THE world remains in a big mess. So is Malaysia. Many readers ask: What are we to do? I retort with this challenge: Do we have the audacity to really change and reform?

Sure, we already have a credible economic transformation program (ETP) – including strategies on how and where we need to change: we also have elaborate tactical road-maps and NKEAs on where we need to go, what to do and how to get there.

These are all well and good. Pemandu has done well so far. But not far enough. These blueprints are well-intentioned plans but they have one basic flaw – they all point to reaching a target income per capita within a specific time frame – US$15,000 by 2020.

That’s just a means to an end. Specifically, the end-game is to reach a much higher (and more sustainable) standard of living. This simply means we need to look at the income level in terms of its international purchasing power. What’s the use of a higher income if it does not translate into being able to acquire more and better goods (and wealth instruments) and services in the world markets.

So a depreciating ringgit in the face of a higher income is not good enough – it’s still sub-optimal. A growing and consistently stable economy backed by a strong exchange rate policy thus becomes critical, indeed essential.

A cheap currency won’t get us there. It only sets us back. The only way I know how to get there is through consistently rising productivity. This can only come with creativity and innovation. Rising productivity will make us more competitive – domestically and globally.

Solid Education is Fundamental–Dr. Lin See Yan

There is no other way. That’s why a good, solid education is fundamental. A well-educated, healthy, and skilled workforce becomes necessary to get us there. It is only in such an environment that creativity and innovation will derive and thrive. Without them, we are doomed to be caught in the middle-income trap of mediocrity. That’s not what we want or aspire to become.

Feedback loop

What’s wrong with Malaysia today? We are told the economy grew 4.9% in Q2’15 and for the year as a whole, 4½-5%. Realistically, closer to 4% than 5%.

Activity is being driven largely by private consumption – much of it through the build-up of more debt. We are told such growth is already the envy of most. But ask around, people don’t feel this growth.

Now that the ringgit has fallen 23% against US dollar so far this year on top of the 6% depreciation in 2014, the international purchasing power of the ringgit has fallen so much that most of us feel that much poorer.

Never in my wildest dream would I imagine that I would need to pay up to RM3.10 to buy S$1! We definitely don’t deserve such a rate of exchange!!

Sure, China has slowed down; so has Japan. Europe is said to be growing but ever so slowly that our exporters don’t really feel its rising demand (if any). The US economy continues to blow hot and cold with the key metrics sending in mixed signals.

We are now told by IMF/OECD that the world has indeed slackened in H1’15 and expect it to further slow down. Also, expect US interest to rise this year – even though gradually (and in small bites).

Still they don’t fully explain why the ringgit is so weak – with no end in sight. For us, much of the answer must lie with the current politically charged, irreducible uncertain situation (brought on by events surrounding 1MDB) that has permeated Malaysian society and made everyone anxious and cautious, even fearful of what the future may bring.

Reminds me of what US President Roosevelt (FDR) said in March 1933 during the depth of the Great Depression: “The only thing we have to fear is fear itself.”

Today, seven years after the 2008 great recession and now, in the midst of continuing intrigues surrounding what has come to be known as the “1MDB scandal,” many are feeling what Americans were feeling then – fear, causing growing paralysis as risk aversion sets in: as individuals restrain their spending (latest retail sales are reported to be significantly down) and enterprises withhold investments (bank loan applications are sharply down) despite loads of readily accessible liquidity.

As a result, the economy starts to weaken, confirming their fears and leading them all to further restrain spending. As the downturn deepens, a vicious circle of anxiety (even despair) begins to take hold. I sense we are now caught in this rather emotional cycle.

As fear turns into fact – the continuing flow of wild rumours doesn’t help – the anxiety worsens and so does the performance. As this mood gets set in motion, it generates a life of its own and becomes difficult to stop.

Economists call this the “feedback-loop” – often in reference to electronics. I particularly like economics Nobel Laureate Shiller’s description of this phenomenon: If a microphone is placed in front of a loudspeaker, eventually some disturbance or disruption (like the 1MDB scandal) will cause the system to produce a painful wail as sound loops from the loudspeaker to the microphone and back, over and over.

The sociologist Robert Merton popularised the term “self-fulfilling prophecy” to refer to such a situation. I admit it’s not easy for many people to fathom that this is happening now. Surely, economic weakness has to reflect something more tangible than the “feedback-loop.”

Believe me, this is in fact happening. Well, think of it this way – despite rock bottom interest rates and loads of liquidity around, why investment is not booming?

And, why housewives and the millennials are not spending? Fear and uncertainty are permeating all over.

Reform

The 1MDB saga has exposed some real weaknesses in the economy – raising a sense of urgency to reform the underlying economic structure, as the old toolbox of pump priming investments to stimulate the economy has outlived its effectiveness.

The nation has long used up the low hanging fruits of cheap land, cheap labour, cheap technology and conventional manufacturing systems and methods.

The ETP haven’t as yet fulfilled promises to allow markets to become more determinate; to overhaul the legal system including labour markets; to unlock the potential of digitalisation in services (finance, healthcare, education, logistics, travel and of course, government) to drive an innovation-based economy; and to loosen far-reaching economic constraints including reducing protectionism.

Essentially, the ETP is still far-off in creating a level playing field for all local enterprises. The role of government is still too heavy-handed. Indeed, it has yet to stop propping up – and creating new, SOEs (state-owned enterprises) with favourable policies and subsidies.

Much of the population’s savings are still channelled into many large “projects” that are costly and inefficient.

But, above all, it must be recognised that sustainable growth has to reflect: (i) an accountable, transparent and corruption-free government; (ii) a professional and competent civil service; (iii) a skilled labour force with excess capacity to create and innovate; (iv) a responsible civil society that is inclusive, and (v) legislative transparency and predictability.

In the final analysis, they bond together as a cohesive whole to foster the vital inculcation of confidence, so necessary (and also a sufficient condition) to get us out of the middle-income trap.

Politics, as we know it today, risks becoming a zero sum game where a few do very well, while struggling families of every race fight over a shrinking economic pie. That’s already happening. In truth, the links between growth and public policy are seldom so neat; certainly not linear.

And even when they do work in unison, they do little to significantly raise middle-class wages. There was a time in our short history when hard work was reliably rewarded with economic security. Politics and technology have changed all that. Gigantic shifts are underway – mostly man-made. They may be unstoppable.

Still the 1MDB scandal has brought to the forefront for most, serious issues of accountability, transparency, discipline and governance. The saga has discredited and destabilised the Government, and damaged investor confidence in the nation’s future growth prospects. Ultimately, the key issues are political in nature.

But is there a firm political will and resolve to restore confidence? One thing I have learnt about Malaysian politics is that ordinary people want to believe what they want to believe. And, facts or no facts (even hybrid ones) are not going to stop them.

That’s simply because people are different with different values, and they make different choices. Indeed, I also learnt that there are domains in which expertise is not possible – like in political strategic forecasting.

Here, the economics Nobel Laureate Daniel Kahneman acknowledges it’s been shown that experts are just no better than a dice-throwing monkey. Anyone care to predict the outcome of the 1MDB scandal by year-end? Good luck.

Former banker, Harvard-educated economist and British chartered scientist Tan Sri Lin See-Yan is the author of ‘The Global Economy in Turbulent Times’ (Wiley, 2015). Feedback is most welcome; email: [email protected]