New Canaan, Connecticut, March 4 (Bloomberg) -- Big political changes may be brewing in Malaysia. Prime Minister Mahathir bin Mohamad appears to be rapidly losing his grip on power. 

Mahathir's position has worsened because his economy is deteriorating, and because of revulsion toward his persecution of his former handpicked successor, Anwar Ibrahim. 

If Mahathir steps down, as some observers believe may soon happen, it could be rightly said that he, like General Suharto of Indonesia, was a victim of the Southeast Asia currency meltdown of 1997. The difference is that the crisis, which erupted on July 2, 1997, in Thailand and subsequently consumed Malaysia and Indonesia, took out Suharto almost immediately. Mahathir managed to hold on to power for several years. 

Mahathir is an example of a man who is very fast on his feet but lacks a sense of where to go. He managed to survive the immediate impact of the crisis by conjuring up imaginary villains. He accused famed hedge fund operator George Soros of bringing his nation low for crass profit. Yet to the best of my knowledge, nobody has ever produced any evidence that currency speculators, especially Soros, were materially involved in the fall of the ringgit. 

Shadowboxing 

Next, Mahathir rejected advice and assistance from the International Monetary Fund. He reveled in spreading the notion that he knew how to handle the crisis better than the rest of the world, and in particular, the IMF. 

Fourteen months later, in September 1998, Mahathir attempted to eliminate foreign exchange trading in the ringgit by instituting a program of capital controls. He also fixed the ringgit at 3.80 to the dollar. 

A year later, in September 1999, Mahathir lifted the controls, but kept the ringgit pegged at 3.80 to the dollar. At first, many people, including some who should have known better, declared that Mahathir had indeed found what he termed a ``kinder and gentler'' solution to the crisis, by comparison to what the IMF had been advocating. And it is tempting to say so, except for the facts. 

The controls were put in long after foreign capital had fled Malaysia. Moreover, at the exchange rate of 3.80 to the dollar, the ringgit was then significantly undervalued relative to other currencies in the region. Anyone wanting to sell ringgits did so at substantially below market value. 

The wider implications of Mahathir's capital controls are now haunting Malaysia. That is one reason recent initial public offerings in Malaysia have gone begging. The country is going to take a long time to shed the image of having taken steps to imprison investor capital. 

Making a Martyr 

The crisis also created a martyr, though a living one, out of Anwar Ibrahim, Mahathir's deputy prime minister and chosen successor. As a supplement to his ranting against hedge funds and currency speculators, Mahathir chose to create an even larger diversion, one that was closer to home. He dismissed Anwar from office and had him arrested on trumped up morals charges in 1998. 

Anwar was found guilty of sodomy and sentenced to 15 years of imprisonment. If the truth could be told freely in Malaysia, it is doubtful there is even one person in the country who believes Anwar was guilty. 

Usually one assumes that a man as cunning as Mahathir would know the elementary rule of dictatorship: Never make an enemy into a national hero. But Mahathir is not the first strong man to make this mistake. Consider the late Shah of Iran, who once had his political nemesis, the Ayatollah Khomeini, exiled to France. When the Ayatollah returned to Iran in 1979, it was he who came to power with the Shah fleeing into exile. 

The thing about Anwar that seems never to be asked is: How good a guy could he be when he came up through the ranks of Mahathir's political machine? Doesn't matter. But if he survives prison, it's fun to think his day to rule will come.