William Pesek / Bloomberg November 30, 2008, 0:18 IST
Much is being made of how the next US Treasury team includes Robert Rubin’s former posse.
Timothy Geithner, Lawrence Summers and the handful of other Rubinites set to run the US economy have something else in common: direct experience with Mahathirism. As fate would have it, the policies of former Malaysian Prime Minister Mahathir Mohamad may make a comeback in Asia.
When Malaysians speak of Mahathirism, they are often referring to the authoritarian or outspoken ways in which Mahathir ruled their nation for 22 years until 2003. For investors, the phrase conjures up images of an anti-free-market firebrand.
The truth has always been somewhere in between. Yet the return of Mahathirism is the talk of Malaysia as Prime Minister Abdullah Ahmad Badawi’s stock falls as fast as those comprising the Kuala Lumpur Composite Index. Mahathir's presence is again being felt by the nation’s 26 million people. His blog is getting millions of hits.
The spread of Mahathir-like policies will be of even greater interest to Geithner, selected by president-elect Barack Obama to be Treasury secretary. That’s because the US may fight an uphill battle to keep Asia on the road toward open markets.
Making the rounds in Asia these days, one increasingly hears the words “Mahathir was right” in his reaction to a regional crisis 10 years ago. Rather than join Indonesia, South Korea and Thailand in accepting International Monetary Fund bailouts, Malaysia took matters into its own hands.
As fallout from the US credit crisis zooms Asia’s way, it’s an open question how governments will respond. The IMF said yesterday Asian growth will probably weaken “substantially” amid slowing demand for exports, faltering consumer confidence and a drop in bank lending.
The idea that Asia is less vulnerable to global events is dying a quick death. The IMF expects growth in Asia, including Japan, Australia and New Zealand, to slow to 4.9 per cent next year, from a 5.6 per cent pace predicted in October.
Let's face it: 4.9 per cent is overly optimistic in a world in which the US is bailing out a single bank — Citigroup Inc., in this case — to the tune of $306 billion. As the US’s woes catch up with the global economy, growth will slow more dramatically than is currently appreciated.
Faced with such prospects, Asian governments may be tempted to turn to Mahathir-like capital controls and pegged currencies. Aside from a desire to stabilise markets, doing so might enable developing nations to avoid aid from the IMF, which tends to come with strict strings attached.
Such concerns have led Turkish Prime Minister Recep Tayyip Erdogan to delay seeking emergency funding from the IMF. Escaping IMF tutelage has been a goal for Erdogan since he became premier in 2003. He chose Malaysia for his first official overseas visit and asked Mahathir how he managed without IMF loans in the 1990s.
Asia has experienced a currency-reserve arms race of sorts since then to achieve a similar goal. Korea, for example, is sitting on $212 billion of reserves, while Malaysia has stockpiled $109 billion.
There’s no guarantee Asia will turn inward. Doing so may do more harm than good for such open and export-dependent economies. Yet if global growth is headed for its worst period since the 1930s, governments will be on the spot to shield living standards.
This time, the US will have little leverage in Asia.
Geithner has first-hand experience with Mahathir’s policies. In July 1998, he and then-Treasury Secretary Rubin traveled to Kuala Lumpur, where they tried to persuade the Malaysian leader to give the IMF's prescriptions more time. A day later, Mahathir announced he was giving up on high interest rates and budget tightening. He imposed capital controls and pegged the ringgit in the months that followed.
The US will have zero moral high ground to counsel against such steps. In Lima last week, President George W Bush urged governments to avoid onerous regulations, spurn protectionism and stay on the free-market path amid a “demanding” global outlook.
Such rhetoric flies in the face of efforts in Washington to bail out banks, insurers and automakers with borrowed money. It bumps up against the Federal Reserve’s unprecedented steps to print dollars.
It’s worth noting how the descendents of Rubinomics— with its focus on balanced budgets, financial deregulation and free trade— are changing with the times. Geithner and Summers, whom Obama chose to be director of the National Economic Council, will find it’s easier to prescribe tough medicine than to take it.
“I can't help feeling I’m vindicated,” Mahathir said in an interview last month. In December 2002, the IMF said Mahathir established a “stability anchor” that helped the economy.
Rubin’s stock also isn’t what it used to be. He’s facing questions about his role in Citigroup’s woes and efforts to avoid regulation of derivatives while in government.
Geithner and Summers may find that the more they try to inject some Rubinism into the global economy, the more Mahathirism may push back.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own ..Mahathirism may make a comeback
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