So this is reform, Mahathir style. When the country’s feisty leader slammed the door on foreign speculators last fall by imposing currency controls, foreign investors went running. Careful analysts said Mahathir had a chance of resuscitating his flagging economy–but only if he implemented changes in the collusive way business gets done. So investors welcomed the government announcement that it will not directly bail out Renong. Yet the government isn’t exactly staying out of the Renong restructuring, either. Renong’s most profitable business, a toll-road operator, will issue bonds to cover the company’s debts–and those bonds are going to be easier to sell now that the government has extended the toll contract by 12 years. “We have to crack the myth that bailouts are the only way out,” says K. S. Jomo, a respected political economist. “If we don’t speak up now, there will be more.”
To fix the system, Mahathir would have to abandon a strategy that served him well in the past. In Malaysia Inc., huge contracts were awarded to Mahathir’s friends without open bidding. In return, the businessmen were expected to contribute when the ruling party needed support. During the 1980s, it was a win-win proposition: the friends got rich, the economy grew and the ruling party prospered.
Renong has long been at the center of Malaysia’s political struggles. In 1987 an opposition politician tried–and failed–to block the award of the first big privatization contract to Halim’s company, arguing for an open tender. In November 1997 Halim tried to bail out his company with a $700 million infusion from a relatively healthy sister company. Deputy Prime Minister Anwar Ibrahim tried–and failed–to open up the deal to the public. Last September, after Anwar started criticizing cronyism, Mahathir sacked him. He sits in jail, facing corruption charges–but crony capitalism remains a key target of his “reformasi” movement.
At the core of Malaysia’s economic problems is an opaque, politicized banking system. Mahathir was not alone in using banks to fund his friends’ projects. Anwar, too, cultivated crony bankers. Spending became reckless because it seemed the money would just keep coming. Today some 8 percent of all bank loans are nonperforming. The government has tried to clean up the mess without letting anybody go bankrupt. The government has absorbed 30 percent of the bad loans and injected $1.2 billion into ailing financial institutions. Moody’s Investors Service says such government protection could make the system more vulnerable to political pressure. “We are taking the soft approach to reform,” says Razak Baginda, who heads a Kuala Lumpur think tank. “You’re not going to see any blood.” The efforts, in the short run, may pay off. This year Malaysia could post 2 percent growth, after shrinking more than 6 percent last year.
While the money flowed, Mahathir’s favored tycoons lived it up, with fleets of Rolls-Royces, beautiful women and private jets. Halim once flew in an entire Russian orchestra to play at his prep school. The high fliers “thought they were good businessmen because they got sweetheart deals,” says Jomo. Now that cronyism has become Malaysia’s dirty little word, Halim is no longer running Renong’s day-to-day operations. “I try to keep a low profile,” he says. But for now Mahathir is still standing by his boys.
