@ the IERP® Global Conference, October 2022

Leading economists took the stage in this session to share views on where to expect emerging risks, and what forms these are likely to take. Moderated by Jason Loh Seong Wei, Head of Social, Law & Human Rights at EMIR Research, the session’s panellists were economist Dr NungsariAhmad Radhi; Prof Dr Evelyn Shyamala, Professor of Economics & Applied Statistics, Universiti Malaya; and Dr Shankaran Nambiar, Senior Research Fellow at the Malaysian Institute of Economic Research (MIER). Dr Nungsari spoke on emerging risks with a particular focus on how global developments could impact Malaysia.

Identifying the decoupling of the real and monetary sectors of the economy as one of the more destabilising factors that has shaped the economic landscape in the last ten to twenty years, he said that this had seen the size of the capital market increasing in relation to the real economy but that this has caused distortions that were proving difficult to manage. “The size of the capital, equity and debt market is about RM3.5 trillion while the size of the country’s GDP is about RM1.6 to RM1.7 trillion,” he explained. “The size of what it takes to produce the economy is thus more than double the size of the economy itself. This poses significant risk.”

While this has happened with most of the economies in the world, including that of the US and several European countries, the distortions that have been created have become some of the key drivers of inequality in the last two decades because, he said, “It provides a different sort of incentive for people to behave, and in the ways companies present their accounts.” People who are in the financial capital market-related sectors are paid very differently from people who are not in this sector. This imbalance has created a ‘sloshing’ of money around the world, looking for assets; the world is now challenged with the consequences of this sloshing.

Central banks were now trying to reel in or regain control of the situation by tightening monetary policy but this has other consequences. Additionally, distortions were being created and wrong allocation decisions were being made by fund managers, investors and governments. Some of the difficulties today may have originated even as far back as the economic crisis of 2008, when the solution to the problems then was the pumping of money into the world economy. With the advent of the pandemic, however, the money supply has had to be reduced, and many other factors have come into play. The US Federal Reserve has raised rates which has caused the Ringgit to weaken against the US Dollar.

A weakened Ringgit will cause money to flow out of the country. The cost of borrowing has risen – another significant risk. The second risk highlighted by Dr Nungsari was sovereign risk; and the third, he said, was that globalisation has now been fractured into small parts. All this does not augur well for Malaysia. Globalisation is actually retreating but the local economy, on its own, cannot generate enough to sustain itself. This situation is unable to encourage the creation of viable firms, which could lead to a fall in exports, which would be detrimental to the economy as companies have to be export-oriented in order to remain competitive in an economy which is domesticating.

Approaching emerging global risks from a trade perspective, Dr Evelyn focused on linking the supply chain with economic resilience; pricing protectionism and how food nationalism is coming on board regionally; and governing cross-border data flows. “Today we see it’s not so much about physical trade,” she said. “It’s digital trade, and this is supported by data flows.” But to what extent is Malaysia resilient to regional and global shocks?External demand is very important but trade is a channel for economic shock, she said. When there is a commodity shock, such as spikes in the price of energy, we are vulnerable because we are linked to global value chains.

Malaysia and ASEAN in general are more resilient to regional shocks but become less resilient when the shock is transmitted through global value chains as these are more disruptive. They are even more disruptive if they come through China, compared to other countries, as China is more important to us. Supply chain disruptions are unlikely to cease, going into 2023/2024; the debate has now shifted from the possible cessation of disruption, to how resilient countries’ supply chains are. Disruptions are set to continue. One risk is our ability to diversify supply chains; another risk is the sustainability of supply chains and a third is how fast firms can digitise their supply chains.

“Today we have to abandon linear logic, and look at systemic networked supply chains based on digitally-based platforms,” she said. “We have an ecosystem linking information, goods and services. Information becomes central to it; it’s circular-centric, no longer linear such as from sourcing of components to final distribution. The government can provide regulatory frameworks to allow for better data sharing but it goes back to how fast companies can digitise, what their capabilities are, and to what extent they can ensure that sustainability is adhered to along the supply chain.” Another risk was in the food trade, she said, which was never talked about before but has now become significant.

Food is one of the essentials, together with pharmaceuticals and medical equipment; quite a number of measures that came about during the pandemic were concentrated in the food sector, and dealt mainly with tolerance/contaminant levels of food products, inspection, testing and labelling. “At the start of the pandemic, countries were concerned about domestic shortages,” she said. “Export bans or prohibition prevailed but towards the end of the pandemic, there was a lot of regulation of imports. These restrictions are on the rise across countries, causing food inflation and domestic supply shortages.”But now food nationalism appears to be on the rise.

Food is being ‘weaponized and the food crisis is a developing risk. Food restrictions are being used as a means of attack, Dr Evelyn said, describing it as a “Food Trade War.” In the case of ASEAN, there is less robust linkage in terms of food trade even though the region has the capacity to do this but is not moving the food sector from the regional perspective; the region thus continues to be affected by global forces. But the trade environment is not just about digital trade or e-commerce; it is also about enablers for domestic trade flows. “Data sharing is important for the promotion of digital trade,” she said. “But before we think about cross-border data flows, we need to think about domestic data flows.”

Domestic data flow and its governance is a prerequisite for cross-border trade but data has to be regulated regionally to be effective. ASEAN countries have uneven development in their regulatory frameworks for domestic and cross-border data flows. There are severe gaps in countries’ data policies. There is a need for harmonising/aligning/streamlining data flows throughout the region for policy to be operable. But how should this be done? “We need to redesign supply chains. We need to abandon our way of thinking in a linear manner,” she said.Instead, we should be thinking systemically or in a network-logic way.

The issue now is digitising and being sustainable, and ensuring that labour practices are being adhered to along the supply chain. As food is essential, there should be more robust linkages at regional levels. While non-tariff measures may not be removed, there are some licensing requirements which may be unnecessary and could perhaps be relaxed. She said that data flows will eventually outpace the flow of goods; this has to be addressed in decision-making. On free trade agreements, she said that these also need to be relooked, particularly from the perspective of regulatory distance, and what platform to use, in light of increasingly complex issues like data streamlining across the region.

Dr Shankaran Nambiar identified the US’ treatment of global capitalism and how it sees its role, quoted by Dr Nungsari, as a crucial factor in the discussion of emerging risks. Referring to a recent statement by a US senator – “The US government owes whatever it does to those within its borders, and does not have to take into account the outcome/spillover for the rest of the world” – Dr Shankaran said that this could be seen in the way its central bank was handling its interest rate policy. “We just have to tag along,” he said. “The only one who hasn’t is Japan, because it has enormous reserves.” He added that we have had a long tradition of abusing our fiscal space but now had to pay the price.

How should we reorient ourselves to face these new challenges? “Malaysia has always been proud of being an export-oriented, open economy, but there has been pushback from the rest of the world,” he said. “Trade is not what it used to be. There is a whole new assortment of issues to deal with now.”Data and human rights were emerging as major issues; non-trade issues were now starting to play a bigger role in trade. “Our preparedness at various levels has to be brought up to mark,” he cautioned. Dr Nungsari recalled that in 1998, we actually had a fiscal surplus, and global trade was going well. Even the financial crisis that was experienced then was not so much a crisis as a financial cycle.

“In 2008, the global financial crisis happened mainly because the US had a crisis, and called it global,” he said. “But now we are on the cusp of something which is not nice. We have had 22 years of fiscal deficit; we had a current account that was in surplus post-1998, but which has now come down to single digits, which means that the amount of funds in the system which has been funding the deficit has been reduced, while the cost itself has gone up – partly because supply has been reduced, but partly also because of what the US is doing. The China-US issue is going to be very significant. We have seen the end of the days of ever-expanding global trade.”