http://www.businessweek.com/magazine/ content/01_29/b3741073.htm

JULY 16, 2001

INTERNATIONAL BUSINESS
By Mark L. Clifford

COMMENTARY: MAHATHIR'S WORST ECONOMIC ENEMY IS HIMSELF

Malaysian Prime Minister Mahathir Mohamad celebrates 20 years in office this month, making him Asia's longest-serving political leader. He's a man who deserves tremendous credit for transforming Malaysia from a struggling economy of tin mines and palm oil plantations into a major electronics exporter.

But rather than reflect on his success, the physician-turned-politician is bitter. Four years after Asia's financial crash, he is still lashing out at enemies real and imagined, at home and abroad. Most of Asia is trying to get on with economic and governmental reform. But Mahathir is playing the politics of resentment. That's bad for Malaysia. If it spreads, it could be bad for Southeast Asia, a region that risks losing more investors to China if its business climate doesn't improve.

To hear an acidulous Mahathir tell it, the forces of globalization are out to destroy midsize countries such as Malaysia. "There are so many corporate giants hiding their teeth and intent on gobbling us up," he told foreign businessmen in a June 27 speech. "The second great Asian colonialism is upon us."

SINGAPORE STING. If only.

Malaysia drew applications for just $1.5 billion in foreign direct investment in the first five months of this year, far off the pace of 2000, when it got $8 billion. So far this year, Penang, the nation's electronics hub, has shed 8,000 jobs. Malaysia can't blame it all on the U.S. tech bust. From 1997 to 1999, members of the Malaysian-American Electronics Industry Assn., which includes Intel, Seagate, and Motorola, kept employment flat at 60,000, and cut investment by half.

Meanwhile, neighboring Singapore is snaring huge projects--despite much higher wages. In December, Taiwan's United Microelectronics Corp. said it will build a $3.6 billion semiconductor plant. Toshiba Corp. and Matsushita Electronic Industrial Co. plan a $1 billion liquid-crystal display factory. Why Singapore? "It's about political stability," says Richard Gabrys, vice-chairman of Deloitte & Touche. "We hear it everywhere from companies these days." Others are skipping Southeast Asia altogether and building modern factories in China.

In his June 27 speech, Mahathir lamented that "today there are no more economic tigers in Asia." That's because "they have been destroyed" by foreign currency traders. Really? As capital-flow figures show, foreign lenders and stock and bond investors are long gone. Credit Mahathir's decision three years ago to impose capital controls and fix the ringgit at 3.8 to the U.S. dollar to stop the outflow of money. That averted an immediate crisis. But Mahathir has done little to curb the crony-infested corporate and financial system, so foreign investors see no reason to return.

With political worries growing, it is Malaysian businessmen who are causing a balance-of-payments problem--by keeping their money out of the country rather than converting it to ringgit. With capital controls mostly gone, foreign reserves have sunk from $32 billion a year ago to $26 billion in mid-May. And this is despite a big trade surplus. Merrill Lynch & Co. economist Vincent Low thinks the currency peg "will break by yearend." Despite high government deficit spending, Low has cut his 2001 growth forecast from 4% to 2.5%.

FEWER FLIGHTS.

One sign of shrinking commerce is air travel. Four airlines, including British Airways PLC, have canceled service to Kuala Lumpur because of poor sales. Meanwhile, Malaysia, eager to protect homegrown industries like its Proton auto company, is retreating to protectionism.

What's really disturbing is that Thailand and Indonesia also are starting to flirt with isolation. That would be tragic. Southeast Asia still has young labor forces, energetic entrepreneurs, and abundant natural resources. But it could fall off the investment map as China keeps opening up. The Philippines, under reformist President Gloria Arroyo-Macapagal, still understands this and wants to maintain open markets. The same day Mahathir gave his tirade, former Philippines President Fidel V. Ramos also spoke in Kuala Lumpur. "The economic crisis," he said, "demonstrated forcefully to all our countries the dangers inherent in our financial systems, the absence of level playing fields in our economies, and the venality of our politics." Ramos can't claim his own country is a pure free trader. But, unlike Mahathir, he recognizes the real issues.