Each sovereign nation has the right to print its own currency, which it then protects against those who would profit by printing copies of the national notes in the kitchen. It is important to distinguish between the printing of national currency by the government, and the same printing done by unauthorised parties, who are known as counterfeiters.
The primary difference between the two parties is that the government may print as much as they like, while counterfeiters are limited to the amount they can print without detection. For both there is great temptation, and the consequence is the same, a consequent dilution of the currency then in circulation.
The currency markets treat this dilution as though it were a form of inflation, as the currency buys less of common commodities. Though the government may attempt to forestall this effect through fixed prices, the market responds in kind, withdrawing the commodities until the price is allowed to increase. The lesson is a hard one. Economics acts with an indifference to political chicanery.
Governments protect their currency in other ways, primarily by giving guarantees that their money will be exchanged in unlimited amounts for other currencies or commodities. Failure to honour this implied contract brings suspicion that the sovereign government is not engaging in completely fair and honest dealing.
Outsiders watch carefully for indications that governments are not dealing openly and fairly with their neighbours and among themselves. The fluctuations of currencies on the open market is an indicator of the regard by which the various governments are held by the international community. Governments which fail to inspire trust soon find that their currency is undesirable, and to provide an incentive for others to accept and use their currency, high interest rates, relative to the world market, must be offered.
Among the governments of the world, Malaysia has attempted to have the best of all situations, a low and stable interest rate, reflecting low inflation, and at the same time calling for an increase in goods and services more typical of an inflationary economy. To relieve any pressures which might arise from loss of confidence in the management of the national economy, the value of the national currency, the ringgit, has been pegged, at a rate of RM3.80 to the US dollar.
Signs of economic distress
The economy of Malaysia has shown signs of distress in the past three years, requiring large doses of deficit spending to maintain the fiction that all is well. But the Malaysian economy is largely controlled by the prime minister and his friends through the office of the Ministry of Finance. The primary source of what stability there may be is the national oil company, known as Petronas. By an oversight, the prime minister's department is trusted with the authority to oversee the disposition of its assets. The books of Petronas are not available for public inspection.
This is not unusual, as all books, both public and private, are not open to public inspection. Double entry bookkeeping has another meaning in Malaysia, one set for cosmetic purposes, the other for distribution of assets among the various contending interests. The concept that books of public corporations or government agencies are to be audited and made public is missing in Malaysia.
The government of Malaysia, in a move deemed to punish an internal state now ruled by the opposition, acted to unilaterally breach a contract of 25 years standing. This act of political pettiness was thought to escape the notice of the international community. It did not.
The government of Malaysia has avowed an interest in creating a trading region in Southeast Asia to provide insulation from other regions of the world. But having given the major impetus to the establishment of Asean Free Trade Area, Malaysia neutered it with a clause allowing the temporary exclusion of automobiles from the free-trade agreements.
Most observers now doubt that the two-year extension (till 2005) will be honoured, and that further extensions will be sought indefinitely in order to protect Proton, the national car company.
The establishment of a western style stock market in Malaysia provided a channel through which domestic and international money could participate in the development of Malaysia. It was seen as a means of generating and redistributing wealth, primarily benefitting those identified as Malays. The original concept was that by portioning all assets into "shares" it would be possible to make an equitable distribution.
Blaming foreign currency traders
The golden goose was killed. The shares were not apportioned equitably. The majority of Malays were not rewarded, other than through a few asphalt roads and some plastic water pipes. For these they are entreated to be eternally grateful to their political party masters, who are supposedly acting paternalistically in their interests. Instead, the shares were "set aside" for the special interests of individuals and party purposes, so that now the capital markets are nothing more than the mess of mismanaged enterprise, laden with unserviceable debt.
The prime minister, bold to the last, refuses to accept any responsibility for the obvious corruption, though he receives annual reports of the financial affairs of all his ministers, and has been shown to be involved in protecting them from prosecution. To the last, he blames foreign "currency traders" for the problems of Malaysia, refusing to acknowledge the national inability to submit to independent external audit, either on the corporate level or in the government.
The stock market, however, sensing the essential dependence on exports, has opted to dispose of all assets denominated in ringgit, choosing to hold any other currency. The peg of the ringgit to the dollar thus loses much of its meaning, and if the US dollar comes under pressure from its own extensive borrowing, the peg will become a liability impossible to maintain. The consequences of this are difficult to see, and the markets shy from uncertainty.
In the midst of the meltdown, one sees the principal actors, in the midst of the flames, making the most of what face is left. None admit mistakes. None admit wrongdoing. In the meantime, the market falls, the flames rise higher.
HARUN RASHID is a scientist avidly interested in the application of Islamic principles in international affairs. The promotion of goodwill through civilisational dialogue motivates his writing. His Worldview column is a personal analysis of Malaysian affairs from a global perspective.