When the Asian financial crisis hit Malaysia last year, Prime Minister Mahathir Mohamad responded by banning the removal of foreign money and making Malaysia's currency, the ringgit, nonconvertible outside of the country. The Prime Minister blamed his country's financial problems on foreign currency traders. In February, Malaysia replaced the ban on the removal of foreign capital with an exit tax that provided investors with a steep penalty for the withdrawal of funds held less than one year. Malaysia just announced that it has removed the exit tax on foreign investment. The government does not believe that the removal of the tax will result in a mass exodus of capital from the country.

Malaysia still imposes a capital gains tax on profitable investments. The capital gains tax, like the exit tax, is graduated to encourage investors to leave their capital within the country. The capital gains tax raises the cost of investment in Malaysia and could still be a deterrent to investment. Possibly as a result of Malaysia's position on capital controls, it has attracted less foreign investment than other Asia countries, like South Korea or Thailand, whose economies have also rebounded.

Malaysia's economic recovery has been aided by setting the ringitt to the dollar at a low rate. Exports became very competitive as a result and economic growth was 4.1 percent in the second quarter. Whether Malaysia's economy will continue this growth depends very much on the reaction of investors to the relaxation of controls. A significant capital outflow could damage the recovery. Dr. Mahathir believes that the outflow of capital will not be significant. Malysia has accumulated $32 billion in reserves and has a current account surplus; it could withstand the expected level of outflow.

(Updated October 1, 1999)