By Lee Wei Lian
The Malaysian Insider
Sep 14, 2011

KUALA LUMPUR, September 14 — The global economy is now so unbalanced that economists are no longer able to predict crises, said Institute of Strategic and International Studies (ISIS) chief Datuk Mahani Zainal Abidin today.

This comes as the global markets continue to be plagued with uncertainty due to the lingering effects of the 2008 financial meltdown that hit the United States and Europe.

While Malaysia was spared from the financial crisis and has resumed economic expansion after the 2009 recession, its stock market has been rocked by global volatility, while inflation has soared due to pressure from high commodity prices. Property prices have also jumped dramatically owing to ample liquidity.

The think tank chief said that the problem was that the financial economy has become much larger than the real economy and admitted that assumptions used by economists no longer work.

“If you look at the world, economic theory has not kept up with what’s happening,” said Mahani at the launch of the Asia-Pacific Trade and Investment Report 2011 today.

“We can’t predict the future as assumptions don’t reflect reality. The financial part of the economy is bigger than the real part.”

She added that a key factor was that financial institutions were now compensating their CEOs based on profits, which encouraged too much risk taking.

“You look at how much a top banker gets paid versus a good engineer. Good engineers studied very hard. What does a good banker do? Basically shuffling papers,” she said.

The former member of the National Economic Action Council that crafted the New Economic Model for the Najib administration said another factor was that financial products and services have become too complex, which made it easier for speculators to manipulate prices.

“These financial people are very clever,” she said. “All the best brains are going into finance. Financial engineering has become far more complex than real engineering. You look at the high price of gold and other commodities. It is not that we are eating more rice. It is because of financial engineering.”

Mahani also warned that the situation is expected to deteriorate further, with the ratio of the financial sector to the larger economy worsening and potentially causing social problems.

“It is easy to create money, you just print,” she said. “The US quantitative easing pumped in US$600 billion (RM1.8 trillion) just like that. But the effects are (destabilising) capital flows. First, the stock market will go up and down. Now, when I see the stock market go down, I don’t worry anymore. Second, it will bite into property. The non-bankers will no longer able to afford property. Only people who know how to manipulate money can buy property.”

She said that Malaysia was lucky in some respects as it had learned from the 1997 Asian financial crisis and was not “gung-ho” about financial liberalisation.

The ISIS head added that Malaysia needed to prepare for the future by building a balanced economy.

“Although we want strong exports we also need a strong domestic economy,” she said. “Don’t forget about agriculture. Last time agriculture was not interesting but now it is considered very important.”

She added that the country needed to take steps to tackle its household debts levels.

As a percentage of GDP, Malaysia’s household debt increased from 66.7 per cent in 2004 to 76 per cent in 2009, which is uncomfortably close to the levels seen in the US prior to the 2008 financial crisis.

“Households have large debts because we encourage consumption,” she said. “Then when there are external shocks, they cannot cope.”