Revisiting Vision 2020 (Updated)

This morning I attended a speech by Tun Mahathir on the Vision 2020 that he introduced way back in 1991. The event was organised by the Institute of Marketing Malaysia (freebie plug here) on the subject of Vision 2020 and what progress we’ve made in achieving its goals.

The grand old man of Malaysian politics was in fine fettle, cracking jokes, most of which were at his own expense (like, having to reread the Vision 2020 document because he couldn’t remember what was in it, and making constant references to mega projects).

I want to touch on a few things he mentioned in his speech, some good, some not so much.

First in reference to the income goals of Vision 2020, we are, quite remarkably, not too far off the pace envisioned 20 years ago (RM):

Vision 2020 required a doubling of income every 10 years, which is close to what has actually been achieved. If GNI per capita reaches RM26,000 this year, then we’re right on track to grow per capita income eight times higher than it was in 1990 by 2020.

Next, Tun Mahathir got on one of his recent favourite hobby horses – the 1997 crisis and currency fluctuations in general. Along with generally condemning the Federal Reserve’s quantitative easing policy, he mentioned something I noted before – the goal of the NEM is denominated in USD terms, not in Ringgit terms. Which implies that any achievement of the NEM might be “illusory” because it is not supported by real growth, but rather a depreciation of the USD. Moreover, he thinks that a full recovery of Malaysia’s currency can only be seen if the Ringgit reaches its pre-1997 level of RM2.5 to the USD.

Those two points actually contradict each other.

If the USD becomes structurally weak (as many, including myself, expect), then historical references aren’t terribly meaningful. If anything, the Ringgit’s exchange rate to the USD would have to be fundamentally higher.

Tun’s thinking on currencies shows he’s still mentally trapped within the Bretton Woods framework that existed before the 1970s. Today’s currency movements aren’t governed by reference to a single currency, even if currency markets continue the tradition of quoting exchange rates in USD terms. The Ringgit is backed by the trust and faith of people in Bank Negara, not its holdings of international reserves. I think we’ve outgrown the need for a nominal anchor to have monetary credibility.

And this line of thought led to a real whopper of a suggestion – BNM’s holdings of international reserves are acknowledged to be excessive relative to trade and settlement needs (along with just about everybody else in East Asia), and Tun suggests that maybe half of it should be used to finance the projects under the ETP. I really don’t know how serious he was about this, but this proposal simply won’t fly.

To see why, just think of the process that needs to be gone through for international reserves to be deployed domestically. Because reserves are in foreign currency terms, BNM would have to convert it into Ringgit before it can be used – USD is not legal tender in Malaysia. That means selling foreign exchange for Ringgit on the open market, which has the result of pushing up the exchange rate and interest rates in the interbank market. Since BNM uses an interest rate target to administer monetary policy, they have to offer Ringgit in the interbank market (buy securities) to reduce the overnight rate to the target rate. The second step is to transfer the money from BNM to the Treasury – which means BNM purchases MGS or GII issues.

The end result of these shenanigans is a sterilised forex intervention that pushes up the exchange rate, and…quantitative easing. Not exactly the kind of policy that Tun would probably approve of, if he actually knew the mechanisms involved.

But after this, I have little to fault in the rest of his remarks. He came out strongly in support of emphasizing domestic direct investment rather than FDI, and suggested according domestic investors the same incentives and perks that foreign investors in Malaysia have traditionally enjoyed.

He also mentioned again that with a high income economy, the price level MUST rise. There is a real relationship between costs and income – high incomes necessarily mean that costs (and therefore goods and services prices) must also rise. You simply cannot run away from this.

Lastly, one other remark really caught my attention though – Tun apparently found it difficult to get information from BNM, even back when he was still Prime Minister. That made me feel a LOT better. Central bank independence is an absolute necessity for macro stability. This might be a holdover from the days when Tun Ismail ran the central bank – apart from being Tun Mahathir’s brother-in-law, he was also reputed to be the one person Mahathir was afraid of really respected. But if even Tun found it difficult to deal with Zeti, I can’t imagine the current crop of politicians doing any better.

I’ll update this post once I’ve gone through the media reports on the event.

Update:

Bernama has done a better precis than I did, including mentioning Tun’s support for teaching science and math in English (“teaching in Bahasa but using English textbooks is a recipe for confusion” or words to that effect). Also from Bernama, his remarks on high income and high costs, and on the proposal for using reserves.

The Star focused solely on his remarks on Warisan Merdeka, which met with support from those present. Funny that they ignored everything else of substance.

Technical Notes:

GNI per capita data from the Economic Planning Unit and BNM