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This episode of #WooSays is Part 2 of our mini-series on the Asian Financial Crisis of 1997–98, where Professor Emeritus Datuk Woo Wing Thye and Melisa Idris zoom in on Malaysia.
When the Thai baht’s collapse triggered currency turmoil across Asia, Malaysia was swept up in the storm. The ringgit crashed, speculation raged, and pressure mounted to accept the IMF’s “medicine.” This episode explores how Malaysia navigated the crisis, the costs and benefits of its bold choices, and the lasting effects on the economy.
When the Thai baht’s collapse triggered currency turmoil across Asia, Malaysia was swept up in the storm. The ringgit crashed, speculation raged, and pressure mounted to accept the IMF’s “medicine.” This episode explores how Malaysia navigated the crisis, the costs and benefits of its bold choices, and the lasting effects on the economy.
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00:00hello folks welcome to another episode of who says this is where we get real about the u.s
00:17china everywhere and everything in between is two superpowers but one global story now in the last
00:23episode we uh began our uh the first part of our mini series on the asian financial crisis where we
00:32explored the big picture the why it happened the competing explanations uh for asia's economic
00:41collapse in the 1990s 1997 1998 to be precise now in this episode we'll zoom in on malaysia
00:49how the how did the crisis unfold here in malaysia and what choices were made that set malaysia apart
00:59from its neighbors i'm elissa idris and joining me here to unpack all of this for us is professor
01:06wu wing thai who during the height of the asian financial crisis in 1997 served as the special
01:14economic advisor to u.s treasury secretary robert rubin who was then under the clinton administration
01:22prof wu let's talk about malaysia before the storm so before the asian financial crisis
01:31before it hit the region talk to us a little bit about how strong malaysia's economy was
01:37were there vulnerabilities kind of simmering under the surface that made us more uh precarious or more
01:45vulnerable to when the crisis hit uh in the seven years before the crisis hit malaysia had a boom such
01:57the growth rate the growth rate was over nine percent a year from 1990 up to 1997 in 1997 the just the
02:08lowest growth rate in that period it was still 7.7 percent the reason for that uh big boom had to do
02:19with the fact that the there was a shifting of production away from japan and the united states
02:32towards southeast asia and this is what that had cost the world bank to produce a book in 1993 called the
02:41asian miracle now that was great optimism because southeast asia had cheap educated labor which multinational
02:53corporations wish to employ and the other thing was it was an easy time to get capital japan had a zero
03:05interest rate policy at that point and if you can borrow money at zero interest rate it's a very good deal
03:15and so southeast asia rightly borrowed and when people borrow the what the one thing that they are
03:23constantly nervous about is i am borrowing in u.s dollars if the exchange rate were to turn against me
03:35then i would end up uh owing more money in my domestic currency than i had expected for example
03:45malaysia's exchange rate from 1957 to up until 1991 was roughly 3.1 ringgit per us dollar
03:58and when the dollar started weakening in 1971 the ringgit started strengthening such that
04:05in the period from 1973 up to june 1997 in other words that's a period of 23 years
04:17the exchange rate was 2.5 ringgit per us dollar so given that long-term uh experience with very stable exchange
04:32rates and given the fact that the economy was booming there is no reason to expect the ringgit to start
04:43uh depreciating in value in fact if you look at the money that was flowing in from japan
04:49because of the zero interest rate the the you the only concern was would we would the with the ringgit go to
05:00two dollars per us dollar so you could see that there was great optimism this was the asia century and it
05:08was the occurrence of the asian uh miracle foreign banks come to malaysia and beg malaysian businesses to
05:18bought to borrow money so the economy boomed and so that was great uh optimism now then thailand which had
05:31uh mismanaged uh mismanaged its economy to a certain extent but not much had uh i would say it mismanaged
05:43its exchange rate which it then had to depreciate so it went from roughly 25 baht to 35 baht and when that
05:55happened many of the businesses that had borrowed in dollars ended up that with debts in but that were
06:06much larger than before that was 50 percent larger than before that means that in terms of local currency
06:16you have just gone bankrupt because your your total debt had gone up by 50 percent so many thai uh businesses
06:28were in were in trouble but what's what was most important was the thai banks had borrowed a lot of
06:36money in japanese yen to relance in but so given the depreciation of the bank
06:45the amount of money that they had borrowed just jumped up 50 percent in bank terms
06:54so they were bankrupt and the government and the imf came in shut down the banks
07:00and when they shut down the banks that means that ordinary business could no longer get working capital
07:06loans and when you couldn't get working capital loans the shop started closing so the atmosphere
07:14in july 1997 was that is there something that we don't understand in other words everything was going
07:24so well and all of a sudden thailand has gone into difficulties a lot of foreign investors really cannot
07:35tell the difference between malaysia thailand philippines indonesia so when they saw the thai
07:41uh economy was in trouble they said well maybe i should ask for my loan from malaysia back to
07:50in other words the malaysians have been repaying the loan paying interest that's no problem but just to
07:58be cautious i would call back to be cautious i would call back the loan and when they did that the malaysian
08:05ringgit started falling the malaysian ringgit which was 2.5 ringgit per us dollar in june 1997
08:16fell to 4.5 ringgit fell to 4.5 ringgit per us dollar by january 1998
08:28now this was not unique to malaysia because the investor the foreign investors and the foreign banks who
08:34panic pulled their money out from everybody they pulled the money out from indonesia too
08:41like the indonesian rupiah went from 2 500 rupiah per us dollar in june 1997 to 10 000 rupiah in january
08:571998 so malaysia's uh a depreciation went from 2.5 to 4.5 the indonesian went from 2 500
09:07to 10 000 a factor of four in our case a factor of two two so and that happened also to korea
09:20the money that was pulled out of korea cost the korean currency to also depreciate greatly
09:27and naturally when economic disasters like this happened i.e the great exchange rate depreciation
09:39someone has to take the blame and then after finding the scapegoat we all move on to business
09:47as usual someone has to take the fall for it yeah um prof i was 16 um in 1997 and i remember
10:00the impact of it so i was old enough to see the consequences or that i was old enough to recognize
10:06we were in economic crisis but too young to understand the factors that that drove it or what
10:12caused it um i remember classmates or friends struggling so families losing their main bread
10:20winner classmates struggling with financial difficulties at home um how did the crisis manifest
10:27in malaysia so you talked a little bit about the foreign the exchange rate but when we think about the
10:33impact to the economy talk to me about how it manifested here and malaysia malaysia's reaction to the crisis
10:45because we famously rejected the imf program so walk us through that period of time well one thing for sure
10:54is when a lot of malaysian banks and the biggest companies in malaysia
11:04uh had borrowed money from foreign banks because interest rate was zero percent so that was a very
11:11rational thing to do and they borrowed the money and invested it in very sound businesses
11:21and all of a sudden the bank now say give me back the loan
11:26so how can you give back the loan because uh the the the amount that you have to raise in ringgit
11:38has almost doubled because you had borrowed it at 2.5 ringgit per us dollar so you have borrowed in dollars and now the ringgit has gone to
11:50four and four and four and four ringgit per dollar so what you the the amount that you need to come up with
11:59is more than sixty seventy percent than what you had borrowed in ringgit and you certainly
12:08uh cannot come up with that amount so you fall into areas and the banks the malaysian banks
12:18who arranged that loan basically became bankrupt
12:25because they had underwritten the loans they had uh taken back the they they they had borrowed the loans
12:33in yen they they gave it to you and now they asking for it back
12:40and you cannot give it back so the banks are in trouble and when the banks are in trouble
12:47they stop lending in general so perfectly fine uh fine businesses could not get working credit
12:58and when they cannot get working credit they have to reduce production and reducing production means
13:04laying off people now it is important to note that in this time there was a lot of chaos outside malaysia
13:19and this chaos in turn undermine uh investors confidence and basically to say hold on i'm not going to uh
13:30expand operation i'm in fact i'm going to uh scale back and see what happens now in the case of malaysia
13:45the banks basically stopped working because the banks were bankrupt so they were not lending up money
13:52so that was great difficulties what usually happens in a democracy
13:59when an economic disaster happened the usual procedure the usual ritual that appears
14:06is whoever was in charge take responsibility for it he leaves office and somebody takes over
14:18that somebody may do exactly the same thing but confidence has been revived and when confidence is revived
14:27in the life business goes back to the usual you could say in the case of thailand right after it the exchange rate debacle in july
14:381997 prime minister chavalit was replaced by uh chongpa within four months in the case of korea when the exchange rate
14:52uh uh plummeted uh plummeted in november 1997 in the new in the presidential election that was held a month later
15:04the opposition won for the first time kim dae jung the perpetual presidential candidate he has he has ran three times before and he's lost each time
15:17he won basically uh uh uh uh economic crisis delegitimize the incumbent
15:26the incumbent and there is a change in government and that business goes back to usual
15:34now this happened in thailand in uh after the middle of 1997 in korea at the end of 1997
15:48and in the case of indonesia when the rupiah had gone from 2 500 to 10 000
16:00so hato was re-elected to be president for the seventh term so there was immediate riots in the streets of jakarta
16:12because the elections were seen as unfair and what happened to the to the rupiah the rupiah went from 10 000
16:23rupiah to u.s dollar to 15 000 rupiah dollars so mahathir could see that
16:33the economic crisis is going to give rise to lots of economic unhappiness and hence potential political
16:48instability and he realized that if people were to start running out of the ringgit even more
16:59both the stock market in malaysia will crash as well as the ringgit because people will be withdrawing
17:08money from the stock market and sending it out to the country when you withdraw money from the stock
17:12market the stock market crash when you send it out the money the ringgit crash so to prevent this crash
17:20crash mahathir imposed the capital controls on september 1st 1998 and then after imposing those controls
17:35he went about restructuring and reorganizing the banks in order for them to start lending money
17:45money normally again to revive the economy but it is interesting to note that this action by mahathir of
17:55capital controls was also timed extremely well politically because the capital controls were imposed
18:06on september 1st 1998 anwar was dismissed as deputy prime minister on september 2nd 1998 and immediately
18:19demonstrations began in malaysia now just imagine what would have happened if there were no capital
18:28controls in place when the student when the demonstrations began because when the demonstrations
18:35began began in indonesia in may 1998 people started sending their money out of indonesia the stock market
18:45started crashing the exchange rate started crashing and then the riots got worse and the army started
18:52shooting university students and it went downhill from them so mahathir was able to prevent an economic crash
19:03from his political action as well so the time so that uh capital control was certainly a masterful stroke
19:14in both economic and political terms and the the the coincidence of it certainly helped the record the
19:24subsequent recovery of malaysia right well um it may be considered a masterful stroke now but at that time i
19:34remember it was quite it was criticized so um the capital controls the ringgit pegging i malaysia's response
19:42was considered reckless was considered isolationist um talk to me about why they worked when the
19:52um when our our neighbors um malaysia's neighbors who accepted imf assistance had a harder time in
20:01terms of recovery had more lingering effects of the asian financial crisis the short-term effects were
20:09certainly more stabilizing for malaysia the long-term if the the criticism about malaysia was that having
20:17imposed capital controls and even though you do remove them after a year or so people will stop
20:26investing in malaysia in the future that was the that was the criticism the criticism was having done it
20:33and you know not allowing people to take their money out when they wanted to they are never going to put
20:40their money in your country again right that was the criticism now in retrospect we see that
20:49the amount of money flowing into into malaysia is just as much as flow that is now flowing into the
20:57other southeast asian countries basically the capital controls did not destroy foreign uh investors confidence
21:08in malaysia now this gives us a chance to recall why mahatayu may have that courage to be such a maverick
21:18because in may that same year when sohato was suffering the consequences of exchange depreciation
21:27hong kong did something that was so out of character that the whole economics profession thought that
21:37hong kong was committing economic suicide what was that yeah hong kong as you know has the reputation
21:46of being the capitalists uh heaven in other words government intervention is minimal uh there's free flow of
21:56capital like uh such that the government uh has as lazy fare as you can be as hands-off what did hong kong do
22:09in may hong kong the hong kong the hong kong has the following currency arrangement it is packed to the u.s dollar
22:19uh the hong kong uh the the hong kong bank would issue hong kong dollars will issue 7.8 hong kong
22:34dollars when has a deposit of one us dollar they have a currency bought arrangement a link
22:42speculators speculated against that link they actually they speculated in the expectation
22:52that the government would let the hong kong dollar depreciate now if you were a speculator
23:02and you expect hong kong's currency to depreciate from 7.8 to let's say 10. that's what you expect
23:14to happen what should one do in order to make a lot of money what one could do is to go to a hong kong
23:23bank times are still pretty normal now and borrow as much as you can in hong kong dollars and
23:33swap all of it into us dollars and take it out so what happens is for people who want to speculate
23:43against the hong kong dollars what you want to do is first borrow a lot of hong kong dollar denomited
23:53debt from the banks buy dollar and move it up and if you want to make even more money
24:02you offer to sell hong kong dollars in the future at let's say 8.8 to a us dollar as opposed to 7.8 you
24:15see now in others you do what you call you sell short now all i got to do now is to start a run out of
24:28hong kong dollar into the dollar so i start telling people the roman p is going to depreciate
24:37in fact uh if you look at the hong kong's uh uh look at the amount of money leaving hong kong
24:45you'll be stupid not to take your money out of hong kong so in such a situation if people do get
24:52afraid if people do get afraid they would liquidate their stocks so the stock market would fall and then
24:59they would take the money they've liquidated and take it out of hong kong and the hong kong exchange
25:05rate would be under threat to devalue so if enough people do it it will force a devaluation
25:15so the hong kong government sees this move by the speculators the hedge funds so the hong kong
25:21government the hong kong monetary authorities went into the stock market and started buying shares
25:30oh in most countries in the world central banks are expressively forbidden from buying shares
25:41why because shares are ownership documents and how do you let us say bank negra starts buying
25:50malaysian shares what does bank negra needs to do it needs to run the printing press
25:56with the picture of our respected king and with that picture they can get the ownership certificate
26:05of the company and basically you have exchanged paper for a real company that is a good deal so
26:13most central banks in the world are expressly forbidden from buying equities because that is
26:21nationalization the government grabbing your company legally and this is the monetary of hong kong start
26:28buying shares so everybody says this is more than communism this is downright confiscation in fact they
26:39bought over seven percent of the hansen hunting index they spent a tremendous amount now when they bought all of
26:52these shares in the hunting index because when people sell and if someone willingly buy it then the price
27:00doesn't go down the price you hold the price in fact if they want to buy more if the cent if the central
27:07bank wants to buy even more that can only push the price up and so people didn't panic they saw that the stock
27:14market was steady and since they didn't panic they didn't send their money out
27:23now what happened to all these speculators who had borrowed lots of hong kong dollars
27:30well they have to pay interest on that loan you know and usually they borrow it for 30 days short-term loans so
27:42when the stock market failed to collapse and the hong kong dollar failed to collapse
27:49and it's time to bring back the money so when they bring back the money the pressure on the depreciation
27:57had disappeared so mahatia saw that this very unconventional move in hong kong what
28:05basically you cannot just go by some uh mantra some simple one-liner never interfere with the market
28:15well it depends on whether the market is misbehaving is being manipulated and so
28:20and so he what so what he did was yes out of the ordinary but that was after what hong kong did was
28:33truly extraordinary it was a violation of all the principles of capitalism the the government buying
28:42into a business directly on the stock market so now after i think within five years the imf admitted
28:54that what malaysia did then was the right step in basically uh if the market had continued to collapse
29:04basically there was a panic going on when a panic is happening you need to stabilize things
29:12because a panic feeds on itself and by the time it stops feeding on itself it's because the economy is
29:19really basically face down in the ground and we were able to prevent that right that is possibly a very
29:31good move but there was another move in which we did in the asian financial crisis which has a very
29:42terrible negative effect that is with us today
29:49which is well there were two things we did one was we refused to let people take their money out
29:56so the ringgit held steady the other thing was because the ringgit as you know when mahatu packed it he packed
30:07it at 3.8 that was what he packed it at on september 1st 1998 but the ringgit used to be 2.5
30:17so for people who had borrowed dollars at 2.5 per us dollar now that us dollar has basically gone up
30:31a lot in ringgit terms so a lot of the banks were just bankrupt and when banks are bankrupt they don't
30:39lend money they don't lend money then the life blood the blood that circulates in the economic body stops
30:49flowing so production is at the standstill so you've got to get the banks working again and in order to
30:56get the banks working again you've got to recapitalize them the government has to put in new capital
31:03so so that they are now servants and then they can do the usual business now in malaysia at that time we
31:12had roughly 48 banks and to recapitalize 48 banks is of course a bigger job than recapitalizing 10 banks
31:24so to make the job easy uh tundain forced the merger of these 48 banks into 10 banks four of which were taken
31:41over by the government so all the small and medium banks disappeared we now have only big banks
31:51and today these banks have gotten even bigger because from from 10 now they have been reduced to eight
32:03so that makes it easy for us to recapitalize the banks because you've got only 10 of them
32:08to to have to supervise but the trouble with that is that what is the difference between a big bank
32:18and a small bank the difference between a big bank and a small bank is who their customers are
32:30now when a bank lends up money the amount of paperwork you do when you make a one million dollar loan
32:41versus making a 10 million dollar loan the paperwork is the same the so if you make only one million
32:50dollar loans you have to make 10 of them equal one 10 million dollar loan so all banks in the world
33:00like to lend to big boys big companies they don't like to lend into small companies
33:04so everybody loves the big companies but the big companies big companies love only the big banks
33:12largely they need specialized services like in foreign exchange treasury management
33:20that smaller banks don't have the expertise to do and they cannot supply that kind of service so
33:28given the fact that the big boys don't want to deal with the small boys small banks that the big
33:33companies want to deal with small banks then what do the small banks have to do they will have to cater
33:39to the less preferred customers the less preferred customers are the small and medium enterprises
33:48so they are the ones who would be using the small and medium banks as you could see that of this 48 banks
33:58at least 30 of them were catering to the small and medium enterprises
34:05so after the forced merger of all these banks from 48 to 10
34:15all of a sudden the small small medium enterprises started having trouble getting working capital loans
34:23what working capital loans uh operate like the following suppose i've shipped my goods off
34:32and i get my customers pay me back in 90 days and what happened is when they pay me back then i order
34:41goods and pay my workers and so far but what if a few of them are late in paying me their bills
34:49if they're late in paying me my bills i will have to borrow from somebody to cover that interval
34:57and that's where the small medium banks used to do but now they are no longer there
35:04so the small and medium enterprises started having working capital problems which is why
35:12in 2004 or 2005 i think papla uh set up an sme bank to to meet them but the sme bank is a government
35:27bank which means the government has to put the capital in it which then how much money can a government put
35:36into a bank because how does a bank land money the bank puts in some capital but then the bank takes in
35:43deposits pull in all this private money and then it lands out the deposits whereas the sme bank doesn't
35:50pull in much deposits and so there's not much to land out so it really didn't make a big difference
35:56so that is a big crisis in terms of getting working capital for smes that have remained with us and gotten worse
36:11since the merger of the banks in 1998 this is why on most uh lampposts we see in malaysia a phone number
36:23and say you need money call me all these alums are doing illegal money lending which is dangerous for
36:31them but it is because they are able to get such high interest from desperate smes and
36:41they are willing to take the risk to do that so if you here is the the fact about malaysia in every
36:49country in the world the number of small firms exceed the number of medium-sized firms the number
36:57of medium-sized firms exceed the number of large firms you get a pyramid shape in malaysia we don't
37:04have a pyramid shape the number of large firms exceed the number of medium-sized firms
37:12and and not only that if you look at the proportion look because the number of total number of firms
37:20increase over time naturally as the economy grow so the absolute numbers always grow so let's look at
37:25the percentage of firms that are medium-sized the percentage of medium-sized firms has been declining
37:33over time which means that they you could say perhaps they all grow into large firms that's why
37:42they're declining over time then the question is why don't the small firms grow into the medium firms
37:49right that if that's a pyramid as the medium firms grow large the small one goes them to them to the medium
37:56but the small ones are not growing the medium so is it possible that the medium of whatever that was
38:03there was growing to large the answer is no the large number of large firms have grown in malaysia because
38:11we are a country with a lot of fdi's and when fdi comes in they set up big factories they don't set up
38:19later workshops uh sme size operations and the second thing is when there's a new high-tech business that
38:29needs to be done an existing domestic conglomerate would set up a big company to enter into the new business
38:38so we have uh in a way blocked business mobility in malaysia because of our refusal to issue any more
38:56license to small and medium banks and
39:01and if these firms cannot get working capital they clearly cannot get investment capital they are
39:13unable to modernize that's why if you look at the productivity gap between large firms and medium-sized
39:22firms the productivity gap has grown has been growing steadily over time
39:28and what is even worse there are two bad things going on because of what we did during asian financial
39:37crisis which has blocked uh capital to the small medium enterprises one is that
39:47we we are trying to decarbonize the economy to decarbonize the economy means that they have to buy new
39:55equipment equipment and if they have not been able to get working capital they are not going to be able to
40:03borrow the money to decarbonize so this environmental action is helping to drive them out of business
40:11that's number one number two is that because the united states is now refusing to buy goods from china
40:22many multinational corporations and and and the u.s is turning to southeast asia to buy goods instead
40:32and because they want to buy more goods in southeast asia who are going to make the goods for them
40:38should it be our smes that expand enhance export or should it be fdi that comes in and produce
40:51to meet this increased demand for exports from the united states and unless we restore
41:02uh the small and medium uh the small and medium financial institutions to help the small and medium enterprises
41:12we are basically letting uh the decarbonization efforts uh eliminate help to eliminate our smes
41:24and we are also allowing the increase demand for malaysian exports to be made by fdi coming into malaysia
41:38now when i talk about this people said oh we have now set up internet banking
41:46be uh you know blending platform so the smes will be able to get uh their funds from these internet banks
42:01there are two two uh reasons why that's not a serious answer
42:08one is look at the size of the internet banks they are very small so they cannot cater to that demand
42:18number one now they won't make much of a difference number two it is like saying the following
42:24we have this medicine for cancer that works and for the rich and powerful we will give them this
42:36proven medicine that works that means normal banking but for the small weak firms we will give them
42:46this new experimental medicine and which means that we will not give them the traditional banking services
42:54we will give them this online banking to do right the trouble is uh the the the common argument
43:06against giving up banking licenses to small and medium banks is that they fail more often
43:12you know small firms fail more more frequently than large firms that is a fact
43:18uh but that is the difference when a small and medium bank fail it is not a threat to the economy
43:30but when a big bank that malayan banking fails you can back it will bring down the economy with it
43:42so they are not a danger other than uh licensing nuisance to bank negra malaysia that they have to
43:52actually go whack through all of this uh banking applications the truth is small and medium banks are not a threat
44:00to the financial stability of malaysia it is the large banks and if we want to promote social mobility
44:11there's no better way than for small businesses to be able to grow to medium businesses and medium
44:19businesses to grow into large businesses and every and nobody would would would say that this is not a
44:29fair way of getting rich it's not like you got a preferential government treatment and hence you got rich
44:36it's because you were able to run your business well and you grew from small to medium
44:44and so forth and and so i think uh one reason why we the the investment rate in malaysia has fallen so
44:54much since the asian financial crisis domestic investment i'm talking about is because the smes
45:02cannot find investment funds and the inability to get working capital means that they are not making as
45:13much money as they otherwise could have this is the terrible long run consequence of the asian financial
45:23crisis because of the way we are responding to it the capital controls have come and gone we stopped
45:33issuing small and medium bank licenses at that time and we have not bothered to resume i think it is time to
45:44rethink about that than to say that let them use the online banks wow the lasting effects of decisions made
45:57during the asian financial crisis brafu i think we'll leave it here for this episode but thank you so
46:04much for getting real about us china everyone everything between especially about the asian financial crisis we
46:11will be back with more on this um on the crisis especially how it's affected uh regional countries
46:19regional economies but for now that's it from moose says i'm melissa idris and i will see you in the next
46:26one bye-bye folks
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