Isolationism Is Not the Right Path

Malaysian Prime Minister Mahathir Mohamad is defying the global economy. On Tuesday, his government announced that it was imposing capital controls and establishing a fixed exchange rate for the national currency, the ringgit. He then fired his deputy prime minister, Anwar Ibrahim, a leading Malaysian liberal. In taking these actions, Mahathir has boldly rejected the course that other crisis-torn Asian countries have followed. Instead of maintaining free financial and trade flows and restructuring domestic economic institutions, he is turning toward protectionism and insularity. But can old-fashioned economic nationalism succeed in the new global economy? Probably not.

This is not to suggest that economic nationalism has never worked. Clearly, the "miracle economies" of East Asia, with the possible exception of Hong Kong, built their late-20th century success on extensive state intervention in the economy, just as the United States did in the early 19th century and Germany did after 1870. Indeed, economic planners in Asia's first economic success story, Japan, were inspired by the leading theorist of American-German protectionism, Friedrich List. In the 20th century, John Maynard Keynes created a whole new vocabulary for managing national economies, a lexicon that shifted the concerns of economic nationalism away from crude protectionism and toward relatively independent fiscal and monetary policies. Keynes' language and methods were different from List's, but the goal was the same: maximizing the performance of an individual national economy.

Mahathir's current moves have more in common with Keynes than List. He is trying to regain control over interest rates and exchange rates, basic instruments of national economic management. But the world economy of the late 20th century is vastly different from that of Keynes' time, and Malaysia is highly dependent on foreign investment and global finance.

More than of 40% of capital investment in Malaysian manufacturing, the economy's dynamic core, comes from foreign sources. While many foreign-invested enterprises have large sunken costs in their current Malaysian operations, a strategic advantage for Mahathir, they are likely to think twice about expanding those operations or even continuing them if they cannot easily repatriate profits or utilize global financial markets. No other countries in the region appear willing to follow the Malaysian example; commentators from Tokyo to Manila to Singapore express deep skepticism about Kuala Lumpur's chances for success.