Malaysian capital controls a failure,
This article appeared in the 9 July 1999 edition of The Asian Wall Street Journal.
says Nobel Prize winner Merton Miller
Malaysians may be paying for mistake for years
SINGAPORE -- Nobel laureate economist Merton Miller said Thursday Malaysia's move last year to implement capital controls is a failure that was at best useless.
"The Malaysian flirtation with capital controls...must be written off as a failure, and one whose costs will be borne by the Malaysian people for many years to come," Miller said in a keynote address to a regional economics conference in Singapore.
The economist said despite Malaysian Prime Minister Mahathir Mohamad's claim that the program has been a success, the capital controls haven't led to a significant increase in economic activity.
Miller, who canceled a keynote address in Kuala Lumpur last year to protest Anwar Ibrahim's arrest and the imposition of the capital controls, acknowledged that Malaysian stock prices are up and the economy seems to have bottomed out.
But he added that this has also happened in other East Asian economies.
At best, controls did "nothing" - but real risk of inflation, ringgit fall
"What, then, did Malaysia's experiment with capital controls accomplish?" he asked. "The most favorable answer for Malaysia is nothing."
Miller said that if the controls are removed in September as planned, the increased money supply that has built up under the controls will likely lead to higher prices and a drop in the value of the newly floated ringgit.
"The consensus view today is, indeed, that the ringgit will fall substantially in value when, and if, full convertibility is reestablished," he said.
Judging by the black market rate of the ringgit, the Malaysian currency will drop 10% or more from its official rate of MYR3.80 to the U.S. dollar if controls are lifted, putting it back where it would have been a year ago without the controls, he said.
"That's the good news, as the old joke has it, that the experiment with controls was at best useless," Miller said. "The bad news is that the episode was actually harmful to Malaysia and its citizens."
Interest rates will probably rise once the capital controls are lifted, Miller said, noting that a recent Malaysian bond issue was priced more than 300 basis points above Treasurys.
"Some of that premium undoubtedly reflects the likely devaluation of the ringgit when trading is resumed, but some of it also is surely risk premium," he continued.
Malaysia will pay more for capital for years to come
"The creditors know that having abandoned convertibility once, a country's commitment to free and unfettered exchange transactions can no longer be taken for granted," Miller said. The cost of attracting equity funds will also have risen, he said.
Miller said Malaysia's best choice might have been to create a currency board, "which permits any country to obtain the advantages of a fixed, devaluation-proof exchange rate as long as it is willing to give up all its discretionary monetary policy."
Merton Miller is a professor emeritus of finance at the prestigious University of Chicago in the US. He spoke at the 5th Annual Nanyang Asia Pacific Central Banking Conference in Singapore.
Miller is winner of the 1990 Nobel Prize in economics for his pioneering work on the theory of financial economics. He was a principal in the ill-fated Long-Term Credit hedge fund, and is still a director of the Chicago Mercantile Exchange.
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