Cronyism and Capital Controls: Evidence from Malaysia

Abstract

The initial impact of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically favored firms. Of the estimated $60 billion loss in market value for politically connected firms from July 1997 to August 1998, roughly 9$5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.