The exchange controls Malaysia plans to introduce are far more restrictive than Thailand's, Thanong Khanthong and Vatchara Charoonsantikul report.

No sooner has Prof Paul Krugman of the Massachusetts Institute of Technology floated a wild idea of exchange controls for crisis-stricken Southeast Asian nations than Dr Mahathir Mohamad, the Malaysian prime minister, decides to act on it fast. Riding on the controversial wave of the Krugman doctrine, Mahathir seizes the narrow window of opportunity to announce his plan to impose exchange controls as a means to end the downward spiral of the Malaysian economy. At least he won't have to fight a solo battle against the Western critics, for in Krugman, one of the top American economists, he has now found a strong ally.

What Mahathir is attempting to do essentially amounts to a reversal of the International Monetary Fund's orthodox prescriptions for economic stabilisation. Although Mahathir was a strong critic of the IMF and its support programme from the start, he let his lieutenants practice a ''shadow'' IMF programme on a voluntary basis. Austere measures, similar to Thailand's, were introduced, ranging from the fiscal and monetary tightening to banking reforms and hoping confidence would return with a capital inflow. But after a year of swallowing the bitter pills, the Malaysian economy is worse off. The ringgit has been wobbling, falling by more than 40 per cent from its pre-crisis level.

Mahathir now says enough is enough with the austere programme. He will tackle the Malaysian economy his way. To jump-start the economy, interest rates must be cut. But interest rates cannot be cut because the rates reflect the working of the market force, which in this particular case is tied to the forward rate, essentially the differential between the US dollar and the local currency rates. If the Malaysian authorities want to cut the rates and free the ringgit from foreign-exchange volatility, exchange controls are the only way to do the job.

The exchange controls Malaysia plans to introduce are far more restrictive than Thailand's. Even during the time Thailand operated the two-tier currency system between May 15, 1997 and Jan 29, 1998, local banks could still settle the offshore baht with foreign banks. Foreign banks could also transfer offshore baht into the country. But Malaysia is now planning to curb offshore settlements of the ringgit, effectively killing the offshore ringgit market.

In the jargon of currency traders, there will be non-delivery forward for the ringgit. Other countries which are practising non-delivery forward for their currencies include North Korea, Taiwan, China, the Philippines and Vietnam. Malaysia abandoned exchange controls 10 years before Thailand embraced foreign-exchange liberalisation in 1990. It is taking a big gamble by stepping backwards to tackle the immediate problem of downward spiral.

Once this measure is introduced, the ringgit will not have any value outside the country. Then Mahathir can focus on reviving the economy by printing the money and bringing down the interest rates. Liquidity in the domestic economy will be boosted. Malaysia, which has relatively lower foreign debts, might have no other alternative but to print money, since foreign capital will not be flowing back into this region for the foreseeable future.

But the trade-offs will be expensive. Foreign investors will think very hard before putting their money into Malaysia. Tuesday Malaysian share prices plummeted 14 per cent in late afternoon trading after Mahathir hinted that Malaysia might go back to fix the ringgit. ''The exchange rate will be fixed,'' he was quoted as saying, adding that this would encourage investment from foreigners. ''With a fixed exchange rate they stand a much better chance of making a good profit,' he said.

Bank Negara subsequently denied that Malaysia had such a plan, telling the financial markets to ignore Mahathir's comment on this point. However, there were news reports that Malaysia would allow foreign investors to take their money out only a year after investing in Malaysian stocks. Moreover, the Malaysian authorities would also plan to replace the 1,000-denominated and 500-denominated ringgit notes in circulation with lower-denominated notes in order to make it more difficult to smuggle the ringgit out of the country.

Responding to Malaysia's exchange-control measures, Thai Finance Minister Tarrin Nimmanahaeminda Tuesday said Thailand would not depart from its present foreign-exchange policy since it had advanced beyond the stabilisation phase, with interest rates coming down and a stable foreign-exchange rate at Bt40-Bt41 to the US dollar. Tarrin's stance is that Thailand will continue to bite the bullet, hoping to be the first country to recover because it has followed the IMF's support programme adequately. The IMF programme hinges on a return of confidence or a return of capital inflow.