Although the Malaysian economy also suffered a serious blow from the 1997 financial crisis, it did not suffer as much as the Thai economy did. It recovered from the crisis stronger than the Thai economy did, and the Malaysian recovery was achieved without the financial assistance from the IMF. Therefore, a satisfactory explanation needs to account for both the failure and success of the Malaysian economy during the 1997 crisis. The following sections discuss the roles of the state, political parties, conglomerates, and local factions in Malaysia's financial politics.
The State
Since its independence in 1957, Malaysia has followed its British colonizer to adopt the constitutional monarchy, in which the Prime Minister, not the King, had the real political power. In contrast to the instability of Thai cabinet governments, however, the Malaysian government was free from military coups and has been controlled by the UMNO-led coalition of political parties. Only five changes of premiership have occurred, and the last one, Mahathir Mohamad has stayed in his office since 1981. This stability of the government plus the British legacy of a professional bureaucracy allowed the Malaysian state to maintain relative political autonomy and administrative efficiency, as compared to its Southeast Asian
neighbors.116 Furthermore, the ruling coalition has been able to command a two-thirds majority in the Parliament, except for a short period in 1969. The parliament or its committee system has not been a major influence in the formulation of national policies.117
This is not to say that the Malaysian government was corruption-free. In fact, government corruption was always a hotly debated issue in Malaysian elections, and it partially contributed to the 1997 financial crisis as well. However, the corruption seemed to concentrate in redistribution policies (monopolies, infrastructure construction, real estate development, government procurements, etc.) and did not significantly affect the export sectors after the late 1960s.
The major redistribution policies were associated with the New Economic Policy (NEP) from 1970 to 1991. The NEP was promulgated by the Malay-dominated government in response to the 1969 racial riots between the Malays and the Chinese.
The state tried to balance the Chinese dominance in the economy through ethnic regulations and state (and quasi-public) enterprises. It was in these sectors where corruption was widely reported. Chinese businesses would use Malay heads to acquire government assistance. Positions of state enterprises and their procurement projects were rewarded to political supporters.118 Investors with strong political connections could use privatization projects to make large gains in the security market.119 After 1991, the NEP was replaced by the National Development Policy, which retained the ethnic bias of the NEP.
In 1986, under the leadership of Mahathir Mohamad (assumed premiership in 1981), Malaysia implemented comprehensive export drives, which included the reduction of red tape and various liberalization measures. Opportunities of corruption
116 In his study of the Malaysian civil service (MCS), Puthucheary (1987, 107) comments: "The MCS enjoys a position of power perhaps unequalled by any oth4er civil service in a democratic country. Its members belong to the same ethnic background as many of the political leaders and are tied by common educational and kinship links. Most importantly, because of the trust and confidence that the political leaders had in the civil service and especially in the MCS officers, they have been given a more important role in political decision-making than would otherwise have been the case." According to the annual surveys conducted from 1995 to 1999 by the Political and Economic Risk Consultancy, Ltd. (Hong Kong), Malaysia's corruption scores were consistently lower than those of India, China, Indonesia, Thailand, and the Philippines (http://www.asiarisk.com/lib10.html, 7/6/99..
117 Gordon P. Means, Malaysian Politics: The Second Generation (New York: Oxford University Press, 1991), 294-95.
118 For a detailed discussion on the relationships between the state and business during the NEP era, see Jomo (1986). Crouch explains how the NEP regulations to encourage bumiputeras to buy non-Malay company shares turned out to benefit non-Malays, members of royal families and local UMNO leaders.
Harold Crouch, Government and Society in Malaysia (Ithaca, NY: Cornell University Press, 1996).
119 FEER 4/23/98, 76.
were thus not eliminated but greatly reduced. The mixture of efficiency and corruption of the state bureaucracy was also reflected in the financial bureaucracy -the central bank and -the Security Exchange Commission.
The central bank of Malaysia is Bank Negara Malaysia. It was established by the Central Bank of Malaya Ordinance in 1958. Its colonial predecessor was the Board of Commissioners of Currency. Therefore, as compared to the Bank of Thailand, Bank Negara had a headstart by inheriting an efficient and autonomous institution from its colonial master.
The institutional features of Bank Negara had certain strengths as well as weaknesses. As in Thailand, Bank Negara was established under the Ministry of Finance. The policy of the Bank was entrusted to its Board of Directors, which consisted of nine to twelve members, including the Governor, Deputy Governors, the Secretary General (or Deputy Secretary General) of the Finance Ministry, and five to eight members who were not officials or representatives of private interests.120 The Finance Minister appointed and dismissed only the Deputy Governors, while the Prime Minister appointed and dismissed the Governor and all other members of the Board with the ceremonial approval of the King. The above information revealed that, as compared to its Thai counterpart, Bank Negara had more political autonomy in its governing structure and personnel. Even though the Bank was located under the Finance Ministry, it was the Prime Minister, not the Finance Ministry, who had real control over the Bank.
The relative long tenure of the Bank's governors also indicated the political autonomy of the institution. Since its establishment in 1959, the Bank has had six governors, averaging one turnover every six and a half years.121 The Bank of Thailand has a turnover every three years.
Bank Negara had exercised effective discipline over Malaysia's banking system.
The ratio of non-performing loans stood only 3.6% of total loans on the eve of the 1997 crisis.122 The ratio grew to 9.1% in March 1998, a relatively small number as compared to Thailand's 48%. The Bank learned its lesson from the banking crisis of the mid-1980s, when the ratio of non-performing loans was 34%. The crisis prompted the Bank to enforce banking regulations more rigorously and to insist on
120 Central Bank of Malaysia Act 1958, www.law.nyu/centralbankscent…alaysia-Central%20Bank%20Act%20519.html, 4/12/2000.
121 www1.bnm.gov.my/about/history.html, 4/21/2000.
transparency.123
There were two major structural problems of the banking system. One was the over-extension of loans to the property sector and loans for the purchase of stocks and shares. The other was the close linkage between banks and security finance companies. In 1997, loans to the property sector accounted for 26% of total loans.
Loans for security investment during the period of 1993-97 grew at 35% on average.124
After the crisis, the Malaysian state adopted IMF-style austerity programs to reduce government expenditures and to reform the banking sector. Among other measures, Bank Negara changed the classification of non-performing loans in arrears from six to three months. It asked banking institutions to make monthly reports of their financial status, and Bank Negara implemented more rigorous and intensive supervision, including monthly stress tests on banking institutions. Fragile banks were order to merge together.125 Except for the provision of more information, no criticism or reform was directed toward Bank Negara, indicating the relative efficiency of the Bank.126 If Bank Negara was not the major cause of the 1997 crisis, which state agency was?
The weak link in the Malaysian financial crisis of 1997 seemed to be the Securities Commission. The Malaysian government established the Securities Commission in 1993, one year after its Thai counterpart. According to the Securities Commission Act of 1993, the Securities Commission reported to the Finance Minister, who also appointed all the nine members of the Commission, including the executive chairman, deputy chief executive, and seven private and government representatives.127 Therefore, like the Thai Securities Exchange Commission, the Malaysian statue of the Securities Commission did not allow it too much political independence from the Finance Ministry or from the pressure of private interests. Past Finance Ministers had used the position to benefit their relatives and proteges; Daim
122 Neac.gov.my/neac/publications/prior.shtml, 4/12/2000.
123 Philippe F. Dehaise, Asia in Crisis: The Implosion of the Banking and Financial Systems (New York: John Wiley & Sons (Asia), 1998), 146.
124 Neac.gov.my/neac/publications/prior.shtml, 4/12/2000.
125 Neac.gov.my/neac/publications/policy.shtml, Neac.gov.my/neac/publications/objective3.shtml, 4/12/200.
126 Under the Statistics Act of 1965, government agencies, including Bank Negara, restricted the amount of data made available to protect confidentiality. In March 1998, the government adopted measures to promote transparency regarding financial and corporate statistics.
Neac.gov.my/neac/publications/ob2act3.shtml, 4/12/2000.
Zainuddin, the Finance Minister from 1984 to 1991, was probably the most controversial one.128
Furthermore, the Finance Minister had direct influence over the supposedly private regulatory body of the Kuala Lumpur Stock Exchanges (KLSE). By the Securities Industry Act of 1983, the Minister could “approve a stock exchange and to appoint any person to the stock exchange‘s committee,” or to dismiss any committee members at any time.129
During the 1997 crisis, the regulators of the security market, the KLSE and the Securities Commission, received many criticisms from the public and the government‘s reviews. Both regulators were criticized for their lack of firm and decisive action against breaches of regulations. They were weak in monitoring and enforcement activities.130 However, these structural weaknesses were part of the new financial politics in Malaysia. Under the New Economic Policy, the government could order corporations to transfer up to 30% of their shares to government approved Malay individuals or companies before the actual listing. This had provided instant profits to UMNO elites and their relatives, as the opposition in late 1994 exposed such scandals.131
Despite the correct diagnosis, no concrete measures have been promulgated to address these organizational and implementation problems. Most of the reform still focused on the transparency of security transaction.
Political Parties
Malaysia‘s political party system exhibited three characteristics. First, most of the political parties were ideological or ethnic-based, and conducted campaign on these lines. Secondly, the United Malays National Organization (UMNO) held a tight leash over its party members, its party allies, and over opposition parties. And thirdly, internal squabbles and defections plagued the opposition parties.
Most of Malaysia‘s political parties were ideological or ethnic-based. On the opposition side, the major opposition parties were the Chinese-based Democratic
127 sc.com.my/html/organisation/members.html, 4/13/2000.
128 FEER 2/19/98, 16-17.
129 www.klse.com.my/website/about/orgstruc.html, 4/21/2000.
130 Neac.gov.my/publications/objective3.shtml, 4/12/2000.
131 James Chin, "The 1995 Malaysian General Election: Mahathir's Last Triumph?" Asian Survey, Vol.36, No.4 (April 1996), 400-401.
Action Party (DAP), and the Malay-based Parti Islam SeMalaysia (PAS). The DAP always campaigned on the issue of racial discrimination, especially in the commercial area; its main base was in the Penang State. The PAS was noted for its Islamic fundamentalism, aiming to turn Malaysia into an Islamic state. Its major constituency was in the Kelantan State.
The ruling coalition, Barisan National (National Front), was composed of three large ethnic political parties (the Malay-based UMNO, the Chinese-based Malaysian Chinese Association, and the Malaysian Indian Congress) and a few other smaller parties. Barisan Nasional was able to maintain uninterrupted rule not only because it was a coalition of ethnic parties, but also because it adopted development policies which created the vast majority of the professional and middle class across ethnic lines.132
UMNO has maintained strong control over its members and other political parties. In terms of internal discipline, UMNO leaders used federal and state government posts, parliamentary seats, and numerous state and quasi-state enterprises to reward followers. Large campaign expenses for individual politicians were covered by UMNO's rich coffers - the Fleet Holdings, the Hatibudi Sendirian Berhad, and the Renong Berhad conglomerates, which held interests in hotels, television, retailing, real estate, construction, and banking at both national and local levels.133 The mass media, owned or tightly controlled by Barisan Nasional, provided the best news image and advertisement for politicians in remote areas.
Dissidents within the party faced expulsion and/or government harassment under the Internal Security Act and Sedition Act. UMNO experienced only two major internal crises in 1987 and 1998. In the aftermath of the UMNO election in 1987, the party was split into two factions. Team A was led by Prime Minister Mahathir, and Team B was composed of UMNO vice-president Tengku Razaleigh Hamzah and old guards who were dissatisfied with Mahathir‘s leadership. Two years later, Team B left UMNO and established a new party, Semangat 46. However, the coalition of Gagasan Rakyat Malaysia (People’s Might), formed by Semangat 46, the DAP, and the PAS, failed to shake down Barisan Nasional’s two-third majority in the 1990 parliamentary
132 Harodl Crouch, "Malaysia: Neither Authoritarian nor Democratic," in Kevin Hewison, Richard Robison and Garry Rodan, eds., Southeast Asia in the 1990s: Authoritarianism, Democracy and Capitalism, (Sidney: Allen & Unwin, 1996).
133 James Chin, "The 1995 Malaysian General Election:", 402.; Harold Crouch, Government and Society in Malaysia, 214-16..
election. By the 1995 election, Gagasan Rakyat had disappeared. Both the DAP and the Semangat 46 lost seats to the Barisan Nasional. The other crisis of the UMNO occurred in 1998, in the midst of the financial crisis, Deputy Prime Minister Anwar Ibrahim and his supporters attempted to force Mahathir to take an early retirement.
But Mahathir fought back fiercely. In July 1998, he published the names of hundreds of companies and individuals that won privatization contracts or benefited from a bumiputra share allocation in recent years. Anwar and his supporters were among the names.134 Anwar was later removed from his posts as Deputy Prime Minister and Finance Minister, and sentenced to a six-year term on charges of corruption (a violation of the Internal Security Act) and homosexual behavior (a violation of the Islamic Law). Anwar‘s supporters, rallying behind Anwar’s wife, formed a lose coalition to challenge Barisan Nasional in the 1999 general election. Although it lost some seats to the PAS, Barisan Nasional maintained its three-quarters majority in the parliamentary seats. The National Justice Party, organized by Anwar's wife, won only five seats.135
Why would the Chinese, who had the economic power, continually support the Malay-dominated Barisan Nasional? Although UMNO championed the interests of the bumiputeras (the Malays), economic interests of the Chinese were never seriously hurt but enhanced. The promotion of Malay interests was implemented through state enterprises and government subsidies, while the economic interests of the Chinese concentrated in the private sectors of commerce, banking, and real estate.
Furthermore, the clandestine use of Malay heads to circumvent government regulations was so widespread that the Chinese elites benefited as much from government promotion policies as the Malays did.136 Furthermore, the nightmare of the 1969 racial riots remained fresh in the mind of old generation Chinese. The massive killings of the Chinese in Indonesia in the late 1990s served only to strengthen the Malay-Chinese‘s belief that a stable and moderate Malay government could better protect their interests and lives than other extremist communal parties.137
UMNO‘s continued dominance over other political parties was maintained through various control instruments of the authoritarian government. Most of the mass media (television stations and newspapers) were either owned by the Barisan
134 FEER 7/2/98, 11.
135 FEER 12/9/99, 17.
136 Harold Crouch, Government and Society in Malaysia, 218.
Nasional or tightly controlled by the government.138 Criticisms of the government often ended up with the charge of sedition or instigating racial conflicts prohibited by the Internal Security Act, which also allowed the police to detain political opponents without trial. The Malaysian government routinely resorted to these harassment techniques during election campaigns.139 The opposition could not depend on the legal system either, since the ruling coalition maintained two-thirds majority in the parliament, which allowed the government to frequently pass constitutional amendments to expand administrative powers at the expense of the opposition.140 In fact, the Supreme Court have become subordinated to the will of Mahathir since he removed some of the judges who opposed him during the UMNO split of 1988. 141In the same year, the Parliament passed a constitutional amendment permitting the Supreme Court to conduct judicial review only when the Parliament grants.142 Furthermore, the British-style single-member constituencies combined with the government's partisan gerrymandering of electoral constituencies had favored the centrist Barisan Nasional over the fundamentalist or extremist opposition parties.
Finally, internal squabbles and defections plagued the opposition parties. Most of Malaysian parties were organized in authoritarian way. When factional divisions occurred within a party, they usually ended up with a split of the party rather than going through democratic turnover of party leadership.143 After losing the 1990 election, many supporters of Semangat 46 returned to UMNO for more patronage and promising career future. The party won only six seats in 1995, and none in 1999. The DAP began serious infighting after it lost badly the 1995 election. In the 1999 election, it increased its parliament seats by one only; it was nine in 1995.144
Conglomerates
The main cause of the Malaysian economic crisis in 1997 seemed to lie in the market. It was a case of market failure without proper government preemptive checks.
137 Gordon P. Means, Malaysian Politics, 294-95.; FEER 3/18/99, 6
138 James Chin, "The 1995 Malaysian General Election:",.401.
139 Ibid, 396.
140 Gordon P. Means, Malaysian Politics, 294-95.
141 K.S. Jomo, "Elections' Janus Face: Limitations and Potential in Malaysia." In R.H. Taylor, ed. The Politics of Elections in Southeast Asia (Washington, DC: Woodrow Wilson Center Press, 1996), 100.
142 Clark D. Neher, Southeast Asia in the New International Era, 124.
143 Gordon P. Means, Malaysian Politics,287.
In the late 1980s and early 1990s, Malaysian conglomerates rapidly expanded their financial subsidiaries in response to the booming economy and the expansion of the capital market. Both the state and private financial institutions overextended their loans to the real estate and capital markets. As savings lacked behind investment, these financial institutions supplemented their capital needs by resorting to mutual borrowing, dubious accounting procedures, and external borrowing.145
The domino effect of the 1997 crisis was caused by the close links among Malaysia's banks, finance companies, securities houses, and merchant banks. Banks controlled from 50 to 100% of the shares of their financial subsidiaries. Mutual borrowing was extensive among these financial institutions.146 Conglomerates like the Antah Holdings Group, the Melewar Group, the Arab Malaysian Group, the R.J.
Reynolds and Land & General Groups, as well as the UMO-controlled Fleet Holdings, Hatibudi, and Renong Berhad, all exhibited such complex financial relationships among their subsidiaries and between conglomerates. Furthermore, many of the financial relationships were not linked to the competitive export sector but rather to the expansion of real estate and security markets of the 1980s and 1990s.147
The expansion of the real estate and financial markets contributed to the rise of financial politics in Malaysia. Political elites found new ways of making instant profits by pricing their official responsibilities and privileged information related to these business activities. For instance, the Malaysian banking industry was dominated by two largely government-owned commercial banks, which provided frequent
The expansion of the real estate and financial markets contributed to the rise of financial politics in Malaysia. Political elites found new ways of making instant profits by pricing their official responsibilities and privileged information related to these business activities. For instance, the Malaysian banking industry was dominated by two largely government-owned commercial banks, which provided frequent