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This article first appeared in Forum, The Edge Malaysia Weekly on June 4, 2018 - June 10, 2018

In Daniel Kahneman’s book Thinking, Fast and Slow, he writes that the human brain is wired to search for cause and effect explanations in everyday life. The idea that the world is chock-full of random events and that things can just happen without some predetermined action or agent is often politely acknowledged, downplayed against the notion that it must be Event X or Person Y who drove that effect.

The difficulty in identifying true causality, particularly in real life, is the absence of the counterfactual. Michael Jordan is widely acknowledged as the greatest basketball player of all time. Of course, he worked extremely hard, was incredibly dedicated to his craft and was a competitive freak to boot. He certainly is worthy and deserving of his success. But would he have been as great had he been the average height of his parents instead of his actual height? Michael Jordan’s father was five foot nine while his mother was five foot five, and yet he shot up to six foot six. How much did this unusual genetic windfall matter?

Public policy is much the same way. We honestly could not tell whether a given policy had worked unless there was some counterfactual. Let us suppose that we had a policy where the teacher-to-student ratio was halved as students went from Form 3 to Form 4. Now, if the students’ scholastic performance improved in Form 4, how do we know how much of it was a result of the policy and how much was due to a natural improvement in aptitude and maturity from Form 3 to Form 4?

Causality is complex and difficult, and continues to remain an enormous battleground for research in the social sciences. With that in mind, I have always been somewhat curious as to how brokers or analysts or business journalists seem to have a dead-on explanation for day-to-day movements in the financial markets. It can be really baffling. For instance, the markets can be negatively impacted by newsflow on possible trade wars one day but improve the next day despite more newsflow on a deterioration in international trade policies.

Of course, this is not to say that newsflow cannot impact markets — it can. So, in the week of May 21, when the FBM KLCI crumbled, it was attributed to announcements by the government, particularly Prime Minister Tun Dr Mahathir Mohamad and Finance Minister Lim Guan Eng, on Malaysia’s national debt and the 1MDB situation. Datuk Seri Najib Razak pounced on this (as any good opposition politician should), stating on his Facebook page that “our Bursa index fell 40.78 points today or 2.21% while the Indonesian stock index added 0.71%”.

I just want to make a couple of points on that statement. First, it is a clear example of cherry-picking and confirmation bias. Markets tanked the world over. Benchmark indices in Singapore, Hong Kong, the UK, Germany and France all suffered, falling 1.32%, 1.82%, 1.13%, 1.47 and 1.32% respectively on the same day but Najib did not mention this.

Second, undoubtedly there are reasons why the global markets tanked and why Malaysia performed so badly. I am not arguing that these movements were random or that the newsflow out of Malaysia did not have an impact. Maybe it did, and if it did, I cannot say how much of the FBM KLCI’s drop was due to global factors and how much to domestic factors.

But I will say this. Even if it were true that the announcements made by the government adversely affected investors, especially foreign funds that had been selling their Malaysian positions over the past few weeks, there is a broader point that I would make about the viability of using “the markets” to determine the effectiveness or viability of a given government, especially in the short term.

Markets love stability and abhor uncertainty and volatility. However, Malaysia is in the midst of a historic period of transition and change — its first change of ruling government since gaining independence. The last time there was a change of government in Malaysia was when the British handed over control of the country. Considering such a monumental change, did anyone ever seriously think that there would be no adverse consequences? Did anyone really believe that everything would be plain sailing and that the markets would give Malaysia a free pass?

No true change and reform is straightforward. But markets, in almost all cases, prefer stability and the status quo — what is going on in Malaysia may be anathema to them. It could be true, after all, that investors prefer the policies of Barisan Nasional; to prove this, we would need to compare the FBM KLCI’s historical performance under BN governance and Pakatan Harapan (PH) governance.

There is one big problem — we have never had a different government post-independence. Maybe by the next election, we would have collected some data points and maybe it will be true that PH’s policies do not inspire confidence. But my suspicion really is that markets prefer stability. This period of change in Malaysia may be unstable now and maybe markets — especially foreign short-term investors — may not like it but this is just the next phase in our nation-building experiment.

Finally, could the government do a better job of managing this period of uncertainty and volatility? Perhaps it could. To assuage investors and the markets a little, maybe it could choose to be more strategic in its communications and maybe it could provide some longer-term views as to how it plans to tackle fiscal challenges.

All that is well and good but ultimately, it comes down to the reason behind the newsflow that we are seeing. If it is an unveiling of the truth behind our fiscal position and economy, then let the truth be told. And if it spooks investors, maybe the nation needs to take the hit from the markets in the short run in order to reboot itself. Maybe our economy needs to go through a J curve. To suggest that the government, or any government, should prioritise short-term hot money flows over long-term transparency and accountability is preposterous.

Having a strong and stable market environment is unquestionably important. The issue is the time horizon. Market reactions, which typically oppose instability and uncertainty that are hallmarks of any period of transition and change, may not be the best way to judge these transitions and changes, especially in the short term. Indeed, these short-term market fluctuations may be a small price to pay for true political, economic and social reform in Malaysia — weeding out corruption, rent-seeking and the like while increasing accountability, institutional strength and structural reforms.

The hope for all Malaysians, which we must collectively work to achieve, is that we and our markets emerge from these short-term jitters — a J curve though it may be — stronger than ever, setting ourselves and our long-term investors on a path of sustained stability and strength.


Nicholas Khaw is an economist with the Khazanah Research and Investment Strategy Division

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