Malaysiakini: Dr Chandra Muzaffar considered your The Malaysian Eclipse book somewhat 'eclipsed' by the Nobel Laureate Joseph Stiglitz's Globalisation and its Discontents .

Jomo:

I take it as a compliment of sorts to have my work compared to Stiglitz's and to be eclipsed by someone of Stiglitz's stature. But I have to add that the two books are not comparable: Stiglitz's book has some three pages on Malaysia.

Eclipse

was a book devoted to understanding the dynamics of the economic crisis and its recovery in Malaysia.

More to the point, my interview with malaysiakini was intended to be about my new book, M Way: Mahathir's Economic Legacy . I had no intention of taking on Chandra. However, the new book does re-affirm some points in the now out-of-print Eclipse .

But the real comparison should actually be with my earlier edited volume, Tigers in Trouble , published in the first half of 1998. Without being too immodest, it was the first book in the world critical of the International Monetary Fund and its orthodox market prescriptions in relation to the 1997-98 East Asian crises.

Subsequent volumes - including Stiglitz's and Paul Krugman's The Return of Depression Economics - are undoubtedly more up-to-date and better on many counts.

However, books such as Stiglitz's or Krugman's, while undoubtedly useful, are broad-brushed global and general analyses. It would be a sad reflection on our intellectual culture if such broad-brushed analysis becomes a substitute for the careful detailed empirical analysis needed to inform policy-making and evaluation.

Eclipse

is not really comparable to the Stiglitz volume. It was put together in mid-2000, and is mainly a compilation of several research articles challenging the orthodoxy - and the simplistic counter-orthodoxy - regarding the 1997-98 crisis in Malaysia on several counts.

It tries to show how Malaysia was similar to, but also different from the other East Asian crisis economies, especially those which went to the IMF for emergency credit facilities.

Malaysia simply never had to, and no one in Malaysia was proposing such a move. Prudential regulations introduced earlier had limited foreign borrowings, especially short-term credit. Instead, Malaysia's vulnerability was due to its earlier 'success' - thanks also to (Prime Minister Dr) Mahathir (Mohamad) and Daim (Zainuddin) - in attracting portfolio capital. Such capital inflows are notoriously volatile.

After the late 1993 collapse of the stock market due to such capital flight, Anwar, as finance minister, introduced controls on such inflows, but lobbyists got them lifted half a year later, creating the conditions for the mid-1990s' asset price bubbles and the sudden exodus after mid-1997.

Eclipse

also tried to look more carefully at capital controls. There are controls and there are controls, all with different consequences, as some recent work by Epstein, Grabel and myself for the G24 has tried to show. We need to go beyond loose rhetoric for and against controls to examine what types of controls work, when, why and so on.

But the September 1998 Malaysian controls were successful.

They were undoubtedly well designed. They were quite effective in killing the offshore ringgit market without discouraging foreign direct investment; the subsequent decline in FDI was due to other factors.

But, coming 14 months after the crisis began, they were too late to stem capital flight, which had largely taken place, resulting in the 80 per cent collapse of the stock market index.

The capital controls, amended in early 1999 and ended within a year, were mainly useful in preventing more capital from rushing to exit owing to the uncertainty induced by the currency control measures to kill the offshore ringgit market.

How much difference did monetary policy make then?

With or without an Anwar sacking? It is absolutely clear that the capital controls provided the economic firewalls for Anwar's sacking; without them, the manner of his sacking could have resulted in a further massive plunge of the already low stock market index.

But without an Anwar sacking? It would be difficult to say what difference capital controls made to the outcome: to a large degree, this is an exercise in counter-factuals, requiring speculation as to what would have happened if capital controls had not been introduced and if Anwar hadn't been sacked.

Clearly, some local businesses have benefitted from the ringgit peg. But the effects of the other measures, especially in macro-economic terms, are quite unclear.

Banks were required to increase credit by eight percent, but that simply did not happen for some years. Interest rates went down, but they went down even more in, say, Thailand after the US Fed cut interest rates in September 1998, after the Russian and LTCM (hedge fund Long-Term Capital Management) crises, stabilising East Asia in the process. Eclipse shows that interest rates in Thailand, historically higher than in Malaysia, fell below ours in the last quarter of 1998.

Remember also that the other crisis economies turned around from late 1998. On some indicators, Malaysia took longer, only turning around in the second quarter of 1999. But the Malaysian recovery was undoubtedly stronger than Thailand's and Indonesia's, but only in 1999 and 2000, although it lagged, and continues to lag, behind South Korea's. So you cannot even say that we recovered more strongly than all those under IMF programmes.

Why then did Korea and Malaysia do better? Was the crucial difference due to monetary policy? What about the contribution of fiscal policy?

Undoubtedly, the governments of these two economies spent a great deal and also worked faster at bank re-capitalisation and corporate restructuring, but that does not necessarily mean one or all of those were the reasons for the stronger recoveries.

The US dot-com bubble and the extended consumption boom obviously helped. Electronics output and exports soared in 1999, pre-Y2K, which helped both Malaysia and Korea more than the others.

Malaysia also benefited from higher petroleum and palm oil prices, while it is likely that the depth of the 1998 recession in Southeast Asia was partly due to El Nino, and not just the currency and financial crises.

Nevertheless, looking at the situation in August 1998, capital controls seemed to make good sense, contrary to the claims of the prophets of doom. But the evidence and the rigour of existing analyses do not allow us to claim much more than that.

So, if you really want to understand these things and consider alternative explanations and counter-factuals, and develop an in-depth analysis, you go to books which also look at the trees, and not just the forest.

Stiglitz's work is at a different level altogether. I think his and Eclipse complement each other, but I would say that, wouldn't I?

Besides Eclipse , there are important books by my erstwhile colleague, Mahani Zainal Abidin, by Prema-Chandra Athukurola of the ANU (Australian National University), and by Mahathir himself, all of which provide much more careful analyses of this contentious period.

Ethan Kaplan and Dani Rodrik argued that the September 1998 measures averted a new crisis in the making, a position I have become much more sympathetic to after earlier doubts due to claims that the offshore ringgit market was shallow and not as influential as presumed.

Meanwhile, Simon Johnson and Todd Mitton have offered strong evidence suggesting that the raft of measures introduced from mid-1998 disproportionately increased the stock prices of companies closely associated with Prime Minister Mahathir. But it is not clear whether this was the intention of the measures or the consequence of market perceptions of their likely beneficiaries.

What do you think about what Stiglitz has to say about Malaysia?

Don't expect too much from three pages. He mainly argues that Malaysia and China came through better because they did not adopt IMF policies, which is what the book is primarily about.

It should also be said that while praising Mahathir's policy responses to the crisis from September 1998 (not in the second half of 1997), Stiglitz also notes on page 122 that Mahathir's 'rhetoric and human rights policies often leave much to be desired'.

In footnote 16 of chapter 4, Stiglitz carefully qualifies his erroneous claim that 'foreign investment actually increased' after the imposition of capital controls.

As I have argued elsewhere, the decline of FDI from the late1990s was worldwide, and with China gaining a greater share of remaining FDI, all Southeast Asian economies have experienced a significant decline of FDI since then.

For instance, in the first half of this year, China took in 91 percent of all FDI to East Asia, up from 78 per cent in the first half of 2002; meanwhile, FDI to Malaysia declined by about 14 percent over the same period.

Those who want to use Stiglitz to attack Anwar quote him saying that Mahathir eventually 'dumped his finance minister and economic policies were reversed' (p 123).

Eclipse

argued that from July 1997 until August 1998, Anwar changed policy twice. First, in December 1997, when Anwar broke with Mahathir's disastrous initial policy responses, which had only exacerbated the downturn in the second half of 1997. Then later, around May 1998, although others argue earlier, after it became clear that the IMF-type policies were only making things worse.

It is now quite uncontroversial for anyone looking closely at changes in Malaysian economic policy after the crisis to note these two turns, which are of little interest to a foreign observer looking for the big picture in the region, if not the world.

That is why Stiglitz's three pages on Malaysia are no substitute for anyone seriously interested in what happened to our country during a very eventful 14 months, and particularly for considering very specific claims, including allegations used to vilify some of the protagonists.

This is no criticism of the Stiglitz book, which is not at all concerned with such matters, but should be of primary concern to honest Malaysians seeking the truth.

What is the bearing of all this for the claim that Anwar was an IMF stooge?

It is clear that until November 1997, i.e. for almost five months, Anwar dutifully went along with Mahathir's policy responses to the crisis, which, as we know, only made things worse.

Remember no one, except a few of us who were irrelevant, had been talking about capital controls, which the government had introduced, and then lifted half a year later in 1994.

After the costly early July 1997 defence of the ringgit, apparently costing RM9 billion, the cabinet approved a scheme in August to set up a RM60 billion fund to save 'selected shareholders' - not just 'selected companies', mind you - clearly sending the signal that the bailout fund would be for cronies!

Then, in early September, the authorities insisted on up-front payments for the purchase of 'designated' shares, to try to pre-empt short-selling, but this ended up reducing liquidity.

In October, Anwar's budget for 1998 basically announced 'business as usual', implying the authorities were in a state of denial.

Then, in mid-November 1997, Anwar was forced to reverse himself to allow the reverse takeover - and bailout - of Renong by UEM without a mandatory general offer, severely undermining the credibility of the authorities.

Each of these episodes resulted in massive drops in the value of the ringgit and the Kuala Lumpur Stock Exchange Composite Index (KLCI), as shown in Eclipse .

Hence, it is very clear that much of the massive damage to the economy in the second half of 1997 was almost entirely Mahathir's doing.

Whether in frustration or in humiliation (after his UEM-Renong 'about-turn'), Anwar turned to more market-oriented or orthodox - now called IMF-type -- macroeconomic policies, hoping to get out of the pit, only to find things getting worse.

So, blame Anwar for this next period by all means, but wrong as it was, this about-turn is insufficient evidence to allege that Anwar was an IMF stooge.

In fact, these so-called IMF-type policies were being advocated by almost the entire national economic policy-making establishment, including Tun Daim, who favoured an even more drastic cut in government spending than proposed by Anwar.

And of course, this was what the international establishment, business interests and media wanted as well.

I do think that Anwar was overly concerned about being internationally acceptable, including by markets and by conservative politicians, and played to the foreign media gallery. But I suspect he was overly compensating for objections to his supposed 'Muslim fundamentalist' background, unacceptable to the Western-dominated international establishment.

Tomorrow: Public discourse on economy 'shallow'