Malaysia's Self-Prescribed Rescue Debated

Malaysia's unique history in the emerging markets financial crisis of the late 1990s began after Thailand, Indonesia and South Korea all agreed to deregulate their financial institutions to attract more foreign capital, raise interest rates and tighten fiscal budgets -- remedies prescribed by the IMF.

Those fears also hit Malaysia, where the stock market index fell from 900 in 1997 to 200 in 1998, and the currency dropped by about 40 percent in a year.

The pressure was intense for Malaysia to follow suit. At the urging of then IMF director Michel Camdessus, French President Jacques Chirac met with Mahathir and Daim to try to convince them to take aid from the IMF and restructure its policies, according to Daim.

"It was clear that what the IMF was doing in Asia was trying to save Wall Street, which is what the Paulson plan is doing now, and the Malaysians were saying no way," said Joseph Stiglitz, former chief economist for the World Bank and Nobel prize recipient in economics.

Malaysian leaders ignored international pleas.

The nation took over the bad debts of its 35 banks, consolidated them into 10 banks, and recapitalized them by loaning them money at low interest rates. Malaysia lowered its key interest rate from 9.5 percent to 8 percent.

"This was very important to restore confidence in the market," Daim said. For small and medium-sized companies, the government provided low-interest loans.

The international community balked over Malaysia's grip on capital flows and refusal to tighten fiscal spending.

Then-U.S. Treasury secretary Robert Rubin said Malaysia's strategy "concerns me very deeply . . . the global economy has benefited enormously from both trade liberalization and the flows of capital that have taken place over the last 10 or 15 years."

The IMF warned in its October 1998 World Economic Outlooks report that Malaysia's plan "may also turn out to be an important setback not only to that country's recovery and potentially to its future development, but also to other emerging market economies that have suffered from heightened investor fear of similar actions elsewhere."

Yet in one year, the economy stopped its downward spiral and began to rebound. In 1999, gross domestic product rose 5.8 percent compared with a contraction of 7.4 percent in 1998.

Retired from government service, Daim said the United States' failure started with its decision to let Lehman Brothers go bankrupt.

"That was the critical piece that set the dominos falling," he said. "They needed to bring back confidence two weeks ago."