Damage Control In Malaysia

Can Mahathir get his country back on course?

It has been one of the most impressive balancing acts in Asia. For the last decade, Malaysian Prime Minister Mahathir Mohamad has skillfully secured the support of local voters, foreign investors, and regional leaders. Malaysians loved his vigorous outbursts against the corruption of the West. His fellow rulers looked to him as a visionary for Asian growth. And in a paradoxical twist, Western investors found they could brush off Mahathir's barbs because they knew he would do everything possible to keep Malaysia's growth engine humming. He would court outside investment, create a financial center for Southeast Asia, and turn his country into a technology hub for the region. On the way to making his country richer, foreign investors would benefit, too.

So it wasn't surprising that in late August, Mahathir responded to the currency turmoil and slide in Malaysia's markets by blaming foreigners, in particular financier George Soros. People had come to expect as much. What was shocking, though, was the way he followed up his rhetoric with action--abruptly curbing stock trading and announcing preferential treatment for Malaysians hurt by the market's fall. Foreign investors quickly fled, pushing the market down 14% in one week. Malaysia watchers were left scratching their heads. What was driving a man, who had worked so hard to raise Malaysia's international profile, to take an action that cost his country billions and possibly its high-tech ambitions?

A key reason for Mahathir's colossal blunder was domestic politics: He was feeling the heat from his increasingly agitated power base. No longer poor Muslim farmers, teachers, and civil servants, Malaysia's ruling party backers are now stock-market players and corporate leaders, including well-connected groups such as Renong that have binged on easy money and run up huge foreign debts. They "had their fingers burned badly" by the bourse plunge, says Lim Kit Siang, Secretary-General of the opposition Democratic Action Party. Having seen the devastation in Thailand, Mahathir faced pressure to prevent a repeat in Malaysia. "The private sector must have approached him [and said] we're all in trouble," says Daim Zainuddin, top economic adviser to Mahathir.

STRONGMAN. But Mahathir's woes extend far beyond pols panicking over their portfolios. He's facing discontent within his party and resurgent Islamic fundamentalism. Those pressures will only intensify as the economy slows and companies suffer from the ringgit's plunge and a property bust. And, after the actions that so spooked foreigners in August and early September, his reputation as a strongman who can get things done may be tarnished beyond repair.

Mahathir is not known for consulting technocrats when making decisions, instead relying on a few key advisers, including Daim. Many analysts believe that the Prime Minister consulted a few insiders and then issued his edict against short-selling in late August without understanding how investors would react to a sudden change in the rules. "You can't do that when you're dealing with international market forces," says E. Terence Gomez, a Malaysia expert visiting at England's University of Leeds. "It backfired this time."

The way Mahathir tampered with the market will have implications far greater than those from his heated rhetoric about Soros and foreign speculators. The short-lived stock-market restrictions have led many observers to question the Prime Minister's understanding of policy issues. "Mahathir has destroyed every strand of credibility he had," says one bitter analyst in Kuala Lumpur.

The Malaysian government now seems to have launched a charm offensive to win back investor confidence. Daim says foreign investors should not get rattled when Mahathir calls foreign investors "racists" and "criminals." "When there are serious discussions with foreign funds, foreign investors, we made it very clear to them [they] are welcome," says Daim.

The damage may be more difficult to repair within his ruling party, the United Malays National Organization (UMNO). "The regime's legitimacy is based on economic growth," says Bridget Welsh, a Malaysia expert at Hofstra University in New York. "Any downturn in the economy has immediate implications for the ruling party."

Even though Mahathir, 71, acted to protect party fat cats from the ravages of the market, many within UMNO would like to see changes at the top. Finance Minister Anwar Ibrahim has been Mahathir's designated successor since 1995, and Malaysians are starting to wonder when Mahathir will hand over the reins. Grumbling delegates at the UMNO party conference in early September didn't dare criticize the Prime Minister, but in private they singled out Mahathir allies for attack. "The popular perception is that public funds will be deployed to prop up the financial interests of the politically well-connected," says Jomo K.S., economics professor at the University of Malaya in Kuala Lumpur.

BEAUTY PAGEANTS. A wild card is the increasingly powerful Islamic movement Mahathir must contend with. Its leaders are anxious to capitalize on any weakness of the Prime Minister. Mahathir has tangled with Islamic critics over the legality of beauty pageants, women wearing cosmetics, even whether Israeli sports teams should be allowed into the country. Earlier this year, the Islamists embarrassed the Prime Minister by organizing a violent demonstration in the capital to protest the Israelis' visit, which Mahathir had allowed.

To be sure, Mahathir is still firmly in charge and his term as party leader lasts until 1999. But his ability to manage the economy in more challenging times will be tested. The country faces a chronic labor shortage, with manufacturing wages rising 15% per year. Mahathir's politically potent grand projects, such as the Multimedia Super Corridor outside Kuala Lumpur, will be much tougher to complete with a weakened currency and slower growth. And foreign investors and local business execs alike will be watching to see how one of Asia's most powerful old-school politicians adapts to a new world.

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