Address by Anwar Ibrahim at the Asian Financial Crisis Seminar organized by the S Rajaratnam School of International Studies, the Nanyang Technological University, Singapore on 22nd August, 2007
The task before us today is daunting indeed. So much has been written and said about the Asian financial crisis that one runs the risk of flogging a dead horse. The academic discourse on this too has been as phenomenal as the crisis itself. We run the risk of hairsplitting, or getting drowned in a sea of statistics or having our vision blurred by the dazzling display of multicolored pie charts and towering graphs. But while it is very easy to be an arm chair critique, learning the lessons from the crisis is much more difficult. I am reminded of the saying by the late John Kenneth Galbraith that this is not the age of doctrine; it is the age of practical judgment, the world of intelligent thought and action, not of adherence to controlling doctrine.Â There is only that much that theory can offer. We are after all talking about real situations here, as real as the fact that even as we sit here today, the worldâ€™s financial markets are again in turmoil because of the crisis in U.S. subprime mortgages. We are again seeing central banks particularly in Southeast Asia defending their currencies against panic selling, dumping millions of U.S. dollars in market interventions. The word â€˜contagionâ€™ as we know too well does not only apply to bird flu.
I need not revisit the stark facts of this crisis but being a student of literature all my life and a firm believer that life can actually imitate art, let me begin with a short verse from Dante in his Divine Comedy:
A heavy clap of thunder! I awoke
From the deep sleep that drugged my mind â€“ startled,
The way one is when shaken out of sleep
Sure enough, on the morning of July 2, 1997 a heavy clap of thunder reverberated across the financial markets of East Asia, shook us out of our slumber and signaled the start of a financial crisis unparalleled since the Great Depression. From Thailand, the turmoil spread to the Philippines, Indonesia, then Malaysia and Singapore. The other Asian countries followed suit, then Russia and Latin America. GDPs tumbled and unemployment rose to 18 million at the end of 1998. The speed of the contagion was totally unexpected, but can anyone of us deny that the writing was already on the wall? Ten years later, the question remains: have we learnt anything?
Firstly, I think no one seriously disputes that there should be a major change in the principles and policies on which the Bretton Woods institutions work. A one-size-fits-all policy has been proven to have greater chances of failure than success under the global system. The need for diversity becomes all the more pressing. Hence, I make no apologies about criticizing the neo-liberal Washington Consensus and the IMFâ€™s standard formulae for borrowing countries. We are told that the IMF has already addressed this fundamental issue but it appears that neither sufficient thought nor serious commitment has been given to it. We are still left asking the question ten years after: Where is that new global financial architecture that was to come about after this wave of creative destruction?
The IMF prescription for privatizations is now recognized to be not only undemocratic but economically unsound. This is especially so where the prerequisites are not in place. Among them are good governance, transparency and accountability. Some may think this is academic or that it concerns only certain economies in Southeast Asia such as Indonesia, Cambodia or Vietnam. On the contrary, just recently the Malaysian government unveiled a series of development projects which are so massive that the word â€˜megaâ€™ doesnâ€™t even come close to describing their magnitude. Obviously, my concern is not against development per se, but when you have an undertaking three times the size of Singapore that would incur tens of billions of ringgit of tax payersâ€™ money, the parceling out of projects and the award of contracts is surely a matter of great concern. Without the prerequisites that must be fulfilled for such a colossal enterprise, that is, good governance, transparency and accountability, privatization will be a passport for plundering. That such banditry can happen is not a mere possibility but a near certainty.
We talk about market friendly policies and â€œpro-growth initiativesâ€. True, this may generate an even bigger pie but without those prerequisites this pie will be devoured only by the select few at the expense of the more deserving majority. And when a crisis breaks out, it is this majority who will bear the brunt. They are the real victims. One of the most enduring lessons, therefore, is that in a financial crisis of the kind that we are talking about, the rich and the power, (read: the cronies and friends of the powers that be) get away unscathed or if they do get into trouble, they will be the first to be bailed out. The life boats are reserved for them in times of trouble. In good times, they get the icing on the economic cake and this applies across the board: water services, waste disposal, telecommunications, and ports speaking of which, you might already know that in Malaysia, a certain billion ringgit port scandal is about to explode and it goes back to the issues of good governance, transparency and accountability.
Another lesson perhaps is the lesson about prudence or more accurately the lack of it. We also call it moral hazard. At the outbreak of the crisis, public investment expenditure in Malaysia surged, pushing the total investment to GDP ratio to 46% in 1997, the highest in the region. Through the 1990s, there had been a continuous increase in the share of investment in domestic aggregate expenditure, from about 35% early in the decade to over 46% in 1997. Mega projects required mega borrowings. Bankers were intimidated by the political connections of the big borrowers. Through such intimidation, â€œmoral suasionâ€ and collusion of interests, the entire banking system became hostage to a handful of borrowers whose debts made up more than half of the entire lending of the banking system. This was vintage moral hazard. Thereâ€™s much wisdom in Poloniusâ€™s dictum that one should â€œneither a borrower nor a lender be for loan oft loses both itself and friend and borrowing dulls the edge of husbandry.â€Â Of course, adopting this advice would mean the collapse of the entire banking and financial system but the truth remains that excessive leverage was one of the key causes of the crisis. One should not be faulted for erring on the side of caution.
Thirdly, as regards managing the economy, my view is this: There must be flexibility and common sense. The rule should be Hayekian free enterprise with a dose of Keynesian fiscal remedy every now and then. This is the middle path. It has been said that Aristotleâ€™s recommendation of the Golden Mean was an attempt to evade the inadequacy of absolute maxims. There must not be too much of anything, even of the virtues just as too much courage is rashness, too much generosity is extravagance and too much accuracy is hairsplitting.Â In Islam we call it the awsatuha just as we are familiar with the chung yung of Confucius. Translated into practical terms, it means that when the economy is underperforming below its potential, increased public expenditures would be needed. Obviously, fiscal discipline must be maintained to ensure that the consequent fiscal imbalance remains within manageable levels at all times.
As Finance Minister, I had on occasions endorsed pump-priming programs geared towards stimulating the economy. I had committed major expenditure for projects clearly underlined with the agenda for social justice: public health, education and human resource training, basic infrastructure and industry, public housing and rural development. Direct fiscal action such as tax reduction, public job creation, and other fiscal measures to expand demand is the hallmark of a caring state based on the humane economy, and should be recommended. But I must immediately lodge a caveat here: At the level of implementation, pump-priming measures, unless executed transparently and with an even hand, will be misused. In the hands of unscrupulous and corrupt leaders and politicians, such measures become a mere metaphor for the siphoning of tax payersâ€™ money to line the pockets of their cronies and relatives.
Fourthly, and this flows from the preceding issue, social justice must remain a long term objective. So, how does that leave my professed belief in the free market? Adam Smithâ€™s laissez-faire economy postulated the invisible hand to maximize individual welfare and economic efficiency. With David Hume, and then fine-tuned by the Austrian school, Hayek being the most ardent of the exponents, the doctrine was that economies must be allowed to develop by spontaneous order.Â The injunction is that state intervention should be avoided like the plague. But while the spirit may be willing, the flesh could be weak and in this regard the invisible hand has invariably demonstrated its fragility under the crushing weight of monopolist suppliers and rent seekers alike. Am I anti-Hayek? No, to my mind, the dictum against state intervention is valid to prevent the overbearing tendency towards totalitarianism. But it has been shown time and again that the free market capitalist system has generated externalities that have led to gross inequalities of income distribution. So I am not totally with him either. Enough has already been seen in the history of free market that points to the exploitation of the poor by the rich whether they are individuals, corporations or countries. Unemployment goes up, wages remain stagnant or worse still, fall, while prices go up.Â Neoliberals will tell us that price inflation is inevitable in a well functioning economy and given time things will find their equilibrium; intervention will only worsen the situation. But my view is that the invisible hand should start making itself seen to ensure that such inflation is within limits. Disparities in purchasing power are real and cannot be analyzed purely from the halls of academia or the detached corridors of power. Governments must be committed to the principle that a more equitable distribution of income is a fundamental precept for the realization of social justice. They should undertake with full conviction, integrated plans for poverty reduction in the long run while ensuring a comprehensive support system for the poor and economically marginalized. In other words, we can subscribe to Hayek only up to a point at which neoliberalism must make way for the paternalism of Keynes. Some call this Dr Jekyll and Mr. Hyde economics. I call it humane economics.
Fifthly, regardless whether the economy is developing or developed, or in the Rostovian sense, at the stage of take-off or high mass-consumption, the right of workers to associate and protect their interests must be central. I subscribe to the view that income distribution is very much an issue of political power as it is of economic power. Such power must be checked by the principles of governance and accountability. Ten years after the crisis, we see the deterioration in the fabric of the institutions we have empowered to represent us. Politicians in public office are not just reneging on their promises of social justice, but are scandalizing the institutions of power with abuse and corrupt practices.
Yet another lesson that may be drawn concerns the issue of the liberalization of the capital account. I know this is stirring up a hornetsâ€™ nest. Let me be the first to say that it is not the be-all and end-all. We are familiar with the negative impact of short-term capital on an economy with weak financial sectors. Countless tomes have been written about this. Nevertheless, as I had advocated before, I believe there is a case for such a measure to be introduced in phases taking into account the macroeconomic situation, the stage of development of its financial institutions, and the impact of existing controls. We will recall that recently, the Malaysian Central Bank embarked exactly on this course by first unpegging the ringgit to the dollar and substituting it with a mixed managed float instead. Indonesia, for instance, successfully liberalized its capital account very early in the reform process. Analyzing Indonesiaâ€™s current situation requires a different set of dynamics and a separate forum but I just want to say that the tendency to dismiss Indonesia as a basket case is absolutely unwarranted. I am convinced that today Indonesia has successfully made their transition from dictatorship to constitutional democracy. The same cannot be said of many other Southeast Asian economies.
Coming back to the capital account issue, prior to my sacking, I made statements which indicated that I was opposed to currency control because I believed it would undermine the systemic ability to respond automatically to a changing external environment. This is precisely the problem today. Imposing capital outflow controls to deal with a short-term crisis may be tempting but the long term consequences are likely to be adverse. To my mind, imposing capital controls was to treat only the symptoms. The lesson therefore is: in as much as the Bretton Woods institutions need reform, the respective governments in the region here are also in need of structural reform in the economic and political spheres.
It has often been argued that the emphasis on political freedom, liberties and democracy is a specifically western priority. Economic development, it is said, must precede freedom. Empty stomachs do not shout for liberty, but for food. But why should development become a trade-off for un-freedom? Why should fundamental liberties be eroded and dissent muzzled in the name of development? If development is to enlarge freedom, then substantial development enlarges freedom substantially, for â€œit is hard to think that any process of substantial development can do without very extensive use of marketsâ€.Â Is this another manifestation of Dr Jekyll and Mr Hide economics? Certainly not. The difference is clear: extensive use of markets does not mean letting market forces go out of control in as much as freedom cannot be absolute. I have already said it earlier in my own words. Perhaps, it may sound more convincing in the words of Nobel laureate Amartya Sen: Statecraft, which will necessarily warrant social support and public regulations, cannot be precluded when they can enrich â€“ rather than impoverish â€“ human lives.
The Malaysian economy has not really recovered. The claim that Malaysia has emerged triumphantly out of the crisis is as empty as the electoral promises made by the powers that be. As the numbers show, Malaysia is significantly falling behind its Southeast Asian neighbors. We would have thought that among the most important lessons learnt is that unstable debt/GDP dynamics is a glaring red flag for the onset of financial crisis. It would appear that this basic lesson has not been learnt.
My figures may be slightly outdated but they show that South Korea is still leading the pack in showing a surplus over GDP.Â Singapore has been posting budget surpluses of six to eight per cent since 2003. Thailand posted small surpluses in 2003 and 2004 and currently registers balanced budgets. Indonesia, however, has been incurring deficit budgets year after year since the crisis, but the Golden Globe Award for spending more than one can afford to goes to Malaysia. Today, we chalk up the highest deficit/GDP ratio among the countries affected by the crisis. Malaysiaâ€™s sovereign rating has remained low.
I am aware I will be accused of being the proverbial dog in the manger. But let me put this to rest. I will say that much good has come out of this and great strides have been made in various areas which will help to fortify the economies in the region when crisis strikes again. Various reputable studies show that in the area of trade, for example, intra-regional exports have almost tripled, China being at the centre and the rest are riding piggy back. Ten years after, considerably much more has been expended on research and development while higher education has made leaps and bounds. The same is said about resource allocation, reduction of systemic risk and the gaining of financial depth.Â But invariably this perspective is only useful when talking in general terms. Some countries are lucky to be endowed with oil and so they get oil money and this may be the primary thing sustaining the economy. Yet other economies have had a head start even before the crisis, and with their infrastructures in tact, have been able to recover faster. However, if we go beyond this veneer, reality bites hard.
Again, speaking about Malaysia, what is there to show in the manufacturing sector and key industries to enhance global competitiveness? And in the production of services, we are not even at the starting block. As I said earlier, government spending continues to be guided by a policy that shows little transparency in the award of contracts, and mega scandals are looming again. We are almost at the bottom in the corruption index while in bureaucratic inefficiency we are up there. We have a leadership which is still groping in the dark on how to propel the country to meet the challenges of global competition. All said, Malaysia needs a new economic agenda to be pursued vigorously with courage, foresight and conviction guided by the principles of transparency, accountability and good governance.
Finally, I have been an ardent critic of the ASEAN failure to take a more proactive position on the question of Myanmar in the political front. Little has happened that would convince me to be less critical. However, in the context of a regional free market, the efforts are more palpable even though unfortunately no intraregional financial integration appears in sight in the near future. But that should only strengthen our resolve to work for greater cohesiveness. Deeper integration means better capacity and preparedness to counter the fluctuations of capital inflows and we cannot talk about integration without mentioning the â€˜Lâ€™ word again. But liberalization must be mutual, collective and coterminous.
When Caesar came upon the land and uttered those three famous phrases what was left unsaid was his immaculate game plan, iron resolve and practical judgment to achieve his ends. Recalling Galbraithâ€™s dictum that this is indeed the age of practical judgment and not of adherence to controlling doctrine, let me end by saying that with intelligent thought and action, a deep resolve to learn from the lessons of history and most importantly, a profound commitment to the principles of accountability and good governance, we would be better placed to face the future ten years from now.