Mahathir's Deputy Under Investigation : Malaysia Leader Ousts Chief Voice of Reform 
International Herald Tribune
September 3, 1998
Thomas Fuller

Prime Minister Mahathir bin Mohamad abruptly dismissed his deputy and anointed successor, Anwar Ibrahim, on Wednesday and moved ahead with his own vision for Malaysia's economic recovery that isolates the nation from world capital flows.

The move leaves Malaysia, for decades one of the region's most politically stable countries, without a clear successor to Mr. Mahathir, 73.

It came as Malaysia's central bank unveiled the second stage of far-reaching currency controls, pegging the ringgit to the U.S. dollar in a plan designed to insulate the country from the regional economic crisis. It is a plan that Mr. Anwar, 51, vocally opposed until a few months ago, when his allies in government and the press were removed one by one.

The protracted power struggle between Malaysia's top two politicians ended late Wednesday evening with the announcement that Mr. Anwar, who was widely seen outside Malaysia as a dynamic alternative to the aging prime minister, was removed from his positions of deputy prime minister and finance minister.

Hundreds of Mr. Anwar's supporters gathered in and around his official residence into the early hours of Thursday. "If the police come and pick me up," Mr. Anwar told them, "please stay calm. They are only doing their job."

Mr. Anwar has been embroiled in a sex scandal in recent weeks brought on by allegations in a recently published book, "Fifty Reasons Why Anwar Cannot Become Prime Minister."

Malaysia's inspector general of police, Abdul Rahim Noor, said late Wednesday that Mr. Anwar was not under arrest but that investigations were continuing relating to allegations in the book.

"We are not arresting for now," Mr. Rahim said. "He's not under house arrest now."

Mr. Mahathir, a contemporary of leaders in Asia who have already ceded power to the next generation — men like President Suharto of Indonesia and Lee Kuan Yew of Singapore — now has total control over his country's beleaguered economy. Over the last few weeks, he has announced radical measures to combat the country's most serious economic crisis in its 41-year history, challenging conventional economic wisdom at almost every turn.

"There's a grand experiment which is going on in the region, and Mahathir represents one of the two competing responses to the crisis," said Gerald Segal, an Asian specialist at the Institute of Strategic Studies in London. "Removing Anwar make sense because he clearly wasn't party to Mahathir's vision."

Mr. Mahathir has steered his country away from the type of recovery plans now being implemented in neighboring Indonesia and Thailand — both of which turned to the International Monetary Fund last year to help rescue their economies.

By following the IMF, Mr. Mahathirhas said, the region risks being "recolonized" by Western powers eager to buy up cheap assets. Malaysia has many of the same problems facing Thailand and Indonesia — high levels of debt and bad loans — but has rejected the idea of seeking IMF help.

Nonetheless Mr. Anwar, in his role as finance minister, pursued policies that were similar to those in Indonesia and Thailand — IMF-style measures without the IMF.

"For the first 12 months of this crisis, Malaysia has been moving back and forth because a debate has gone on within the country," Mr. Segal said. "What we are now going to see is a clear test." Mr. Mahathir's vision — which flies in the face of conventional IMF-style economics — was laid out on Tuesday.

The prime minister banned any trading of the ringgit abroad and said all Malaysian currency held outside of the country must be repatriated before Oct. 1. The estimated 20 billion ringgit ($5.26 billion) held abroad would help reflate Malaysia' s cash-strapped economy, Mr. Mahathir said.

The move effectively insulates the ringgit from the world's currency markets. The central bank Wednesday pegged the currency at 3.8 to the dollar indefinitely.

By putting Malaysia in this currency cocoon, Mr. Mahathir hopes that interest rates can be lowered and money can be pumped into the economy without the risk of the ringgit losing its value — as would happen if it were openly traded.

It is a plan that would help rescue the captains of Malaysian industry from their deeply indebted positions — men often hand-picked by Mr. Mahathir.

Opposition to the currency controls ran deep at the country's central bank. The bank's governor and his deputy resigned last Friday to avoid implementing the plan.

Analysts outside the country say Malaysia's plan can only work if companies that are not viable are shut down — not simply resuscitated with the cash that will be pumped into the economy.

"I'm very much afraid that this is an act of trying to avoid the tough steps that have to be taken," said Dave Carbon, chief economist for Asia at Credit Lyonnais Securities in Singapore.

"The Malaysian economy has some real problems with it — things are broken," he said. "When the engine is broken and you step on the gas, the car just doesn't move."

Tim Condon, regional economist at Morgan Stanley, Dean Witter & Co. in Hong Kong, warned that lowering interest rates could flood the system with cash and lead to inflation.

"If inflation accelerates and if savers are getting a negative return on their savings," he said, "there's going to be tremendous incentive to take your money and hold it in foreign assets." Only then would Malaysia's experiment be put to the test. Tuesday's rules are designed to discourage Malaysians from taking their money abroad. Indeed, they are banned from taking more than the equivalent of 10,000 ringgit out of the country.

But if the incentive to park savings abroad becomes too great — the currency becomes overvalued in the eyes of Malaysians — holes could emerge in Malaysia's new currency system.

"The incentive to cheat in these kinds of capital control regimes is a direct function of how overvalued your currency is," Mr. Condon said. "By pegging, they've made it easier for the currency to become overvalued."

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