Prime Minister Mahathir Mohamad loves the spotlight, and he thrives on bashing conventional wisdom. He achieved both on Sept. 1 when, in what he promised would be a "shocking" development, he announced capital controls on what had once been one of Asia's most open economies. For good measure he also banned foreigners from taking stock market earnings out of Malaysia for 12 months. A day later, he fired his deputy Anwar Ibrahim, who had opposed steps to shut the economy off from the rest of the world. And when Anwar led protest rallies warning, among other things, that the controls would be used to bail out Mahathir cronies, the Prime Minister had him arrested.

The upshot? Malaysia has suddenly become politically shaky. And its international credibility is as low as its credit status, which the rating agencies Standard & Poor's and Moody's have both recently downgraded. Mahathir may be firmly in charge, but Malaysia has fallen off the radar screen of most foreign investors. Even the World Bank has announced that the capital controls have "disrupted" its plans to lend the country $1.7 billion. In Kuala Lumpur the black market rate for the dollar is already up to 4.2 ringgit, compared with the official rate of 3.8.

Mahathir remains defiant. To boost the stock market, he began prodding local banks--already weighed down with huge levels of bad debt--to increase their lending for share purchases. The central bank, at Mahathir's behest, also pushed through a critical change in the banking system, declaring that a loan becomes "non-performing" only if no repayment is made on it for six months, instead of the previous three-month standard. The switch, introduced Wednesday with some confusion--the same announcement had been made on Tuesday and then retracted an hour later--was ostensibly meant to allow banks to lend more. But it also provides a neat way of reducing the overall amount of bad loans in the banking system and allowing property developers with empty new buildings to stay afloat--at least in a drawn-out, Japanese sort of way. (Japan has stagnated for eight years since its bubble burst.)

So why did Malaysia do it? The country had achieved phenomenal growth in the past decade of openness. Malaysia is the only Southeast Asian country that permits foreigners to own land, for example. It was until recently the 13th largest trading nation in the world, with imports and exports more than one-and-a-half times GDP. Its 22 million people saw incomes shoot up as a result of foreign-investment inflows, often in big state-initiated infrastructure projects. So why suddenly turn away from the path of Asia's Miracle and veer instead toward a go-it-alone approach more akin to North Korea or Burma?

Economists in the region say Malaysia's shift traces to what many refer to as "the M factor." After 17 years in power, Mahathir was unable to stand back and watch as the wealth he thought would multiply to first-world levels by 2020 evaporated as quickly as the monsoon rain on Kuala Lumpur's hot asphalt. Insiders say that in recent months he has become obsessed with neighboring Indonesia, where the plunging currency wiped out economic advances of the last two decades. Determined not to suffer the same fate, Mahathir desperately cast around for a way of reasserting control over the economy, forcing out anyone--even his anointed successor Anwar--who dared to oppose him. Now the economy is firmly in the hands of one man, a 72-year-old veteran of open-heart surgery who concurrently holds the titles of Prime Minister, Home Minister and Finance Minister.

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