Policymakers must not be afraid of instituting bold policies if they are deemed necessary, says BNM governor
by HABHAJAN SINGH / pic by TMR file
What are some of key deep underlying thoughts at work at the Malaysian central bank?
Here is one clue how you can get “inside” the mind of Bank Negara Malaysia (BNM), especially when it comes to public policy. Read the BNM chief’s speech delivered recently just before the nation celebrated Chinese New Year.
In one of his longest speeches to date, BNM governor Tan Sri Muhammad Ibrahim outlined how the folks at the central bank approach some of the decisions that have wide-ranging impact on the nation and the people.
He walks us through his thinking on how they do their heavy lifting.
“Public policy has never been easy. It is deceivingly simple if we just think about the outcomes,” he said at the onset of the speech entitled “Public Policy Perspective — Some Thoughts and Contemplations from a Central Banker”. In the audience were Harvard Business School alumni celebrating the 40th anniversary for their club in Malaysia.
In practice, he said the policymaker makes difficult decisions involving complicated trade-offs, competing objectives and priorities. It goes without saying that they have to balance the limited resources and the competing demands.
“Public policy can never ever meet the needs of everyone all at the same time,” he said pointedly in the speech that runs into some 3,900 words, longer even than his speech at the annual dinner of the Financial Market Association of Malaysia. Traditionally, that is where Muhammad has given some of his longer speeches.
One clear pointer coming out from the governor was to expect the unexpected. With such varied challenges before policymakers, he emphasised that there can be no set template or rule when it comes to executing public policies.
“From this perspective, it is therefore a remarkable paradox that policymaking at the international level is steeped in conventions, rules and norms that set out expectations on how policymakers should behave and conduct policies. “These hard and soft rules, have at times, guided policymakers through some turbulent episodes.
“Of concern, however, is when this set of prescriptions acts like a straitjacket, constraining policymakers from making bold and necessary policy decisions, just because it does not conform to ‘consensus thinking’.
“This is in spite of universal acknowledgment that we are experiencing change that is unmatched, both in pace and dimensions.
“Clearly, this changes the rules of the game. Conformity could come at a cost — and that cost can be significant if it is driven solely by ideology,” he said.
Deviating from the Norm
While pressing the point, he noted the pitfalls of group-think in the name of achieving unanimity.
He anchored his arguments by showing how Malaysia moved away from the inflation targeting framework once considered as the international best practice in monetary policy framework.
“The theoretical elegance of inflation targeting appealed to many central banks to tread on the same path,” he said.
In Malaysia, however, the central bank had decided to carve out its own route.
“While the broad framework was appealing, we concluded that adopting an explicit inflation target would have the unintended effect of ‘straitjacketing’ our policy flexibility. We believe that the inflation targeting framework is not ideal for an open and small economy with a sizeable financial market like Malaysia.
“An economy such as ours is susceptible to real external shocks and could also face problems such as large and volatile capital flows and exchange rates. Therefore, we did not adopt the inflation targeting framework.
“We adopted what we characterised as ‘inflation anchoring’. The policy outcome is similar, stable inflation. But the process and focus are different,” he said.
In the speech, Muhammad also picked out five lessons gleaned from the experience of the central bank that could broadly apply to policymakers.
1. It is important for policymakers to remain agile in their approach to policies. They should not be too rigid in their own ways that they neglect changes in the environment and fail to change with the times.
2. Policymakers need to protect and value their autonomy in the conduct of policies and not be constrained by prevailing rules and consensus thinking established by the international community.
3. Policymakers must not be afraid of instituting bold policies if they are deemed necessary.
4. Clear and transparent communication is crucial. Policies will not be effective if the motivations and understanding between policymakers and the public are not aligned.
5. Policymakers must not formulate public policy in isolation. They must promulgate policy with hard facts, backed by statistics and sound theoretical evidence.
There are more pointers to be picked up from the speech. Do pick it up.