When politics takes its orders from commerce

On world markets and hard truths

A few years back, when the Sunday Times wrote something disagreeable about Mahathir bin Mohamad, Prime Minister of Malaysia, the owner of the newspaper, Rupert Murdoch, rushed to downplay any criticism, and the editor swiftly found himself moved to another job. Now, when Dr Mahathir attacks the activities of the financier George Soros for speculating against South-east Asian currencies, and says that currency traders should be shot, Mr Soros replies in kind, calling him "a menace to his own country" and "a loose cannon" who should not be taken seriously.

You could, I suppose, simply conclude that the pen is less mighty than the wallet; or maybe just that Mr Soros has an elan which Mr Murdoch lacks.

There is certainly some irony in the whole spat, for Malaysia stood alongside Mr Soros at the forefront of the speculation against sterling when the pound was ejected from the ERM back in 1992.

But, of course, there is also a serious story here: a story that tells us about the way power is devolving in the world, and the way in which politicians can respond to that shift, shaping it to help them achieve their objectives.

It is now widely accepted that national governments are less important than they used to be - that power is devolving upwards to bodies such as the EU, multinational corporations and the financial markets, and downwards to regional interests and a new class of mobile, articulate, rich individuals. But only a few politicians fully grasp the fact that they have to behave differently in response to this. They still have power, but much of that power is exerted by gearing up their own limited authority, attaching it to other points of power and thereby magnifying it. It is the power of the persuader, not of the bully. At one extreme, Tony Blair completely understands this; at the other, Dr Mahathir does not.

The driving, dominating, crushing power of the world's financial markets inevitably inspires the view that they are in some way a threat to democracy. Who is running the show? The ordinary people of a given country? Or the speculators in far-off financial centres? So it is very easy to demonise international speculators.

You can even catch an element of hostility towards the City of London - that it has somehow been undermining British industry - here in Britain. If it is possible to demonise your own people on your own doorstep, how much easier it is when they are foreigners thousands of miles away.

Still, Dr Matathir's intemperance came as a surprise, and not just to Mr Soros. It came as a surprise because Malaysia had become something of a darling among international investors. It was growing very fast. It seemed to be politically stable. It had a "can do" spirit in the government, which was not only backing enormous investment projects, such as the world's tallest buildings, a new airport and a gigantic dam, but also did not seem to be too bothered with any opposition to its ambition. People in the world markets thought they had a government that understood the rules of the capitalist game.

Clearly, they were wrong. In fact the Malaysian government thought that the markets wanted the orders associated with these large projects, and not much else. Actually, the markets want secure and sustainable economic growth that will bring a good return on investments. Malaysia thought that the new world of global capitalism was the world of Mr Murdoch, when in fact it was more the world of Mr Soros.

Business and finance are crucially different. Of course, there is an element of the commercial world that cuddles up to politicians to gain access to markets, a contract for a dam or a licence to drill for oil. But people in the financial markets are in general much more antiseptic in their appraisal. They want the ability to get their money in, but more especially the ability to get their money out. Hedging against currency and interest rates risks are absolutely essential to their calculations.

So when politicians talk about capital controls, or fulminate against international currency movements, investors are liable to rush for the door. The wisest of those international investors (sadly, by no means all) do also concern themselves with issues such as the environmental implications of projects, and the level of corruption in the government. But the one mantra to which they all subscribe - whether wise or foolish, sophisticated or thick - is freedom of capital movement. So the recent response of the Malaysian government to a regional economic crisis has been pretty much a classic case of how not to manage a government's relationship with the new barony of power.

That is the negative message: how not to do it. What about the positive one: what should politicians do to gear up their own authority?

We are seeing that evolve here in Britain. The first rule is to deliver competence: competent macroeconomic management, but also competent management of public services, fine-tuning them so that scarce taxpayer money is used to best effect.

But new politics has to go far beyond that. Politicians cannot command and control; at least, they can command and control only their own people, not the rest of us. Instead politicians will have to behave like entrepreneurs, taking ideas and selling them to other people who can help them make them work.

One of the really fascinating features of this government is the way in which a string of people from the business community have become involved with government projects. Take the Millennium Dome: it is not being funded directly by government, for most of the money will come from the lottery, entry fees and sponsorship. Yet Peter Mandelson is personally orchestrating the commercial and artistic talent that is needed if the thing is to be a success.

In a few years' time this row over the role of speculators will seem terribly old-fashioned. Governments the world over will have come to live with the fact that there is a global capital market and that it is not very difficult to accept the rules of that game - just as they are gradually learning that they have to accept the rules of democracy. But to push ahead, to be really effective, they will have learn to deploy a new set of skills, including charm. I have met Mr Soros only once, but he seemed to me to be the sort of chap who took himself rather seriously. My tip for Dr Mahathir is this. Try flattery; it is more likely to be effective than saying that currency speculators ought to be shot.