By Jomo K.S.*

After nearly three years of unprecedented popularity at home, Prime Minister Mahathir bin Mohamad has seen his reputation take a beating in the business community. This is because of rhetoric that in the past lifted his stature in developing countries – his bold, almost quixotic tilting against the windmills of Western dominance.

Rather than analyse the consequences of international financial liberalization, Mr. Mahathir has been railing against George Soros, the American financier, for allegedly leading a speculative assault that has undermined the currencies of Malaysia and several other Southeast Asian countries. He recently said that currency trading was unnecessary, unproductive and immoral, and should be made illegal.

His call for an end to international foreign exchange markets and currency speculation only seemed to confirm Mr. Soros’s claim that he had become a menace to his own country because interfering with the convertability of capital at a moment like this is a recipe for disaster. The value of the Malaysian ringgit and stocks has plunged each time the prime minister has advanced his radical remedy.

By accusing Mr. Soros of using financial power to manipulate Southeast Asian currencies for profit, while offering no real evidence for such a conspiracy theory, Mr. Mahathir has obscured understanding of what has actually been happening. Not surprisingly, Mr. Soros accuses him of trying to deflect attention from his own economic mismanagement.

Still, the same Mr. Soros recently said unregulated expansion of capitalism threatened to undermine capitalism’s own future. He argued that excessive liberalization had resulted in virtual anarchy that was endangering the stability so necessary for orderly capitalist growth and democratic development.

The prevailing system of flexible exchange rates was introduced 1971 when the United States withdrew unilaterally from the Bretton Woods arrangement of fixed exchange rates, which had pegged the dollar to gold at $35 per ounce and the ringgit at three to the dollar.

The new order has had very mixed consequences. Under it, the volume of foreign exchange trade increased to more than 67 times the value of the international trade in goods by 1995.

The present system is not – as was suggested recently by U.S. Treasury Secretary Robert Rubin – an integral and long-term foundation of global trade in goods and services. In fact, various critics have offered alternatives to the present system, including a return to fixed exchange rates.

The Nobel laureate James Tobin of Yale University has called for a modest tax on foreign exchange spot transactions to enable national authorities to operate more independent monetary policies, discourage speculative capital movements and increase the relative weight of long-term economic fundamentals against short-term, speculative activity.

Another Nobel laureate, Laurence Klein, has mentioned two other options: regional monetary arrangements, and the introduction of circuit-breakers into the system – a suggestion also made by the World Bank’s chief economist, Joseph Stiglitz.

But the lobby for financial liberalization remains much stronger and far more influential, dominating most of the business media and key financial institutions internationally, especially in the United States.

Nonetheless, it would be a pity if Mr. Mahathir’s arguments were dismissed out of hand. He was raising a real problem, albeit incorrectly.

The fact is that the present international financial system and its proposed liberalization fervour those already dominant and privileged in the world economy, at the expense of developing countries, especially those at the poorest end of the spectrum.

* Jomo K.S. is author of Southeast Asia’s Misunderstood Miracle, is a professor in the Applied Economics Department at the University of Malaya in Kuala Lumpur. This article first appeared in the International Herald Tribune 10 October 1997.