Malaysia´s Alternative Approach to Crisis Management

Abstract

The severity of the crisis and the speed of its recovery surprised not only the affected countries but the market as well.1 After a decade of high economic growth supported by an outward-looking strategy, active participation by for eign investors and prudent fiscal policy, the East Asian economies had been touted as the global growth centre for the next century. Within six months of the onset of the crisis in July 1997, the affected East Asian economies were threatened with economic implosion and hardship. Their economic contrac tion in 1998 was the worst ever experienced. Similarly, the recovery also came swiftly, if only to some. In 1999, most of the crisis-hit countries grew between 4 and 10 per cent. Short-term capital, which had drained from the region, flooded back, thus pushing the stock markets past their pre-crisis levels. The Malaysian experience of fall and recovery generally follows that of other affected countries. The initial impact of the crisis was delayed and Malaysia managed to register a reasonably strong growth rate of 7.7 per cent in 1997. The severity of the crisis was really felt in the first quarter of 1998 when the gross domestic product (GDP) declined by 3.1 per cent, but by the third quarter the GDP fell by 10.9 per cent, its largest contraction. This sharp con traction was caused by the collapse of aggregate demand by 20.3 per cent, which primarily came from a decline of private sector investment of 50.5 per cent. Higher cost of funds and shortage of credit, excess capacity, and the expectation of decreasing consumption triggered cut-backs in private invest ment. Although there was a reduction in public consumption (-7.2 per cent), public investment (0.4 per cent), and private consumption (-7.5 per cent), these were relatively small compared with the drop in private investment. But unlike some other crisis-hit economies, the severe economic contraction in Malaysia did not translate into hyperinflation and widespread unemployment. In 1998, inflation rose to 5.3 per cent, double that of 1997, and unemploy ment climbed to 3.2 per cent from 2.5 per cent. Apart from the GDP contraction, the most striking effects of the crisis were the steep depreciation of the ringgit and the massive short-term capital out