Issue cover-dated June 27, 2002

What brought Daim down

In many ways, Daim Zainuddin was the leading architect of Malaysia's economic model. But his break with Prime Minister Mahathir Mohamad has cast a shadow over his legacy.

By Leslie Lopez/KUALA LUMPUR

NEARLY A YEAR AGO, Daim Zainuddin, one of the region's most powerful finance ministers, resigned from government after months of speculation about souring ties with his boss, Malaysian Prime Minister Mahathir Mohamad.
This was one of the biggest turning points in Malaysia's political history, marking the break of one of its most enduring partnerships. "Daim leaving office stands as one of the three main political fallings-out during the Mahathir era," says former Deputy Premier Musa Hitam, ranking it with his own departure from government in 1985 and the 1998 sacking of still-imprisoned Anwar Ibrahim.
For nearly two decades, Daim had been Mahathir's chief economic trouble-shooter, fitting neatly into roles ranging from finance minister to informal adviser to purse-keeper of the United Malays National Organization, or Umno, the dominant partner in the ruling National Front coalition. Along the way, he'd been the most enthusiastic architect of the Malaysian economic model, a form of command capitalism in which the government shovels economic opportunities to selected ethnic Malay, or bumiputra, businessmen. Some well-connected, non-Malay businessmen have also benefited, but the primary policy goal has been the creation of a Malay entrepreneurial class. Nearly everything in the political system revolves around this network of patronage.
During all the years they worked together, there had been little evidence of any serious rift between Mahathir and Daim. Indeed, it was Daim whom Mahathir tapped to help pull Malaysia out of its worst-ever recession during the Asian financial crisis, after his spectacular break with former Deputy Premier Anwar. Most people in Malaysian political circles were enthralled by the power of the diminutive, 153-centimetre man known by close associates as "Muscles," for his political influence.
But today, Daim's legacy lies in tatters. As Mahathir slowly repairs his tarnished political reputation and earns grudging respect as the architect of Malaysia's most recent economic recovery, the elfin, 63-year-old lawyer-turned-tycoon is being privately castigated by Kuala Lumpur's political and business elite for delaying Malaysia's rebound from its 1998 recession.
Many now blame bailouts of Daim protégés over the past three years, as well as Daim's alleged interference in the affairs of regulatory agencies on matters involving his close associates, for foreign investors' disenchantment with Malaysia during his time as finance minister. Critics maintain that Daim blurred the lines between his public duties and his private interests, and his efforts to foster a bumiputra entrepreneurial class morphed into cronyism through the award of government contracts to close associates. "Daim epitomized what was wrong with Malaysia after the regional economic crisis," says the research chief of a foreign bank in Singapore.
Of course, this isn't a black-and-white matter. Many private economists and bankers say it's premature to conclude that the days of close ties between politics and big business in Malaysia are over. Mahathir continues to shower business opportunities, without any open tender, to close associates such as reclusive tycoon Syed Mokhtar Al-Bukhary, who in a matter of five years has built an empire with interests in power generation, ports, construction and property. "The political-economy model hasn't really changed," says Manu Bhaskaran, head of economic research of U.S.-based Centennial Group in Singapore. "If anything, it's just a more narrow cast of characters with alliances."
But Bhaskaran concedes that Malaysia has learned some lessons from the regional economic crisis, which struck in mid-1997. The country has made huge strides in restructuring its corporate sector. "Clearly, there is a new model of how assets and companies are managed, with strong emphasis on returns," he says. "All this is good for the economy because it improves economic efficiency."
Despite all the brickbats, no one is writing Daim off just yet. More than 10 years younger than the premier, he's believed to be one of the region's richest men, and is still seen as a powerful behind-the-scenes player in Malaysian politics. He continues to have close ties to senior Umno officials, businessmen and top civil servants--connections that could easily pave the way for his return to government once Mahathir leaves office. But as long as Mahathir is around, the prospect of a Daim comeback is slim, say analysts and Umno politicians.
The reasons behind Daim's departure have been kept out of public debate. But close associates of the two politicians say that apart from differences over economic policy, Mahathir and Daim clashed over the management of Umno's coffers. Appointed Umno treasurer in 1984, Daim has collected and managed the political funds that helped keep the prime minister and his party in power. Senior party officials say that Umno's business empire, managed largely through the use of business nominees, remains a closely guarded secret to which only Mahathir and Daim are privy.
"It clearly wasn't some kind of shadow play," says a senior government official who worked closely with the two politicians over the past three years. "The falling-out was very real because he was becoming a political liability to the PM."
Several close associates of the two men say the first sign of cracks in Malaysia's most powerful tag-team emerged from differences over the country's plan to consolidate its banking sector. Daim had pushed for the consolidation of Malaysia's 58 financial institutions into six so-called anchor banks, several of which would have been controlled by his business allies. But Mahathir backed the then-central bank governor, Ali Abul Hassan Sulaiman, who called for the creation of 10 anchor banks.
Daim never forgave Ali. According to senior government officials, Daim played a key role in persuading Mahathir not to renew the central bank governor's contract when it expired in April 2000. But Ali fought back. Government officials say he wrote a seven-page letter to Mahathir before he left office, detailing several instances where Daim intervened personally in transactions involving banks controlled by his close associates. Officials close to Mahathir say the letter marked the turning point where policy differences between the premier and Daim turned into a political clash.
Among the institutions the letter accused Daim of favouring were the International Bank of Malaysia, or IBM, which Daim had previously controlled, and the Multi-Purpose Bank. (A Daim-controlled company acquired IBM in mid-1997, and Daim then disposed of his shareholding in the company to a business protégé in late 1998, after he was appointed finance minister for the second time.)
According to officials familiar with the letter, Ali cited Daim's push for IBM to be given first right to acquire the merchant-banking arm of state-owned Bank Bumiputra Malaysia in 1999, despite its low offer. That institution, Bumiputra Merchant Bankers, was later merged into Alliance Bank, one of the 10 anchor banks the government eventually created.
The letter also detailed instances where Daim blocked corporate plans presented by several prominent businessmen. In one instance, Ali Abul Hassan recounted how state-owned Bank Simpanan Nasional proposed to sell its merchant-banking arm to Hong Leong Bank, which was owned by tycoon Quek Leng Chan of the Hong Leong Group. (Quek at one time enjoyed close ties to Anwar.) According to people familiar with the letter, Ali noted that Hong Leong Bank was offering 70 million ringgit ($18 million) for the state institution--four times more than the 17 million ringgit Perwira Affin Bank, a rival bidder, was prepared to pay. But Daim dismissed the bid by Quek's bank, the letter said, remarking to the central bank governor: "Don't be mad." Perwira Affin ultimately won the bid.
The government's penchant for bailing out its troubled corporate sons, especially those close to Daim, was also beginning to take its toll on Mahathir's relationship with his long-time adviser. "The bailouts would have been tolerable if the economy was doing well," says a senior Umno official, who also has extensive business interests. He says that the government's failure to revive the stockmarket resulted in the breakdown in Umno's patronage machinery.
Soon grumbling within Umno grew louder, accusing Daim of favouring close business associates in the award of government contracts. That forced Mahathir to distance himself. One senior government official close to the prime minister points to Daim's move to rescue Tajudin Ramli, head of national carrier Malaysia Airlines and one of Daim's most prominent allies. The official maintains that Mahathir was upset that Daim hadn't fully briefed him over the move, in which the government paid Tajudin 1.8 billion ringgit for his 29% stake in the airline in December 2000--valuing the purchase at 8 ringgit a share, a premium of more than two-and-a-half times the price on the Kuala Lumpur Stock Exchange.
"The PM realized that he was being forced to take the flak for the rescues, and that was hurting him politically," says a senior Umno official close to Mahathir. That wasn't the only Daim-sponsored bailout. When a Renong telecommunications unit received one of the country's worst receptions for its initial public offer in March last year, government officials say Daim ordered a civil-service pension fund to take up a huge stake in the company. That transaction raised hackles within the government and, at a top-level Umno meeting in mid-April, Daim was pressed to explain the use of public funds to support the offering.
"He gave a very short explanation, something to the effect that the shares wouldn't be subscribed to, so the government had to help out," says a senior Umno official who was present at the meeting. "I don't think the PM was pleased with the explanation and by then it was clear that Daim was becoming a liability."
Daim associates tell a different story, arguing that Daim couldn't have unilaterally undertaken the financial rescues. "Things were clearly desperate politically for Umno and the government," says a businessman close to Daim. "He was just a convenient scapegoat to help arrest the anger."
Daim didn't respond to numerous requests to be interviewed for this article. But one close business associate who sees the former finance minister regularly says he's "peeved about the half-truths" that are being told about him. "He's being blamed for everything," the businessman says. "But he feels that he carried out orders, and big decisions such as bailouts were done only after a consensus was reached in the cabinet or with Mahathir."
Scapegoat or not, Daim's fall from grace represents an enormous comedown for a man who has long enjoyed an enduring influence on Mahathir, Malaysia's leader since 1981. Daim was central in shaping Mahathir's economic policies: Under his stewardship as finance minister, Malaysia's programme of privatizing state enterprises and the award of multibillion-dollar infrastructure projects to the private sector were tailored to hand opportunity to select bumiputra businessmen. Banks were directed to provide easy credit to favoured bumiputra concerns, and principles such as competitive bidding were replaced with negotiated tenders. Huge business empires, such as Halim Saad's diversified Renong Group and Tajudin's airline group, were built.
Today, the most prominent of Daim's once high-flying business protégés, Halim and Tajudin, have lost control of their corporate empires. Daim himself has maintained a low profile since leaving the Finance Ministry in June last year, rarely attending public or Umno functions. Close associates say he travels extensively and spends time in Bali, where he owns a palatial home.
Foreign bankers and local businessman still seek meetings with him at his spartan Kuala Lumpur office. There, perched on a tall stool, he tracks the local stockmarket on a computer screen while speaking to his guests. "He is very relaxed and is actively punting on the market," says a senior businessman, who visited Daim at his office recently. Like several other people who remain in contact with the politician, this businessman says Daim remains "amazingly well informed" about the political and business situation in the country.
His extensive business interests are still run in a secretive fashion. Built on shrewd networking, they're shrouded, close associates say, using a wide array of nominee associates or family companies to acquire and run his investments. Among assets believed to be under Daim's control is the International Commercial Bank, a financial institution which operates eight banks in Europe and Africa. (See story on page 42.)
Taciturn and intensely private, Daim continues to evoke strong feelings among Malaysians. Admirers credit him with plucking Malaysia from its mid-1980s recession. As finance minister during that time, he slashed public debt and relaxed investment rules, which helped fuel a decade-long boom. Politicians also credit him with building Umno's huge financial resources and providing massive opportunities to ethnic Malay businessmen.
Above all, he reinvented Malysian politics, says University of Malaya economics professor Jomo Kwame Sundaram, referring to the strong culture of money and patronage that today dominates the system. "He was the most entrepreneurial and most innovative because he was always conscious of balancing making money for the party or helping his cronies and keeping business sentiment upbeat," Jomo says.
But his critics say Daim failed to adhere to these traits during his second stint as finance minister. "There was too much self-interest," alleges a political analyst closely aligned to the government. "Mahathir felt that Daim was trying to make sure that large sections of the corporate sector would be beholden to him rather than to the PM."
Many politicians believe the move against Daim's protégés is part of a clean-up of Umno's business interests. "The Umno empire has always been a mystery to all of us," says a former senior government minister and Umno member. "With Daim out of the picture, only Mahathir knows what the party is worth."