Hardev Kaur.

ECONOMISTS, even Nobel prize winners, forget that textbook examples increasingly do not apply to a real world which is changing every minute. With the dynamic world economic scenario, modern technology and communication, most textbook models are "obsolete" and do not work according to plan. The Nobel prize winners at Long Term Capital Management (LTCM) found this out when they took their mighty fund into deep trouble, prompting the US to resort to a bailout.

Increasingly, since the problems at LTCM, financial institutions appear to be less dazzled by Nobel laureates.

Even with luminaries such as John Meriwether, a former Salomon Brothers vice-chairman, and Myron Scholes, a Nobel laureate, at its helm did not stop them from nearly taking LTCM under and threatening the financial system. Nobel laureates, while highly knowledgeable in their narrow field of focus, are not exposed to the "real world" as they have not managed or led even small economies. They thus do not see the "big picture" or appreciate the impact policies have on people.

It does not require rocket scientists to see that a crisis, not least the recent financial crisis, called for practical and workable solutions and not experiments with textbook remedies, cookie cutters or one-size-fits-all solutions.

While Malaysian policies are taken to task, even by the likes of a Nobel laureate such as Melton Miller, it is conveniently forgotten that Malaysia's policies are neither straight from textbooks nor are they designed in a clinical laboratory and in highly controlled conditions.

Malaysian policies take into account the dynamism of the marketplace. Some, including, Mark Carawan, managing partner of Arthur Andersen's emerging markets and financial restructuring, suggest that Asian economies need to take a leaf from Malaysia's "book of remedies".

Malaysia, he points out, "without international intervention, has taken care of reviewing its financial sector through locally adapted structures". The policies take into account the realities of the situation and needs of the domestic economy. Miller, who criticized Malaysia's capital controls, conveniently ignores the fact that the Malaysian measures were not classic textbook controls but "selective" and designed to address a specific problem - to tackle the destabilizing short-term capital flows.

The selective controls, into their 10th month with subsequent amendments, have started to show results and "more importantly, it is an alternative which works", according to Assistant Bank Negara Governor Dr Awang Adek Hussin. The economy is showing signs of recovery, gross domestic product (GDP) is forecast to be positive with some quoting as high as 4.9 per cent this year, interest rates have declined, the stock market has regained its strength with both the index and market capitalization on the uptrend, and both manufacturing and producer indexes are showing positive growth.

Danaharta, Danamodal and the Corporate Debt Restructuring (CDRC) are instrumental in implementing financial reform in the banking system and debt restructuring of the corporate sector.

In many instances these are ahead of other crisis-hit countries which have turned to the International Monetary Fund (IMF) for aid.

Consumer and business confidence is on the uptrend in Malaysia. Big ticket items, such as houses and passenger car sales are on the rise. The trade balance position continues to register substantial surpluses.

Foreign reserves have increased to US$31 billion (RM117.8 billion), sufficient for seven months of retained imports.

In Malaysia, there are no social dislocations as those evident in IMF-assisted countries.

Tan Sri Dr Lin See Yan, former Bank Negara Deputy Governor, pointed out that the number of poor in Malaysia remained at below 10 per cent, unlike in the IMF-assisted countries where poverty has significantly increased. In Thailand, for example, the poor are getting poorer two years into the crisis. In Indonesia, there is much dislocation and many have starved, having to feed on cats and garbage.

In South Korea, the rising unemployment has seen workers resorting to demonstrations.

The fact that the original IMF policies and conditions have been amended in South Korea, Thailand and Indonesia is hardly being mentioned. They have subsequently followed Malaysia's remedies, including lowering of interest rates and increasing lending to jump-start business activities.

Malaysia also imposed the selective controls from a position of strength. Its foreign reserves were healthy, it had a low external debt and low debt equity ratio and a high savings rate.

The exchange rate was not overvalued; in fact it is undervalued. Typically, controls are imposed when the exchange rate is overvalued with insufficient foreign reserves.

Malaysia did not abandon convertibility of the ringgit. It merely illegalised trade in the ringgit abroad. The measures, as Lin points out, are "IMF-consistent and intentionally left the ringgit completely convertible on the current account and for all dealings affecting foreign direct investments". Either Miller is "ill informed or misinformed" about Malaysia's selective controls or he is coloured by his "commitment to worshiping markets and hate central banks".

He says Malaysia's currency will collapse but the market and an increasing number of analysts are of the opinion that the currency is undervalued. In addition, there is no black market for the ringgit.

Even the fixed exchange rate of the ringgit at RM3.80 to US$1 has its merits. It has provided predictability and stability for businesses. The choice of a fixed exchange rate regime is not necessarily undesirable.

As Awang told a recent seminar, the whole world benefited from the system (of fixed exchange rates) for most part of modern history, spanning the years from the pre-war periods of silver and gold standards to even the post-war Bretton Woods system and the Smithsonian arrangement which lasted until 1973. But the Currency Board, an alternative suggested by Miller for Malaysia and many other countries in East Asia in order to "break with their past histories and to junk their central banks", has several drawbacks.

These, according to Awang, include effectively giving up the Central Bank as it loses completely its discretionary power to vary the level of money supply and interest rates.

The Currency Board will also eliminate the traditionally important role played by the Central Bank in the development of financial markets and the economy. The Currency Board will not prevent speculators from taking a position against the currency, especially when the level of foreign reserves is not high. Malaysia's approach is unique and has major advantages - that is "to have the fixed exchange rate supported by selective exchange controls, while at the same time maintaining an actively functioning Central Bank as a critical agent to economic growth and development".

Increasingly, there is support for Malaysia's remedies, including the selective controls, from a wide range of people including academia, practitioners, government leaders and those at think tanks.

Even the likes of Paul Krugman, Jeffry Sachs, Joseph Stiglitz, Jagdish Bhagwati and Stanley Fisher advocate intervention where there are externalities or where there is market failure, or where the welfare of the poor is jeopardized. Singapore's Senior Minister Lee Kuan Yew says Malaysia's selective controls are one way of stopping the hedge funds' tyranny and that the Malaysian economy has not gone bankrupt.

Controls are one option available to small countries as a means of preventing hedge funds from attacking their currencies.

Krugman in his latest book The Return of Depression Economics says the controls have worked far better than the sceptics claimed.

Others note that Malaysia has not wasted the "window of opportunity". The London-based Financial Times, in a recent editorial, points out that "Malaysia has not used its controls as a way of shirking the task of reform". Awang told the seminar in Singapore that Malaysia's controls had not only helped restore stability but also "stopped the country almost immediately from sliding into recession, which would be socially unstable and economically more difficult to recover from".

This is something that Miller, the Nobel prize winner, perhaps does not consider or appreciate in his "analysis".