong, built their late-20th century success on extensive state intervention in the economy, just as the United States did in the early 19th century and Germany did after 1870. Indeed, economic planners in Asia's first economic success story, Japan, were inspired by the leading theorist of American-German protectionism, Friedrich List. In the 20th century, John Maynard Keynes created a whole new vocabulary for managing national economies, a lexicon that shifted the concerns of economic nationalism away from crude protectionism and toward relatively independent fiscal and monetary policies. Keynes' language and methods were different from List's, but the goal was the same: maximizing the performance of an individual national economy.
Mahathir's current moves have more in common with Keynes than List. He is trying to regain control over interest rates and exchange rates, basic instruments of national economic management. But the world economy of the late 20th century is vastly different from that of Keynes' time, and Malaysia is highly dependent on foreign investment and global finance.
More than of 40% of capital investment in Malaysian manufacturing, the economy's dynamic core, comes from foreign sources. While many foreign-invested enterprises have large sunken costs in their current Malaysian operations, a strategic advantage for Mahathir, they are likely to think twice about expanding those operations or even continuing them if they cannot easily repatriate profits or utilize global financial markets. No other countries in the region appear willing to follow the Malaysian example; commentators from Tokyo to Manila to Singapore express deep skepticism about Kuala Lumpur's chances for success.
Foreign investors thus have alternatives. They do not have to face Malaysia's stricter regulatory regime but can put their money in the relatively freer economies of the Philippines, Taiwan or Thailand. What Mahathir has done is reduce the competitive advantage of the Malaysian economy, the very quality that brought it success in the past 20 years and the resource that it will need even more to weather the storms of globalization.
Some commentators have suggested that capital controls may be workable. They point to China and India, both of which limit the convertibility of their currencies, as examples of successful financial protectionism. But both of these countries have vast natural and human resources and generally are less dependent on the world economy than is Malaysia. Moreover, in both cases, robust economic growth, especially in China, has come in the wake of liberalization, movement away from the very highly regulated practices of the past. Even if they are not completely open, they are shifting toward the global liberal norm, not away from it, as Malaysia is currently doing.
MIT economist Paul Krugman has been quite outspoken in supporting capital controls under certain circumstances. He argues that such regulations might be useful as temporary measures and should accompany, not displace, reform of domestic economic policies. It seems, however, that Mahathir is trying to avoid domestic reform and displace the blame for Malaysia's troubles onto foreigners. He is more taken with extravagant economic symbolism--the tallest building in the world, the longest automobile convoy--than with productivity and efficiency. He is captivated by xenophobic and anti-Semitic conspiracy theories. He is, in short, unlikely to hold to the kind of economic discipline that the careful Krugman would require.
Mahathir's frustration is understandable. Economic globalization does limit national sovereignty; it does impose costs on working classes, and it does empower the controllers of financial capital. The motley right/left coalition of American anti-globalists, from Pat Buchanan to Ralph Nader to William Grieder, no doubt are sympathetic with Mahathir's plight and hope for the success of his unorthodox moves. But it is more likely that full economic autonomy is now anachronistic.
Without access to world markets and money, living standards will decline steeply with no possibility of future recovery, a truism understood in Beijing and Bangkok alike. However bad things are in Thailand and South Korea, their continuing commitment to economic openness gives them a way up and out. Mahathir is likely to keep Malaysia down and out.