The US inflation rate has not gone up since June of last year, yet the Fed consistently hiked its federal funds rate in an attempt to achieve the desired 2% inflation rate, the former United Nations assistant secretary-general for economic development said.
“Inflation is no longer accelerating, therefore the non-accelerating inflation rate of unemployment (NAIRU) should be the focus, not inflation rates,” he argued.
Central bank governors throughout the world remain obsessed with the 2% inflation rate goal despite its lack of empirical or theoretical justification, claimed Jomo during his opening address at the Malaysia Futures forum jointly organised by Khazanah Research Institute and the LSE Saw Swee Hock Southeast Asia Centre today.
Continuous rate hikes in the US have led other countries to also respond by similarly raising their respective rates in order to avoid a flight of capital (to countries with higher interest rates), he added.
Focus on vital sectors
During a later session, another panellist said that Malaysia’s economy has shifted away from manufacturing into services, driven by foreign direct investment (FDI) from China and other factors.
Malaysia must determine whether this structural shift would benefit the country and identify which sectors should be focused on, said Guanie Lim, an assistant professor at the National Graduate Institute for Policy Studies in Tokyo.
The Southeast Asian studies academic cited Thailand’s success in becoming the “kitchen of the world” and “Detroit of the east” as examples of effective policy shifts that can drive vital sectors of the economy.
He added that Malaysia cannot solely depend on FDI to become a high-income nation, as other countries – such as South Korea, Taiwan and Hong Kong – managed to grow rapidly without relying too much on FDI.
Meanwhile, Universiti Kebangsaan Malaysia academic Noor Azlan Ghazali said that Malaysia must be more selective in accepting investments.
He criticised the country’s over-dependence on FDI, remarking that “Malaysia is a nation addicted to cheap (investments), we want everything to be cheap”.
“If we want to be an advanced high income nation, it’s not (going to be) cheap,” Azlan argued.
On the other hand, Malaysia needs to identify and attract more technical and complex investments in order to move up the global value chain.