Mahathir: Shun currency trading, focus on 'real business'

MANILA, Philippines — Former Malaysian Prime Minister Mahathir Mohamad, the country's leader during the 1998 Asian financial crisis, urged Asia to shun currency trading and to focus on "real" businesses that produce jobs and provide services. 

In a panel discussion following his recent lecture at the University of Santo Tomas (UST), the statesman called currency trading a “bad business,” reminiscent of his moves to limit foreign-exchange transactions when the ringgit was under speculative attacks about 15 years ago.

“Currency trading does not produce jobs. It doesn’t create industry spin-offs. It does not need shipping or transportation. This is a bad kind of business… We should focus on the real business of manufacturing goods and providing services,” he said in his lecture Monday, June 11.

Currency trading or foreign exchange is the trade of international currencies, creating relative values for each currency. It is done in a market of no controls, principally based on the idea that markets are self-regulating.

"(The) decision not to regulate markets was the worst decision ever made,” Mahathir said.

The statesman delivered these remarks in connection with UST's conferment on him of the title honorary professor.

Benefiting a few

Mahathir has long been a hard-line critic of Western-style financial market management, stating it only benefits an elite minority.

During the Asian crisis, he responded with capital controls when investors fled Asian economies and the ringgit plunged about 90% against the dollar over a period of 6 months. He blamed speculators, including billionaire financier George Soros, for the trades on the ringgit that undermined and could have destabilized the Malaysian economy.  

The Mahathir-led limits to foreign exchange transactions trapped foreign capital within the country, while pegging the currency at a fixed rate against the dollar stayed on for over 7 years.

The International Monetary Fund criticized Mahathir's currency controls, but later acknowledged limits to capital flows as "legitimate tools" that countries could use when their economies are being destabilized.

Recently, Mahathir earned the ire of some investor and policy groups again, including IMF's current Managing Director Christine Lagarde, when he favored the exit of Greece from the Eurozone as crisis in the region deepens.  

He had written in an opinion piece for the Financial Times earlier this year that Europeans and Americans have invented “new financial products such as short-selling of shares and currencies, subprime lending, securitization, leveraged investments through hedge funds, and a multitude of others.”

“Getting greedy, they abused the system, manipulating the market for greater profits,” Mahathir said.

In his lecture, Mahathir said he allocated 25% of Malaysia’s national budget during his term to education and training. This allowed locals to learn about manufacturing, allowing Malaysia to import raw materials, develop these, and eventually export the final products.

Malaysia's gross domestic product (GDP) became largely based on exports afterwards, Mahathir said.

'Real business' in PH

In the Philippines, major economic indicators display growth in manufacturing and services at least in the first quarter of 2012.

Latest data from the National Statistical Coordination Board (NSCB) show the manufacturing industry grew by 5.7%. This growth, however, is slower than last year’s that was pegged at 8.1%.

Manufacturing also tops the list of sectors that were primary recipients of foreign direct investment (FDI). (Read: Foreign direct investments up 72% in Q1.) 

On the other hand, the services sector as a whole grew at 8.5%, driving the quarter’s GDP growth at a surprising 6.4%. (Read: Philippines grows 6.4% in first quarter, second fastest after China.)

A stark difference, however, between Malaysia’s services sector and the Philippines’ was the level of compensation for service providers. Mahathir said, “Labor-intensive industries go to countries where wages are low. They don’t go to Malaysia. We attract industries that pay higher wages.”

Mahathir's strategy

Mahathir added he capitalized on making Malaysia more viable for FDI by extending tax incentives and minimizing bureaucratic strains. It was a risk, said Mahathir, as it was done at a time when the country had just gained independence and was afraid of foreign take-over.

Talking about the results, he said, “Lots of Malaysians found employment. Their income stimulated consumption.”

In the panel discussion, Mahathir also explained the need to adapt to “competition.” He said government needs to constantly adjust their policies in a competitive world. The statesman cited the example of Malaysia, which chose to lower costs for technological gadgets in reaction to the competition posed by Singapore.

A panelist in Mahathir's lecture, UST's Dr Peter Yu, also commended Malaysia's infrastructure. He noted, however, that the Philippine government “can't follow the exact same path of Malaysia” because the latter is rich in oil and natural gas reserves unlike the Philippines.

A medical doctor by profession, Mahathir said not being an economist is an advantage for him because it allows him to “think outside the box.” “I’m not bound by economic theories,” Mahathir said.

During his lecture, Mahathir also warned against the dangers of an irresponsible democracy (Read: Mahathir warns vs 'too much democracy.'— Rappler.com