Muhammad bin Ibrahim: Some thoughts on the new economy
Speech by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the Malaysian Institute of Economic Research's (MIER) 30th Anniversary Dinner,
Kuala Lumpur, 26 September 2016.
* * *
Distinguished Guests, Ladies and Gentlemen,
I am honoured to speak here at the Malaysian Institute of Economic Research's (MIER) 30th
Anniversary Dinner. I would like to commend MIER on the institute's continuous efforts in
expanding economic knowledge, and the commitment to research over the past 30 years.
Today, we meet at a time where the global economy is becoming increasingly dynamic and
challenging, underpinned by complex global interlinkages and shifting trends. The challenges
posed to policymakers are immense. The rapidly evolving world also necessitates swift, yet
pragmatic policies in order for us to remain ahead of the competition. Against this backdrop, a
deep understanding of the core issues is absolutely critical in supporting evidence-based policy
responses; not only to manage risks but also to better leverage on opportunities. Tonight, I will be
sharing some thoughts about this "new world economy" that we are in, and along the way, share
some policy insights and research ideas for the many economists and policy thinkers in this
room.
Global macroeconomic environment is becoming increasingly challenging
The periods of strong global growth have become something of a distant memory to us. Global
growth for the past 5 years has averaged 3.5%, well below the pre-crisis average of 5.1%. Trade
activity, which was once itself a catalyst of growth is now lacklustre. This was evidenced by the
slower growth in global trade activity relative to global growth, as reflected in the decline in trade
intensity from 1.6 times between 2002 and 2007 to just around 1 time between 2011 and 2015.
Trade activity in the 1990s was driven mainly by trade of intermediate goods following the
proliferation of global value chains, driven in part by the ICT revolution. However, the expansion of
global value chains has slowed with increasing on-shoring of manufacturing activity. Global trade
has also been dampened by weaker investment growth in several major advanced economies
and China's efforts in rebalancing its economy. Given these cyclical weaknesses and structural
shifts, the prospects for global growth and trade are expected to remain challenging going
forward. In fact, the World Trade Organisation has projected for world trade to grow by only
around 3% in 2016 and 2017.
Global risks have also increased significantly. In a globalised and digitalised world, higher
interconnectedness and integration have resulted in greater transmission and amplification of
risks. Country-specific risks have become more eminent as they could generate broader
contagion effects. Ongoing global developments such as policy adjustments in several major
economies, volatile commodity price movements and geopolitical tensions have compounded
the uncertainties surrounding the global economy. Although baseline growth forecasts are
already relatively low, the materialisation of these downside risks could nudge growth even lower.
Unconventional policies during the challenging times fast reaching limits
At the onset of the Global Financial Crisis, immediate policy responses were largely targeted
towards stabilising the financial markets. As volatility began to subside, and as financial
institutions and markets were stabilised, the policy focus subsequently shifted to rejuvenating
growth and raising employment. An immediate policy challenge facing crisis-affected countries
was that conventional policy responses of expansionary monetary and fiscal policies have fast
reached significant constraints. Let me elaborate.
In the aftermath of the crisis, public debt in crisis-affected countries reached very high levels, in
large parts due to the high cost of bailing out financial institutions. In the advanced economies,
public debt grew by almost half within the span of 5 years from 2007 to 2012. For Europe, it even
culminated in the European Sovereign Debt Crisis. The enlarged public debt levels and fiscal
deficit put a hard limit on current governments' ability to spur real activity, even as growth falters.
Many governments of crisis-affected countries undertook austerity measures to avert financial
market backlash. This, of course, have had a further dampening impact on growth. In short,
fiscal policy has lost its ammunition and has been rendered impotent in many countries.
In many of the economies, monetary policy became the only feasible stimulus tool, so called 'the
only game in town'. However, substantial easing by major central banks has led to global policy
rates reaching historically low levels. In fact, the zero lower bound that was once a theoretical
constraint has now been the norm for the last 8 years. Unconventional policy measures, such as
quantitative easing were adopted. Next came the introduction of the negative interest rate policy,
particularly in the advanced economies. First adopted by the Danish National Bank in 2012, five
other central banks have now lowered their key policy rates to negative territory. The outcomes of
these unprecedented policy measures remain uncertain, with possibility of unintended
consequences and the emergence of yet more risks.
Fiscal and monetary policy, two of the most important macroeconomic policy tools, are reaching
a point where they have very limited room to influence the desired growth and employment
outcomes. This raises a few questions - have we reached a point where macro economy
becomes a dismal science? Have we reached a macro-policy trap? What have we missed in the
design of these policy tools? These are very important questions. They warrant a deep
rethinking of the underlying basis of the discipline, and a re-examination of the many principles that
we have been relying on all these while. To apply the same solution over and over again is
certainly not a viable option.
The international monetary system fosters imbalances and volatility of capital flows and
exchange rates
Since the departure from the Bretton Woods system, the international monetary system has
evolved to reflect on-going changes in global economic developments and economic thoughts.
The architecture of our current monetary system is characterised by flexible exchange rate
regimes, free capital flow and independent monetary policy. This global landscape has expanded
the cross-border exchange of goods, services and capital. Importantly, the transition to more
market-based foreign exchange rate system has accorded policymakers greater control over
domestic policies, accelerated the development of financial sector, and, ultimately, boosted
economic growth.
Nonetheless, this international monetary system also has obvious shortcomings. In the
postBretton Woods period, the frequency of banking and currency crisis has increased dramatically
with large output and employment losses. At the centre of this international monetary system,
policy adjustments in major economies have led to significant volatility in the financial markets.
The initial hint of tapering by the Federal Reserve in May 2013 resulted in large reversal of capital
flows and exchange rate over-shooting in emerging economies. Today, the complexity of
managing an economy is compounded by the impact of global shifts in capital on domestic
financial markets and real economic activities.
Given our high degree of openness, Malaysia was not spared by these developments. For
example, global concerns over monetary policy normalisation by the Federal Reserve continue to
impact the ringgit. Ringgit volatility since September 2014 has exceeded levels in previous
episodes of sharp adjustments such as the European Sovereign Debt Crisis and Taper Tantrum.
The weak ringgit performance was further amplified by the misperception about Malaysia's
reliance on commodities and our position as a net oil exporter. Despite Malaysia's lower
dependency on commodities, the magnitude of ringgit depreciation is disproportionately higher
and is even comparable to the currencies of countries that rely more heavily on commodities,
such as Australia and Norway. For the record, in 2015, commodities constituted only 19% of
Malaysia's total exports. For example, the oil and gas industry accounts for only 11% of total
exports, about 1% of total employment, and 22% of Government revenue. I must emphasize that
adjustments in the ringgit should be viewed from a long-term perspective. In the short-term,
exchange rate movements could react to new headlines and market sentiments, instead of
reflecting the underlying strength of the economy. What is important, therefore, is to ensure the
availability of ample reserves, maintain strong economic fundamentals and manage our
exposure to external debt.
There has been increasing discussion among global policymakers, including at the recent
symposium at Jackson Hole, on the changing nature of our international monetary system.
Some measures proposed include encouraging the use of Special Drawing Rights (SDRs) by
the International Monetary Fund to increase the flexibility of the current monetary system. The
G20 framework also stressed on countries' shared responsibility in supporting "strong, sustainable
and balanced growth" globally. Ultimately, there is an increasingly compelling case for a new
thinking about the international monetary system and ways to reduce excessive volatility in global
markets. Managing excessive volatility is particularly pertinent for small and open economies as
volatile currency fluctuations not only affect trade, external debt servicing and cost of investment,
but also affect domestic business and consumer sentiments. In response, countries in the
region have embarked on greater quest to use local currencies for the settlement of trade and
investment activities.
Against this backdrop, I shall attempt to outline some of the core issues in need of policy
responses. I will be sharing some thoughts on the so-called "new global economy", and along the
way provide some policy insights that may spur research ideas for the many economists and
policy thinkers in this room.
A World Defined by Paradoxes
Since the global financial crisis almost a decade ago, the world has continued to be reshaped by
complex and challenging forces with far-reaching implications, both economically and politically.
Some of these forces were not foreseen and are causing many unintended consequences.
So it's not surprising that some circumstances are seemingly contradictory yet in some sense
expresses a possible truth. In other words, paradoxes. These paradoxes pose a challenge to us
all; from policy-makers, to businesses, to academics , provoking us to question our
understanding of how the world works, and forcing us to rethink the approaches that we need to
formulate in response to these forces that are shaping the global economy. I have three
paradoxes in mind.
The first paradox is this;
while globalisation drives the world to grow closer
together, we are simultaneously drifting further apart. By many measures, nations and
people are closer than ever in terms of trade, investment, information exchange and physical
mobility. Despite the weakness in growth and trade activities, global flows of goods, services and
finance is still more than one-third of global GDP, 150% the level in 1990. Yet, social disparities,
most noticeably inequality in the distribution of income, have worsened considerably. Income
1
inequality has risen in many OECD countries since the 1980s ; we in Asia have not fared well
2
either, with an average Gini coefficient that is higher than the rest of the world . The distance
between the reality that we live in and our idea of an ideal construct of society is thus at once
both closer and further than it was in our parents' generation.
The issues underlying this paradox are complex and different for every nation. In many ways, it is
driven by the very forces of globalisation that have brought our economies closer together, but at
the same time undermined the welfare of the middle-class in advanced economies and driven
the 'haves and have-nots' further apart in the emerging economies. The problems confronting us
today are different from the past. The implications for policymakers and social thinkers are
therefore, immense. These new challenges require more nuanced understanding and
approaches, and because of this, our frameworks need to adjust accordingly. For a start, it is
important to recognise that new challenges can arise as a by-product of a genuinely positive
development. Indeed it has been argued that rising income inequality is a direct and unavoidable
consequence of the advent of technological revolution and the expanding process of
globalisation. Thus, in this new economy, one of the pressing challenges may come down to
reconciling the benefactors of technology and globalisation with those who are excluded, with the
intention of keeping inequality at bay.
This brings me to the second paradox. Despite all the technological advancements that we
have experienced in recent years, labour productivity has not risen in tandem. The world
is now at the cusp of path-breaking and fundamental technological changes - in the area of
artificial intelligence, bio-technology, advanced analytics or 'Big Data', and fintech, just to name a
few.
But at the same time, labour productivity has been anaemic in major economies since the global
financial crisis, which in the US, is currently experiencing the longest run of declining worker
3
productivity since the 1970s . Tangible slowdown in productivity is also prevalent in many
emerging economies since the global financial crisis.
This is a disconcerting trend, as productivity growth is the bedrock of sustained improvements in
standards of living and income. To borrow Paul Krugman's quote, "productivity isn't everything,
but in the long-run it's almost everything". It's a real challenge, to truly understand why this is
happening. Advocates of the secular stagnation hypothesis argue that this is a result of
underinvestment in capital; others point to declining business dynamism, excessive household debt
that leads to the misallocation of resources, and some attribute it to measurement errors given
the expansion of the digital economy. And then, there are those who question the
productivityenhancing-value of recent technological innovations. What is the value of an Apple Watch as
compared to the invention of the internet? It is indeed a challenge to comprehend this rapidly
changing complex system that we operate in, let alone diagnose it. We need to humbly
recognise the boundaries of our understanding for now, but at the same time relentlessly expand
the frontier of thinking and conduct robust deliberation on the implication for public policy
formulations.
The last paradox, one that is familiar to many policymakers, a disquieting calmness. In the
financial markets, the VIX - a standard indicator to measure volatility in the global financial
markets - is at its lowest in the last two years. In fact, it is close to the all-time low of below 10,
last seen just before the global financial crisis. Yet, a quick scan of financial news would reveal
significant uncertainty in the global economy, amid an ongoing series of policy adjustments in
major economies, volatile commodity price movements and geopolitical tensions. To a large
extent, this paradox is an outcome of the combined policy efforts by central banks and
governments worldwide to maintain stability since the global financial crisis.
But beneath this sense of calmness is a tense undercurrent. There is an underlying anxiety that
prevails beyond the realm of economics, for example in relation to issues of international
security, environmental change, and the global spread of disease. Despite the tremendous
progress that has been achieved in many of these areas through international treaties and
institutional efforts globally, anxieties remain. Extreme views are becoming more prevalent in
both side of the aisle, and manifests in the form of backlash against conventional wisdom, and
the establishments. We ought to be circumspect in expressing our views. As individuals and
institutions that have influence to mould public thought and perception, we have the added
responsibility to be balanced. We should not be too eager to discard all wisdom that have been
carefully amassed over many years but at the same willing to adapt to new thinking, new
circumstances and new possibilities.
As policy-makers and economists, these contemporary issues confronting the field of
economics are indeed reinvigorating. New rules are being made. Old rules revisited. The
contradictory forces that I mentioned earlier, are causing great policy tensions. The policies that
have been implemented and experimented in recent years by policy-makers across the world
might themselves appear in contradictions. And the fact that the performance so far has been
mixed does not invoke confidence in some of the policy prescriptions. These ranged from
continued experimentation of unconventional monetary policies and the need to 'balance' that,
with preserving financial stability, to the continued reemphasis in fiscal and structural policies in
both advanced and emerging economies.
But in facing a world of paradoxes, perhaps we too need to take full advantage of the strong
foundations and conventions that were built in the past, yet remain sufficiently nimble and
unafraid to rethink and reconstruct in facing the uncertain future. Errors will be inevitable, but the
more important point is our ability to correct them and to remain committed to achieving the right
outcomes. This is true for policies of central banks as well.
Bank Negara Malaysia's Approach to Monetary Policy
Within this context, please do allow me to share with you the approach to monetary policy that
Bank Negara Malaysia takes. Bank Negara Malaysia's decision-making processes and
governance framework today reflect the combination of the efforts and progress since the
establishment of the Monetary Policy Committee (MPC) a decade and a half ago.
Not many of you might be aware, but the MPC had its first meeting in 2002. In fact, the upcoming
MPC meeting in November would mark our 100th MPC meeting since 2002. Before that,
monetary policy formulation was conducted under the absence of an established framework and
a standard structure. Over the years however, the MPC has evolved and enhanced its
effectiveness as the sole body responsible for the formulation of Malaysia's monetary policy and
policies for the conduct of monetary policy operations.
Of note, the new interest rate framework which was implemented in 2004 introduced the
Overnight Policy Rate (OPR) as a new policy rate and contributed towards improvements in the
conduct of monetary operations.
This not only played an integral role in enhancing the effectiveness of our monetary policy
transmission, it also encouraged a more market-oriented financial system. At the same time,
foreign exchange administration rules were liberalised, which created the preconditions for us to
shift to a flexible exchange rate regime in 2005.
These developments laid the necessary foundations for the formulation of monetary policy to be
eventually formalised following the enactment of the Central Bank of Malaysia Act 2009. The Act
was a significant milestone - it institutionalised the autonomy of the Bank in the formulation of
monetary policy and provides greater flexibility in monetary policy implementation.
Prior to the Act, the MPC, which was an advisory committee supporting the Governor, had
meetings that typically took place only within a day. In its current form, the MPC meetings are
now conducted over two days. The additional time is noteworthy, as it enabled the evolvement of
the MPC towards a more robust, inclusive and comprehensive decision-making platform. This
extension allocates sufficient time on the first day for in-depth presentations by staff and
discussion amongst the MPC members on the implications of new economic developments. On
the second day, the MPC members deliberate and decide on the appropriate policy after having
carefully appraised and internalised the assessment and discussion from the first day. All these
proceedings are also meticulously minuted, with the intention that the Bank will one day release
the minutes for transparency purposes, and for the benefit of the research community.
Even after the formal institutionalisation of our conduct of monetary policy, continuous efforts
were made in the years after to further strengthen our policy decision-making framework in face
of the ever-challenging policy environment. For instance, the establishment of the Joint Policy
Committee in 2010, which combines members from both the MPC and the Financial Stability
Committee, was done in recognition of the need to have effective coordination of monetary and
financial stability policies given their increasing interdependence. The year 2015 also marked
another significant milestone for the Bank. We appointed for the first time two external members
to our MPC, a progress that reflected the ongoing maturity and inclusiveness of the MPC as a
decision-making committee.
The inclusion of the external members has brought about additional diversity of views, and their
relevant experiences have further enhanced the collective expertise of the MPC.
It is important for us to outline the philosophy that underpins our policymaking. The first is
pragmatism - the need to do the right thing without necessarily being dogmatic and rigid in
approaches. Our monetary policy framework is not on inflation targeting, but one with primacy
placed on the price stability mandate while giving due regards to developments in the economy.
This was amply illustrated in the way that we managed the challenges in 2007 and 2008. Back
then, monetary policy was faced with the dual challenge of inflationary pressures from escalating
global commodity and food prices, as well as headwinds in global growth from the unstable
global financial markets. In this case, despite the upside risks to inflation, monetary policy was
maintained given the need to balance against the weakening global growth prospects and its
implications on the domestic economy.
BNM recognised that the upside risks to inflation originated mainly from supply-driven factors, in
which the members opined that monetary policy was not the appropriate tool to alleviate the
impact. In this situation, raising rates to achieve a stable inflation at all cost would be against our
philosophy and against public interest.
During that time, our monetary policy inaction was criticised for being behind the rate-hike curve
relative to the actions taken by other regional central banks. But in retrospect, we were
attempting to do the right thing based on the prevailing data and our assessment. We would like
to think that our departure from the convention stood the test of time, and that we were eventually
proven right when Malaysia was able to withstand the crisis.
Staying committed to our decisions, however, does not imply inflexibility in our approach. When
global conditions deteriorated rapidly, monetary stimulus was swiftly and significantly front-loaded
between November 2008 and February 2009, to cushion the domestic economy from adverse
spillovers. Conversely, as the recovery became more firmly entrenched, Malaysia was the first in
the region to normalise interest rates in March 2009 from the record-low level, well ahead of the
regional counterparts.
We shall continue to strive to make monetary policy decisions based on prevailing data and the
assessment to the best of our ability, even if it might be against conventional wisdom or no
matter how unpopular the decisions might be.
In managing the exchange rate, a similar philosophy of pragmatism is applied. We should
recognise that in today's world of greater interconnectivity, we are all susceptible to the vagaries
of the global financial markets. But to distance ourselves from the global financial markets is not
an option.
In this regard, despite the extreme volatility experienced in recent years, our thinking has
remained the same - market forces ought to determine the direction and level of the exchange
rate. The central bank's role should be to contain the degree of volatility, which we know has
significant implications for an open economy like ours.
As such, there will be times when the Bank's presence is apparent in the market, to manage the
degree of volatility, but there will be times when the ringgit movements will be more volatile than
normal so that it will take its course in line with demand and supply in the market that reflects
underlying trade transactions. More recently, the ringgit had adjusted to reflect changes in the
global economy including the developments in the US economy and global crude oil prices.
Certainly there are risks associated with different levels of exchange rates and that different
levels of exchange rate will benefit differently the various sectors and stakeholders in the
economy.
Looking forward, while the financial markets can be capricious, as market players focus on
short-term developments, our role as policy makers is to look beyond these noises. As we
continue to address our vulnerabilities and improve domestic fundamentals, the ringgit will
eventually reflect the strength of our economy.
Our path forward would continue to be characterised by fast-moving and ever-evolving
macroeconomic risks and constantly evolving global trends. In facing the complex and
multifaceted risks associated with it, the Malaysian economy is subjected to concerns of price
stability and many other considerations that could affect overall macroeconomic stability.
This brings me to another one of our approaches in relation to ensuring overall macroeconomic
stability. We do not rely on any single policy tool. In particular, dependence on monetary policy as
the sole instrument would be too narrow an approach. Monetary policy at best provides an
enabling macroeconomic environment to support growth, and it should not be relied upon as the
primary instrument to drive growth. In this regard, the Bank's policy toolkit relies on a broad set of
instruments to achieve overall macroeconomic stability. This includes considerations of
macroprudential and pro-growth policies, as well as our advice on fiscal policy to the government. Such
an approach is key in ensuring that no single tool is overburdened.
Reawakening growth, reigniting productivity and restoring inclusiveness
Before I conclude, let me suggest how we can successfully navigate this global landscape with
contradictory forces held in tension. I have no precise answer. But I will highlight three important
outcomes that need to be achieved jointly in order to secure continued and sustainable progress
in the global economy.
First, is the need to reawaken growth. Having had sub-par growth for nearly a decade now,
policy-makers need to relook what we have learnt and rethink our approaches; from fiscal to
monetary policies and structural issues that need to be addressed, to enable us to remove any
impediments to growth. We need to enact policies that enable the private-sector to revive their
dynamism and explore new strategies to enable them to engage and uncover productive
investment opportunities.
The second is to reignite productivity. To this end, just as how technology and globalisation has
resulted in many of the paradoxes outlined earlier, it is also an avenue that could provide
answers to our challenges. Policy-makers and the private sector need to automate and adopt
technology to increase productivity and dispense the easy way out of depending on low cost
labour model for competitiveness.
Third, and perhaps the most important of all - to restore inclusiveness. The socio- and
geopolitical paralysis that is splicing the centre towards the far-left and far-right in so many parts of
the world can be traced back to the unequal sharing of global economic progress in past
decades. This underscores the importance of broader-based economic growth and the urgency
to close the inequality gap. Leaders from the public and private sectors must help boost
labourmarket participation; across genders, creed and nationalities and cushion any negative social
costs that may arise as a by-product of growth.
Only by reawakening growth, reigniting productivity and restoring inclusiveness, can we reclaim a
positive and sustainable future.
On that note, I would like to congratulate MIER on its commitment to research this past 30 years.
It is my hope that MIER will continue to produce quality policy-informative-research, strengthening
the synergies that exist between policy-making and research efforts. Finally, my wish is for MIER
to become the leading "global bearer" for economic research in Malaysia; a think-tank that
matters, to the sound policy formulation of the nation.
Thank you.
1
Income Inequality: The Gap between Rich and Poor, B. Keely (OECD Insights, 2015).
2
Sharing the Growth Dividend: Analysis of Inequality in Asia, S. Jain Chandra et al. (IMF Working Paper, 2016).
3
The Morning Ledger: Productivity Slump Threatens Long-Term U.S. Growth, W. Azeez (Wall Street Journal,
2016).