Asian Tiger's New Path: Blocking the Flow of Capital

A feisty, brilliant man named Mahathir bin Mohamad has led Malaysia for nearly two decades, deftly taking advantage of foreign capital and markets to turn this Southeast Asian mighty mouse of 22 million people into America's 11th biggest trading partner.

Mr. Mahathir has understood the dominant ideology of the second half of this century: that governments should let the free market guide their economies and forsake state control for liberalization.

But early this month, Mr. Mahathir pretty much kissed globalization goodbye, declaring Malaysia's currency worthless overseas, fixing its value to the dollar, and making it impossible for foreigners to yank their money quickly out of Malaysian investments.

In the aftermath of East Asia's economic crisis, which has begun to buffet the rest of the world, the managers of the global economy are deciding that free markets can be a little too free. Economists, officials, and political leaders are concluding, in the words of British Premier Tony Blair, that there is a need for "a new international financial system for a new international financial age."

The recognition is growing that there is simply too much money circulating the globe in search of profit.

In the mid-1990s, for instance, foreign banks and mutual-fund managers were making annual investments in Thailand worth nearly 10 percent of the country's entire economy. When confidence in those investments sagged last summer, the investors pulled their money out, collapsing the Thai economy and setting off a chain reaction throughout the region.

Just what sort of new system could prevent a recurrence remains unclear - except in Malaysia. Mahathir insists that countries can and should protect themselves from shocks caused by sudden changes in the international flow of capital. His is a controversial policy, since countries have been moving away from currency controls since the 1970s on the theory that free-flowing money helps trade and investment.

American Federal Reserve Chairman Alan Greenspan warned last week that "the obvious consequence of confiscating part, or all, of foreign investors' capital and/or income, is to ensure a sharp reduction in the availability of new foreign investment." The World Bank, worried about Malaysia's controls, announced this week it would postpone consideration of a $700 million loan Malaysia requested.

Malaysians seem ready to take the risk of alienating outsiders. "Right or wrong, let history be the judge," says investment banker David Chua, of the currency-control policy. "If it is wrong, then people will spit on Mahathir for a decade. If it is right, then we have an alternative."

Alternative to what? To the conventional wisdom, to the International Monetary Fund's ideas on how to help countries in crisis, to what some call the "Washington consensus." Mahathir's willingness to go it alone is part trademark boldness and partly the response of a leader whose economy is in a desperate situation.

Just a year ago, Malaysians were worried about the economy overheating, labor shortages, and inflation. Today there is recession, rising unemployment, and the perception - before the controls were announced - that there was no way out.

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