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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

A QUESTION OF OPENNESS

At the 51st World Bank-IMF annual meetings in Hong Kong, Asia ponders the costs and benefits of freer markets

By Ricardo Saludo and Assif Shameen


Go to a story about Asia's economic slump

Go to a country breakdown of signs to watch for

Go to a story about corruption

Go to Paul Krugman's analysis of Asia's financial problems

"To survive, the current global capitalist system has to satisfy the needs and aspirations of its participants." George Soros

"Society must be protected from profiteers. Currency speculation should be made illegal." Mahathir Mohamad

The two men have much in common. Both rose to the top from very low, one the son of a schoolteacher with a large family to support, the other a Jewish survivor of the Holocaust whose family arrived in America destitute after Hungary's 1956 revolt. Both are in the prime of their careers, one as leader of the world's fastest-growing economy in the last decade, the other as head of the biggest financial hedge fund in the world. They even showed broad agreement on the overall aim -- making capitalism work better -- in back-to-back speeches at the 51st annual meetings of the World Bank and the International Monetary Fund in Hong Kong.

So why are Mahathir Mohamad and George Soros calling each other names? In July, Malaysia's prime minister accused the billionaire of deliberately undermining Southeast Asian currencies for political reasons, and later labeled him a moron. Last week he called currency trading -- Soros's profession -- "immoral." The next day, Soros paid the prime minister back, saying: "Dr. Mahathir is a menace to his own country." Among those caught in the verbal crossfire were Malaysia's stocks and currency, with the ringgit falling 2% and the Kuala Lumpur share index 3.4% on the Monday after the weekend of rival speeches.

If the public ascribed the bad blood to the temper of two proud men, then it would have missed the point -- and an opportunity to address a crucial, timely issue. For the Mahathir-Soros debate has become a lightning rod for the pros and cons of openness to the world and the constraints it imposes on individual nations. Openness in social and economic systems. Openness to pressures, standards and values from across the globe. Openness to the flows of capital, technology, information and trade, which can bring prosperity, but can also demand painful adjustments -- as East Asia's recent currency turmoil attests.

"The open society could serve as a unifying principle for our global society," argued Soros in his Sept. 21 presentation at the Hong Kong Convention and Exhibition Center. The day before, Mahathir had warned: "We have always welcomed foreign investment, including speculation. . . . But when the big funds use their massive weight to move shares up and down and make huge profits by their manipulation, it is too much to expect us to welcome them." He called foreign-exchange speculation "unnecessary, unproductive and immoral." To which Soros retorted: "Dr. Mahathir's suggestion yesterday to ban currency trading is so inappropriate that it does not deserve serious consideration."

In fact, there were growing fears at the World Bank-IMF sessions that speculation-hit Southeast Asian nations may pull back from moves to further open their financial-services markets, part of an initiative to conclude by Dec. 12 a new World Trade Organization deal to liberalize the global industry. At the Hong Kong meetings, U.S. Treasury Secretary Robert Rubin was meeting with Asian finance officials partly on the WTO pact, which is to replace a 1995 agreement that Washington declined to sign for what it saw as a lack of sufficient concessions from other countries. And at the Sept. 23 plenary session, no less than Michel Camdessus, managing director of the Fund, took up the cudgels for open markets.

"When you have such financial turbulence on your doorstep," the Frenchman told delegates, "is this the right time [to liberalize]? Yes." While countries may have to open up gradually and to impose temporary curbs "when justified," Camdessus insisted: "Freedom has its risks! Let's go then for an orderly liberalization." From the region's financial turbulence he drew one lesson: "Countries cannot compete for the blessings of global capital markets and refuse their disciplines. Hence, the importance of pursuing policies that give market confidence."

Malaysians got another demonstration of that truism last week, as if they needed more convincing. The Monday after Mahathir spoke, it took heavy buying by state-run investment funds -- and deft explaining by Deputy Premier and Finance Minister Anwar Ibrahim -- to keep the Kuala Lumpur market afloat. Anwar maintained that "Malaysia will not outlaw currency markets," adding that the PM set "general policy directions" but he took charge of specifics. "Had Anwar not clarified matters, there would have been mayhem," said a currency dealer at a European bank in Hong Kong. "People think Malaysians are anti-foreign. Nobody is interested in Malaysia now."

Anwar made the requisite noises to calm investors. "Malaysia remains committed to keeping its economy and markets open," he told Asiaweek. "We are not about to put up new barriers. Malaysia has benefited a great deal from foreign investment, foreign expertise, and we continue to need them." Kuala Lumpur's priority, he added, was to "put our house in order -- improve economic fundamentals by tightening fiscal policy, postponing some mega-projects and bringing the current-account deficit down." Of the PM's attacks on currency speculation, Anwar said "they reflected his concern over the market turmoil and a sense of betrayal" by foreign investors. Thai Finance Minister Thanong Bidaya agreed: "Dr. Mahathir is like a man stabbed with a knife. He cries out."

The Malaysian leader may also be echoing a cry of fear and pain from all Asia, whose world-beating growth looks set to slow in the face of increasing financial woes and global competition -- both triggered in large part by liberalization. Bangkok Bank's investment banking chief Pisit Leeahtam, formerly of the Fund, expounded on "my version of the Thai crisis," which he blamed on "market failure." Thailand, he explained, freed up the financial sector faster than it could put prudent rules in place. Result: some small banks and a host of finance companies borrowed heavily abroad and lent recklessly at home. Soros admits that opening up the financial sector to foreign competition may not be the best way forward. Domestic institutional investors may work better. For his part, Anwar wants IMF action against speculation.

On the competitiveness front, goods from lower-wage exporters like China are seen as posing serious threats to Thailand and Indonesia. These and other newly industrializing economies have yet to upgrade their industries to justify their higher costs. Thus, these countries fear tougher times as world trade opens up further. Indeed, the turmoil is partly fueled by market expectations that Asian currencies pegged to the dollar will be devalued to preserve export competitiveness, given the greenback's strengthening in the past couple of years.

Andrew Buxton, chairman of Barclays Bank, Britain's biggest, believes "most Asian countries are by and large committed to deregulating their financial sectors." The likelihood, he told Asiaweek, is that in coming months Malaysia, like many of its neighbors, will advance concessions for the WTO deal, and "we are now very optimistic that an agreement will be reached in December." But the price for such a deal could well be the creation of an East Asian economic stabilization fund ready to bail out any future Thailand-style crisis.

Kenneth Courtis, Deutsche Bank's chief economist in Tokyo, says of Mahathir and Soros: "If you ignore the personal attacks and the talk about currency speculation, they have a lot in common -- and very valid points." They both worry about how unbridled financial trading, rapacious monopolies and constraints imposed by markets on governments could hurt people. Plainly, open markets, like other policy measures, exact a price. Asia must decide how much it can afford to pay.


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