Zeti Akhtar Aziz: Big shift - traversing the complexities of a new world
Luncheon address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the
Khazanah Megatrends Forum 2012: "Big shift - traversing the complexities of a new world",
Kuala Lumpur, 2 October 2012.
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The global economy has now entered into a period of slower economic growth despite the
significant and wide ranging pro-growth policies that have been implemented across the
world. Why then has the world not been able to achieve a sustained long-lasting recovery?
What has been holding back this prospect? In addition, the rapid and significant changes in
the global environment have also brought with them new demands and new challenges. Our
understanding of the factors that are containing the global growth prospects and the
consequence of the new environment will better position us to face the fundamentally new
landscape and to manage its consequent challenges.
Let me first thank Khazanah for the invitation to speak at this Khazanah Megatrends Forum.
The topic on the Big Shift that is being experienced in the world today is indeed highly
relevant. While the international and national attention is currently focused on the immediate
challenges of the global environment, equally important, however, is to recognise the
long-term changes that will reshape our future. The first part of my remarks today will focus
on the immediate challenges of the global economy, taking into account the fundamental
factors that are likely to affect the growth outlook. The second part of my remarks will touch
on the key imperatives to best prepare us for the new global landscape, so as to be better
positioned to succeed and survive in this new environment.
Policy-makers in the world economy have continued to be confronted with policy challenges
since the onset of the global financial crisis. While the policy responses have focused on
addressing the origins of the crisis - on the extensive build-up of excesses, the
over-leverage and over-indebtedness of the private and public sectors, the breakdown in the
functioning of financial markets, the loss of competitiveness, and the loss in confidence in the
financial system and the economy, the concern now is on achieving a sustained economic
recovery that is accompanied by job creation. Half a decade into the crisis, and this has yet
to be achieved. In the recent months, the global economy has again experienced a
broad-based moderation in growth from an already modest pace. This has stemmed largely
from the renewed weakness of the economic recovery in several of the major advanced
economies.
In the United States, the significant monetary accommodation, reinforced by the large scale
financial market interventions and the significant fiscal stimulus during the early stage of the
crisis, has averted an economic depression, but it has not, however, brought about a
sustained recovery. In Europe, an economic contraction is being experienced, resulting from
the combination of fiscal austerity, tight credit conditions, and the continued uncertainty and
volatility in the financial markets. While important progress has recently been made in
Europe on the arrangements that will contribute to containing significant high-risk events, and
in paving the way towards a more sustainable and integrated European region, its
immediate-term effects on economic recovery is likely to be limited.
There are several factors that are containing the potential for sustained growth in these
economies. This can be classified into seven categories. Firstly, is the gradual process of
unwinding the excesses that had been built up over several years. These include the high
degree of indebtedness by households, the financial sector and the public sector. Secondly,
is the significant long-term structural adjustments that are needed to regain relative
competitiveness. This will involve greater efficiency and innovation within existing industries,
and the shifting of resources out of industries in which these economies no longer have
comparative advantage, into new industries which have comparative advantage. While the
former may result in economic gains, it may not necessarily be accompanied by increased
employment, and the latter may result in temporary economic dislocation and increased
unemployment. Thus, even if such policies were to yield results, they may not produce a
robust recovery of economic activity and a reduction in unemployment in the short and
medium term.
The third is the need for the introduction of new institutions and the transformation of existing
institutions to render them relevant to the changed environment. While existing institutions
may need to be transformed, merged or even dissolved, new institutions may need to be
established to facilitate management of the new environment. The same will hold true for
businesses if they are to remain competitive, and, in particular, if they should venture into
new areas and across borders.
The fourth category of factors concerns economic and financial management.
Macroeconomic policies in most of these economies have been pursued to the limit,
rendering limited policy flexibility. Monetary policy accommodation has resulted in
substantially low interest rates which have been brought down to near zero levels, while the
cumulative fiscal expansion during the period 2007-2009 has amounted to an average of
four per cent of GDP. In addition, are the potential intended or unintended consequences of
the international regulatory reforms. The reforms have focused on building a stronger global
regulatory framework and raising the resilience of the banking system. While still in their
early stage of implementation, concerns have been raised on their implications on the cost
both to the financial intermediation process and to the real economy.
An important change in our environment both at national and international level is the
increased inter-connectedness within the financial system and the global economy. This
greater inter-connectedness, and hence the greater inter-dependence, requires having in
place the governance arrangements for greater coordination. Fifth is that these
arrangements have not been put in place both at the national and international levels. In
addition, corporations or organisations in this new environment can no longer function by
departments or sections, but as an integrated organisation. This also requires new
governance arrangements. For an economy or a financial system, we have seen how a crisis
in one segment was thought to be confined, but it had pervasive consequences on the entire
financial system and the economy.
Sixth, is that despite the increased connectivity of the world, as exemplified by the swift
spread of the financial crisis and economic shocks throughout the global economy and
international financial system in 2008, the institutional arrangements for the cross-border
dimension of policy-making have yet to reach the levels commensurate with the degree of
economic and financial integration in the world.
Finally, the response to the crisis needs to be comprehensive. While addressing the
weaknesses and lapses is important, equally important is the enabling environment for the
measures to yield results. Pro-growth policies are vital for this purpose. During the Asian
financial crisis, Malaysia gave equal attention to financial sector resolution to restore the
financial intermediation process and thus credit supply. Equally emphasis was placed on
addressing the problems of borrowers. Debt restructuring and mechanisms for support were
put in place for the corporate sector, small and medium-scale enterprises and the household
sector. This supported growth of the economy and at a fraction of the cost of the financial
sector resolution.
In this current environment, the emerging economies are challenged by both the weakening
global growth and the spillovers arising from the policy actions in the major advanced
economies. While continuing to register reasonable economic growth, the momentum of the
growth has moderated in most emerging economies, affected by slowing external demand
and uncertainty in the financial markets. Nevertheless, current ongoing shifts occurring in the
emerging economies have contributed to sustaining our economies. It is the growing
importance of domestic demand in most of the emerging economies in Asia that is creating a
huge cumulative domestic market, and this is resulting in greater regional integration with an
increase in intra-regional trade. Greater regional and inter-regional integration of the
emerging economies through the proliferation of interlocking networks of trade, investment
and finance, has contributed to provide mutually reinforcing support to economic activity in
the emerging economies.
In Malaysia, the decline in external demand while affecting overall growth, has been partially
offset by stronger domestic demand, following the robust resumption of private consumption
and investment activities, and the diversification of exports to the regional economies. In
addition, the wide-ranging reforms implemented since the Asian financial crisis have resulted
in strengthened financial intermediaries and a more developed financial system. This has
allowed for the economy to better intermediate the volatile cross-border flows without
disruption to the financial system. In addition, Malaysia's economic flexibility has allowed us
to shift resources from industries in which we no longer have comparative advantage to new
areas of growth. It is these factors that will continue to underpin the positive growth outlook of
the Malaysian economy into the near to medium term.
Key Imperatives to prepare for the new global landscape
The changing global landscape presents significant new challenges for both the developed
and emerging economies. Important is to be well-positioned to manage the new risks and to
build the necessary capability and capacity to have the agility and flexibility to adjust to the
rapidly changing conditions. As the emerging economies aspire towards achieving higher
levels of income and living standards, a different path from that which led the way for the
advanced economies will now need to be considered. The current global financial crisis and
the Asian financial crisis have provided us with many important lessons that should form the
underpinnings for our business models and our policies for growth and development. A key
priority of policy should be to balance the need of ensuring sustained stability while having in
place the necessary foundations to secure long-term development.
Avoiding and preventing the build-up of excesses is a critical imperative. The recent crisis
has forcefully shown that markets cannot be exclusively relied on to rein in excesses. Market
discipline needs to be complemented by policy interventions to effectively manage the
build-up of imbalances in the financial sector and in the economy. In the financial system,
this involves putting in place more comprehensive regulatory frameworks, complemented by
enhanced surveillance arrangements and relatively more intrusive supervisory oversight. It
also involves having wide-ranging policy tools, including macro-prudential policies, to
mitigate and manage the risks emanating from excesses in the financial system. As the
experience in the advanced economies has shown, the source of imbalances can arise in a
number in segments of the economy, including from the household, the financial and the
public sectors. This underscores the importance of prudence; to ensure that growth is
underpinned by sustainability and not excesses. A further lesson is to build buffers during the
good times to better position us to withstand future shocks.
Equally important for policy in the emerging economies is to put in place the necessary
foundations for long-term growth. This involves few areas of significance. The first is to
create a competitive environment that allows for greater economic flexibility. This includes
reforms for a sequenced and gradual removal of distortions prevailing in the economy,
lowering the costs of doing business, and to streamline the involvement of the public sector
in businesses. The second is to accord importance to investments in modern infrastructure,
and to enhance technological readiness that will enable the economy to prepare for the
changing economic and financial landscape.
Another area of significance is to ensure balanced and inclusive development. Indeed, in the
emerging economies, this is becoming increasingly urgent as the benefits of rapid
development have not been evenly distributed, and income inequality has risen further even
in the developed economies. Going forward, economic empowerment will increasingly
depend on access to technology, high quality education, healthcare and social security
systems. Equally important is greater financial inclusion. Without policy intervention, the
trend towards greater inequality could potentially intensify. In Malaysia, many of the
necessary policy strategies for long-term growth in these areas of significance are already at
various stages of implementation, with considerable progress being made in certain areas.
As the technological gap between the emerging and the advanced economies converges, it
will become increasingly critical for an emerging economy such as Malaysia to transition from
growth based on capital accumulation, to growth based on productivity improvements. In
addition, the rising global inter-connectedness characterised by the emergence of highly
intricate networks such as the increase of global manufacturing supply chains, increases the
susceptibility of industries to both cascading failures, as well as to the rapid re-orientation of
business competitiveness through disruptive innovations such as in the mobile computing
industry or the possible rise of additive manufacturing. To advance forward in this direction,
human capital development is pivotal. It leads to greater value creation, enhanced
technological readiness and the capacity to innovate and adapt - all of which are key for
firms to operate in the new landscape. Productivity is thus not only a function of physical
technology, but of talent development, including leadership development, given the
increasing dynamic and complex environment.
In the area of regional collaboration and cooperation, the Asian region is well ahead in the
areas of surveillance arrangements, financial safety nets and crisis management. These
frameworks and arrangements were established in the period of relative stability since the
Asian financial crisis. The establishment of regional arrangements and platforms, including
the building of regional financial infrastructures and markets, is not only aimed at facilitating
the efficient intermediation of financial resources in the region, but also at safeguarding
financial stability in the region. This trend paves the way for coordinated policy actions to
manage and mitigate the risks and vulnerabilities to the region. Given our diversities, there is
also tremendous opportunity for the private sector, in particular in ASEAN, to integrate further
in the areas of trade, investment and finance, and to leverage on the respective comparative
advantage that exists in the region.
Conclusion
While we could best prepare for the future using all the knowledge that we currently have,
the transition towards the new landscape will continue to be paved with uncertainty and new
challenges. Further, there will be increasing complexity in the functioning of the global
economy and the international financial system. In this environment, perhaps the best
compass for policy-makers and businesses is one that is centred on principles; in particular,
on ethics and integrity. Recent experiences in the advanced economies have put this into
question. This needs to be restored. The next generation of policy-makers and leaders in
business will be defined not by the power they hold and the amount of wealth they amass,
but by the stewardship they exercise in serving the people and the responsibility they
demonstrate to their communities. Thank you.