When two old foes meet ...

"I would like to say that I am not anti-Semitic, I am not anti-Jew but I certainly am very much against what's happening in Palestine, where the Israelis have tried to out-terrorise the Palestinians,"

- Dr Mahathir.

Once upon a time, Malaysia's former Prime Minister Mahathir Mohamad called one of the richest people in the world, Mr George Soros, a "moron". In return, the American financier called the veteran politician a "menace" to his own country.

After an almost decade-long feud, former Malaysian Prime Minister Mahathir Mohamad has buried the hatchet with George Soros, the US financier. Dr Mahathir had blamed Mr Soros for the 1997 Asian financial crisis.

But now,,they both now share a similar platform to fight war and promote peace.
In their first meeting since the Asian financial crisis, Dr Mahathir told Mr Soros that he accepted that the US financier was not personally responsible for the sharp fall in the local currency, the ringgit, back in 1997.

"I accept that you are not involved. Well, it's not a question of forgiveness or anything like that. It's just that you didn't do it and I accept that you didn't do it. That's all," said the former Malaysian PM.

Billionaire and philanthropist George Soros said Malaysia was not a victim of the "resource curse" like other countries such as Angola or Sudan where "the government was corrupt" and where there were tribal wars.

He said Malaysia had a stable government, mirrored by its economic performance.

However, the country should work towards transparency and accountability initiatives, he added.

"Transparency initiatives in Malaysia would be of considerable benefit to the country as a whole," he said during a dinner talk organised by the London School of Economics and Political Science Alumni Society of Malaysia here Friday.

He said the people of Malaysia have the right to demand for transparency and accountability from the government.

Still, the 76-year-old billionaire did agree with Dr Mahathir on one thing.

"Our views about the error of the Bush administration in its response to the terrorist attack. I think we have very similar views in that we abhor terrorists because they kill innocent people for political ends," said the US financier.

Asian financial crisis.

The unwinding of the Thai currency peg in 1997 led to an increase in currency speculation across Asia, and eventually the contagion spread to virtually all parts of Asia. In the first instance, the failure of ASEAN to rally behind Thai authorities in their defence of the currency peg marked an abject failure to foresee the potential wider impact of the crisis - a function of the lack of central leadership at the organization as countries sought to protect their own interests rather than any common good.

Particularly galling for both Thailand and subsequent victims Malaysia and Indonesia was the fact that currency speculators in the main operated from fellow ASEAN member Singapore. Malaysia's then Prime Minister Mahathir Mohamad made outrageous remarks condemning a "Jewish conspiracy", but many media analysts at the time assumed that his "intended" target was actually Singapore.

Further inflaming the situation, Indonesian politicians blamed ethnic Chinese business people for the crisis affecting their country, leading to widespread riots against Chinese families across the country. Many business people fled to Singapore, where they felt safer and more welcome. This naturally led to accusations in the Indonesian media that Singapore was shielding the business people from legal action back in Indonesia, causing relations to decline further.

As the crisis ended, Singapore lost a significant opportunity to export its more sophisticated business and legal practices to the rest of ASEAN. The main reason was members' promise not to interfere in each other's affairs, and yet in an increasingly global environment, such strictures were largely pointless. A failure to address basic corporate governance and bankruptcy procedures slowed down the recovery from the Asian financial crisis across Southeast Asia.

This is in contrast to the experience in many other Asian countries, for example South Korea, which rebounded much more quickly by adopting improved procedures. The fact that Singapore's relations with its neighbors had deteriorated due to the above factors played a part in this eventuality. Ironically enough it was these countries rather than Singapore that actually bore the full brunt of the mistake.

The second missed opportunity following the Asian financial crisis was a failure to push through a free trade zone. Malaysia in particular objected, due to the impact on its palm oil and auto manufacturing businesses. This failure to integrate quickly meant the continuation of wasteful government support for failed businesses across the region, in turn delaying recovery from the crisis.

ASEAN could still have gotten away with sub-optimal practices, but for the emergence of China at the same time as a higher value-added producer. China's rise came at the expense of ASEAN countries, whose failure to create more viable and global businesses has meant a continuation of the downward spiral from the 1990s in certain areas of manufacturing.

The crisis had its upsides, as Singapore cemented its position as the sole financial center of South and Southeast Asia in the aftermath of the Asian financial crisis. Putative competitors such as Kuala Lumpur fell by the wayside due to their failure to improve governance and the rule of law, as demonstrated so clearly in the aftermath of the financial crisis.

The role of the International Monetary Fund (IMF) was very controversial during the crisis, causing many locals to call the crisis the "IMF crisis." To begin with, many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (i.e. elimination of restrictions on capital flows); maintenance of high domestic interest rates in order to suck in portfolio investment and bank capital; and pegging of the national currency to the dollar to reassure foreign investors against currency risk.

However, the greatest criticism of the IMF's role in the crisis was targeted towards its response. As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditors. The dynamics in this scenario were similar to that of the Latin American debt crisis.

In response, the IMF offered to step in the case of each nation and offer it a multi-billion dollar "rescue package" to enable these nations to avoid default. However, the IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a structural adjustment package (SAP). The SAP's called on crisis nations to cut government spending to reduce deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. However, the effects of the SAP's were mixed and their impact controversial. Critics, however, noted the contractionary nature of these policies, arguing that in a recession, the traditional Keynesian response is to increase government spending, prop up major companies, and lower interest rates. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic pain. They pointed out that the U.S. government pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the U.S. itself entered a recession in 2001.

Anwar bin Ibrahim, former deputy prime minister and finance minister of Malaysia, in his capacity as finance minister, supported the International Monetary Fund (IMF) plan for recovery which meant a restructuring of the economy involving opening up to greater foreign investment and competition. He also instituted an austerity package that slashed government spending by 18%, cut ministerial salaries and deferred major investment projects. Large-scale infrastructure development projects known as "mega projects" were set back as well, despite being a cornerstone of Mahathir's plans for developing the nation.

These measures aroused bitter opposition from Mahathir. It also angered many affected business figures some of whose business empires had developed through exclusive government contracts, cheap credit from public funds or commercial sources backed by government guarantees, concessions, and various other forms of rent seeking. In particular, Tun Daim Zainuddin, the powerful Treasurer of UMNO and Executive Director of the NEAC, had large holdings of Malaysian banks and other businesses that would be vulnerable to such actions. Daim was a close confidante of Mahathir (both being from the same town) and had been the Finance Minister before Anwar.

Although many Malaysian companies faced the threat of bankruptcy, Anwar declared: "There is no question of any bailout. The banks will be allowed to protect themselves and the government will not interfere." Anwar advocated a free market approach, sympathetic to foreign investment and trade liberalisation, whereas Mahathir favored currency and foreign investment controls, blaming (alleged) unchecked speculation by currency speculators like George Soros for the shrinking economy.

In 1998 Newsweek magazine named Anwar the "Asian of the Year." However, that year, matters between Anwar and Mahathir came to a head around the time of the quadrennial UMNO General Assembly. The Youth wing of UMNO, headed by Anwar's associate, Ahmad Zahid Hamidi (also a member of ABIM), gave notice that it would initiate a debate on "cronyism and nepotism". In light of the recent fall of President Suharto of Indonesia, thought to have embezzled huge amounts of money from the Indonesian treasury, this was widely interpreted as a proxy attack on Mahathir. The response was swift, as Mahathir issued lists of "cronies" who had benefited from government share allocations and privatizations. To the chagrin of Anwar and his allies, several of them were on the list, including Anwar and Zahid.

At the UMNO General Assembly, a book, 50 Dalil Kenapa Anwar Tidak Boleh Jadi PM ("50 Reasons Why Anwar Cannot Become Prime Minister") was circulated containing graphic sexual allegations as well as accusations of corruption against Anwar. Anwar was fired from the Cabinet on September 2, 1998, amid police reports that he was under investigation. The following day, he was expelled from UMNO.

World public opinion feels that Anwar was a victim of a power struggle in Malaysia and that the verdict against him is simply designed to 'put him away' from the political scene...




Mahathir Abdullah Ahmad Badawi Malaysia Soros Asian financial crisis Anwar