Examples:
I started, from the very beginning to find a way to deal with the problem without resorting to the IMF [International Monetary Fund]. From the very beginning, I thought that resorting to the IMF would not be good for the economy in the first place and would weaken our position to the point where we would lose control over our economy and also our politics. So we had to find a way by ourselves to overcome this currency devaluation, which has cost us billions of dollars. Between the currency devaluation and the fall in the stockmarket, we lost almost $200 billion. That is something that lots of people don't appreciate.
Yes, because the market capitalization of the KLSE [Kuala Lumpur Stock Exchange] was very high. It was about 800 billion Malaysian ringgit at 2.50 [to the U.S. dollar]. At 2.50 that was about $300 billion U.S. When the share prices went down, the market capitalization of course was depreciated, causing terrible problems for the companies and the banks because they were unable to pay their debts and the banks couldn't collect their debts. So if it is allowed to go on, we would go bankrupt. You can't do any business at all and the government in the end would not be able to collect taxes, because nobody was making any profit. So the question is: How do we overcome this problem without resorting to the IMF? And we came up, I came up, with the idea that we'll adjust everything according to the depreciation in the value of the currency. If the currency is devalued by 20%, okay, we will increase prices by 20%, increase all wages by 20%. That way you will nullify the effect of the devaluation.
But the devaluation was not something that is static, it keeps on moving up and down. Obviously, we cannot do this. So we have to think of some other way to overcome this problem. And we looked around, we looked at Chile, we looked at China and at a number of other countries which were poorer than us, but they were not attacked by the currency traders. And we discovered that the difference between them and us is that we allow our currency to be traded, whereas they keep a tight control over their currency. Because of that, China, for example, was able to continue growing during our recession. Obviously, if the currency traders could attack them, they would have attacked them. Indeed, they tried to attack China through Hong Kong and that was a failure. So by preventing currency traders from getting hold of your currency, you can stabilize the economy.
We had to look into how to do that. See, most our money was in Singapore. What Singapore did was to offer very high interest rates, siphoning off all the money. Banks had no money to lend. And people were, of course, attracted by the high interest rates or they have a loss of confidence in Malaysian banks and kept their money with branches of foreign banks in Singapore. So then of course the interbank rates went up. All these things created . . .
We heard that at one stage there was 32 billion ringgit in Singapore and 20 billion ringgit in Malaysia.
Yes, that was about right. We estimated that there would be about 32 billion ringgit in Singapore. And that money was obviously being lent to the currency traders so that they can trade it down. And that was damaging our economy more and more. So the question is how do we get this money out of their control? How do we bring back the money? The answer to that of course is to make the money absolutely valueless outside of Malaysia. So we gave them one month. If within one month, they don't bring back the money, we declare that money as no longer legal tender. It will not be allowed to come in. And if they're not allowed to come in, in whatever form it may be--it may be just bank transactions, figures in books and all that, but they can't just transfer it back by computer or whatever--that will force them to bring the money back into the country. Otherwise they will lose and in fact a lot of people lost money. I believe that a lot of currency traders lost money. Once it is back, the question is how do we prevent the money from going out. And we had of course all these regulations and they have been effective. Also the rate of exchange that we had permitted to fall. The temptation of course is to strengthen it to the old level of 2.5 [to the U.S. dollar]. But if we do that we will not be competitive against our neighbours.
We heard that at one stage there was 32 billion ringgit in Singapore and 20 billion ringgit in Malaysia.
Yes, that was about right. We estimated that there would be about 32 billion ringgit in Singapore. And that money was obviously being lent to the currency traders so that they can trade it down. And that was damaging our economy more and more. So the question is how do we get this money out of their control? How do we bring back the money? The answer to that of course is to make the money absolutely valueless outside of Malaysia. So we gave them one month. If within one month, they don't bring back the money, we declare that money as no longer legal tender. It will not be allowed to come in. And if they're not allowed to come in, in whatever form it may be--it may be just bank transactions, figures in books and all that, but they can't just transfer it back by computer or whatever--that will force them to bring the money back into the country. Otherwise they will lose and in fact a lot of people lost money. I believe that a lot of currency traders lost money. Once it is back, the question is how do we prevent the money from going out. And we had of course all these regulations and they have been effective. Also the rate of exchange that we had permitted to fall. The temptation of course is to strengthen it to the old level of 2.5 [to the U.S. dollar]. But if we do that we will not be competitive against our neighbours.
So you turned it to your advantage by . . .
Well, at that time the exchange rate was 3.8. So we took 3.8 and made that the official exchange rate.
But now people say that if you do not peg the ringgit, it will revalue. It is undervalued now.
Yes, the currency is actually stronger now. But it doesn't do us any harm. It makes us more competitive. Maybe at some stage other currencies might become strong again. But even then we have no necessity to change, unless of course the difference is very big and that results in our imports being very costly and that may damage our economy. It's been a very difficult problem to tackle because we have a need to know everything that is happening in the country. We hold meetings of the NEAC [executive committee] every day, two hours.
Even now?
Even now. We monitor everything--currency reserves, stockmarket, who is buying, who is selling and sales of vehicles, sales of property, retail sales--everything is monitored by this small group of people. And we make decisions and those decisions are carried out. Although we have really no very strong legal standing, but because I'm the prime minister I can carry everything along.
In your book you said that doctors study the symptoms and make a diagnosis and then prescribe medicine.
We review the patient so to speak every morning, we do a walk around and we see the patient and look at the report sheets and then make modifications to the medicine or whatever. That's how I'm trained.
Initially when you prescribed the medicine, wasn't it more of a temporary measure? The other day you made a statement that made it sound more indefinite.
There has never been any change in our decision. We keep it there until the world's financial system is adjusted. We have said that from the very beginning. We will keep the controls on until the world makes sure that they regulate currency trading and this very rapid flow of capital, which is damaging to a lot of countries. I don't say that it is not good for the world, but it is not good for us. But even for the world, even for the United States, it is not good. They're enjoying life now, but they're enjoying life because of this bubble stockmarket. But they cannot sell things. We used to buy Boeing aircraft before, but we can't buy any more. We don't have money any more. The whole of East Asia is not buying aircraft any more. This is something that I told President Clinton in Vancouver. I told him that East Asia at that time had lost $500 billion in terms of purchasing power. And since they have no purchasing power, you cannot sell to them, you cannot sell these aircraft. . . . So you destroy your market, you destroy yourself.
I said this to President Clinton, but he said that there's nothing that can be done.
The Group of Seven meeting starts today. Nobody seems to have a proposal for reform of the world's financial architecture.
It is not that there's no proposal. It's just that they won't consider a proposal because they don't like it, particularly the United States doesn't like it. I have spoken to [French] President Chirac, I have spoken to [British Prime Minister] Tony Blair, I have spoken to the Japanese prime minister and I have some idea about how controls can be imposed. But they're not willing to listen. I mean Chirac is very supportive, so are the Japanese. But the decision is with the United States. Because all these currency traders come from the United States and they are benefiting by it. They have a lot of money flowing in there.
But the Long-Term Capital Management saga showed that there's danger to the American economy as well.
Which explains why they have modified their stand a little bit. Indeed, Clinton said at one stage if the economy of East Asia is harmed, then workers in the United States will be retrenched. I don't know if he was influenced by what I told him or not. I don't want to ask for credit, but the point is that they are coming around to realize that this is not just destroying us. It's destroying them too. In the end, they will not be able to survive. I feel that we need stability for the world's economies. There is no harm in having some kind of mechanism for fixing the exchange rates, so that there is not too violent a swing in the exchange rates. It's not going to harm anybody. The only people who may not benefit from it may be a few people who deal with the currency. The rest of the world will benefit. So why are we protecting these people? Why are they so important that they are not transparent, that they are not regulated? They don't have to have good governance or whatever--all of which we are told we must have. Why this disparity, why this double standard?
Full interview: http://www.feer.com/Restricted/index_cover2.html