Malaysia
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Malaysia is a nation is Southeast Asia, largely divided into two, equally-sized regions, one on the Malay Peninsula, and the other on the island of Borneo, separated by the South China Sea. Its capital is Kuala Lumpur, and it is a modern, multi-ethnic nation with one of the most dynamic economies in all of Asia.
The ancient Malay empire fell to Portuguese explorers in 1511, as Europeans pushed into the Indies in search of gold and spices. By 1786, the region was under control of the British, establishing colonies known as the Straits Settlements. The entire region was occupied by the Japanese during World War II, and independence gained after the war. Civil war lasted until 1960, when some degree of political stability was achieved under President Sukarno.
In the 1980s, Malaysia began a period of rapid economic expansion and political reform. Currently, it is a federal constitutional elective monarchy, with executive power vested in the country's Prime Minister. Many of Malaysia's political parties are ethnically based, as the nation is a conglomeration of the following people:
- Malay
- Chinese
- Indian
- Indigenous peoples
However, Malaysia is also home to one of the largest Islamic populations in the world, and questions over the supremacy of secular or Islamic law continue to dominate. In terms of foreign policy, Malaysia maintains strict neutrality and friendly relations with all other nations.
The financial crisis that devastated Malaysia began in mid-1997 with the overheating of this rapidly growing economy and the failure of existing monetary policy to adequately compensate. In previous years, the government had established a quasi-pegging of the Malaysian ringgit to the dollar. At the same time, the restrictions on the Malaysian stock market were eased. These two factors encouraged the influx of foreign capital for investment in what appeared to be a rapidly growing and highly profitable economy. The domestic savings rate in Malaysia was already high and the foreign investment augmented the amount of capital seeking a return from the Malaysian economy. An upward inflationary spiral began, with too much capital seeking too few investment opportunities. This caused the escalation of stock values and real property prices while the value of the ringgit remained relatively fixed because of its peg to the dollar.
While the fundamental fiscal policies of Malaysia contributed to the growing economy, they also contributed to the rapid economic decline when this inflationary situation occurred. The nation had long run a current account deficit, with its imports far exceeding its exports despite its dramatic rise in export activity in the past decade. The nation often touted its balance of trade surplus with the United States as evidence of the nation's prosperity. It rarely mentioned the extremely large balance of trade deficit that it ran with Japan and Europe. Malaysia did not find this troubling since it assumed that the continued economic growth would eventually enable the nation to become an overall net exporter. To further this end, the nation borrowed heavily in the international market to obtain the capital necessary for industrial and economic expansion. This external capital also served as a means to pay for the deficit in its balance of trade ledger, permitting the nation to import more goods than it exported over a long period of time without eroding its economic and capital infrastructure.
The international community not only accepted the premise that future growth would enable Malaysia to pay its debt and correct its balance of payments account, but also encouraged it. The emerging economies of Southeast Asia were perceived as a relatively safe place for investment. Foreign banks and private investors were eager to participate in these booming economies and made substantial loans and investments. Although this deluge of foreign investment and Malaysian easy money policies should have theoretically caused inflation, the pegging of the ringgit to the dollar masked the effects of a money supply that was increasing dramatically. In general, the apparent prosperity dispelled investor doubts as to the wisdom of the economic scheme.
Malaysian economic and industrial policy encouraged growth, overlooking the fact that too much growth can be counterproductive. Investment in industry rose until it was close to 40% of GDP as compared to only 20% or less in the rest of the world. Yet this substantial rate of investment led only to a growth rate in the GDP of only 8% a year. This revealed a high level of inefficiency in the Malaysian industrial base, characterized by overcapacity. The underlying philosophy of encouraging increased industrial expansion relied on the presumption that excess industrial capacity would be needed in the very near future as export demand for the nation's products grew.