At exactly 11.3O am on Aug 6, after months of debate and calculation, the executive council of the National Econo-mic Action Council NEAC, headed by Prime Minister Datuk Seri Dr Mahathir Mohamad achieved full consensus and took the tough, decisive decision.

At 11am on Sept 1, Bank Negara an-nounced that once there is discernible normalization of the currency and fi-nancial markets, Malaysia will return to the previous arrangement of free capital flows". Until then, there would be tight exchange control along the lines of the China model.

Economists like Massachusetts Institute of Technology (MIT)'s Paul Krugman should be pleased. Malaysia is doing exactly what he advocated in the latest issue of Fortune magazine. Krugman argued that the crisis economies of Fast Asia had all adopted "Plan A", the traditional International Monetary Fund (IMF) medicine requiring the tightening of belts, the very tightest monetary and fiscal policy, the tough imposition of ferocious economic austerity. Krugman's view, indeed the emerging conventional wisdom today, is that the IMF formula simply does not work and cannot work. "Plan A" makes the pro-blems of recovery infinitely worse, not better. Krugman and an increasing, -though still small number - of eco-nomists believe that it is time to go for "Plan B", a difficult, drastic and heretical departure from economic orthodoxy: exchange control. This is exactly what Malaysia has done.

The verdict from those who have been badly hit and who will lose money has, understandably, been severe. Some have labeled Malaysia economically illiterate. Some are said to be feeble-minded, ignorant, stupid. Malaysia has been called crazy. "the odd man out", a "pariah", by fi-nancial experts who apparently seem un-aware that the vast majority of economies on this planet operate a system of currency control.

Anyone wishing not to insult but to understand why we took our temporary but drastic step need look no further than the headlines in the last week, indeed the main stories over the last six months. What would happen to our very small, very vulnerable, very open, very globalize economy - if Hong Kong lost its peg? If China devalued its yuan? If the Japanese yen plummets? If the Russian catastrophe hits Europe even harder? If Latin America collapses? If Southeast Asia goes into further freefall? If Northeast Asia continues its massive downward trajectory? And if Wall Street collapses, and the world's only really healthy economy fell to the floor?

The effects of much lesser shocks had over the last year been simply devastating. By early August, the dismal picture had become all too clear to the decision-makers. In the first quarter, the economy had contracted by 2.8 per cent. In the second quarter, it shrank by a further 6.8 per cent. Were we on the way to minus 10 per cent?

We were certainly in our first recession in 13 years, our second recession in almost 50 years, our worst economic crisis since the Communist Emergency of a generation and a half ago.

Rightly or wrongly, for many weeks now, the decision-makers in Kuala Lumpur had come to the difficult conclusion that if "drastic" measures were not taken and taken immediately to get growth going again. The economy would continue to drop and drop and drop, with no end in sight.

Hit by incredible falls in the value of the ringgit, a massive rise in the cost of borrowing, the withdrawal of bank lending and credit, the disappearance of the East Asian market, the toughest bargaining from the markets in North America and Europe, hurled from wall to wall by the crushing currency tornado, regional contagion, the collapse of con-fidence and the collapse of investment, and the entire weight of a vicious cycle from which there was no escape, it was believed that all major Malaysian com-panies would simply go bankrupt; the small- and medium-scale enterprises would simply die. (If all these things fell on the head of the finest super companies anywhere, they too would be on the way to bankruptcy). The decision-makers believed, rightly or wrongly that if "drastic" measures were not taken, the economy would be trapped in an economic depression lasting years, not months. There was no light at the end of the tunnel. Only more darkness.

Several years of severe economic recession, a barren lost decade, would be devastating not only to the economy but also to the entire fabric of Malaysian society. At stake was more than profit, money, jobs, standard of living and quality of life.

The decision makers believed, rightly or wrongly, that the austerity measures introduced late last year, the so-called "IMF package without the IMF" - a massive cut in government spending, a massive cut in credit expansion from nearly 30 per cent to 15 per cent by the end of 1998, the tightest monetary and fiscal policy - had clearly and blatantly failed.

I myself once thought it was the only thing that we could do, that it might work. With the benefit of hindsight, these austerity measures had made the crisis much worse, not better.

Rightly or wrongly, by early July it was felt that in order to avoid national calamity, we had to push interest rates down, to ensure the necessary liquidity, to get the banks to lend (without which there wasn't a ghost of a chance to reach even the 15 per cent end-of-1998 target), to prime the pump, to go for a large fiscal deficit, to prevent the total collapse of domestic demand and to do a hundred other non-macho, non-austerity, non-blood letting, things.

The central, inescapable problem was that all the major measures that were necessary to turn the economy around, to re-ignite the process of growth and to prevent a disastrous and prolonged economic depression would result in massive pressure on the free-floating ringgit.

Since June 1997, the ringgit had fallen from 2.5 to the dollar to 4.2 to the dollar. Even with the status quo, without any of the essential growth measures, there was already widespread talk of the ringgit falling to 4.50, 5.00, 6.00, 8.00, even 10.00 to the US dollar!

Like many others, Malaysia had "lost the confidence of the international investors", with painful consequences. Given the regional and global turbulence, it was felt that international confidence could not return in the short term.

It was felt necessary to act to prevent the collapse of domestic confidence, the loss of which would be fatal. (Just look at Indonesia)

For eight long and intellectually challenging weeks, over more than 26 morning meetings, the executive council of the NEAC debated and discussed the specific pros and cons and the minute and large nuts and bolts of capital control -before it took the very calculated decision to insulate the economy from currency turbulence in much the same way that China has been able to do. The deed is now done.

No one is under the illusion that the medicine is anything but unpleasant. Many things will change. Many, many problems will arise. But Malaysians and foreigners working in Malaysia can now stop worrying about currency attack and massive currency turbulence. The ringgit will be stabilized. It can be expected to strengthen substantially, although it will not be allowed to get out of sync, thus forcing Malaysia to lose economic com-petitiveness). All the steps needed to prevent the economy dropping further, all the mea-sures to turn it around and to get growth going once more, can now be implemented.

It was absolutely clear from the very beginning that no one should confuse insulation with isolation. We want insulation, not isolation. Our move is not an ideological statement, not a challenge hurled even at the speculators who work day and night scouring the earth in search of a good kill. Malaysia's move is not anti-West, anti-private enterprise, anti-market. It is simply pro-growth .

We are merely a ship seeking calm waters in the middle of a raging storm. Our radical move will give us shelter at a time of incredible global turbulence. People and businesses can carve on with their lives without being swept away by the swirling winds of the currency tornado.

In place from Sept 1 is capital account non-convertibility, not current account non-convertibility. There is no turning away from interdependence, from the necessity of seeing the entire world as Malaysia's marketplace. Foreign exchange, where needed, must be readily available. All the facilitation to trade, repatriation of dividends and profits, etc, will be in place and must be guaranteed.

Foreign direct investors must be assured that they are treasured. Indeed, after such a massive devaluation, and with assured currency stability, the country should quickly emerge as a most competitive platform for production for the rest of the world, a compelling advantage that should be a strong magnet to foreign direct investment.

Having taken the toughest of decisions, Malaysia must obviously now get on with the tough job of turning the economy around and the incredibly problematic task of putting the country on a healthy path to sustainable recovery and sustainable growth.

We can expect no charity for our renunciation of economic orthodoxy. We can expect no helping hand. All that we have a right to ask for - given that the orthodoxy has been tried and has abys-mally failed - is no rush to judgement on the part of others.

We now have a breathing space, a chance to do the things that need to be done to halt the freefall of the Malaysia economy, to reignite the process of growth and to ride the road to recovery.

Written By Tan Sri Dr Nordin Sopiee