The government has abused the capital and exchange control (CEC) policy in "helping a few people close to them", said a local university lecturer in Universiti Kebangsaan Malaysia today.

In his presentation at the Third International Malaysian Studies Conference, Universiti Malaya's Mohamed Aslam said, "It seems that the ruling party is practising the "economics of corrupt democracy".

"Economically, Malaysia has missed an opportunity to stabilise and promote sustainable economic growth by fully utilising the policy," he said in his working paper 'Malaysia: Capital and Exchange Controls, Economics Rational, Stock Market and A Corporate Mess'.

"Malaysia may face another phase of economic crisis from the US economic slowdown and prolonged economic recession in Japan," he added.

In September 1998, Prime Minister Dr Mahathir Mohamad implemented the CEC policy to cushion the Asian financial crisis which hit the region in 1997.

Crisis impact

The idea of these measures emerged since the policy package prescribed to Indonesia, South Korea and Thailand by the International Monetary Fund failed to contain the impact of the crisis.

The three-day conference with the theme 'Malaysia in Transformation: Problems and Challenges' was organised by the Malaysian Social Sciences Association, in collaboration with the university's Institute of Malaysian and International Studies and Institute of the Malay World and Civilisation.

The topics covered at the conference include government and politics, labour, immigration and management, women and development, science and technology, environment and society, education and health, international relations and globalisation and culture, language and literature.

Mohamed, who lectures at UM's Faculty of Economics and Administration, said the 1997 economic crisis has struck many large corporations and most of the companies are closely associated to members of Umno.

"Since banks are reluctant to provide loans or refinance the companies in debt, and the companies themselves barely undergo extensive 'market-based' debt restructuring, the government (including public fund entities) has been asked to step in to help those sick firms (selected) by issuing guaranteed bonds or by paying cash," he said.

Indebted companies

"Implicitly, the bonds are financed by the taxpayers and this has created unhappiness in the society," he added.

Mohamed said the CEC policy and expansionary monetary policy have expanded liquidity in the financial system.

However, he added, banks remain sceptical in providing or extending banking facilities to fragile or indebted companies.

"Due to the experience from the effects of the economic crisis, banks are hesitant to provide loans to weak companies to avoid facing another height of non-performing loans," he said.

However, Mohamed said, the capital control (and the fixed exchange rate) would have been ineffective in restoring monetary policy independence without the exchange control.

"Even though the government has received a lot of criticism mainly from portfolio investors who stated that the capital and exchange controls could harm investment, nevertheless the CEC policy has promoted and stimulated economic recovery," he said.

"Although the CEC policy has directly hurt incentives to invest in portfolio instruments, it is not in foreign direct investment (FDI)," he added.

"There are other reasons why FDI is diverted from the country, among them are China's robust economy and the recession in Japan," he explained.