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Dear Dr. Mahatir Mohamad :
Prime Minister of Malaysia

I was as surprised as anyone when you announced sweeping currency controls. I'm unclear about the details, but since my recent FORTUNE article did suggest that temporary currency controls are part of the solution for Asia, I should probably claim some responsibility for your policy turn. Currency controls are a risky, stop-gap measure, but some gaps desperately need to be stopped. Like you and the people of Malaysia, I truly hope it pays off. But now that you've fired your Finance Minister and put him under investigation for a variety of alleged misdeeds, I'm worried that your approach may be tending toward the draconian, to say the least. So before things get out of hand, let me suggest a few guiding principles.

  • The implementation of controls should aim to disrupt ordinary business as little as possible. The devil can be in the details - even a conceptually sound policy can founder if the rules are poorly conceived. The initial announcement of the plan seems to indicate, for example, that Malaysian traveling abroad will be restricted to carrying unreasonably small quantities of currency; that will need to be fixed, as will any other failings that become apparent through further study or experience.

  • No matter how well currency controls are executed, the economic distortions that controls cause are serious and tend to get worse over time. So they must be regarded as temporary measures, designed to win breathing room for an economic recovery, not as a permanent secession of Malaysia from the international capital market. It would be a good idea to declare now a date for the removal of controls - at most three years from now - with the possibility of early parole as the economy recovers.

  • Experience suggests that currency controls do the most damage when used to defend an over - valued currency, and thereby inexorably evolve from a temporary defense against speculation into a permanent system of trade protection. Malaysia does not need a strong ringgit - on the contrary, it needs a highly competitive real exchange rate in order to increase exports.

  • Controls are an aid to reform, not an alternative. Use them to allow adoption of expansionary monetary and fiscal policies, and hence to promote a recovery of the real economy. A recovery may reduce, but not eliminate, insolvency in the corporate sector and nonperforming loans in the banking system.
Remember, above all, that the point of controls is to buy time for economic growth and financial-sector cleanup. They should not be used to prove the soundness of the pre-crisis economy or the wickedness of hedge funds. If Malaysia recovers, that will be lesson enough.


Webmaster's note: The author is a professor of economics at the Massachusetts Institute of Technology, United States. The open letter was carried by FORTUNE Issue No. 18 (28 Sept 1998). Malaysia had recently adopted exchange controls which makes the local currency Ringgit not tradeable outside Malaysia. The Ringgit is pegged at a fixed rate of one USD to 3.80 Ringgit.

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