Malaysia isn’t everyone’s idea of inspiration. The prime minister’s office now has its third occupant in less than two years and the economy is struggling to put the Covid-19 recession behind it. So entrenched do the problems of recent years appear that they obscure the country’s history as a financial rebel, and the role that events 23 years ago played in shaping not only contemporary Malaysia but also other emerging markets. This is an anniversary with policy resonance as far as downtown Washington.          

In the first two days of September 1998, with the region still in the grip of a severe economic crisis, Kuala Lumpur did what many developing countries feared to contemplate. Mahathir Mohamad, then in his first turn as prime minister, imposed sweeping capital controls and pegged Malaysia’s currency, the ringgit, to the dollar. Mahathir dismissed his finance minister and heir apparent, Anwar Ibrahim, who favoured more orthodox policies and was thought to be sympathetic to the views of the International Monetary Fund, U.S. Treasury and Wall Street. The dramatic reversal — Malaysia had been a beneficiary of market liberalisation at the start of the decade — was followed by predictions of doom. You can’t change the rules of the game unilaterally, nationalist leaders can’t fight the market, and so on, the arguments went. (I was sceptical myself.)

Malaysia survived, as did Mahathir, who began dismantling the measures a few months later. Interest rates came down and growth returned.

Economists have since debated the role these revolutionary measures played in Malaysia’s revival. Some say the manoeuvring created breathing space to reflate the economy. By effectively quarantining capital inside the country, the government could protect precious domestic programs and companies deemed systemically — or politically —  important. Others have explained away the relatively benign impact of the controls: They were announced after the peak of the crisis; IMF recipients Indonesia, South Korea and Thailand were already on the mend; the Federal Reserve cut rates later that year, juicing global markets. Either way, by avoiding disaster, Malaysia inspired greater scrutiny of prescriptions handed down — critics say forced — by international financial institutions. Its eventual stability gave credence to antagonists of what was known as the “Washington Consensus.” You don’t hear many IMF officials these days urging tight monetary policy and balanced budgets; the lender whose brand was austerity is all touchy feely now. 

Crucially, Malaysia’s actions paved the way for bold steps among its neighbours during the pandemic. Last week, Indonesia said it will undertake once-heretical debt monetization for a third year. There are also echoes of Malaysia’s gamble in the soft monetization employed by the Philippines, and even in India’s quantitative easing. The idea of capital controls comes up periodically in Turkey, buffeted by swings in the exchange rate and soaring inflation. (While advanced economies have done QE off-and-on for the past decade, the Covid era has seen developing nations engaging in hitherto unconventional practices.)

Malaysia’s relative economic stability stands in contrast with its political turmoil. Mahathir had dispatched with deputies and challengers before, but not so cruelly as he did with Anwar, who was charged with sodomy and imprisoned in what many people said was a vendetta. He was beaten in jail. While the street marches lionizing Anwar and demanding reform didn’t fell Mahathir, the schisms reverberate today. Mahathir held onto leadership of the United Malays National Organization, a tarnished brand. The party lost ground in the 1999 general election; Mahathir stood aside before the next polls.   

The opposition kept chipping away at UMNO and, in 2018, ironically, under a bloc headed by Mahathir, ousted UMNO for the first time since independence. Anwar’s supporters got behind Mahathir on the understanding that, if victorious, their guy would be released. The tipping point was the 1MDB corruption scandal, but UMNO’s support had been eroding before graft revelations became tabloid and movie fodder.

Prolonged politicking between Anwar, now out of prison, and Mahathir ultimately undid that winning bloc. Its successor administration under Muhyiddin Yassin was similarly wracked by factionalism and resigned last month. Ismail Sabri Yaakob became prime minister Aug. 21 and his cabinet was sworn in this week. The new premier’s majority in parliament is as slender as Muhyiddin’s, which bodes poorly for his team’s longevity, particularly as the extent of the economic damage from the pandemic weighs on the confidence of investors and the public alike. Instability will continue as long as there is more than one party claiming broad support among ethnic Malays. It wasn’t that way before 1998.

That is the untold story of Malaysia’s capital control success, for want of a better word. The country emerged externally as a champion. Internally, it was riven as never before. A few days in September tell you that the biggest beneficiaries of Malaysia’s iconoclastic legacy may have been its neighbours, more than two decades after the fact.

**This article was first published in Bloomberg.