.... An Unhappy Anniversary
Mahathir's 20 years in power have gone sour
By Jim Rohwer 
FORTUNE Monday, August 13, 2001


The occasion could hardly have been more cheerless. On July 16, Mahathir Mohamad, Asia's longest-serving ruler, passed the 20-year mark as Malaysia's Prime Minister, but there were no fireworks or parades. Malaysia's export-dependent economy is sinking. The country faces daunting long-term challenges to its competitiveness. And Mahathir, 76, is increasingly obsessed with self-preservation. He is more isolated, autocratic, and unpopular than ever--crucially among the country's majority ethnic-Malay population and among the foreign investors he relishes insulting. Some anniversary. 

It shouldn't have been like this. Before the financial thunderstorm of 1997-98 broke, Malaysia had one of the region's best economic records. Mahathir can claim credit for an era of multiracial stability, economic openness, and public investment that raised incomes by almost 6% a year for 20 years, to an average of $4,000 for each of his country's 23 million people. The incidence of absolute poverty (not being able to meet basic needs) fell from 40% to just over 5%. Even the controversial imposition of capital controls in late 1998 seemed to work. GDP grew by more than 8% last year, and Malaysia started to clean up bank balance sheets. 

That was then. The global tech collapse has uncovered serious cracks in the Malaysian facade. The workings of Malaysia Inc., the corporations on which Mahathir's ruling party depends for its funds, are as murky as ever. The most notorious instance was the government buyout in 2000 of Malaysia Airlines' well-connected controlling shareholder, Tajuddin Ramli, at more than twice the market price. That's a premium that adds up to 0.3% of the country's GDP. More broadly, Danaharta, the asset-management agency, has taken on $1.3 billion in nonperforming bank assets but has liquidated few of them. The feckless borrowers continue merrily on their way. 

An unreconstructed Malaysia is in no position to weather the global downturn. Exports amount to 110% of GDP (with electronics accounting for more than half), and their value is shrinking. The dollar peg, imposed in 1998, is hurting too. Malaysia's real exchange rate has risen by 13%, while the rest of Asia's (save for Hong Kong's) has been falling as the dollar rises. As a result, capital is fleeing: Foreign-exchange reserves have dropped from $34 billion in the spring of 2000 to $26 billion now. With the economy faltering--GDP growth of 2% this year looks optimistic--investors have lost faith. The stock market is 40% off its post-crisis peak in the spring of 2000, and according to global banking group ABN Amro, foreigners own only $5 billion of it now, compared with $100 billion in 1997. 

That's just the beginning. Malaysia soared in the 1980s and 1990s on the wings of multinational investment in factories, especially those churning out chips and disk drives. In the precrisis 1990s, foreign direct investment averaged $5 billion a year; now it is down to less than $1 billion--with a similar dwindling in the transfer of advanced technology and management methods. The best young Malaysians, of all races, have already noticed: There is a brain drain to Singapore, with the ranks of SingTel, in particular, swelling with Malaysian engineers. And when China joins the WTO, who's going to choose the desolate Multimedia Super Corridor outside Kuala Lumpur when they could be in Shanghai? 

Such headaches are spreading pain throughout Southeast Asia. The prescription, as Singapore's remaking of itself into a much more flexible place since 1997 has shown, is imaginative leadership. But the attention of Dr. Mahathir--a physi- cian before he went into politics--is not on the patient. Ever since he turned against his designated heir, Anwar Ibrahim, in late 1998, and had him jailed (he's now serving a 15-year sentence), Mahathir has been focused on shoring up his political base. Anwar is no saint, and maybe not much of a leader. But he is popular with Malays and a lot more talented than the deputies now surrounding Mahathir, who are, in the words of David Roche, a London-based investment advisor, "a bunch of mediocre sycophants who couldn't rule a rice paddy in a monsoon." 

All this may ring a gamelan for you. Malaysia looks increasingly like a richer, smaller version of late-Suharto Indonesia. Just hope that it's a more manageable one.

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