Indeed, to some, the Hong Kong dollar increasingly sticks out like a sore thumb, but to others it is being seen increasingly as a pillar of stability in financial markets in the Asian region and an example of financial prudence. I hope you belong to the latter group of people rather than the former, but I fear that I may be expecting too much, for indeed it is quite natural when you do not have the chance to examine in detail an apparently controversial matter to be sceptical about it rather than to hang your faith in it. But my task today is, so to speak, to try and win you over. Exchange Rate Policy 3. Let me start with Hong Kong’s exchange rate policy. Here one is often attracted by the simplistic argument that Hong Kong, which prides itself as the freest economy in the world, should best operate with a freely floating exchange rate. I obviously do not subscribe to that view. Hong Kong, as you all know, is a highly externally oriented economy. Almost all our daily needs are imported, including for example the water from our tap at home and sand for construction. And almost all our manufactured products are exported. Furthermore, we are very much an entrepot, handling a large volume of re-exports1, supported by the largest container port in the world. And our service industries are also very externally oriented, providing financial and other services for the region, in particular for the Mainland of China.
In the past three decades, only a handful of countries have managed to achieve that status, and importantly, to sustain their position. In fact, the road to becoming a high-income economy is more difficult today, as countries are confronted with challenges and uncertainties like never before. According to the OECD1, the present landscape has “new rules, new environmental constraints, new technologies and more competition”. We will need to adapt to these changes, while managing other shocks that may come our way. What we don’t want is for the economy to take one step forward, only to be pulled two steps back. Along these lines, allow me to share four points on how Malaysia can more confidently transition towards a high-income economy. An economy centred on innovation My first point is on putting innovation at the centre of our economic development. Malaysia has come a long way. From being a commodities-based economy, we have diversified into high-end manufacturing and modern services. This helped us advance into a middle income economy in the early 70s. Yet, since then, we have struggled to achieve productivity- and innovation-driven growth needed to become a high-income economy. Even today, the deficit in the innovation capability of our economy remains. For instance: Malaysia does not spend enough on R&D. In fact we spend less than half of other frontier economies like Korea, Taiwan and Singapore. Our R&D efforts have focused on generating scientific knowledge, but less on applying that knowledge. This has resulted in low commercialisation of R&D.