Asian Financial Crisis and Recovery of Malaysia

Asian Financial Crisis -- Recovery of Malaysia

The modern day society is currently facing one of the most difficult moments -- the emergence of the internationalized economic crisis. It initially commenced in the American real estate sector, but quickly expanded to the rest of the American -- as well as global -- sectors. The impacts of the crisis are tremendous, but one should not despair as these would be gradually overcome. Economic crises had occurred in the past and will continue to occur in the future. Probably the most relevant example in this sense is constituted by the Great Depression of the 1929-1933, which is held as the most critical economic depression, but which was eventually overcome.

Economic crises are a given of the economic activity and the natural economic cycle, which goes through its stages of introduction, growth, maturity and eventual decline. They exist and are overcome, but they should also teach lessons. Given this realization, a question is being posed relative to the lessons Malaysia drew from the Asian financial crisis of 1997-98. Specifically, has it been better able to face the challenges of the internationalized economic crisis of today as a result of its experience with the Asian financial crisis? In order to answer this question, it is necessary to review the crisis and the means in which Malaysia has overcome it.

2. The Asian Financial Crisis

The Asian financial crisis has its roots in Thailand, and it is the result of currency devaluations. As the Thai government refused to continue pegging the local currency to the United States dollar, the baht (the Thai official currency) suffered dramatic devaluations. The national currencies of the surrounding countries were also impacted and subsequently followed devaluations. The financial markets in the region were also severely impacted and the southern region of Asia faced a severe economic crisis.

In the following months of the crisis, the value of the national currencies in six Asian countries -- Indonesia, South Korea, Malaysia, the Philippines, Taiwan and Thailand -- dropped to less than half their initial values in United States dollars (Maroney, Naka and Wansi, 2004). Two of the most deeply affected countries were Indonesia and Thailand, which experienced riots and were forced to accept several conditions of the IMF in exchange for loans. In terms of Malaysia, the country was impacted at a lower level and the revival went beyond the economic sector and also integrated the business sector and the political field (Ping and Yean, 2007).

At an international level, the crisis generated limited impacts and this was due to the rapid intervention of the International Monetary Fund, which confined the crisis to Asia. Nevertheless, the countries used the crisis to develop and implement new protectionist measures that safeguard the stability of their currencies. "The Asian crisis led to some needed financial and government reforms in countries like Thailand, South Korea, Japan and Indonesia. It also serves as a valuable case study for economists who try to understand the interwoven markets of today, especially as it relates to currency trading and national accounts management" (Investopedia, 2010).

3. The Recovery of Malaysia and the Role of the Government

The economic crisis that hit Malaysia in 1997 generated devastating impacts, including social and political turmoil and the near collapse of the currency and property markets, which generated tremendous impacts on the entire economy and society. Confronted with the new challenges, the Malaysian government turned away from the help and assistance of the International Monetary Fund. This help had been sought by the neighboring countries, but the cost was high. The Malaysian government chose to develop and implement its own plan for fighting off the crisis. This plan was structured onto the following actions:

The creation of the National Economic Action Council (NEAC). The NEAC would be run by the Prime Minister and consultative to the body of the Cabinet, and its scope would be that of stabilizing the Malaysian economy.

The NEAC would focus on the development and implementation of actions which reduced the pressures on the Malaysian national currency (the ringgit)

The pressures on the ringgit would be reduced through the introduction of selective capital controls and the pegging of the national currency to the United States dollar. The capital controls had the scope of reducing the speculative trading on the ringgit and they also limited the ability of foreign investments in the country. In other words, they were protective and protectionist, and instead of opening the country for more foreign investments, it closed the boundaries until the problems would be solved internally and in a sustainable manner (Essential Action).

The National Economic Action Council also strived to introduce balance and stability in the banking sector and within the business community. In terms of the banking sector stability, the efforts materialized in the creation of two additional institutions -- the Danaharta and the Danamodal. The Danaharta, or the National Asset Management Company, was in charge of relieving banks of their underperforming loans; the Danamondal, or a National Capital Fund, would help banks recapitalize (Ping and Yean, 2007).

The actions of the Malaysian government proved successful as the country commenced to register economic growth as early as 1999 -- only two years after the crisis had been set. In 1998 for instance, the country's gross domestic product growth rate was of -7.36%, but the following year it had increased by 6.14%. In 2000, the Malaysian GDP was growing at a rate of 8.86 per cent, revealing as such levels higher than those before the crisis (Coe and Kim, 2002).

This virtually indicates that the role of the Malaysian government was increased and that the institution supported the economic recovery of the country. Additionally, this finding is also supported by the slower recovery of the countries which had sought the assistance of the International Monetary Fund, rather than implement their own federal measures and programs. Ping and Yean (2007) state: "It would seem that the government has achieved some success as seen in the recovery of the Malaysian economy from 1999 onwards. The GDP which experienced negative growth of 7.4% in 1998 went back to positive growth of 6.1% in 1999. The GDP continued to grow subsequently."

The actions and reforms were also aimed to reduce the country's deficit in its balance of payments, but their main scope was that of eliminating speculations and the pressures on the national currency. In a time of liberalization, the country enclosed itself through the implementation of this radical solution and reduced its access to international funds (Agenor, 1999).

While it denied the assistance and help of the IMF, Malaysia did borrow funds from various sources, including American commercial banks, but also banking institutions in the United Kingdom, Germany or Japan. In the case of Malaysia, Japan was the largest loaner (Nanto, 1998). As a paradox, despite the implemented capital controls, the borrowings of Malaysian firms from abroad increased. The government eventually decided that firms looking to borrow more than 5 million ringgit would need the approval of the federal institution (Zhu, 2001).

Overall, Malaysia managed to overcome the crisis in an efficient and timely manner and much of this success is attributed to the Malaysian government. Aside from the actual reforms developed and implemented by the government, the rapid recovery is also attributed to a series of country specific features, such as an abundance of natural resources -- tin, petroleum, natural gas, timber, bauxite, copper and iron ore (Central Intelligence Agency, 2010) -- or the potential for strong growths (Poon, 2000).

While it cannot be doubted that the actions of the Malaysian government have indeed helped the country in overcoming the crisis of 1997-1998, a question is being posed relative to their long-term stability. And this stability is assessed through the lenses of the high levels of competition Malaysia is facing within the international market, especially from China. Given this context then, it is believed that the reforms have outgrown their use, and they should now be replaced with others. Specifically, in order to consolidate the country's competitiveness in the international community, it is necessary for the federal controls on capitals to be reduced. Subsequently, foreign investments ought to be welcomed and the country should focus more of liberalization. "Given the high level of competition faced by Malaysia's export oriented industries, especially from China, long-term economic growth will require Malaysia becoming a regional financial centre. This would require Malaysia to remove all capital controls and allow its currency to fluctuate freely. Instead of relying on capital controls, the rate of accumulation of short-term foreign debt on be better controlled by a tax on short-term capital inflows" (Anwar and Gupta, 2004).

4. The Asian Financial Crisis and the Current Global Crisis

The Malaysian government maintained the protectionist reforms and continued to control the capital inflows. This measure proved highly useful in the wake of the internationalized economic crisis currently taking its tool on the populations. Due to the control of capitals and the limited ability to invest in risky titles, the Malaysian economy has suffered lowered impacts as a result of the crisis. Nevertheless, the country was still influenced in terms of consumer demands. In this order of ideas, the Malaysian economy remains highly dependent on exports. And in a context in which the global purchasing power and demand have decreased as result of the crisis, the levels of exports -- and the adjacent earnings -- have also decreased. In order to remedy the situation, the Malaysian government is striving to reduce the country's dependence on exports (Central Intelligence Agency, 2010).

The efforts seem to have generated positive results and the first half of 2010 has retrieved sustainable growths in the country's gross domestic product. The main explanation forwarded by the federal authority in Malaysia is that the country is not threatened by the crisis as it is not involved in risky borrowings. Nevertheless, the government would continue to assess the global arena and develop the country specific strategies and actions which best respond to the emergent challenges.

In order to increase Malaysia's economic strength and stability, the government is currently developing the infrastructure. It has even implemented an economic stimulus package of 67 million ringgit and, through it, the country's international competitiveness is enhanced. Additionally, efforts are being made in terms of industrial diversity and attractiveness to foreign investors (The Malaysian Insider, 2010).

5. Conclusions

Economic crisis are natural processes and stages of the economic cycle, which cannot be overcome, but their threat and intensity can be reduced. Malaysia has learnt this lesson and has developed and implemented a series of protectionist policies by which it better controlled the capitals in its economy. The protectionist measures had a twofold benefit. On the one hand, they helped Malaysia overcome the Asian financial crisis of 1997-1998. In the immediate aftermath of the crisis, the country proved able to revive its economic growth and registered positive growth rates of the gross domestic product.

Secondly, by maintaining its protectionist policies, it avoided the threat of the current economic crisis which now affects the entire global community. The simplest explanation in this sense is constituted by the fact that the Malaysian government limited speculative financing and risky borrowing, limiting as such the country's exposure to financial crisis. Nevertheless, the country is still facing the threats of the global crisis due to a limitation of the demand for the country's exports. In this order of ideas, the federal institution is now increasing its efforts to diversify the industry and reduce the dependency on exports. Finally, the means in which the government dealt with the crisis of 1997-1998 raises one additional point of discussion -- the enclosing of the economy in times of globalization and liberalization. Given this standpoint, it is necessary for the country to open its boundaries to foreign investments. All the elements discussed are interesting points in the Malaysian economy, which continues to constitute an intriguing topic of research. The academic community is likely to follow the future evolution of the country.