Will It Be Business as Usual in Malaysia?

LONDON, 3 November 2003 — In a post-Sept. 11 era, Mahathir Mohamad has emerged as a voice of moderation, condemning both international terrorism and the US-led coalition for the war in Iraq and its continued occupation of the country. He has condemned the over-emphasis in Muslim countries on Islamic studies, and criticized the scholars for neglecting the sciences, technology, defense, social policy and administration, and economics and finance, which has contributed to the backwardness of the Muslim countries. The Muslims, he recently reiterated did not need to re-invent Islam, but to go “back to basics” to the tolerant and progressive Islam.

However, it is in the economic and finance field that Malaysia under Mahathir flourished, and that the erstwhile Malaysian premier’s legacy may well be overlooked and neglected by historians. When it came to crises, such as the 1998 Asian financial crisis and the more recent regional SARS crisis, it was decisive economic and financial policy decisions sometimes against the wishes of the International Monetary Fund (IMF), that stood out and won the day.

In the aftermath of the SARS crisis, Malaysia introduced a $1.9 billion economic stimulus package to help especially the tourism and manufacturing industries. Today the Malaysian economic fundamentals are the envy of other countries in the region — the ringgit is stable against the US dollar and has appreciated against most currencies except the euro; interest rates in the first quarter of 2003 hovered between 2.75 percent to 2.8 percent; the current account for the first quarter of 2003 was in surplus at 3.3 percent; the total external debt was $49.1 billion (of which short-term debt is only $8.1 billion) against international reserves of $34.9 billion for the same period; Malaysia attracted 2.9 million tourists in the first quarter of 2003 despite the SARS situation; the trade balance was in surplus by 17.6 billion ringgit; inflation remained low at 1.4 percent in first quarter; the total debt burden of the government remained at 45.9 percent of GDP (compared to over 90 percent for Saudi Arabia); and real GDP growth stood at a healthy 4 percent.

Countries in the region should follow the Malaysian model.

In the field of Islamic banking, it was the vision of the Mahathir government to develop its famous “dual banking” model, whereby the country will have a conventional banking system operating side-by-side with an Islamic banking system, cooperating but not inter-acting.

This model has been spectacularly successful which has made the Malaysian Islamic banking system the most developed and proactive in the world, complete with regulatory and legal framework; anti-money laundering and compliance measures, code of ethics for managers; market depth with number of players and pool of funds; check clearing and interbank money market; and a thriving bond market with secondary trading. The few missing links are now being worked on such as the global integration of the local Islamic banking market and the establishment of a deposit insurance scheme.

One of the last policy decisions agreed by Mahathir, who retained the finance minister portfolio after Tun Daim resigned two years ago, is to bring forward Malaysia’s banking market liberalization timetable. In September, Bank Negara (the central bank) announced that it will give three new banking licenses to foreign players in 2004, three years ahead of the schedule in the Financial Sector Master Plan.

One area where criticism has been leveled at Mahathir’s economic legacy is the too cosy relationship between Malaysian politics and big business. This has tended to cloud transparency and accountability, and has lended a greater propensity to potential corruption. The banking and corporate debt restructuring are signs that Malaysia is taking heed of such criticism. The Badawi premiership, according to sources, may encourage an arms length between politics and big business. But remains to be seen.

All these developments are underpinned by the fact that Mahathir is a politician with an instinct for the free market.

In the last decade or so he has adopted the 2020 Vision for his newly-industrialized country, whereby Malaysia would join the ranks of the fully industrialized countries of the world. He has sponsored the Multimedia Super Corridor (MSC) project, a triangular development which comprises Putrajaya, the world’s first paperless government administrative capital; Cuberjaya, a Malaysian version of Silicon Valley; and the futuristic Kuala Lumpur International Airport.

The MSC is fast becoming a reality — Putrajaya is up and running; Cyberjaya is attracting global and regional corporate giants; and the KLIA is the gateway to Malaysia. The project had to stall because of the Asian crisis but is back on track. Mahathir has successfully transformed the Malaysian economy from a primary commodity producer, to an assembly and manufacturing hub. He started the final transformation into a knowledge-based economy symbolized by electronic, Internet, intranet, smart technology.

This is the economic challenge for his successor Datuk Abdullah Badawi to complete the implementation of Mahathir’s 2020 Vision. Early indications are that it will be business as usual.