The paper looks in depth at Malaysia's unorthodox capital and other currency control measures introduced in September 1998. The failures of the international financial liberalization advocated by the Washington Consensus are acknowledged at the outset. The study seeks to explain the circumstances in which Malaysia's controls were introduced as well as assess their nature and impact before drawing some general lessons of relevance to other emerging market economies. The paper considers the recent evolution of the Malaysian financial system and regulation in the decade preceding the outbreak of the crisis in mid-1997.

Early Malaysian policy responses from July 1997 until September 1998 are then considered, followed by a detailed consideration of the nature of the control measures and an assessment of their efficacy. Finally, the actual significance of the Malaysian controls is emphasized, before some policy lessons are drawn. The paper suggests caution in making gross generalizations and instead urges greater attention to context and detail. Measures to insulate the domestic banking system from short-term volatility through regulatory measures and capital controls on easily reversible short-term inflows as well as stricter prudential regulation and supervision may be far more effective and desirable.

Although the 1998 collapse was less deep in Malaysia than in Thailand and Indonesia, and the recovery faster after early 1999, the pre-crisis problems in Malaysia were less serious to begin with, owing to strengthened prudential regulations. There is little evidence of any serious harm to the Malaysian economy that can be attributed to the introduction of the controls, but it is impossible to prove that the continuation of the controls would have had absolutely no negative effects on desired long-term foreign direct investment. Capital controls on outflows and other such efforts to prop up a currency already under attack may well be of limited effectiveness, depending on very specific circumstances. The absence of serious damage attributable to the Malaysian controls led then IMF Managing Director Horst Kohler to endorse the consideration of controls on outflows for countries in financial distress.