Malaysian PM was ahead of his time

Dr Mahathir Mohamad is having the last laugh. Rather than going cap in hand to the International Monetary Fund, the former prime minister of Malaysia was called an idiot, an ignoramus and a pariah for introducing capital controls during the Asian financial crisis. Now look what's happening in Europe, especially with the latest rescue of Cyprus' banking system.

Back then, Western savants and pundits were almost unanimous in denouncing Mahathir's measures. Why? Well, free-market fundamentalism - the (un)holy gospel of Washington, London, the IMF and the World Bank.

Now the Cypriot government is expected to impose capital curbs as part of the rescue package sanctioned by the so-called troika of the European Commission, European Central Bank and IMF. Measures will include restrictions on bank withdrawals severe enough that they may limit the ability of people to take money aboard. Umm, isn't this the euro we are talking about, the free currency of the euro zone?

Iceland, another tiny country, has also imposed capital controls since 2008. It is not part of the euro zone and was denounced by Western savants and pundits. Now its economy is recovering rather nicely. In December, the IMF effectively changed religions by claiming capital controls may sometimes be necessary and be the lesser of evils. Previously, it had favoured unfettered flows of money across borders. It's obvious that surging hot money moving swiftly in and out of developing economies without deep markets and well-functioning financial institutions could be highly destabilising. Since 2010, emerging countries such as Brazil, Indonesia, Thailand and Korea have introduced capital curbs to counter the ultra-loose monetary policy pursued by beleaguered Western economies.

As Paul Krugman of The New York Times has pointed out, capital controls were common in the post-war era, a much more stable time. But since we allowed international capital to go on steroids, he points to crises in Mexico, Brazil, Chile and Argentina in 1982; Sweden and Finland in 1991; Mexico again in 1995; Thailand, Malaysia, Korea and Indonesia in 1998; Argentina again in 2002; and recently Iceland, Ireland, Greece, Portugal, Spain, Italy and now Cyprus.

Mahathir, I salute you.