From Che Det by Dr. Mahathir
1. One reason advanced by the advocates of letting the Ringgit to be traded abroad is that it will encourage foreign direct investment.
2. There was a time when Malaysia practically pioneered encouragement for foreign direct investment. It was even before FDI became popular with many developing countries as a shortcut to economic growth. Malaysia wanted FDI for job-creating labour intensive industries because of the need to create employment opportunities for its workforce at that time. It was really not about growing the economy.
3. For Malaysia at that time, foregoing taxes and even local participation were not important. The Government did not rely on FDI to fill its treasury.
4. The policy of attracting FDI was so successful that it resolved the problem of unemployment until it created a problem of labour shortage. This led to an inflow of foreign workers and the expatriation of billions of Ringgit back to their countries. FDI no longer helped Malaysia's growth.
5. But being used to this easy approach we keep on inviting FDI believing that it would still help with our economy. But let us look at what really happens when there is foreign direct investment.
6. Most people think that there would be an inflow of capital. But actually only about 10 per cent of the capital needed was brought in. The rest is borrowed from local banks, preferably foreign owned banks. It is therefore Malaysian money that is invested.
7. Apart from tax exemption Malaysia also subsidised the operations of foreign owned companies through subsidised electricity, fuel and domestic transportation. Of course the Malaysian workers contribute through their cheap labour.
8. There is another type of FDI which is even less beneficial. This take the form of investments in the stock market. Usually the objective is not to benefit from profits and dividends but from capital gains.
9. When foreign investors buy Malaysian shares, the prices are likely to appreciate. Foreign institutional investors, especially pension funds can easily push up share prices with their repeated purchases.
10. When the prices are high enough the investors would dump the shares and collect capital gains. The local investors would lose money as prices depreciated.
11. During the financial cirisis of 1997-98, foreign investors dumped their shares so as to quickly change the Ringgit into foreign (US) currency before further falls in the Ringgit would give them less foreign currency in exchange. This invariably caused a steep fall in the share prices and Stock Market Index with consequent losses by local investors.
12. The Malaysian Stock Exchange makes money from commissions or the sales and purchase of shares. Consequently they are happy with more selling and buying on the Exchange. They therefore welcome foreign investors in the market. In fact they believe that if short selling is allowed they will make even more money.But these kinds of market activities do not benefit the nation.
13. FDI is double-edged and caution is needed when deciding on encouraging it. Today FDI is not coming into Malaysia because countries such as China, Vietnam, even Thailand and Indonesia offer lower cost of labour. Besides the economic recession in America and Europe mean less capital is available.
14. But what about the Ringgit? How will it affect the FDI? We need to know whether there was a lowering of FDI due to fixing the Ringgit exchange rate in 1998. If there was, was it directly due to the exchange control or other factors like increase in the cost of labour and competition with the above-mentioned low cost countries?
15. Actually when the Ringgit was fixed at RM3.80 to 1 US Dollar, the cost of investing in Malaysia was lower in terms of foreign currency. Now that the Ringgit has appreciated to RM3.20, the cost has appreciated. If we allow free trading of Ringgit abroad, two things can happen.
16. If the Ringgit strengthens then the cost of investment in Malaysia would increase, This would not facilitate foreign investments.
17. On the other hand the currency traders may once again cause the Ringgit to depreciate. This may result in increased FDI. But remember how we went into recession when our ringgit was devalued by foreign currency traders? Do we want to have that crisis again?
18. The present financial crisis in the world is due to the abuse of regulations in the financial market. No positive steps have been taken so far to regulate it. Certainly currency trading remains unregulated and selective.
19. The latest report says that every day currency trading is valued at four trillion dollars, equal to the total output of Germany in one year.
20. Whereas Germany's 4 trillion dollars yearly output creates millions of jobs, businesses big and small and much trade, the 4 trillion a day currency trade creates practically no jobs, businesses or trade. Of course the currency traders make tons of money. In the process we know that they can cause a repeat of the crisis faced by the world when they lose. Why should the world allow such greedy people to put the world at risk.
21. If we fully free our Ringgit the risk of being attacked by currency traders will once again be faced by us. Do we really want to have the financial crisis once again?
22. So I hope the Government will explain why it wants the Ringgit to be traded again. I hope it is not because we want to be good boys who will always do what we are told to do.