Accommodating Global Markets: Malaysia's Response to Economic Crisis

The East Asian financial crisis has shown how governments in affected countries have had to contend both with the external constraint imposed by global capital mobility and domestic political dynamics when instituting adjustment to the crisis. Some commentators see the reform process in the East Asian states as an outcome of the disciplining behaviour of financial markets that will lead to the complete dismantling of those structures that supported the state- directed developmentalist mode of economic organisation and the emergence of a neo-liberal form of capitalism. Others point out that because the economic systems in place in the East Asian states are societally embedded, their complete dismantling in favour of the neo-liberal model is neither assured nor justified at this point in time. The Malaysian experience shows that despite having to accommodate global markets, the government has tried to maintain the ethnic-based distributive policy that favours ethnic Malays with material entitlements. One reason for this was to ensure the security of state and regime (or political system). A second reason was because the state was not wholly insulated from a key social group that emerged as a result of the ethnic-based distributive policy, namely an elite Malay corporate group. A third reason was economic nationalism, a major component of Prime Minister Mahathir's vision for the country that stressed the building up of Malaysian corporations and conglomerates able to compete with global corporations in a globalised world economy. For these reasons the extent to which a more orthodox or neoliberal adjustment response could be embraced was limited. Two key features of the state in Malaysia facilitated this process of defending national economic arrangements, at least during the period in question. First, the state's access to domestic sources of funds for adjustment allowed the authorities to maintain foreign equity restrictions in strategic sectors like banking. Second, the centralisation of power in the office of the Prime Minister and the subordination of the other branches of the state and of civil society ensured that the ideas, interpretations and interests of Prime Minister Mahathir and his allies ultimately prevailed in the way the crisis was evaluated and adjustment pursued. Despite these domestic constraints, the government has liberalised some aspects of the ethnic-based distributive policy in a move to accommodate global market forces and restore growth. This does not, however, imply a shift in the ideological and policy agenda towards complete embrace of neo-liberal norms and practices. The imposition of capital controls, although announced as a temporary measure to allow space for the government to pursue its preferred course of adjustment, nevertheless indicates that the commitment to free markets is instrumental or tactical. The Malaysian case suggests that movement towards neo-liberal forms of economic organisation as a result of the financial crisis may be limited and is is not inevitable.