Mahathir as Reformer: Analysts Start to Listen
International Herald Tribune
November 14, 1997
Thomas Fuller 

When Prime Minister Mahathir bin Mohamad announced in September that Malaysia — stung by Asia's financial turmoil — would make currency trading illegal, many analysts wrote off the comments as emotional and quixotic.

Since those remarks, however, the prime minister has been gaining support in a campaign to study ways of regulating the world's currency markets.

In recent weeks, Mr. Mahathir has shed some of the rhetorical flourish that he brandished in calling currency speculation "unnecessary, unproductive and immoral." Now, some of the ideas behind the words are gaining a broader hearing as political leaders, financial officials and some economists suggest that something must be done to make economies and currencies less susceptible to surges in capital flow.

Joseph Stiglitz, senior vice president and chief economist for the World Bank in Washington, said: "In some instances development of policy instruments to allow greater control over surges of short-term capital flows may be important, a policy some have described as 'throwing sand in the wheels of international capital,"' he said.

And on Thursday in Kuala Lumpur, the managing director of the International Monetary Fund, Michel Camdessus, said he would preside next month over a meeting of Pacific Rim finance ministers that would focus on "what kind of new regulations should be or shouldn't be considered in order to introduce discipline in the markets."

That meeting, in Kuala Lumpur, will include the U.S. Treasury secretary, Robert Rubin, as well as the finance chiefs of Japan, China, the nine members of the Association of South East Asian Nations, and about 20 other Pacific Rim countries.

"There is certainly a sense that we are not dealing with perfect markets," said Amar Bhattacharya, an economic adviser at the World Bank. "There is growing consensus that there is a role for policy — and that's as much a domestic issue as it is international."

Direct support for Mr. Mahathir has come notably among his counterparts in the developing world. Last week, Mr. Mahathir persuaded a grouping of 15 leaders from developing countries to jointly urge the World Bank and International Monetary Fund to study currency markets "with a view to appropriately regulating them, in order to make them more open and transparent."

The idea of discouraging speculative flows spurred James Tobin of Yale University, a Nobel laureate, to propose that a small tax be imposed on foreign exchange transactions. The tax would hurt investors who changed in and out of currencies frequently.

Although Mr. Mahathir will have several opportunities over the next few weeks to make his case, he readily concedes the difficulty of trying to change the world's currency trading system. "Whether I can convince people or not I don't know, because powerful countries are not so much affected by currency manipulation," he said.

Later this month, President Bill Clinton is scheduled to meet — on the sidelines of the Asia-Pacific Economic Cooperation summit in Vancouver, British Columbia — with leaders from Southeast Asia to discuss the region's currency turmoil. Mr. Mahathir has made no secret of his intention to press his point at the summit meeting.

"What I would like APEC to do is to appreciate that the members of APEC are not at the same level of development," he said. "You cannot just say that these are market forces, full stop. You must also understand that when market forces work against the interest of millions of people, then you have to examine exactly what you mean by market forces."

Critics of Mr. Mahathir's ideas say they are no different from those of past leaders who have had to battle speculators and devalue their currencies.

"Nixon said the same thing about the speculators forcing the dollar devaluation that Mahathir has said in the last six months," said C. Fred Bergsten, a former top U.S. Treasury official, referring to former President Richard Nixon, who in 1971 removed the United States from the postwar fixed exchange-rate system. "Mahathir was almost quoting Nixon."

"There's a germ of truth in what he says," Mr. Bergsten added. "But while it's understandable, Mahathir is essentially scapegoating and blaming the messenger."

Copyright © 2006 the International Herald Tribune