EXECUTIVE ACTION | Mahathir Mohamad shows Malaysia - and the world - he is sole boss

ASIAWEEK 11 Sept 1998 | By Assif Shameen and Sangwon Suh
SOON AFTER HE ASSUMED OFFICE as Malaysia's deputy prime minister in 1993, Anwar Ibrahim invited a veteran politician, Musa Hitam, to his home one day. Musa was a former deputy PM who had served under PM Mahathir Mohamad for five years. After some friendly small talk, Musa told Anwar jokingly: "I must warn you about Maha-thir." Given that every deputy PM under Mahathir had lasted just five or six years, Anwar himself was not likely to survive very long, Musa said in half-jest. They both roared with laughter. Anwar later told his friends that Musa's problem was that he had not tried hard enough to work with Mahathir as a loyal deputy. For his part, Musa felt that Anwar was too young and na•ve. On Sept. 2 Anwar became the third deputy PM to walk out the revolving door of Mahathir's cabinet. After five years, he had been fired.

In the days leading up to Anwar's departure, there had been rumors that something was going to happen, but the dismissal still came as a surprise. On Sept. 1, just one day before the sacking, Mahathir had described his relationship with his deputy as "good." D-Day itself started off normally, with Anwar going to the weekly cabinet meeting in the morning. In the afternoon, he attended another meeting with the PM, Spe-cial Functions Minister Daim Zainuddin and some officials from the central bank, Bank Negara, to discuss economic matters. Afterward, Mahathir re-vealed the bad news: he wanted Anwar to resign. Anwar refused, saying there was no reason for him to quit. He was told that if he didn't deliver a resignation letter by 5 p.m., he would be sacked. Anwar returned to his office to tell his aides and associates what had happened. Then, shortly before 7 p.m., a messenger from the PM's office carried a letter to Anwar - by now at home - which said he had been fired from his government positions as of 5:30 p.m. As news of the dismissal spread, stunned Anwar backers gathered outside his home, while police blocked off the area to control the crowd. One young man summed up the feeling of shock felt by Anwar's supporters: "It's the end of the world. This is unjust."

Anwar's dramatic fall from grace was the culmination of what had been months of maneuvering by the PM. Mahathir, 72, and Anwar, 51, were long known to have been at odds over policy matters, but things came to a head in June during the general assembly of the United Malays National Organization (UMNO), the country's dominant political party. There, Ma-hathir, whose leadership was perceived to have weakened in the face of the economic crisis, was indirectly excoriated by an Anwar ally for alleged corruption and nep-otism. Having successfully parried the at-tack, Mahathir proceeded to strike back, chipping away steadily at his deputy's position over the next several weeks.

The counter-offensive began almost immediately with the appointment of old friend Daim to the cabinet to oversee the country's economic recovery - a responsibility that, strictly speaking, came under the purview of Anwar in his capacity as finance minister. In July, three senior newspaper and TV personnel, all aligned with Anwar, abruptly resigned in a move widely believed to have been engineered by Mahathir. Then just six days before Anwar's dismissal, Bank Negara governor Ahmad Mohamed Don and his deputy Fong Weng Phak quit their posts. The central bank was known to have differed with Mahathir - and sided with Anwar - over economic policy.

Anwar's departure, though, does not simply indicate Mahathir's success in strengthening his political position; it also marks his victory - for now at least - in the struggle to determine the economic destiny of the country. That Malaysia is in deep trouble is undisputed. On Aug. 27 Kuala Lumpur revealed that its economy shrank 6.8% in the second quarter of 1998 after contracting 2.8% in the first quarter. Economists project the Malaysian economy shrinking by 5% in 1998 - its worst recession in over 40 years.
FOR BRINGING MALAYSIA OUT of its economic straits, Anwar favored the kind of tight monetary policy and austerity measures prescribed by the International Monetary Fund. Mahathir and Daim, on the other hand, feel the way out is to generate growth by loosening monetary policy, lowering interest rates and expanding the money supply. Now that Anwar is gone, Mahathir has a freer hand in steering the country's economic course.
Even before Anwar was fired, Mahathir revealed he would be going his own way by unveiling wide-ranging new measures that went against IMF strictures and conventional free-market economic theory. On Sept. 1, in a move widely anticipated but denied by the government until the last minute, Bank Negara announced that it would institute currency controls to curb capital flows and stabilize the ringgit. Put simply, the move is an at-tempt by the government to gain control over the ringgit, so that interest rates can be lowered without triggering a devaluation. In the process, Mahathir has, in his characteristically combative style, set his country on a collision course with foreign invest-ors and the IMF. (Just the day before, he had risked the ire of Singapore by banning the trading of Malaysian shares outside the country, a move that mainly affects the over-the-counter market in the neighboring is-land-state.)

Key provisions of the capital-control measures include limiting the amount of Malay-sian currency that can be carried into or out of the country. Start-ing Oct. 1, foreign travelers will be al-lowed no more than 1,000 ringgit (about $250); local residents will be prohibited from taking abroad more than the equivalent of 10,000 ringgit in foreign currency. In addition, official approval will be re-quired for any transfer or withdrawal of funds involving external ringgit accounts, and profits from the sale of Malaysian stocks purchased with foreign funds cannot be repatriated for a year.

What kind of effect will the new regulations have? "Whatever one thinks about the measures," says chief economist Manu Bhaskaran of SG Securities Asia in Singa-pore, "they lay the ground for a massive reflation, fiscal pump-priming, printing money, changes to collateral value guidelines and credit growth going back up to 15% from under 10% currently." If everything works out according to Mahathir's plans, Bhaskaran adds, "there could be a 3% to 4% GDP growth next year" following this year's contractions.

Abdul Razak Baginda, executive di-rector of the Malaysian Strategic Research Center, sees other benefits from the capital controls. "It's the beginning of the end for unbridled currency speculation," he says. "We've all paid a heavy price. But in a few months, [the speculators'] movement will be limited." He adds that the new mechanism "will reduce the impact of lowered interest rates. If the ringgit is controlled, it will be a soft landing."

But any system that restricts the movement of capital is bound to upset in-ternational investors, and shortly after its unveiling, the Kuala Lumpur Composite Index fell 40.21 points, or 13.3%, as foreign traders sought to unload their Malay-sian stocks. (The next day, however, the bourse rebounded to make up much of the lost ground after Bank Negara pegged the ringgit at 3.80 to the U.S. dollar.) An exasperated Andrew Ballingal, chief strategist for Schroders Asia, lashed out at the new measures. "As far as I am concerned, all the lights have gone out in Malaysia," he declared. "Mahathir says: We don't want these bloody foreigners investing any money in Malaysia. I think a lot of in-vestors won't go near Malaysia irrespective of how attractive a place it is for in-vestment as long Mahathir is in charge. Mahathir says he doesn't need the world. Well, maybe the world doesn't need him." Alan Brown, chief investment officer for State Street Global Advisors in London, offers a less heated assessment. "In six months to a year, investors will probably come round to accepting the new rules of the game," he says. "China and India have capital controls and people still invest there. Even Britain had exchange controls until as recently as 1978."

FOR HIS PART, MAHATHIR has maintained that the IMF has not been very helpful - nor have its prescriptions worked. "We have asked the IMF to have some regulation on currency trading," he said, "but it looks like they are not interested as they do not stand to lose in any way. We are the ones who stand to lose. Hence, we have to resort to whatever methods we ourselves can take. And what we can do on our own is to take care of our own currency."
As a longtime critic of the IMF's policies, Mahathir has seen his position vindicated, with a number of experts now turning around to criticize the inefficacy of the body's strictures. Even renowned U.S. economist Paul Krugman has argued for exchange controls, notwithstanding the distortions they eventually put on the economy, saying that desperate situations require desperate measures. "What Maha-thir has said has been proven right," says Ng Han Seng, head of research at Kuala-Lumpur-based Hwang-DBS Securities. "But the question is how to cure [the crisis] - and whether what Malaysia will do now is the cure."

Mahathir may be confident on that point, but others are not. Krugman himself has said that while Malaysia may be on the right track, things could still go wrong. In an open letter to Mahathir published shortly after the capital controls were unveiled, Krugman stressed that the new measures could only be a temporary measure to give the government some breathing space. Bhaskaran of SG Securities Asia agrees with Krugman. "This sort of reflation would only work temporarily," he says. "Eventually, the distortions will start to appear in nine months to a year."

Meanwhile, what lies ahead for An-war? As bizarre as it may seem, there is now talk that he could be criminally prosecuted. Shortly before Anwar's dismissal, former deputy PM Ghafar Baba launched a tirade against him (without specifically naming Anwar but clearly referring to him). Ghafar accused the person of colluding with foreign powers. He spouted: "In foreign countries, a stooge is usually shot or punished with life imprisonment."

Ghafar's statement may be a product of an overheated imagination. But immediately after Anwar's sacking, police ar-rived at his offices to seize documents and seal the rooms. Mahathir's supporters have insinuated that Anwar is a "foreign agent" who worked to further the agenda of such international bodies as the IMF and the World Bank. Several ranking UMNO officials say they expect either Anwar or some of his close associates to be charged with leaking state secrets.

Assuming this conspiracy theory is just that, Anwar could opt to wage an all-out war against Mahathir, challenging him for the top post in next year's party polls. "Anwar is a good mobilizer and a good networker," says a retired Malay politician. "He has put a lot of his people in key places around the country." True, but if Anwar is charged he may lose his UMNO deputy presidency as well.

As it is, Mahathir may well abolish the post of deputy prime minister. "He doesn't want to be remembered as someone who had half a dozen deputy PMs," says a senior UMNO leader. Instead, Maha-thir may choose an UMNO vice president, Abdullah Badawi, the mild-mannered (and non-threatening) foreign minister, to be his de facto No. 2 by naming him to a new post of senior minister.

Mahathir would also not want to be known for splitting UMNO, which occur-red before in 1987. This time, given that the feud involves someone as influential as Anwar, the rift could go beyond repair. Says a well-placed UMNO source: "Then Malays would remember him as the man who divided the community." Or - as Mahathir would much prefer it - who brought Malaysia back from the brink.

- With additional reporting by Santha Oorjitham/Kuala Lumpur