Podium: Going back to the beginning

A speech by the Malaysian Prime Minister to a conference of inventors

THE EVENTS of the past year have been extremely chaotic and painful to us. We suddenly find ourselves seemingly helpless and unprepared to handle the situation brought about by others. Most of us tend to handle the new situation in the orthodox way. In other words, we are not inventive. We are not even willing to question conventional wisdom, believing that the usual way must be the correct way. Yet we must all realise that we are not dealing with the usual situation, brought about by the usual way of doing things.

Currency trading is not quite new, but the advance of technology has changed completely the way currency is traded. They no longer have to carry cash, or even financial papers, to exchange for the desired currency. Through computers, vast sums of money can be transferred immediately from one end of the earth to another. The result is instantaneous changes in exchange rates, which makes any prior calculation regarding cost impossible.

Businesses have to resort to hedging, ie a form of insurance, in itself an invention to cope with rapid changes in exchange rates.

Faced with these new ways of trading currencies, the standard methods of dealing with exchange rate volatility cannot be applied. Increasing interest rates, crunching credit, balanced budget, higher taxes and all the other prescriptions of the IMF, will not work. And indeed, after trillions of dollars have been lost, and millions and millions have been thrown out of jobs and forced to starve and to beg, the IMF itself has admitted that the standard remedy does not work.

So what will work?

A Malay proverb says: "If you lose your way, go back to the beginning." To invent new ways of doing anything, it is worthwhile to re-examine the old ways, to identify their strengths and their faults, and then to modify or innovate the old ways.

This is what Malaysia has done. In the old days, the value of money was determined by the value of gold. Then came the fixed exchange rate of the Bretton Woods regime. Going back to gold is not practical. But the fixed exchange rate of Bretton Woods had obviously enabled the post-war economic recovery and subsequent world-wide prosperity.

It did not fail because the rates were fixed. The Bretton Woods regime failed because major developed countries reneged on their promises; because they devalued their currencies in order to become competitive, in order to overcome their mounting costs owing to excessive wage demands. If they had kept wages and incomes under control, they need not have devalued, and the Bretton Woods fixed exchange regime would have continued to make the world prosperous.

Having identified the true cause of the failure of the Bretton Woods formula,we find that the idea of using a fixed exchange rate to achieve economic recovery becomes more acceptable. But one country by itself cannot bring back the fixed exchange rate system of the world. The obvious need is for us to develop a way of using a fixed exchange rate for just one country, irrespective of whether other countries will accept it or not. The answer lies in internalising the currency, in rendering the currency illegal outside the country.

No one other than people operating businesses within Malaysia need accept the exchange rate. Outside Malaysia other currencies will be used. Thus, foreign trade will be conducted entirely in other currencies.

The fixed exchange rate devised by Malaysia is inventive and innovative. Turmoil is now engulfing the whole world. The rich countries that smugly declared that the currency turmoil of East Asia would not affect them are now finding that they are not safe from currency traders and their destructive activities. The failure of the Long Term Capital Management hedge fund has forced the great Western governments to look more closely at currency trading.

Now, even the IMF has admitted to a need to regulate currency trading. Clearly, necessity has been the mother of invention.

Inventiveness in dealing with economic and financial management is no different from inventiveness in other fields. We do not know exactly when the wheel was invented. Of course, we do not need to invent the wheel all over again. But we do know that, since the wheel was invented, its effectiveness and applications have been extended into numerous fields.

Orthodoxy will cause stagnation. Conservatives never progress. Those who fear change will be condemned to wither where they stand.