Malaysia in the Era of Globalization #36

By M. Bakri Musa

Chapter 5: Understanding Globalization (Cont’d)

Missing the Japanese Lesson

In truth many misread the Japanese success story. As Harvard’s Michael Porter observes in his book, The Competitive Advantage of Nations, the successful Japanese companies that now dominate global markets – the Sonys, Olympus, and Toyotas – had survived rigorous competition at home. They competed aggressively among themselves and only the most vigorous, those who have mastered the art of satisfying their customers and reducing the costs, go on to conquer the world. Meanwhile their “protected” industries – their banks and other financial institutions – are wallowing in misery, unable to compete beyond their shores.

As a result of its commitment to foreign trade, Malaysia enjoyed a boom in direct foreign investments in the 1980s and 90s. These later investors were chiefly in manufacturing, especially semiconductors. They were welcomed because, quite apart from the employment opportunities provided and foreign exchange earned, they spread the “Made in Malaysia” brand names worldwide. Malaysians also discovered that being a factory worker, even a foreign-owned one, was much more agreeable to working the land under the blistering sun. Indeed those foreign employers, yes even those companies owned by our former colonizers, were much more enlightened and generous with their benefits than native ones!

Thus it was a no-brainer for Malaysian policymakers to welcome foreign investors even if it that meant abandoning long accepted dogmas. For example, during the recession of the mid 1980’s, the government saw fit to relax the stringent rules on Bumiputra ownership and employment in order to attract foreign investors. Foreign investors were now no longer derisively labeled as capitalists or exploiters of workers; rather they were much-welcomed employers and contributors to the nation’s well being.

Having seen the tangible benefits of direct foreign investments and trade, Malaysia felt encouraged to liberalize further its markets. The initial steps were tentative and tepid, and consisted of mainly dismantling the massive barriers and tariffs. Later, foreigners were allowed total ownership of enterprises that catered exclusively for exports.

Remarkable things happened. For one, local industries forced to compete with imports were now producing better quality products. For another these investors, especially the Americans, transferred their superior technology and expertise onto local hands. These early successes emboldened the government to free up other sectors like financial and capital markets. Local companies could now tap foreign capital and likewise, foreign funds could flow easily into Malaysia. These liberalization steps notwithstanding, the government still controlled the financial sector and other “commanding heights” of the economy.

With the subsequent free flow of capital, Malaysia took off. With foreign portfolio managers now tracking the local stock market, the Kuala Lumpur Stock Exchange (KLSE) index zoomed; so too the local economy, especially real estate, fueled by the easy availability of foreign loans. The skyline of Kuala Lumpur was reshaped almost daily with the sprouting of new skyscrapers. Foreign lenders, smitten by their earlier successes, were rushing to lend lest they would be left out of this latest El Dorado. The herd mentality took hold, with money managers compelled to seek borrowers in Malaysia. Every little project could now get funded regardless of its economic sense.

Alas, all that came to a crushing halt with the economic crisis of 1997. The bubble burst.

For Malaysia the end results were essentially these: its currency devalued by about 40%; economic growth sputtered; and its high-flying corporate players grounded. But the most significant casualty was that the tentative liberalization steps came not only to a crashing halt but were reversed. Malaysia instituted strict capital controls and declared its currency illegal abroad. The economic consequences were severe enough, but the more significant impact was on the collective Malaysian psyche. Foreigners are now looked upon again with deep suspicion; viewed as the new colonizers and as the cause of the crisis.

There is no shortage of analyses on this crisis. But economic post-mortem lacks the certitude and finality of the medical variety. The debate continues. One feature is not disputed – the distrust of foreigners resurfaced.

The seeds of such suspicions however, had been sown much earlier, during the liberalization phase and the coming of the third wave of foreign investors. This third wave, symbolic of globalization, was made up not of planters, miners, or manufacturers as with the first two waves, rather of “knowledge workers.” To use the phrase of President Clinton’s Labor Secretary Robert Reich, they are the highly valued “symbolic analytic” workers: consultants, professionals, investment bankers, venture capitalists, and others. Their services were already highly developed and efficient in the West; thus they targeted the vast virgin territories of the Third World for their next conquest.

What galls Malaysia and other developing countries is that unlike earlier investors who seemed to bring tangible beneficial results to the host nation, these later investors appear to just rake in the profits. Western bankers and portfolio managers would invest in Malaysian companies, reap the profits, and then move on. To the uninitiated, they appeared to come into the market, speculated on some shares, and then walked off with their bounty. What Malaysians did not realize was that these foreign funds buoyed the KLSE index and the shares of many local companies. With the increased value of those shares these companies could leverage their equities to get even more loans. But when the crisis hit, foreign investors fled, chased away by among other things, capital control.

The KLSE tanked, losing nearly 80% of its value in dollar terms. Companies that had leveraged themselves precariously had to unload their shares. That in turn created a downward pressure on stock prices. Nearly five years later the KLSE index is just barely halfway up to its highest point just before the crash. It will remain sluggish until foreign money returns.

This third wave of investors brought with them only their superior skills, symbolized by their ever-present laptops. Although their services were needed badly, they also ended up exposing the inadequacies of local talent and institutions. Thus when these new foreign enterprises easily captured local markets with their innovative products and superior services, their local competitors were reeling. When Citibank issued credit cards and consumer loans to civil servants based solely on the security of their job (a niche hitherto ignored by local banks), not only was it a huge success but it also irritated local banks. As the government and members of the ruling elite own these local banks, it did not take long before Citibank would be accused of unfair competition, and legislations introduced to curb its expansion.

This scene would be repeated with other financial institutions like brokerage and insurance companies, as well as other sectors. The professions too were quick to jump in to curb the inflow of foreign experts, under the pretext of maintaining “local standards.” The Bar Association was making threatening noises when the government was planning to open up the legal service to foreign competition. When the prestigious multinational law firm Baker & McKenzie was contemplating a branch in Kuala Lumpur, there was a huge outcry from local lawyers. Never mind that the vast majority of local firms are nothing more than one-lawyer operations and thus cannot even begin to comprehend the needs of modern multinational corporations. Nor are local lawyers trained in the intricacies of international law, or familiar with the new financial products and services that are being hawked by these new companies of the K economy. Fields like cyber laws, patent laws, and intellectual property rights that are the concerns of the new economy are not even taught in local law schools.

Instead of looking at these foreigners to upgrade local services and skills, Malaysians (agitated and aided by their leaders) view them instead as rapacious predators. There is mortal fear that the likes of Citibank and Bank of America if left unchecked would devour local banks. Similarly, the Merrill Lynches and Charles Schwabs would wipe out the country’s creaky and inefficient securities industry. Money managers like Fidelity and Templeton Funds, with their aggressive marketing and efficient services, would crush local competitors. The fact that local consumers prefer these companies with their more superior services and products is completely ignored by the authorities.

Malaysians, like consumers everywhere, look for the best value for their hard-earned cash. They could not care less who provide the services. But the authorities, stuck in the old school of economics and unable to unshackle themselves from their nationalistic mentality, insist that banks, insurance, brokerage firms, and other commanding heights of the economy remain under local control.

Like their manufacturing counterpart earlier, the local financial sector was protected from aggressive foreign competition. And just like the earlier manufacturers, the finance sector remains flabby, inefficient, and poorly managed, unable to graduate to the next level that increasingly sophisticated Malaysians have come to expect. Thus while international banks could clear foreign money drafts almost immediately, local banks would take weeks, all the while profiting from the free “float” at the expense of customers.

Next: Trading in Money