IS it always a good thing to liberalise?

The evidence to support positive linkages between trade and financial liberalisation, and economic growth in developing economies is both strong and considerable.

It has been widely argued that pro-market, pro-business policies to opening up will not only attract much needed capital investment, but also to shake up local productions through stiffer competition as well as transfer of technological know-how.

Despite a decline of 14% in foreign direct investment (FDI) to developing markets in 2016, as reported by UNCTAD’s 2017 World Investment Report, FDI remains the largest and most constant external source of finance for these countries.

Furthermore, governments in these countries often treat economic growth as the basis for political legitimacy, thus it is unsurprising that foreign investment deals are actively promoted so that jobs are created and social entitlements are extended in time with the electoral cycle.

Yet, the scaling up of liberalisation policies may subject countries to recurrent external shocks. The financial crisis of 2007-2008 has shown how open capital flows had encouraged emerging markets to ramp up holdings of dollar-denominated reserves, and thereby indirectly fuelled growth in the American housing market.

In turn, when the housing market went bust, the world was suddenly caught in a financial contagion, realising a bit too late at how unprepared it had been for many governments to safeguard its citizens from policy mistakes originated in another foreign country.

By most measures, you could say that the worst is finally behind us. The International Monetary Fund (IMF) is now projecting a global expansion of 3.7% in 2018, supported by upswings in investment and trade, industrial production as well as improved business and consumer confidence.

But, the growth rate is still lower than the 10-year average of 4.6% before the crisis.

Advanced economies are also struggling with weak inflation, hence suggesting that there is still a fair amount of slack, and that the economies are not running at their fullest potentials.

Competing theories abound on why we have yet to grow as fast, or faster, than before the crisis.

Some pointed at excessive savings as a drag on demand while others alluded to something far more fundamental such as a decline in productivity and how certain jobs may lose relevance in a new digital era.

It also appears that major central banks’ aggressive monetary policies have run their course in promoting economic recovery. In any case, the US Federal Reserve has now turned to scaling back its balance sheet as means to control aggregate prices before they spiral out of control.

But questions remain if the trillion-dollar monetary stimulus has indeed fed into building the real economy as originally intended or has it been recycled into propping up the financial asset prices instead.

At least in the case of US, that period of low real interest rates and high unemployment had not been exploited to bridge infrastructure gaps in order to meet future needs.

Today, the net government investment has been found to be lower than at any time for the past sixty years while US lawmakers eagerly approved sweeping tax cuts that will inevitably lead to increased budget deficits and debt.

Given the improving economic outlook, will other governments now take fuller advantage to implement structural reforms and expanding public investments or do they also take part in the regulatory race to the bottom as means to attract foreign capital?

On the other hand, the post-crisis world may see some permanent changes to the global economic landscape.

As the developing markets become richer and more sophisticated, we may be seeing a gradual shift in economic power from the West to the East.

At the 19th National Congress, Chinese President Xi Jinping reaffirmed the current policy course on the “new normal” of higher quality, but slower economic growth.

This sentiment substitutes the decades-long policy of highly extractive, catch-up growth for a more inclusive and innovation-led development.

The Chinese has also earmarked some US$1.4 trillion (RM5.6 trillion) in its ambitious Belt and Road Initiative (BRI) where it seek to build and enhance infrastructure connectivity spanning 60 countries, benefiting some 70% of the world’s population.

If the initiative takes off as intended, we could yet see a historic level of uplifting in the living standards of low-income households, and at such a scale that its consumption power eclipses that of G7 or G20 nations.

So what do all these developments mean to Malaysia?

We need to first have a sincere and conscious debate about the long-term impact of pursuing greater liberalisation.

There are many lessons to be made of the Asian Financial Crisis 1997-1998, chief of which is that financial markets are not always efficient or rational, and that bandwagoning raises the risks of financial contagion across borders.

So, while we may welcome China’s massive and cheap capital injections to improve our infrastructure connectivity, we need to also beef up our competitiveness to ensure sustainable growth as well as our ability to service those loans.

On the other hand, the Malaysian government’s successful signings of free trade agreement are often reported in the news with highly celebratory tone.

Despite the withdrawal of President Trump’s US from multilateral trade talks in general, the Malaysian side still seems convinced that it is in our best interest to ratify the newly revised Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), albeit with some unresolved items such as the status of state-owned enterprises (SOEs).

As experts debate on the projected cost-and-benefit of trade agreement talks, it is interesting to note how even mature Western democracies are increasingly showing signs of fatigue with liberalisation.

Many are claiming that opening up to foreign investors tends to benefit only the big and rich enterprises, at the expense of anyone else.

As foreign competition undercuts local businesses, the resulting losses to employment and income have led to the rise of support for far-right political parties across Europe, further sowing instability in the region.

It is therefore crucial to acknowledge that unbridled liberalisation may also create significant long-term shocks that undermine the social fabric that holds a community together.

So does this mean that we should stop liberalising? No, in fact, we need to deliberate on ways to make liberalisation work for the common people.

One example will be for negotiating governments to agree on improving labour market regulations as the basis of trade talks.

Also, foreign capital injections should not be approved without accounting for the likely damaging consequences to the local environment as well as livelihood of communities involved.

As the post-Brexit UK’s future may attest, it is getting much tougher moving about without being part of the European Union, let alone fulfilling the rhetoric of becoming stronger than before by going it alone. The linkages of trade and investment in the globalised world have proven more entrenched and overwhelming than one could imagine.

While Malaysia is a confident country with the ambition and potential to succeed in the big world, it is important for all to agree that its success in doing so will only count if the great majority of its people are having the biggest piece of the pie. – January 5, 2018.

*Lau Zheng Zhou is Research Director at Asian Strategy & Leadership Institute (ASLI). He can be contacted at [email protected]

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.