Broken Dreams
	As Malaysia slips into recession, Prime Minister Mahathir is blaming everyone—except himself. Can "Dr. M" survive the region's turmoil?
	By Anthony Spaeth

Originally published June 15, 1998
"The world is huge," goes an old Malay adage, "but try to strike at it and you will always miss." That wisdom is worth reviving in today's Malaysia, a country accustomed to the good old days of the Asian economic boom—and seriously floundering in its downdraft. The Malaysian economy is in trouble, and Prime Minister Mahathir bin Mohamad, its architect and prime mover, is widely perceived to be in a state of stubborn denial. Instead of transforming himself into Mr. Fix-It, Mahathir has chosen to lash out at the outside world—specifically at international currency traders who he believes are out to do Malaysia harm. "I feel disappointed, frustrated and at times very angry that the world would see the destruction of the economies of a whole region and say that this was caused by something else," Mahathir told TIME. "I feel a great injustice has been done here."

Combativeness is Mahathir's style, familiar throughout the region since he became Prime Minister nearly 17 years ago. It's also his substance. The ambitious, take-no-prisoners approach of "Dr. M" has transformed Malaysia's politics, race relations and, most spectacularly, its economy. Before Asia's currency crisis hit last year, Mahathir had built up Malaysia's average yearly income from $300 a person to $5,000, a legacy few leaders can match.

Trouble is, the world has changed around Malaysia—and that's something Mahathir seems reluctant to accept. In the 1980s, when the feisty Prime Minister took on British businesses or the local judiciary, Malaysia—like other young Asian nations—was not yet fully integrated into the global economy. With a weak parliament, tough subversion laws and a compliant press, a leader with big plans could do pretty much what he wanted, whether the world approved or not. But with economic borders more permeable than ever, the support of international bankers and traders can lift any country—and their disapproval, justified or not, can be ruinous. That's a lesson learned the hard way by former President Suharto of Indonesia, who found himself powerless to quell anti-government student protests partly because the outside world wouldn't have approved: his currency and the economy underpinning it would have collapsed.

There are no students on the streets of Kuala Lumpur, the Malaysian capital. If anything, young, middle-class Malaysians seem to have inherited a dose of Mahathir's supreme confidence, dismissing the possibility that their country could suffer the fate of Thailand or Indonesia. Economists have a term for it—"hazardous complacency"—and say time may be running out for Malaysia to prevent a crash. Last week, the government formally announced that recession had arrived: growth was negative 1.8% for the first quarter of the year. Investment firm Goldman Sachs (Asia) warns that property prices in Malaysia could plunge 50% by the middle of next year. Already, bank credit has dried up for most local businesses, and 25% of the country's roughly $120 billion in domestic debt is at risk. Millions of square meters of office and shopping-center space are empty in Kuala Lumpur, creating a glut that is starting to look dangerously similar to Bangkok's. Economists fear that a single bank run could set off a chain reaction of panic, a collapse of the ringgit and widespread bankruptcies.

Which puts at serious risk Malaysia's ambition to become a world-class economy by the year 2020. If the country's leaders don't get the national act together, Malaysia might end up with several years of recession, followed by lackluster growth and a landscape scattered with dashed national dreams. Even more poignant is the threat to Mahathir's place in history, which could be poised for a Suharto-esque tumble. Instead of being remembered as the man who pushed his country toward prosperity, the 73-year-old former physician could go down as Malaysia's own Godzilla, who forewent patience and rationality to angrily swing his tail, in the process reducing his amazing vision to economic rubble. "Mahathir is the problem," says Sin-ming Shaw, head of Shaw Investment Management in Hong Kong. "It is tragic. He could destroy everything he has done."

All is not quite lost. Malaysia probably still has time to make things better, and it wouldn't be beyond Mahathir to pluck victory from the jaws of defeat. "This guy can make U-turns like no other leader in Asia," says an economist in Singapore. "He could stand up and say, 'My policies have been wrong.'" For now, however, Mahathir seems content to downplay Malaysia's problems, including a banking system crumbling under domestic debt estimated at 170% of GDP. He defends a series of complicated financial deals widely seen as state bailouts for associates and, in the most controversial instance, for his son Mirzan. Most worrisome is the Prime Minister's aggressive denials that he has made any mistakes, or that problems at home are as significant as slings and arrows from abroad. "Western experts cannot distinguish between Indonesia and Malaysia," Mahathir fumes. "They therefore expect what happens to Indonesia must happen to Malaysia. This expectation is self-fulfilling because they will publish their analysis and they will be believed. The economic and financial attack on Malaysia will be increased."

Woeful predictions are indeed rolling in, and not just from the West. "Structurally, Malaysia is just like Indonesia," says Abdul Razak Baginda, executive director of the Malaysian Strategic Research Centre. "The only thing different is the scale." Finance Minister Anwar Ibrahim, who is also Mahathir's deputy and heir-apparent, announced a plan last month for a private sector fund that would take over and try to revive bad loans from local banks, similar to a fund established in the U.S. during the savings and loan crisis of the 1980s. But much, much more is needed to cope with shaky banks, insolvent finance companies and a corporate sector parched for credit—the same hydra of problems plaguing Asia's worst-hit economies. On the books, Malaysia has strong financial regulations, but they tend to get bent or ignored when important people are involved, especially in such shaky times. "The situation is dire," says Salman Khan, a banking analyst at the Goldman Sachs (Asia) research division in Hong Kong. "There is a reluctance by the leadership to face the music."

Ironically, a few quarters ago Malaysia seemed fully able to ride out the regional economic crisis. True, its currency and stock markets stumbled and an estimated $10 billion of capital fled the country, but Malaysia didn't need to call in the International Monetary Fund. Private firms had a relatively small amount of foreign loans on their books. The leadership seemed strong and enduring, unlike those in Thailand and South Korea, and far more nimble than the Suharto regime. Economists then conceded that the days of 8% yearly growth were over but figured that, after a slowdown of perhaps 15 months, Mahathir would engineer a recovery that would be the region's beacon of survival. "Malaysia could have been the swing factor in Southeast Asia," says Robert Zielinski, head of Asian banking research at Jardine Fleming International Securities in Singapore.

How did things go so wrong? Mahathir's tirades were the first blow. When Thailand's financial problems touched off last year's currency crisis, forcing devaluation in such disparate economies as the Philippines, Indonesia, Malaysia and South Korea, Mahathir loudly proclaimed that the global financial system was not only too powerful but irrational and unfair. It was easy to agree as panic swept across the region, but Mahathir ranted on and on, and his government started showing a highly visible hand in trying to protect its markets. Last August, Malaysia prohibited short selling—a process that involves borrowing shares an investor thinks will fall, selling them and then buying them back at a lower price. (Mahathir's edict effectively propped up the stock exchange by making it harder to trade.) In September, he announced that the government would form a $20 billion fund to buy Malaysian shares at above-market prices—another controversial intervention. He threatened to use the country's draconian Internal Security Act to punish number-crunching analysts who dared to issue negative reports on the economy. At a World Bank-IMF meeting in Hong Kong, the Prime Minister said currency trading should be "made illegal." In reaction to that, the Malaysian ringgit immediately lost 2% of its value against the U.S. dollar (all in all, the currency has fallen more than 50% since last June), and the stock exchange tanked. "What upsets me," says K.S. Jomo, an economist at the University of Malaya, "is that while there was some truth in what he was saying, he kept on saying it even after it was clear his outbursts were causing the ringgit's fall."

The tirades continue, as does a year-long tug-of-war over policy between Mahathir and Deputy Prime Minister Anwar, who is also Finance Minister. From the start, Anwar assured the world that no matter what Mahathir declared, his deputy would be making rational decisions behind the scenes. But that hasn't always been the case, and a Jekyll-Hyde leadership has developed. Last year, Anwar preached fiscal austerity; but his October 1997 budget included some of his boss' grandiose projects, including a plan to build the world's longest bridge, to the Indonesian province of Sumatra. That project was subsequently canceled, but not the ultimate Mahathir monument: a new capital city 25 km south of Kuala Lumpur, which is already under construction in a former rubber plantation. Estimated cost when completed: $5 billion. Another $8 billion is being spent on a hi-tech "Cybercity," part of the so-called Multimedia Super Corridor, an information technology industrial zone.

The battle continued last week as the Prime Minister argued publicly for lowering interest rates—which could further sink the ringgit—while Anwar and central bank governor Ahmad Mohd Don insisted that money remain tight. Whenever he can, Mahathir flays the world for its unbridled power and callousness. "We live in fear", he says. Anwar's philosophy is vastly different. In a speech last week in Kuala Lumpur, the Deputy PM mused that Asia's economic crisis could actually bring about a "creative destruction that will cleanse society of collusion, cronyism and nepotism"—although he discretely left colluders and cronies unnamed.

Behind the scenes, the key split between Mahathir and Anwar is over the controversial corporate bailouts. To build up the economy in the late 1980s and '90s, Mahathir hand-picked entrepreneurs and showered them with government contracts and easy funding. The crisis has hit many of them hard—and for rescue they have come running back to the Prime Minister. In November, cash-rich United Engineers (Malaysia), or UEM, announced that it had received government approval to take over its heavily indebted parent company, Renong Group. That firm is the flagship of an empire controlled by Halim Saad, who has close ties with Malaysia's ruling party, the United Malays National Organization. Halim was bailed out with an estimated $800 million, and UEM's shareholders, including 24 major international investors and funds, suddenly found themselves owners of a much poorer company. Outraged by the move, investors pushed the stock market down 20% in three days. Anwar publicly opposed the deal; both he and former Finance Minister Daim Zainuddin, director of a newly formed National Economic Action Council, pledged no more big bailouts.

But they have continued. Next in the spotlight was shipping tycoon Mirzan Mahathir, the Prime Minister's eldest son. The local stock market's crash has wiped out some $900 million of his wealth on paper, and in May, Mirzan announced a rescue package for his empire that includes support from state-controlled Malaysian International Shipping Corp. and Petronas, the government-owned oil giant. The Prime Minister insists it was a routine commercial transaction at fair prices, but some Malaysians believe the arrangement smacks of favoritism. Indeed, both Anwar and the head of Petronas opposed and stalled the deal for months until pressure from above became too intense. Says Chandra Muzaffar, head of Kuala Lumpur's Just World Trust, a social reform think tank: "The Prime Minister made the biggest political mistake of his career." Says Mahathir: "People are determined to say I am helping my son. The fact is, I have been very firm about these things... I didn't make any decision."

But at an April cabinet meeting, when Anwar was out of the country, the government also approved large loans to a Mahathir friend, Vincent Tan, and Perwaja Terengganu, a state-supported white elephant that has never made a ringgit. Still pending is a controversial proposal to compensate Ekran Bhd., a holding company controlled by another influential industrialist named Ting Pek Khiing, for the hundreds of millions Ekran says it lost when the government cancelled an ambitious dam project last year.

The bailouts have given Anwar ammunition against his boss, although insiders believe the Deputy Prime Minister isn't likely to mount an intra-party coup against Mahathir unless he is fired as Finance Minister. More likely, says Chandra, Anwar is positioning himself as a credible alternative to Mahathir—one with a significantly different style and outlook—in case the economy really takes a tumble. "If there are many more layoffs and bankruptcies," Chandra says, "and if people inside the party are affected, then the pressure on No. 1 will increase from within the party." The bailouts have yet to rile the public, largely because Malaysia's press is famously easy on its top politicians. But that was true too in Indonesia until a few weeks ago, and Mahathir's friends in need are increasingly starting to resemble the cronies of Suharto and former Philippine President Ferdinand Marcos. "People are making those connections," says Chandra.

Mahathir argues with considerable passion that he is trying to salvage some of the economic forces he has unleashed in his 17 years—in particular, the industrialists who helped the country grow. They are now threatened by an outside world of speculators and bankers who no longer want merely to invest and lend but also to have a close look at the books. The world, meanwhile, increasingly sees an entrenched Prime Minister—of all world leaders, only Cuba's Fidel Castro has held power longer—who is trying to protect his associates. At the very least, Dr. M. is out of step with the new tune being played by the global economy. And that brings up another old Malay saying: "One unable to dance blames the unevenness of the floor." —Reported by John Colmey/Kuala Lumpur

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