The “Asian Contagion” currency crisis that depressed Thailand, Indonesian, South Korean and other currencies by as much as 70% was not yet over. Larry Summers, then Deputy Secretary of the U.S. Treasury, was describing the U.S. vision of financial world order; as Time magazine reported, he was “bursting with hubris over its booming equity markets and its just-announced 5.6% fourth-quarter growth figure.” On the same stage as Summers, Mahathir bin Muhammed, Prime Minister of Malaysia, was calling for short-term currency controls to prevent “hot money” speculators from infecting the Malaysian ringgit with the same disease.
Restricting the conversion of ringgit to dollars was anathema to Summers, flying in the face of free trade generally and limiting the freedom of bankers to speculate in currency specifically
This limitation of speculation was exactly Mahathir’s point. He cited the International Monetary Fund’s 1997 judgment that “Malaysia is a good example of a country where the authorities are well aware of the challenges of managing the pressures that result from high growth and of maintaining a sound financial system amidst substantial capital flows and a booming property market.” Mahathir charged that despite this record, speculators were betting against the ringgit, based not on its long-term value but on the risk perceived because of the Thai experience, and that their position would be self-fulfilling: their negative bets would drive down the currency, making the speculators an untidy profit and crashing the Malaysian economy by reducing its ability to pay its dollar-denominated debts. In turn, this would have real world impact on its citizens.
Mahathir stood his ground, not just at Davos but in the financial markets, by refusing the IMF’s aid, reducing Malaysia’s interest rates, and restricting currency trading. For this he was sharply criticized by the IMF, whose proposal was to restore investor confidence in the ringgit by letting the currency fall and maintaining high in-country interest rates, both disastrous for the Malaysian on the street, whatever the boost to investor confidence.
But in a 2001 paper, the IMF acknowledged that Malaysia’s policies had been effective, and that Malaysia’s recovery in 1999-2000 was among the strongest of the Asian crisis economies—and even apologized for the criticism.
A live case how we need both free and regulated trade of currency. That’s why every economy is a mixed one. IMF was wrong in both US and emerging markets.