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Cronyism and Capital Controls: Evidence from Malaysia

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Simon Johnson
Todd Mitton

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Abstract

The initial impact of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically favored firms. Of the estimated $60 billion loss in market value for politically connected firms from July 1997 to August 1998, roughly 9% can be attributed to the fall in the value of their connections. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir. Of the estimated $5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8521.

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Date of creation: Oct 2001
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Handle: RePEc:nbr:nberwo:8521

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E - Macroeconomics and Monetary Economics
G - Financial Economics

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