The Malaysian financial crisis: Capital expansion, cronyism and contraction

The Malaysian economy crashed following a sharp drop in the ringgit and the stock market from late 1997, which came in the wake of a regional financial crisis triggered by the baht crisis that started in July 1997. Many have since begun to question the merits of Malaysia as a model of successful development. This paper traces systematically the causes of the late 1980s and early 1990s boom, and the slowdown subsequently. The boom is argued to have been shaped by increased flows of foreign direct investment through a combination of pressures forcing East Asian investment abroad and liberalisation of domestic policies and favourable depreciation in exchange rates and introduction of export‐oriented incentives, which even helped pad crony ventures. The slowdown was triggered by an appreciation of exchange rates, falling tariffs and scrapping of export‐oriented incentives, which encouraged imports and discouraged exports, slowdown in foreign investment inflows, slow technological progress in the face of rising costs, expansion in debt‐driven investment into property and real sectors and unsustainable growth in unproductive crony ventures. The bust consequendy took place following speculation, regional contagion effect, and massive capital flight influenced by herd behaviour and confidence wrecking policy statements.