In crisis, truths are often revealed. The current financial crisis enveloping Malaysia has stripped away much pretense to reveal a system of politically connected crony capitalism. The system helped Malaysia generate some of the highest growth rates in the world for a decade but now has run its course. Squeezed by the twin export juggernauts of China and Japan, Malaysia can no longer follow a development strategy so dependent on inside dealmaking by a political elite. Indeed, the entire economic management of Malaysian Prime Minister Mahathir Mohamad is now in doubt.
At the heart of Malaysia's crony capitalism is Renong, a powerful conglomerate of more than 100 companies operating in virtually all major industries. This was the vehicle used to reward political friends through public-works projects and overseas contracts. The country's most powerful political figures were involved in its businesses. Mahathir's ruling party, the United Malays National Organization (UMNO) was financed, in part, by Renong cash.
Unfortunately, Mahathir's quixotic reaction to the recent currency crisis made a bad situation worse for Renong. His interference in the markets caused foreign investors to lose confidence and bail out of Malaysian stocks. Renong's subsidiaries used Renong equity as collateral for bank loans, and as the stock market dropped, they faced the prospect of banks' calling in their loans. This may have prompted Mahathir to intervene further, exacerbating the situation.
The Mahathir government has finally acknowledged its mistakes and pulled back from interfering in the markets. It is also cutting back on public expenditures on big projects. But nowhere is there yet a recognition that Malaysia's entire economic strategy must be rethought. Only new political blood can bring fresh insight to this process.