This article first appeared in Forum, The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

When I was learning the craft of central banking, the focus was all about formulating policy — monetary, financial stability, fiscal, consumer, competition and so on. The word “strategy” — how to achieve a satisfactory outcome in policy objectives — was hardly used or mentioned at all.

Of course, any policy or strategy will depend essentially on your paradigm, the world view that comprises your experience, perspectives, values, and essential likes and dislikes. Most of us think we are open, objective and unbiased, but our paradigm shapes the way we make decisions, which is why groupthink (everybody must think alike) makes bureaucratic behaviour predictable to your competitors.

Systems thinker Donella Meadows observed in her book The Global Citizen (2000): “Your paradigm is so intrinsic to your mental process that you are hardly aware of its existence, until you try to communicate with someone with a different paradigm.”

In their book The Art of Strategy, game theorists Avinash Dixit and Barry Nalebuff wrote: “Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.”

They added, “It is also the art of finding ways to cooperate, even when others are motivated by self-interest, not benevolence. It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others’ shoes so as to predict and influence what they will do.”

In essence, we need to read the paradigm and strategy in our adversary’s head, whether we are an individual, business or state. Competition under uncertainty is why strategy is much more important than policy.

The US-China rivalry puts strategy centre stage in the competition, cooperation and confrontation game. You can see the Americans and Chinese poring over each other’s policy and strategy documents to figure out how the other side thinks, and will react, to changes in each other’s game. The geopolitical game is so much more complex because we are dealing with multiple players, in which minor events can blow up to change the whole direction of the game.

This has happened time and again in history. In World War I, the assassination of Austrian Archduke Franz Ferdinand by a Serbian nationalist sparked the war between the European powers. Germany was not ready to take on Russia, Britain and France at the same time. And when the Americans entered the war, the game was over. What no one understood was that WWI led to Germany’s defeat, but also ended with the Russian Revolution, creating the conditions for WWII.

The Big Picture (the environment) creates small events that change the Big Picture in an unending cycle of history.

Who would have predicted in 2019 that the coronavirus would create a worldwide pandemic and global recession? Science has enabled a rapid response through the discovery of vaccines, but the coronavirus is mutating as fast, to upset prospects for a sharp recovery in, at least, the US and China. Thus, it is no longer about health policy, but a strategy of controlling the virus, and the ability to execute that strategy effectively.

We therefore need strategy for matters pertaining to the military, politics, business and daily life.

Underdogs have to use their wits to outfox superior rivals who are smarter, stronger, faster and/or better endowed. They win through bluff, deceit, ruses, tricks, allies or action that confuse the opposition. When the opponents hesitate, the strategist acts with speed, nimbleness and decisiveness before the other side even guesses what is going on.

But the game theory is complicated because not only are you reading your opponent, but he is also reading you. Hence, the Chinese strategist Sunzi is explicit in reminding everyone to “know oneself”. If you are blind to your own weaknesses and biases, and your opponent knows them, you will be attacked and be put on the defensive.

Policies tend to be static, with broad goals or aspirations. Strategies are dynamic, because everyone needs to think about actions in advance, and to react quickly in the light of rapidly changing conditions.

Strategy is therefore the game plan to achieve overall goals, and policies are sub-goals for different departments or organisations to implement. Institutions or organisations are executing agencies which use projects, processes and programmes to achieve the policy objectives. Thus, the inability to deliver is not just paradigm, policy or strategy failures, but execution failure or weaknesses.

My own experience working in domestic and international institutions taught me that we must always reflect on whether our basic policies are working or not, and why not. The free market model, embodied in the Washington Consensus that democracy, free markets and rule of law were the correct paths to national development, argued for following best practices.

In other words, if you followed the ideal market system, basically the US or British model of parliamentary democracy, transparency and free press, independent institutions, and adopted international standards, then every country could become like the US, the most advanced and developed country in the world. Right?

Not necessarily. This strategy of “follow the leader” suggests that the “rest” can become the “best” by copying the West. But what happens when the “best” stumbles? Will the “rest” go down with the “best”?

As behavioural economist Daniel Kahneman observed in his book Thinking Fast and Slow, “we are blind to the obvious, and we are also blind to our blindness”.

This policy blindness is clearly seen in the current global liquidity trap. A domestic liquidity trap was first identified by the British economist John Maynard Keynes, who observed that there was ample liquidity and savings in Britain and the US in the 1930s, but their economies kept getting into deflation with huge unemployment.

His General Theory of Employment, Interest and Money (1936) was the first coherent framework to look at why an economy could get into a liquidity trap. The classical economists argued that since aggregate demand is by definition equal to aggregate supply, prices will always adjust to produce equilibrium.

Keynes pointed out that economic behaviour was ruled by dynamic expectations. If savers expect conditions to get worse, they will not spend or invest, so hoarding liquidity creates the liquidity trap. The classical economists argued for fiscal balance, a return to the gold standard, and everything would be back to normal.

Keynes broke this “free market equilibrium” mode of thinking by pushing for governments to intervene through the creation of a growth cycle. Create jobs, then people will spend and the economy will get out of the trap.

Keynes was correct and the world got out of the 1930s Great Depression through government spending, but it got out of hand from war spending. After the US overspent on the 1970s Vietnam War, inflation got out of hand, and the neoclassical Chicago School pushed aside Keynesian economics and argued for free markets. As US President Reagan famously said in 1981, “Government is not the solution to our problem, government is the problem.”

This intellectual tilt to the market was the foundation of neoliberal thinking since the 1980s. Monetarism — meaning if governments stick to fiscal discipline and central banks keep money supply to “fine-tune” financial markets and prices, all will be well — claimed credit for nearly 40 years of “Great Moderation”, in which there was good growth and almost no inflation. But in practice, there were three financial crises — the 1980s Latin American debt crisis, 1998 Asian financial crisis and the 2008 American sub-prime/European debt crisis — each larger than the other in scale.

Just as excessive use of fiscal policy ruined Keynesianism, excessive use of monetary policy has now punctured monetarism. We have arrived at another global liquidity trap in which excessive use of loose monetary policy through central bank liquidity expansion (quantitative easing or QE) has generated very short-term liquidity, but low growth, low inflation and rising income and wealth inequalities.

Who needs strategy when after 2008, politicians discovered that they could have their cake and eat it? Politicians need not take any painful structural adjustments, such as raising taxes, since central banks can print money to bail them out of any liquidity stresses. The rich loved loose monetary policy because it boosted short-term asset bubbles. The middle class became more and more upset that their wages got eroded and they seemed to be losing out in both income and wealth and, now, access to health.

Policies, strategies and paradigm have to change when the context has changed through technology, financialisation, climate warming and politics.

The global liquidity trap manifests itself in lots of short-term liquidity at near-zero interest rates, and short-term financial markets at record highs, but there is a UN Sustainable Development Goal financing gap for long-term investments of roughly US$2.5 trillion a year to 2030. Indeed, the Asian Development Bank has warned that Asia will need to invest US$1.7 trillion annually in infrastructure until 2030. In short, everyone is borrowing short and few invest long.

You would have thought that as Asia is a high-growth, high-savings region — with high foreign exchange reserves and a young population — its infrastructure needs should be met easily. Why isn’t there a mechanism within Asia to mop up the excess liquidity and channel this to long-term funding?

In short, what is wrong with Asian financial policy or strategy? After all, the region maintains good fiscal and financial discipline with strong macro-prudential regulation relative to the rest of the world.

The unfortunate answer is that Asian savings are financing more and more the US as the biggest borrower, and less and less Asia’s own requirements. Based on International Monetary Fund data, the US ran a net liability to the rest of world (net of foreign assets held) of US$14.1 trillion or 67% of GDP, with roughly three-quarters funded by the net surplus foreign positions of Japan, South Korea, China, Taiwan, Hong Kong and Singapore.

Is this situation, where the banker consumes much of the surplus savings in the world, sustainable?

Asian financial policymakers should therefore review not just their prudent policies, but ask whether their current strategy is still viable in a world of growing risks and uncertainties. Surely, it is time to invest back in our own neighbourhood, which is not only growing the fastest but is also the factory and growth engine of the world.

Indeed, experienced project lenders in Hong Kong and Singapore complain about a shortage of “bankable projects”, with “too much money chasing too few good projects”. We are not short of funds, and yet there is no pipeline of good projects on hand to finance and implement.

The reason for this project shortage is not lack of funds, but lack of implementation capacity. Post-Covid 19, we need to upgrade our health facilities, focus on education and job reskilling, tackle urgent zero-carbon targets, improve digital access and boost energy efficiency using non-fossil fuels. This is a public sector capacity problem because the private sector does not have the data nor access to help design these large, complex projects.

The obvious blind spot is that the best blueprints, plans or policies are useless if you do not have the design-manage-operate and implementation capacity. We have relied too much on macroeconomists, MBAs and financial engineers in the last four decades, who talk very elegantly at a high level, but cannot put their plans into action on the ground. We need real engineers with real-life experience in executing large-scale projects to lead this important work to provide jobs and get good green infrastructure going. It is no longer theory, but practice.

The best strategy therefore is not to just talk, but walk the talk. Only then will politicians or businesses get back the trust of the people. Time to pay real engineers better and cut the pay of financial engineers.

Andrew Sheng is a former central banker whose views are personal to himself

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