Background

Malaysis is a nation put together from fragments of the British Empire. TheBritish crown colony of the Straits Settlement was composed of the southern section of the Malay Peninsula, including the island of Singapore. The territories on the Malay Peninsula; i.e. everything except Singapore, became independent in 1957 as the Federation of Malaya. This is now what is western Malaysia. In 1963 the Federation of Malaya was incorporated with Singapore and Sarawak and Sabah into the Federation of Malaysia. In 1965 Singapore separated and the remaining states in the Federation became known as Malaysia. The states of Sarawak and Sabah, what is now eastern Malaysia are part of the island of Borneo. Sabah had been a territory ruled by a British charter company, but Sarawak was the holding of the family of James Brooke. James Brooke, known as the White Rajah of Borneo, was an adventure who was given Sarawak by the sultan of Brunei in return for help in suppressing a rebellion. Eastern Malaysia has very little in common with western Malaysia.

The ethnic composition of Malaysia is of significance because some public policies are based upon ethnicity.

Foreign Currency Speculation by Bank Negara,
the Central Bank of Malaysia

The decline in the value of the dollar relative to other currencies after the Plaza Accord of 1985 resulted in a decline in the foreign currency value of Malaysia's $5 billion of foreign exchange reserves. Whether the Plaza Accord was the cause of the devaluation of the dollar is in doubt, but nevertheless the Malaysian Government felt victimized by a conspiracy of the big powers and decided to strike back by using the information its central bank obtained from other central banks to speculate in the currency markets. The central bank of Malaysia, Bank Negara, soon became a major player in the international currency markets dealing in transaction with dollar values on the order of the hundreds of millions. It tried to use its dealings to trigger automatic selling rules on the other central banks. In 1990 Bank Negara sold massive amounts of pound sterling just as Britain was entering into the European Exchange Rate Mechanism (ERM) and drove down its value. In 1992 Bank Negara bought even larger amounts of pound sterling on the assumption that Britain would maintain the stability of the pound as required by the ERM. When Britain withdrew from the ERM and allowed the pound's value to fall Bank Negara lost $3.6 billion. In 1993 Bank Negara lost another $2.2 billion and by 1994 it was insolvent and its losses had to be covered by the Government of Malaysia. The head of Bank Negara resigned and the political opposition in Malaysia called for an investigation.

The Southeast Asia Financial and Economic Crisis

Malaysia rejected the orthodox policy proposed by the IMF for dealing with its economic crisis. It September of 1998 it imposed capital flow controls and as of May 1999 its strategy seems to be working. Other favorable conditions also contributed to its recovery.