Malaysia would not have lost three precious months if the government had heeded the DAP’s advice in Parliament fo greater flexibility  in the  capital control measures

(Petaling Jaya, Thursday): The Special Functions Minister, Tun Daim Zainuddin has said that a working group within the National Economic Action Council (NEAC) is studying ways to modify the controls placed on the outflow of short-term capital.

He told the International Herald Tribune  that Malaysia was studying two options for replacing the one-year moratorium on the  repatriation of foreign capital invested in shares - an exit tax on the withdrawal of foreign portfolio investments and a system of "most-favoured investors" which would allow investors judged to have a long-term interest in the country more freedom to move money in and out.

Malaysia would not have lost three precious months if the government had heeded the DAP’s advice in Parliament for greater flexibility in the  capital control measures.

During the Parliamentary debate on the 1999 budget on October 26, 1998, I had cautioned that the efficacy of capital controls introduced on Sept.1 remained a matter of controversy and reminded the authorities of the views of influential economists that there would have been recovery of growth in the country regardless capital controls had been imposed or not.

Although DAP is not opposed to the capital control measures as extraordinary times may require extraordinary measures, the DAP raised several critical issues about the capital control measures which have an important bearing on restoring investor confidence in Malaysia but unfortunately, these were not given serious  consideration by the government at the time.

DAP had urged the government to  encourage capital inflows - both long-term and short-term - but restrict short-term capital from outflowing within a certain time frame as what the government had done instead was to bar short-term capital inflows totally.  This was akin to locking the stable doors after the horses have bolted. It is short-sighted as in the event the horses (short-term capital) wish to return, they can’t as the doors are locked.  Or to put it facetiously,  what is there left to control when there is no capital left.

During the budget debate, the DAP proposed a form of withholding tax, or "exit tax" as mentioned by Daim yesterday, say about 3 % if within a month and then a diminishing amount the longer the capital is retained.  This will ensure that there  will be some capital inflows at least.

In this connection, the following views of  Michael Mussa, the  Economic Counselor and Director of Research Department of the International Monetary Fund (IMF) in Washington on Monday on Malaysia’s capital control measures when releasing the IMF’s latest  World Economic Outlook, which forecast a  -7.5 per cent GDP growth for Malaysia for this year and a -2% GDP growth for next year, is worth noting.
 

"My assessment is that in the short term the capital controls are probably neither going to hurt very much, nor are they going to help very much. We have seen interest rates come down in Malaysia, but we've also seen them come down in Thailand and Korea. So it is not by any means clear to me that the capital controls are assisting very much in the adjustment effort. On the other hand, it's hard to see a great deal of evidence that they are in the short term doing an enormous amount of harm either.

"There is a question, I think, for the longer term of whether because of the experience with the imposition of these controls, investors are going to be more reluctant in the future to bring capital into Malaysia because they recognize the potential that they'll be stuck because of the controls and will be unable to withdraw it. So it may well be that down the road Malaysia will look less attractive to foreign investors because they'll look back on this experience with controls and regard it as a negative.

"In the end, it will be very, very difficult to figure out whether that has happened or not because in the volatility that characterizes the behavior of the growth rate of real GDP over a significant number of years, it's often difficult to ascertain whether an event like capital controls has, say, slowed the long-term growth rate by half a percentage point for a decade or not. But we'll need to address that question more down the road."

During the budget debate, the DAP also raised another very important aspect of the capital control measures - whether  the window of opportunity created  by the capital controls were being  fully utilised to undertake structural economic and financial reforms, as eliminating corruption, cronyism and nepotism.  Unfortunately, the answer in this case is a categorical negative.

(24/12/98)