Public Forum: From Class to Kamunting


October 3, 2014

Public Forum: From Class to Kamunting

From Class to Kamunting

A Public Forum will be held at Auditorium Tun Suffian, Law Faculty, University of Malaya, Pantai Valley, Kuala Lumpur on October 15, 2014 (8.00pm-10.00pm). Two well-known academics, Dr. Syed Husin Ali and Dr. Kua Kia Soong, who were ISA detainees, will share their experiences with us. All are welcome.  Let us  be Free Men and Women for Malaysia. Support Academic Freedom, Freedom of Expression. Justice and Democracy.

Mandela and Theron“…I have cherished the ideal of a democratic and free society in which all persons live together in harmony and with equal opportunities. It is an ideal which I hope to live for and to achieve. But if needs be, it is an ideal for which I am prepared to die.” –Nelson Mandela,  20 April 1964, Rivonia trial

 

Inspirations from Raja Aziz Addruse: Morality and the Rule of Law


October 3, 2014

Inspirations from Raja Aziz Addruse: Morality and the Rule of Law

Third Raja Aziz Addruse Memorial Lecture

International Malaysia Law Conference 2014

 by

Tunku Zain Al-‘Abidin ibni Tuanku Muhriz

 September 24, 2014

Royale Chulan Kuala Lumpur

Introduction

I’m not a lawyer.  Thank God.   So how is it that I am able to speak after the Chief Justices of Malaysia and Hong Kong in one of the main events of this conference?

When Christopher and Brendan met me some months ago to invite me to deliver this lecture, I was stunned.  I asked them why they would invite me, and they said they wanted someone younger, a change from the typical luminary, and a civil society perspective.  Furthermore Aunty Catherine had already approved.  With that final bullet, I could hardly say no.

And so today I’m delivering the longest lecture of my life in front of an intimidating audience.  However I see many people from outside the legal profession in the audience, which gives me an excuse to omit ostentatious legalese.

Raja AzizMalaysia’s Champion of The Rule of Law

To most of you, Raja Aziz Addruse was an éminence grise.  His curriculum vitae would take up most of the lecture, but he is rightly best known for three things: for being elected thrice to the presidency of the Bar Council; for founding the country’s first human rights NGO; and for dealing with profound constitutional issues either through his cases, writing or speeches.

To me, Raja Aziz was first a family friend.  I saw him at open houses and dinners throughout my childhood, when I knew him as Uncle Aziz, with no inkling of the role he played in our nation’s democracy.  When researching Malaysian politics and law as a teenager I kept seeing this name “Raja Aziz Addruse”, and eventually I realised this was Uncle Aziz.  I capitalised on this by interviewing him for my dissertation on social stratification in Malaysia.  On the proliferation of Datukships he said: “You don’t need a title to ‘be someone’.  There are many people without titles who are doing alright.  But there are many people just flout their titles to get somewhere.  In the end they don’t get very far.”[1]

This was very pertinent because in his lifetime he rejected at least four Datukships.  According to his daughter Raja Azrine, “as he had rejected it for the first time, it was not proper for him to receive further offers.”[2]  Yet there was no one more genuinely qualified for such recognition.

Still, while many people are entirely worthy of honours – like those in this room, hopefully – there is little confidence in the system.  Some analyse post-nominals to identify which award from which state has been bestowed to judge accordingly, but this is a sad reversal of the original intent of the system: that there may be shame in accepting honours.  As I will show in my lecture today, Raja Aziz did not need decorations to affirm his integrity, honour and morality: he had those in abundance, transmitted to the world by his gentlemanly decorum.

Of course there are greater things to worry about than our honours system, though that is indicative of a more general state of affairs.  Anecdotal evidence and opinion polls point to a lack of confidence in national institutions: the executive, legislative and judicial bodies at federal and state level, the electoral system, the police, and even the heads of state.  Check and balance institutions are derided in social media as being compromised by certain interests instead of constraining them, and among the chattering classes there is no shortage of cynicism to describe the health of our democracy.

In assessing how we got to such a state, we need to revisit our constitutional setup and the intentions of its architects: for it is our Constitution that largely defines the functions of these institutions and sets the rules of engagement between them.  Before we do that, it is prudent to consider some constitutional principles.

Constitutionalism

As every student of constitutional law knows, AV Dicey presented the orthodox perspective of constitutional law in the United Kingdom – that the sovereignty of Parliament was the prime constitutional principle: parliament can make or unmake any law whatever, and even the judiciary is subject to Parliament.  This view has since been challenged: one noteworthy case was R (Jackson) v Attorney General in 2005, where the judges’ obiter comments suggested that the rule of law trumped parliamentary sovereignty. 

But what do we mean by ‘the rule of law’?  In his widely acclaimed book on the subject, Lord Bingham identified eight features of the rule of law: accessibility of the law, law not discretion, equality before the law, the exercise of power, human rights, dispute resolution, a fair trial, and the rule of law in the international order.[3]

Friedrich August von Hayek believed that the central role of the state should be to maintain the rule of law, with as little arbitrary intervention as possible.[4] By contrast, Ronald Dworkin criticised the view that the rule of law embodied any formal qualities in law that could be determined by the application of a rule.  Rather, he regarded law as having inherent moral content and as itself a branch of moral philosophy. [5]

Jeffrey Jowell observed that Dworkin was seeking a general theory of law, while Dicey was seeking “a general principle of how power should be deployed by a government in a democracy”, though undeniably the questions are linked.  On parliamentary supremacy, he has said that “it may take some time, provocative legislation, and considerable judicial courage for the courts to assert the primacy of the Rule of Law over parliamentary sovereignty, but it is no longer self-evident that a legislature in a modern democracy should be able with impunity to violate the strictures of the Rule of Law.”[6]

Continuing on this note, Trevor Allan has argued that “the core of the liberal ideal of a government of laws requires that the general laws of the state contain some aspect of serving the common good. He writes: “No one can be expected to acknowledge any legal rule, as imposing a genuine legal obligation, unless it is accompanied by the claim that his obedience serves a common good.”[7]  The rule of law offers the individual not merely a series of laws to obey, but a justification for doing so.

Clearly, constitutional law is a deep topic, full of nuance, complexity and controversy.  The example of the UK illustrates the active debate that surrounds it.  We must note, however, that the Malaysian and the British legal systems differ in that we have a single written formal constitution.

Intuitively, one may feel this would help in clarifying this issue, but this is barely the case as disputes surround how written constitutions should be interpreted, as in the United States.  Recently President Obama was criticised by for making a “decisive break in the American constitutional tradition” by not seeking congressional consent when declaring war against the Islamic State of Iraq and Syria; instead, “the president is acting on the proposition that the commander in chief has unilateral authority to declare war.”[8]

So how do we balance the supremacy of the constitution with the sovereignty of parliament and the ideal of rule of law?  At the heart of this debate lies more fundamental questions about the very nature of law.  Is law, as HLA Hart would argue, merely something that is passed by the proper channels?  Or, as Lon Fuller would argue, is the law’s purpose to provide order and clarity?  Does legislation that fails to fulfil these criteria not deserve to be regarded as law?

To explore how we ought to define the law in Malaysia, it is crucial to place the law in its proper context.  The law does not operate in a vacuum, but functions within and interacts with society.  In this way the law both shapes and is shaped by society and is part of a broader societal framework.  The law should reflect society’s ideals and values, clarifying them and providing order to societal morality.

Here we come up against another issue: morality is personal but the law must be universal.  Given society is not uniform, but a collection of individuals each holding on to different beliefs, what shape should the law take in order to best secure the interests – and morality – of society as whole, rather than just a handful of interest groups?  Even if a nation’s founding fathers were at one time universally accepted as reflecting the nation’s moral norms, to what extent do we accept that those norms can change over time?

Many open-ended questions have been put forward, and we are in danger of moving from constitutional law to jurisprudence.  But asking these difficult questions is a necessary part of nation-building, and Raja Aziz played a large part in helping to answer them

Raja Aziz’s views

It is clear that Raja Aziz did not favour Dicey’s view, and he opposed the 1988 amendments that moved Malaysia closer to that position, writing: “The fundamental principle which applies under a written constitution is that it is the Constitution itself, and not Parliament, which is supreme… To remove from the High Courts the judicial power of the Federation, which had since Merdeka Day been vested in them, and to have Parliament instead confer upon the High Courts their jurisdiction and power cannot be conducive to the maintenance of an independent judiciary.”[9]

He favoured the interpretation of the Indian courts in Kesavananda v The State of Kerala in which fundamental rights provided by the constitution formed part of its basic structure and could not be abrogated, and lamented that the Malaysian courts in Loh Kooi Choon v Government of Malaysia as well as the Singaporean courts in Teo Soh Lung v Minister for Home Affairs rejected this argument.  “On this view,” he argued, “the fundamental rights, though said to be guaranteed by the Constitution, are illusory.  They form part of the Constitution only for so long as the Government deigns to let them remain.”[10] When asked in 2007 what the Constitution meant to him, Raja Aziz replied “it means nothing to me at the moment, because it can be changed at any time.”[11]

These words are ominous when the basic structure of our Constitution is under threat today with regards jurisdiction of courts, religious issues and the relationship between Peninsular Malaysia and Sabah and Sarawak.  Even more dangerously, there are those who have deliberately reinterpreted basic premises of our Constitution, citing key articles out of context as justification.  Raja Aziz, as a staunch defender of the Constitution as it was understood by those who drafted and adopted it, would be appalled.

His unwavering defence of the Merdeka principles led the current President of the Malaysian Bar, in paying tribute to his predecessor, to say: “Ungku was undoubtedly a legal luminary and a doyen of the Bar.  His unequivocal commitment to a strong and independent Bar and the independence of the judiciary – two essential elements of the rule of law – is legendary.”[12]Inevitably, Raja Aziz also commented extensively on other issues as and when they became topical.

On the independence of parliamentarians, he wrote: “No backbencher can afford to be independent if he depends on his parliamentary allowances for his existence.  Certainly he is not qualified to be one if he does not have the courage of his own convictions.”[13]

On freedom of speech, he opined: “A free press is one of the checks and balances necessary to secure the continued development of democracy,” and after mentioning the Printing Presses and Publications Act, the Official Secrets Act and the Sedition Act he went on to say: “Part of the obstacles to press freedom has been due to the reluctance of the courts to limit the scope of the restrictions which can be imposed on freedom of speech.  That has resulted in a wide discretion being left to the Public Prosecutor.” [14]  “In defamation cases, the courts have not shown concern at the adverse effect the substantial damages they have award to claimants… They seem to have misunderstood their role in a democratic society, which is to preserve and protect the constitutional rights of individuals.”[15]

On the 1993 constitutional amendments to remove the legal immunity of the Rulers, he warned: “The amendments will arm the Executive with the power to subjugate the Rulers through threats of prosecution for any offences, however minor.  The Rulers will be at the mercy of the Executive… The power to prosecute is a powerful weapon which, in the hands of the ruthless, can be abused to great advantage – not by prosecuting the alleged offender but by withholding prosecution in return for his cooperation.”[16]

On the mandatory nature of the death penalty, during his 1976-78 term as President of the Malaysian Bar, he “led the Bar Council to oppose legislation where judges must impose the mandatory death sentence for various offences without allowing them the opportunity to choose other alternative forms of punishment.”[17]

On police killings in the late 1990s, he wrote: “That the police have a right to self-defence and the requisite use of firearms in the course of apprehending suspects and preventing the commission of crimes is accepted.   What has, however, given cause for concern is whether in performing those duties the police have too willingly abandoned all principles of self-restraint when it comes to using firearms.  The alarming increase in the number of suspected criminal fatalities bespeaks the possibility of a police force that has forgotten the two crucial principles that define all legal and justified use of force – proportionality and discrimination.”[18]

On apostasy, in an article about a follower of the Sky Kingdom sect, he said: “[Kamariah Ali’s] long and futile legal struggle highlights the need to seriously address the constitutional issue of the right of Muslims to freedom of religion… The civil courts have the jurisdiction to interpret the Constitution and protect fundamental liberties, including the right to freedom of religion under Article 11.”[19]

On conversion of children to Islam by one spouse, he similarly “was critical of the court’s refusal to make decisions.”[20]

On the police reaction to the first Walk for Justice in 2007, he wrote: “Police officers turned up at the Bar Council office a few days after the Walk to question three of the Council’s office bearers against whom a complaint had apparently been made.  When requested to do so, the police officers were not able to provide details of the complaint or of the first information report.  They behaved as if the country was a police state.”[21]

On detention without trial, in 1976 after the government tabled an amendment to the Federal Constitution which would withdraw from persons arrested, detained or place under restricted residence, their rights to counsel amongst other things, he issued a Protest Note with the following: “One basic difference distinguishes those who are loyal to this country from those who are bent on over-throwing it; and that is, that the former have respect for the law.  But harsh and unjust laws cannot command respect willingly; and a law which treats persons who may have committed ordinary crimes in the same way as it does communist terrorists cannot be good law.  What distinguishes our system of government from that advocated by our adversaries is the fundamental human rights protected by the Constitution.”[22]

Mr Lim Chee Wee as President of the Malaysian Bar used that quote at the Dedication and Naming Ceremony of the Raja Aziz Addruse Auditorium three years ago.  In that speech Mr Lim also said that “Ungku would have welcomed the Malaysia Day speech made by our Prime Minister on 16 September 2011, on abolishing the ISA and other detention without trial laws.  He would also have scrutinised with a keen eye the actual words in which these promised reforms are eventually couched.”  If Raja Aziz were alive today, I’m sure he would pen an eloquent denunciation of the recent invocations of the Sedition Act.

Raja Aziz had a long-held distaste for the Sedition Act, and felt that the decision of the Indian Supreme Court in Kedar Nath v State of Bihar, in which the court recognised a duty “of drawing a clear line of demarcation between the ambit of a citizen’s fundamental rights guaranteed [by the Constitution] and the power of the legislature to impose reasonable restrictions on that guaranteed right in the interest of, inter alia, security of the State and public order”, was superior to the Malaysian High Court’s argument that “it is impossible to spell out any requirement of the intention to incite violence, tumult or public disorder in order to constitute sedition under the Sedition Act.”  Here, Raja Aziz cited the United States Supreme Court in Ricco v Biggs: “The preservation and protection of the individual’s constitutional rights are within the inherent duty and power of the courts, which the legislature can neither control or abolish.”  He went on to say that “the removal from the citizens of one of their fundamental rights cannot possibly be to promote the growth of the nation.”[23]

Dato’ Cyrus Das speaking in 2011 recalled how Raja Aziz “led the Bar team in the sedition case against Dato’ Param Cumaraswamy, then Vice-President of the Bar, arguing that the offence of sedition was a relic of British colonialism and did not sit well with the guarantees of liberty and free speech conferred by the modern Malaysian Constitution. Raja Aziz argued convincingly that the term ‘seditious tendency’ could not be applied elastically to cover every criticism of government that comes close to home.  The acquittal of Dato’ Param was applauded domestically and internationally as a vindication of free speech in Malaysia.”[24]

On so many issues, I found repeatedly that I agreed with Raja Aziz, even though sometimes that concord came from a completely different direction.

IDEAS

My background was in what lawyers like to denigrate as the “fluffy” social sciences centred on public policy and political philosophy.  Through this process I concluded that Malaysia was modelled largely on what would be termed in the UK as classical liberal lines: Bapa Merdeka spoke consistently of liberty and justice, and his speeches and articles are replete with calls for the protection of individual freedoms, for strong check and balance institutions, for government to keep out of business, and his famous maxim that a free, sovereign nation is better happy than mighty.

In London I found two Malaysians who agreed with me and we established a think tank to promote these values and commensurately advocate policy change.  This became the Institute for Democracy and Economic Affairs, which I am happy to say today flourishes under a dedicated team that promotes market-based solutions to public policy problems guided by the principles of rule of law, limited government, individual liberty and free markets.

When I returned to Malaysia one of the first events we organised was a seminar on the rule of law, and I asked Raja Aziz to speak.  He graciously agreed, and more generally when we met over meals with my parents, conversations would turn to what IDEAS was doing and what I was writing about.  He disagreed with me sometimes – a point he would make explicit when he wrote his foreword to my first collection of articles.[25]

We were on the same page when it came to political freedom, but he was less enthusiastic about IDEAS’ views on economic freedom.   Still I think he was glad that we had set up this think tank, and thought us a worthy participant in the NGO space that was pioneered by HAKAM, which he founded with Param Cumaraswamy, Tun Hussein Onn and Tunku Abdul Rahman in 1989.

Raja Aziz showed me that there is no issue beyond debate.  He proved that even the most incendiary topics could be calmly but comprehensively explored.  Today there are those who feel that certain institutions should never be questioned, and would advocate an authoritarian show of force and use the Sedition Act if citizens question certain decisions.  But such tactics are hardly conducive to fostering affection for the very institutions that they are purportedly trying to defend.  History has given us ample evidence of the terrors that can arise once governments adopt such logic.  Conversely, confidence in institutions can be engendered by demonstrating that they serve the people, and equally importantly, by showing how they evolved over time in our particular socio-political milieu.

History

When I talk to young Malaysians about the history of democracy in this country I start by citing the agreement between Demang Lebar Daun and Sang Sapurba, which established a contract between the ruler and the ruled, as well as the Batu Bersurat Terengganu of 1303, which required the ruler to act in accordance with a higher power.  The next few centuries see a rich tradition of law-making, especially in Malacca and Kedah, as the increasingly prosperous sultanates demanded that citizens and traders enjoyed security, justice and low taxes.  The federation of Negeri Sembilan shows us that traditional institutions from Pagar Ruyong – the matrilineal clan structure, decentralised governance and adat courts – could be adapted to fit a new geography.  The Johor Constitution of 1895 and the Terengganu Constitution of 1911 show us that rulers were aware of the importance of separation of powers and limits to the authority of institutions.

While the Reid Commission looked to the Westminster model in the writing of our Constitution, there is no doubt that history played its part: the Rulers and political leaders involved in the Merdeka negotiations would not have accepted a paradigm that was alien to what the people were used to – after all, that lay at the crux of the rejection of the Malayan Union.   In a sense, the 1948 Federation of Malaya settlement, the 1957 Merdeka Agreement and the 1963 Formation of Malaysia were echoes of the 1773 Federation of Negeri Sembilan: different institutions with different histories fusing together in an attempt at create modern sovereign states in the Westphalian system.

Unfortunately, this is not the way Malaysian history is presently taught to schoolchildren, where key events are often not placed in the proper context.  In the worst case, important events are cherry-picked and distorted in order to satisfy present-day political objectives.  While every country has its national myths and legends, not all governments permit academic scrutiny of these myths and legends.  This is why I have constantly argued for the need to liberate the teaching of history from political control.

The post-war period is particularly sensitive. The Malaysian Left continuously complains that their contributions to independence are omitted from official accounts.  But the role of the Malay Rulers too is relegated in favour of the myth that a single political party championed and won Merdeka.  Sustaining this narrative necessitates the creation of another myth: namely, that institutions have, over the last sixty years, remained static and monolithic – as if the political successors of Dato’ Onn Ja’afar and Tunku Abdul Rahman are by default their ideological successors.  Accordingly, internal party factionalism is conveniently forgotten.

Also forgotten is past leaders’ attitudes towards authoritarian legislation in particular conditions.  When confronted on the possible abuse of the Internal Security Act designed to combat communist terrorists, Tun Dr Ismail Abdul Rahman famously replied that “Abuse of the Act can be prevented by vigilant public opinion via elections, a free press and above all the Parliament.”[26]  Imagine that!

The confidence Malaysians have in these institutions is weak partly because of this deficient grasp of history, but is aided and abetted by deliberate distortion by political leaders, often through collaborative academics.

 Today

This has drastic consequences.  When institutions have been compromised by personal or party interests, it becomes difficult even for ethical individuals to rectify the situation.  There are several figures who once enjoyed good public reputations in the NGO or corporate world, but lost credibility simply by becoming cabinet ministers.  The prevalent view is that individuals will be corrupted by the system, instead of the system being cleansed by individuals.  This in turn deters many citizens from wanting to contribute, and the cycle of institutional destruction spirals downward.

Ulterior motives are assumed where there are good intentions, and damaging aspersions are cast.  In the worst case scenario, dejected individuals come to the conclusion that “since others are going to think I am corrupt anyway, I may as well be corrupt.”  It helps that politicians have amassed tools of patronage to reorient loose moral compasses:  I have seen how admirable people who succeeded in competitive international environments nonetheless succumb to extra inducements.  It also helps that accomplices in the traditional and new media will happily concoct fictions their paymasters direct.

When you place this in a political environment that routinely employs the vocabulary of race and religion, there is even more polarisation.  Retired politicians and civil servants tell me how, once upon a time, political leaders on opposing sides were able to socialise with one another.  They may have disagreed ideologically but they did not doubt each other’s sincerity.  Today, simply supporting a different party leads to accusations of treason.

In such an atmosphere, what hope is there for rule of law and morality?  How do we break the cycle of institutional destruction?  Party hacks will naturally say that only if their side gains a comfortable majority at the next election will there be real change.  Yet, as we have seen in recent political shenanigans on both sides, that is unmitigated fantasy.

Rather, we need to cajole political forces into a consensus, to re-forge a shared understanding of the Constitution, the rule of law, and the separation of powers.  Here, aspects of Tun Abdullah Badawi’s administration are instructive.  During his premiership there was an opening up of democratic space that allowed organisations like IDEAS to prosper, strengthening the role of civil society.  His acceptance of the 2008 general election results while others bayed for blood proved that peaceful transitions are possible.  His decision to form a Royal Commission of Inquiry into police reform produced a valuable proposal for an Independent Police Complaints and Misconduct Commission, even if it wasn’t fully implemented.  His attempt to reform the judiciary, accompanied by a statement of regret about the 1988 constitutional crisis, was a step in the right direction in recalibrating the relationship between judiciary, executive and public.

So there are things that morally courageous Prime Ministers can do to realise Tunku Abdul Rahman’s vision of “a sovereign democratic and independent State founded upon the principles of liberty and justice.”[27]  But where moral courage might be absent, it is up to civil society to show that the pillars of the Rukunegara can be upheld without the insincere hectoring of the state

I know that the Malaysian Bar, through its various committees, have strong relationships with NGOs too.  You’re in a unique position, being a creature of statute rather than subject to the Registrar of Societies.  But recently even the Bar has been made a scapegoat for incompetence elsewhere: the leaking of an early draft of the National Harmony Bill, for example, was laid at your feet even though political machinations drove it.  The future of that legislation is uncertain, since the Sedition Act has been lately invoked despite a promise to repeal it.

It is important to bear in mind that the motivations of those on either side of the Sedition Act focus on quite different aspects.  Those who want to repeal the Act – like the 701 members of the Malaysian Bar who voted last Friday to march peacefully against it – are outraged by the recent spate of arrests.  Here, Raja Aziz’s point about the elasticity of the definition of ‘seditious tendency’ is prescient.

On the other side, there are those who want to keep the Act out of a genuine fear that racial and religious slurs will be spread to incite violence.  Here I think the majority of members of the Bar would sympathise.  That is why it is vital that a completed draft of the National Harmony Bill be presented to Parliament as soon as possible, so that both sides might be assuaged.  This view is well articulated by Dato’ Saifuddin Abdullah, the former deputy minister for higher education and now CEO of the Global Movements of the Moderates Foundation.

Though he has shown moral courage, there needs to be more.  In such times we miss Raja Aziz.  His moral courage, leadership and reasoned voice of calm would pierce through the turbulence to educate us all.

Conclusion

Thus far I have tried to demonstrate my inspirations from Raja Aziz.  Here are some others:

Tun Dzaiddin Abdullah, who was his partner at Rithauddeen and Aziz, and presently Chairman of IDEAS’ Council, wrote: “He couldn’t care less about politics but was focused on the law.  He would only take a case if there was a legal issue, not for political reasons.  The law was closest to his heart.”[28]  Indeed, Raja Aziz representing Syed Husin Ali, Dato’ Seri Anwar Ibrahim or Chin Peng does not in itself, as apparatchiks on both sides might wish to promote, mean he endorsed their politics or ideologies.

Introducing the inaugural Raja Aziz Addruse Memorial Lecture, Mr Christopher Leong said: “‘To act without fear’ is not to have no fear; it is to have the ability to overcome fear or to act in spite of it.  The cause of justice demands this of the Members of the Malaysian Bar, and Ungku exemplified it: there is no advocate I know who has conducted and carried himself truer to this core principle of the Bar.”[29] 

Mr Lim Chee Wee spoke of the personal legacy that Ungku left to Malaysian lawyers: “There can only be one Raja Aziz Addruse.  That his professional brethren recognised this is attested to by the number of lawyers whose reaction to a crisis is to ask themselves, ‘what would Ungku have done?’…  He would have taken an unwaveringly moral stand, couched in terms at once certain and polite, and he would have maintained this approach against all challenges, in the face of all adversities, without thought of personal consequence.”

Dato’ Cyrus Das said of Raja Aziz: “Principles like the rule of law and the independence of the judiciary were to him not mere clichés or fancy words to be uttered at the appropriate time and to be forgotten when it becomes inconvenient.  Raja Aziz believed in these values.  He was acutely aware from the Tunku’s time that Malaysia was a developing democracy and that a proper balance had to be struck between executive authority and individual rights.  He saw the Malaysian Constitution as providing for this equilibrium and that the role of the judiciary was to maintain this balance.   By his cases he strove valiantly to argue for this principle anxious that the judiciary should not be seen by the public to be a mere extension of government.”[30]

And Dato’ Param Cumaraswamy said: “His eminence in advocacy before the Courts and the respect he commanded from the Judges earned him a reputation, and he was in demand in the profession as lead counsel…  When Lord President Tun Mohd Suffian first introduced the appointment of temporary judicial commissioners to clear then backlog of cases in the High Court, Raja Aziz was one of the few appointed. But he refused any permanent judicial appointment. He felt that only through practice of the law could he contribute effectively to the advancement of the cause of justice through respect for the rule of law and human rights…  He gave voice to the voiceless, taking on their causes on pro-bono briefs before the courts to assist those who could not afford access to the courts… His relentless and committed pursuit of justice through the rule of law was noted by the International Commission of Jurists, [and] Raja Aziz was elected as a Commissioner in 2006.”[31] 

Raja Aziz was more than just a great constitutional lawyer: he was a national hero.  I hope that through the efforts of the Malaysian Bar, and especially through this lecture series, his legacy will not go the way of so many other Malaysian heroes: forgotten and unappreciated. 

Perhaps we can take comfort in the fact that, despite the 1988 amendments, there remains a contestation between the supremacy of Parliament and that of the Constitution: that judicial review may survive despite ouster clauses, that separation of powers is inherent to our democracy, that the basic structure doctrine should apply.  Like many of you, I pray that the battle that Raja Aziz fought throughout his legal career can still be won – but only if the Malaysian judiciary successfully asserts its independence, and wins respect from the people.

By way of conclusion I would like to thank my parents, through whom I first got to know Uncle Aziz, and who have supported me as I have navigated precariously through the nexus of Malaysian civil society and politics.Dato’ Dominic Puthucheary, Dato’ Malik Imtiaz Sarwar and Vinayak Sri Ram for giving valuable feedback on early drafts of this lecture.

IDEAS’ intern Jian Eu for gathering materials and drafting a section of this lecture. The Bar Council, especially Christopher Leong and Brendan Siva for inviting me to deliver this lecture, Chin Oy Sim for sending me rare resources on Raja Aziz, and Anne Andrew for assisting with invitations.And Aunty Catherine for her trust in me.

If anything I have said does not befit the stature of the Raja Aziz Addruse Memorial Lecture, then I apologise.  If I have misrepresented the opinions of others, then please correct me.  If I have committed sedition, then God help us all – though I can count on 701 members of the Malaysian Bar to assist.

One of the fascinating nuggets I learnt in the course of preparing for this lecture was Raja Aziz’s role, as Deputy Parliamentary Draftsman, in one piece of legislation that never saw the light of day: the Malay Surnames Act.  In an interview he revealed: “[Tunku Abdul Rahman] thought that having surnames would enable Malays to trace their lineage much more easily and they would no longer need to use bin or binti… I thought that it was a very good thing and I adopted Addruse.”

While Raja Aziz rejected all offers of Dato’, he certainly lived up to the style of “Yang Mulia”.  But it is the name “Addruse” that we must ensure endures as an inspiration of steadfast morality.  I ask you now to spend a moment to remember him in your thoughts and prayers.

_________

[1]Tunku ’Abidin Muhriz, Transcript of interview with Raja Aziz Addruse, 23 December 2002

[2] Quoted in ‘Bar auditorium renamed after Raja Aziz Addruse’, Malaysiakini, 30 October 2011

[3] T Bingham, The Rule of Law (2010)

[4] F Hayek, The Road to Serfdom (1944)

[5] R Dworkin, A Matter of Principle (1985) and Laws Empire (1986)

[6] J Jowell, D Oliver (eds) The Changing Constitution (2011)

[7] TRS Allan, ‘The Rule of law as the rule of reason: consent and constitutionalism’, Law Quarterly Review, 1999

[8] Bruce Ackerman, ‘Obama’s Betrayal of the Constitution’, New York Times, 11 September 2014

[9] Raja Aziz Addruse, ‘Fundamental Rights and the Rule of Law: Their Protection by Judges’

[10] Ibid.

[11] Roger Tan, ‘A gentleman who believed in honesty and fair play’, The Star, 13 July 2011

[12] Christopher Leong, Speech at the presentation of the inaugural Malaysian Bar Lifetime Achievement Award, 10 March 2012

[13] Raja Aziz Addruse, ‘Does our Constitution provide for adequate representation for opposing and varied interests in Parliament?’, The Malayan Law Journal, April 1976

[14] Raja Aziz Addruse, ‘Journalists, Press Freedom and the Law’, 10 May 2002

[15] Raja Aziz Addruse, ‘Human Rights and the Fundamental Liberties under the Federal Constitution’, Pahang Bar Annual Lecture 2000

[16] Quoted in Professor Mark Gillen, ‘The Malay Rulers Loss of Immunity’, 1994

[17] ‘Bar auditorium named after Raja Aziz Addruse’, Malaysiakini, 30 October 2011

[18] Raja Aziz Addruse, ‘Police cannot assume the roles of judges’, New Straits Times, 11 April 1998

[19] Raja Aziz Addruse, ‘Let’s have certainty in this law’, New Straits Times, 27 April 2008

[20] Ding Jo-Ann, ‘Remembering Raja Aziz Addruse’, The Nut Graph, 12 December 2011

[21] Raja Aziz Addruse, ‘The Constitution: What it means to me’, New Straits Times, 27 April 2008

[22] Quoted in Lim Chee Wee, Speech at the Dedication and Naming Ceremony of the Raja Aziz Addruse Auditorium, Bar Council, 29 October 2011

[23] All quoted in Raja Aziz Addruse, ‘Fundamental Rights and the Rule of Law: Their Protection by Judges’

[24] Cyrus Das, Speech at the Dedication and Naming Ceremony of the Raja Aziz Addruse Auditorium, Bar Council, 29 October 2011

[25] Tunku ’Abidin Muhriz, Abiding Times (2011)

[26] Quoted in Ooi Kee Beng, The Reluctant Politician (2006)

[27] Tunku Abdul Rahman, Proclamation of Independence, 31 August 1957

[28] ‘Raja Aziz a quiet man of principles’, New Straits Times, 13 July 2011

[29] Christopher Leong, Opening Remarks at the Inaugural Raja Aziz Addruse Memorial Lecture, 29 October 2011

[30] Dato’ Cyrus Das, Speech at the Dedication and Naming Ceremony of the Raja Aziz Addruse Auditorium, 29 October 2011

[31] Dato’ Param Cumaraswamy, ‘Raja Aziz Addruse – At the forefront of advocacy’, Aliran, 7 September 2011

 

 

 

 

A Tyranny of Ideas


September 30, 2014

ZaidgeistA Tyranny of Ideas

by Zaid Ibrahim@www.zaid.my

http://www.zaid.my/current/a-tyranny-of-ideas/

Najib in New York 2014PM Najib at UNGA, New York

Last Friday, our Prime Minister spoke at the United Nations General Assembly about the urgent need to combat the extremist ideas pervading the Islamic world. Datuk Seri Najib Tun Razak said it is not enough just to bomb the Islamic State’s bases in Iraq and Syria—it is equally important to confront the ideas that give rise to such extremism. Like all Muslim leaders speaking on an international platform, Najib said Islam is a religion of peace that is based on the Quran and the Sunnah, and that finding the right ideas about Islam is essential.

Once again US President Barack Obama sang his praises, but the challenge of rising above rhetoric is as great as ever. Those advocating Islamic systems of governance like the Caliphate in the Middle East, which has been described as “extremist”, read the same Quran and follow the same Sunnah as our Prime Minister; as JAKIM and the ulamak in Malaysia; and as the mullahs in Pakistan and Yemen. Despite sharing the same source, they have managed to come up with very different ideas about what Islam is and what it means to be a Muslim.

If our Prime Minister genuinely wants to see the growth of new and peaceful ideas about Islam, then he must be willing to let the religion and its institutions become a subject of constructive discourse and critical analysis by its adherents. If Malaysia wants to protect itself from extremism, he must allow for different interpretations of the faith and reasoning to flourish in the country.

He must put a stop to what is happening now, which is allowing the ulamaks to unilaterally define what Islam is, what is permissible under the faith and what is not. In fact, based on the fact that we allow Islam to be defined solely by those in power, Malaysia is no different from the IS in the Middle East.

For example, anyone in Malaysia who takes their cue from the Quran’s Surah Al-Baqarah (which says there is no compulsion in religion) and declares that mankind is allowed freedom of religion can be charged for insulting Islam. They can also face an apostasy charge and will probably end up in jail. On a matter such as this, where there is explicit support in the Quran, such a viewpoint should be allowed to be discussed freely.

Malaysia, the so-called cradle of peaceful Islam, must remove all laws that inhibit thinking and reasoning. How will we be able to establish Islam as a religion of peace if we are fearful of other ideas and resort to tyranny of thought instead? Where can we hope to end up if we will only subscribe to thinking that has been sanctioned by the state? Malaysia must not be a country that is run by tyrants in Brioni suits. This makes our leaders no different from IS leaders, except for their choice of wardrobe. But is our Prime Minister ready for such a transformation?

Kassim AhmadLook at what is happening to writer and Islamic scholar Kassim Ahmad (pic left). All he ever said was that the primary source of Islam is the Quran, so there is no need to look to other sources when the subject is covered in the Quran and is clear and incontrovertible. The ulamaks of Malaysia, of course, do not share this view, and because of this Kassim has been charged in the Wilayah Shariah Court.

I urge our Prime Minister to speak to the ulamaks and all relevant religious authorities involved in the administration of Islamic matters in the country, and give them copies of the speech he made in New York last Friday. He should tell them to withdraw the charge against Kassim. If he is unable or unwilling to do so, then the speech was clearly just for show, another sad example of how Muslim leaders are afraid of exposing their people to productive, progressive and peaceful ideas.

This is the tragedy of the Muslim community. Their leaders know what the problem is but they are afraid of the ulamaks. That’s why in many Muslim-majority countries, political leaders do not incur the wrath of the ulamaks or the mullahs. Najib is no different. He was brave in New York because the ulamak do not rule there—Wall Street does.

Public Announcement–Azmi Sharom and Academic Freedom


September 10, 2014

Azmi Sharom and Academic Freedom HARTAL at University of Malaya, KUALA LUMPUR

PM NajibOur government must stand with us in partnership for national development. We Malaysians are not the enemy just because we beg to differ. Indeed we are your source of strength in times of national stress. Please own up to reality, Prime Minister Najib Tun Razak. In our hands lie your political future and premiership. Listen to the voices of dissent and address the underlying causes of our discontent. And demonstrate to us that you have got what it takes to lead us to a future of hope, freedom, and justice, unity and harmony. –Din Merican

This is to remind all UM Alumni and Members of the Public that University of Malaya students and Faculty will hold a hartal in its Pantai Valley, Kuala Lumpur campus today. All are welcome to this peaceful assembly to support Associate Professor of Law Dr. Azmi Sharom, and stand up for academic freedom.

It is time that we inform our government that dissent in the name of FREEDOM is an integral part of our democracy. A grave injustice has been done to Dr. Azmi Sharom and other civil society activists who dare to speak up on issues of governance, justice, freedom and democracy by the indiscriminate use of the Sedition Act, 1948, a relic from the British colonial era, to achieve political ends.

Harry S TrumanTo quote my favourite American President, Harry Truman, “[O]nce a government is committed to the principle of silencing the voice of opposition, it has only one way to go, and that is down the path of increasingly repressive measures, until it becomes a source of terror to all its citizens and creates a country where everyone lives in fear.”

Our government must stand with us in partnership for national development. We Malaysians are not the enemy just because we beg to differ. Indeed we are your source of strength in times of national stress. Please own up to reality, Prime Minister Najib Tun Razak. In our hands lie your political future and premiership. Listen to the voices of dissent and address the underlying causes of our discontent. And demonstrate to us that you have got what it takes to lead us to a future of hope, freedom and justice, unity and harmony. –Din Merican

Azmi Sharom Hartal

Azmi Sharom Hartal2Azmi Sharom Hartal3

Monetary Policy and Financial Stability by Fed Chair Janet Yellen


July 7, 2014

Chair Janet L. Yellen

At the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C.

July 2, 2014

Monetary Policy and Financial Stability

Janet_Yellen_FEDIt is an honor to deliver the inaugural Michel Camdessus Central Banking Lecture. Michel Camdessus served with distinction as governor of the Banque de France and was one of the longest-serving managing directors of the International Monetary Fund (IMF).

In these roles, he was well aware of the challenges central banks face in their pursuit of price stability and full employment, and of the interconnections between macroeconomic stability and financial stability. Those interconnections were apparent in the Latin American debt crisis, the Mexican peso crisis, and the East Asian financial crisis, to which the IMF responded under Camdessus’s leadership. These episodes took place in emerging market economies, but since then, the global financial crisis and, more recently, the euro crisis have reminded us that no economy is immune from financial instability and the adverse effects on employment, economic activity, and price stability that financial crises cause.

The recent crises have appropriately increased the focus on financial stability at central banks around the world. At the Federal Reserve, we have devoted substantially increased resources to monitoring financial stability and have refocused our regulatory and supervisory efforts to limit the buildup of systemic risk. There have also been calls, from some quarters, for a fundamental reconsideration of the goals and strategy of monetary policy. Today I will focus on a key question spurred by this debate: How should monetary and other policymakers balance macroprudential approaches and monetary policy in the pursuit of financial stability?

In my remarks, I will argue that monetary policy faces significant limitations as a tool to promote financial stability: Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role. Such an approach should focus on “through the cycle” standards that increase the resilience of the financial system to adverse shocks and on efforts to ensure that the regulatory umbrella will cover previously uncovered systemically important institutions and activities. These efforts should be complemented by the use of countercyclical macroprudential tools, a few of which I will describe. But experience with such tools remains limited, and we have much to learn to use these measures effectively.

I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns. Accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability. Because of this possibility, and because transparency enhances the effectiveness of monetary policy, it is crucial that policymakers communicate their views clearly on the risks to financial stability and how such risks influence the appropriate monetary policy stance. I will conclude by briefly laying out how financial stability concerns affect my current assessment of the appropriate stance of monetary policy.

Balancing Financial Stability with Price Stability: Lessons from the Recent Past

When considering the connections between financial stability, price stability, and full employment, the discussion often focuses on the potential for conflicts among these objectives. Such situations are important, since it is only when conflicts arise that policymakers need to weigh the tradeoffs among multiple objectives. But it is important to note that, in many ways, the pursuit of financial stability is complementary to the goals of price stability and full employment. A smoothly operating financial system promotes the efficient allocation of saving and investment, facilitating economic growth and employment. A strong labor market contributes to healthy household and business balance sheets, thereby contributing to financial stability. And price stability contributes not only to the efficient allocation of resources in the real economy, but also to reduced uncertainty and efficient pricing in financial markets, which in turn supports financial stability.

Despite these complementarities, monetary policy has powerful effects on risk taking. Indeed, the accommodative policy stance of recent years has supported the recovery, in part, by providing increased incentives for households and businesses to take on the risk of potentially productive investments. But such risk-taking can go too far, thereby contributing to fragility in the financial system.1 This possibility does not obviate the need for monetary policy to focus primarily on price stability and full employment–the costs to society in terms of deviations from price stability and full employment that would arise would likely be significant. I will highlight these potential costs and the clear need for a macroprudential policy approach by looking back at the vulnerabilities in the U.S. economy before the crisis. I will also discuss how these vulnerabilities might have been affected had the Federal Reserve tightened monetary policy in the mid-2000s to promote financial stability.

Looking Back at the Mid-2000s

Although it was not recognized at the time, risks to financial stability within the United States escalated to a dangerous level in the mid-2000s. During that period, policymakers–myself included–were aware that homes seemed overvalued by a number of sensible metrics and that home prices might decline, although there was disagreement about how likely such a decline was and how large it might be. What was not appreciated was how serious the fallout from such a decline would be for the financial sector and the macroeconomy. Policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression because that reversal interacted with critical vulnerabilities in the financial system and in government regulation.

In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, weak underwriting of loans, deficiencies in risk measurement and risk management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.

In the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important financial institutions (SIFIs) and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole.

It is not uncommon to hear it suggested that the crisis could have been prevented or significantly mitigated by substantially tighter monetary policy in the mid-2000s. At the very least, however, such an approach would have been insufficient to address the full range of critical vulnerabilities I have just described. A tighter monetary policy would not have closed the gaps in the regulatory structure that allowed some SIFIs and markets to escape comprehensive supervision; a tighter monetary policy would not have shifted supervisory attention to a macroprudential perspective; and a tighter monetary policy would not have increased the transparency of exotic financial instruments or ameliorated deficiencies in risk measurement and risk management within the private sector.

Some advocates of the view that a substantially tighter monetary policy may have helped prevent the crisis might acknowledge these points, but they might also argue that a tighter monetary policy could have limited the rise in house prices, the use of leverage within the private sector, and the excessive reliance on short-term funding, and that each of these channels would have contained–or perhaps even prevented–the worst effects of the crisis.

A review of the empirical evidence suggests that the level of interest rates does influence house prices, leverage, and maturity transformation, but it is also clear that a tighter monetary policy would have been a very blunt tool: Substantially mitigating the emerging financial vulnerabilities through higher interest rates would have had sizable adverse effects in terms of higher unemployment. In particular, a range of studies conclude that tighter monetary policy during the mid-2000s might have contributed to a slower rate of house price appreciation. But the magnitude of this effect would likely have been modest relative to the substantial momentum in these prices over the period; hence, a very significant tightening, with large increases in unemployment, would have been necessary to halt the housing bubble.2 Such a slowing in the housing market might have constrained the rise in household leverage, as mortgage debt growth would have been slower. But the job losses and higher interest payments associated with higher interest rates would have directly weakened households’ ability to repay previous debts, suggesting that a sizable tightening may have mitigated vulnerabilities in household balance sheets only modestly.3

Similar mixed results would have been likely with regard to the effects of tighter monetary policy on leverage and reliance on short-term financing within the financial sector. In particular, the evidence that low interest rates contribute to increased leverage and reliance on short-term funding points toward some ability of higher interest rates to lessen these vulnerabilities, but that evidence is typically consistent with a sizable range of quantitative effects or alternative views regarding the causal channels at work.4 Furthermore, vulnerabilities from excessive leverage and reliance on short-term funding in the financial sector grew rapidly through the middle of 2007, well after monetary policy had already tightened significantly relative to the accommodative policy stance of 2003 and early 2004. In my assessment, macroprudential policies, such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and likely more effective methods to address these vulnerabilities.5

Recent International Experience

Turning to recent experience outside the United States, a number of foreign economies have seen rapidly rising real estate prices, which has raised financial stability concerns despite, in some cases, high unemployment and shortfalls in inflation relative to the central bank’s inflation target.6 These developments have prompted debate on how to best balance the use of monetary policy and macroprudential tools in promoting financial stability.

For example, Canada, Switzerland, and the United Kingdom have expressed a willingness to use monetary policy to address financial stability concerns in unusual circumstances, but they have similarly concluded that macroprudential policies should serve as the primary tool to pursue financial stability. In Canada, with inflation below target and output growth quite subdued, the Bank of Canada has kept the policy rate at or below 1 percent, but limits on mortgage lending were tightened in each of the years from 2009 through 2012, including changes in loan-to-value and debt-to-income caps, among other measures.7 In contrast, in Norway and Sweden, monetary policy decisions have been influenced somewhat by financial stability concerns, but the steps taken have been limited. In Norway, policymakers increased the policy interest rate in mid-2010 when they were facing escalating household debt despite inflation below target and output below capacity, in part as a way of “guarding against the risk of future imbalances.”8 Similarly, Sweden’s Riksbank held its policy rate “slightly higher than we would have done otherwise” because of financial stability concerns.9 In both cases, macroprudential actions were also either taken or under consideration.

In reviewing these experiences, it seems clear that monetary policymakers have perceived significant hurdles to using sizable adjustments in monetary policy to contain financial stability risks. Some proponents of a larger monetary policy response to financial stability concerns might argue that these perceived hurdles have been overblown and that financial stability concerns should be elevated significantly in monetary policy discussions. A more balanced assessment, in my view, would be that increased focus on financial stability risks is appropriate in monetary policy discussions, but the potential cost, in terms of diminished macroeconomic performance, is likely to be too great to give financial stability risks a central role in monetary policy decisions, at least most of the time.

If monetary policy is not to play a central role in addressing financial stability issues, this task must rely on macroprudential policies. In this regard, I would note that here, too, policymakers abroad have made important strides, and not just those in the advanced economies. Emerging market economies have in many ways been leaders in applying macroprudential policy tools, employing in recent years a variety of restrictions on real estate lending or other activities that were perceived to create vulnerabilities.10 Although it is probably too soon to draw clear conclusions, these experiences will help inform our understanding of these policies and their efficacy.

Promoting Financial Stability through a Macroprudential Approach

If macroprudential tools are to play the primary role in the pursuit of financial stability, questions remain on which macroprudential tools are likely to be most effective, what the limits of such tools may be, and when, because of such limits, it may be appropriate to adjust monetary policy to “get in the cracks” that persist in the macroprudential framework.11

In weighing these questions, I find it helpful to distinguish between tools that primarily build through-the-cycle resilience against adverse financial developments and those primarily intended to lean against financial excesses.12

Building Resilience

Tools that build resilience aim to make the financial system better able to withstand unexpected adverse developments. For example, requirements to hold sufficient loss-absorbing capital make financial institutions more resilient in the face of unexpected losses. Such requirements take on a macroprudential dimension when they are most stringent for the largest, most systemically important firms, thereby minimizing the risk that losses at such firms will reverberate through the financial system. Resilience against runs can be enhanced both by stronger capital positions and requirements for sufficient liquidity buffers among the most interconnected firms. An effective resolution regime for SIFIs can also enhance resilience by better protecting the financial system from contagion in the event of a SIFI collapse. Further, the stability of the financial system can be enhanced through measures that address interconnectedness between financial firms, such as margin and central clearing requirements for derivatives transactions. Finally, a regulatory umbrella wide enough to cover previous gaps in the regulation and supervision of systemically important firms and markets can help prevent risks from migrating to areas where they are difficult to detect or address.

In the United States, considerable progress has been made on each of these fronts. Changes in bank capital regulations, which will include a surcharge for systemically important institutions, have significantly increased requirements for loss-absorbing capital at the largest banking firms. The Federal Reserve’s stress tests and Comprehensive Capital Analysis and Review process require that large financial institutions maintain sufficient capital to weather severe shocks, and that they demonstrate that their internal capital planning processes are effective, while providing perspective on the loss-absorbing capacity across a large swath of the financial system. The Basel III framework also includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding.

Oversight of the U.S. shadow banking system also has been strengthened. The new Financial Stability Oversight Council has designated some nonbank financial firms as systemically important institutions that are subject to consolidated supervision by the Federal Reserve. In addition, measures are being undertaken to address some of the potential sources of instability in short-term wholesale funding markets, including reforms to the triparty repo market and money market mutual funds–although progress in these areas has, at times, been frustratingly slow.

Additional measures should be taken to address residual risks in the short-term wholesale funding markets. Some of these measures–such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding–would likely apply only to the largest, most complex organizations. Other measures–such as minimum margin requirements for repurchase agreements and other securities financing transactions–could, at least in principle, apply on a marketwide basis. To the extent that minimum margin requirements lead to more conservative margin levels during normal and exuberant times, they could help avoid potentially destabilizing procyclical margin increases in short-term wholesale funding markets during times of stress.

Leaning Against the Wind

At this point, it should be clear that I think efforts to build resilience in the financial system are critical to minimizing the chance of financial instability and the potential damage from it. This focus on resilience differs from much of the public discussion, which often concerns whether some particular asset class is experiencing a “bubble” and whether policymakers should attempt to pop the bubble. Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.

Nonetheless, some macroprudential tools can be adjusted in a manner that may further enhance resilience as risks emerge. In addition, macroprudential tools can, in some cases, be targeted at areas of concern. For example, the new Basel III regulatory capital framework includes a countercyclical capital buffer, which may help build additional loss-absorbing capacity within the financial sector during periods of rapid credit creation while also leaning against emerging excesses. The stress tests include a scenario design process in which the macroeconomic stresses in the scenario become more severe during buoyant economic expansions and incorporate the possibility of highlighting salient risk scenarios, both of which may contribute to increasing resilience during periods in which risks are rising.13 Similarly, minimum margin requirements for securities financing transactions could potentially vary on a countercyclical basis so that they are higher in normal times than in times of stress.

Implications for Monetary Policy, Now and in the Future

In light of the considerable efforts under way to implement a macroprudential approach to enhance financial stability and the increased focus of policymakers on monitoring emerging financial stability risks, I see three key principles that should guide the interaction of monetary policy and macroprudential policy in the United States.

First, it is critical for regulators to complete their efforts at implementing a macroprudential approach to enhance resilience within the financial system, which will minimize the likelihood that monetary policy will need to focus on financial stability issues rather than on price stability and full employment. Key steps along this path include completion of the transition to full implementation of Basel III, including new liquidity requirements; enhanced prudential standards for systemically important firms, including risk-based capital requirements, a leverage ratio, and tighter prudential buffers for firms heavily reliant on short-term wholesale funding; expansion of the regulatory umbrella to incorporate all systemically important firms; the institution of an effective, cross-border resolution regime for systemically important financial institutions; and consideration of regulations, such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector and SIFIs.

Second, policymakers must carefully monitor evolving risks to the financial system and be realistic about the ability of macroprudential tools to influence these developments. The limitations of macroprudential policies reflect the potential for risks to emerge outside sectors subject to regulation, the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macroprudential tools such as a countercyclical capital buffer, and the potential for such policy steps to be delayed or to lack public support.14 Given such limitations, adjustments in monetary policy may, at times, be needed to curb risks to financial stability.15

These first two principles will be more effective in helping to address financial stability risks when the public understands how monetary policymakers are weighing such risks in the setting of monetary policy. Because these issues are both new and complex, there is no simple rule that can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability. As a result, policymakers should clearly and consistently communicate their views on the stability of the financial system and how those views are influencing the stance of monetary policy.

To that end, I will briefly lay out my current assessment of financial stability risks and their relevance, at this time, to the stance of monetary policy in the United States. In recent years, accommodative monetary policy has contributed to low interest rates, a flat yield curve, improved financial conditions more broadly, and a stronger labor market. These effects have contributed to balance sheet repair among households, improved financial conditions among businesses, and hence a strengthening in the health of the financial sector. Moreover, the improvements in household and business balance sheets have been accompanied by the increased safety of the financial sector associated with the macroprudential efforts I have outlined. Overall, nonfinancial credit growth remains moderate, while leverage in the financial system, on balance, is much reduced. Reliance on short-term wholesale funding is also significantly lower than immediately before the crisis, although important structural vulnerabilities remain in short-term funding markets.

Taking all of these factors into consideration, I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns. That said, I do see pockets of increased risk-taking across the financial system, and an acceleration or broadening of these concerns could necessitate a more robust macroprudential approach. For example, corporate bond spreads, as well as indicators of expected volatility in some asset markets, have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward. In addition, terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a “reach for yield” in the face of persistently low interest rates. The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance regarding leveraged lending practices in early 2013 and followed up on this guidance late last year. To date, we do not see a systemic threat from leveraged lending, since broad measures of credit outstanding do not suggest that nonfinancial borrowers, in the aggregate, are taking on excessive debt and the improved capital and liquidity positions at lending institutions should ensure resilience against potential losses due to their exposures. But we are mindful of the possibility that credit provision could accelerate, borrower losses could rise unexpectedly sharply, and that leverage and liquidity in the financial system could deteriorate. It is therefore important that we monitor the degree to which the macroprudential steps we have taken have built sufficient resilience, and that we consider the deployment of other tools, including adjustments to the stance of monetary policy, as conditions change in potentially unexpected ways.

Conclusion

In closing, the policy approach to promoting financial stability has changed dramatically in the wake of the global financial crisis. We have made considerable progress in implementing a macroprudential approach in the United States, and these changes have also had a significant effect on our monetary policy discussions. An important contributor to the progress made in the United States has been the lessons we learned from the experience gained by central banks and regulatory authorities all around the world. The IMF plays an important role in this evolving process as a forum for representatives from the world’s economies and as an institution charged with promoting financial and economic stability globally. I expect to both contribute to and learn from ongoing discussions on these issues.


1. The possibility that periods of relative economic stability may contribute to risk-taking and the buildup of imbalances that may unwind in a painful manner is often linked to the ideas of Hyman Minsky (see Hyman P. Minsky (1992), “The Financial Instability Hypothesis (PDF),” Leaving the Board Working Paper 74 (Annandale-on-Hudson, N.Y.: Jerome Levy Economics Institute of Bard College, May)). For a recent example of an economic model that tries to explore these ideas, see, for example, Markus K. Brunnermeier and Yuliy Sannikov (2014), “A Macroeconomic Model with a Financial Sector,” Leaving the Board American Economic Review, vol. 104 (February), pp. 379-421. Return to text

2. For a discussion of this issue encompassing experience across a broad range of advanced economies in the 2000s, including the United States, see Jane Dokko, Brian M. Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van Den Heuvel (2011), “Monetary Policy and the Global Housing Bubble,” Leaving the Board Economic Policy, vol. 26 (April), pp. 233-83. Igan and Loungani (2012) highlight how interest rates are an important, but far from the most important, determinant of housing cycles across countries (see Deniz Igan and Prakash Loungani (2012), “Global Housing Cycles,” Leaving the Board IMF Working Paper Series WP/12/217 (Washington: International Monetary Fund, August)). Bean and others (2010), examining the tradeoffs between unemployment, inflation, and stabilization of the housing market in the United Kingdom, imply that reliance on monetary policy to contain a housing boom may be too costly in terms of other monetary policy goals (see Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor (2010), “Monetary Policy after the Fall (PDF),” Leaving the Board paper presented at “Macroeconomic Challenges: The Decade Ahead,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 26-28). Saiz (2014) suggests that about 50 percent of the variation in house prices during the 2000s boom can be explained by low interest rates, and finds that it was the remaining, “non-fundamental” component that subsequently collapsed–that is, the interest rate component was not a primary factor in what Saiz terms “the bust” (see Albert Saiz (2014), “Interest Rates and Fundamental Fluctuations in Home Values (PDF),” Leaving the Board paper presented at the Public Policy and Economics Spring 2014 Workshops, hosted by the Harris School of Public Policy, University of Chicago, April 8). Return to text

3. The notion that tighter monetary policy may have ambiguous effects on leverage or repayment capacity is illustrated in, for example, Anton Korinek and Alp Simsek (2014), “Liquidity Trap and Excessive Leverage (PDF),” Leaving the Board NBER Working Paper Series 19970 (Cambridge, Mass.: National Bureau of Economic Research, March). Return to text

4. See, for example, Tobias Adrian and Hyun Song Shin (2010), “Liquidity and Leverage,” Leaving the Board Journal of Financial Intermediation, vol. 19 (July), pp. 418-37; and Tobias Adrian and Hyun Song Shin (2011), “Financial Intermediaries and Monetary Economics,” in Benjamin Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3A (San Diego, Ca.: Elsevier), pp. 601-50. For a study emphasizing how changes in the response of monetary policy to financial vulnerabilities would likely change the relationship between monetary policy and financial vulnerabilities, see Oliver de Groot (2014), “The Risk Channel of Monetary Policy (PDF),” Leaving the Board International Journal of Central Banking, vol. 10 (June), pp. 115-60. Return to text

5. This evidence and experience suggest that a reliance on monetary policy as a primary tool to address the broad range of vulnerabilities that emerged in the mid-2000s would have had uncertain and limited effects on risks to financial stability. Such uncertainty does not imply that a modestly tighter monetary policy may not have been marginally helpful. For example, some research suggests that financial imbalances that became apparent in the mid-2000s may have signaled a tighter labor market and more inflationary pressure than would have been perceived solely from labor market conditions and overall economic activity. Hence, such financial imbalances may have called for a modestly tighter monetary policy through the traditional policy lens focused on inflationary pressure and economic slack. See, for example, David M. Arseneau and Michael Kiley (2014), “The Role of Financial Imbalances in Assessing the State of the Economy,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, April 18). Return to text

6. For a summary of house price developments across a range of countries through 2013, see International Monetary Fund (2014), “Global Housing Watch.” Leaving the Board Return to text

7. For a discussion of macroprudential steps taken in Canada, see Ivo Krznar and James Morsink (2014), “With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada,” Leaving the Board IMF Working Paper Series 14/83 (Washington: International Monetary Fund, May). Return to text

8. See Norges Bank (2010), “The Executive Board’s Monetary Policy Decision–Background and General Assessment,” Leaving the Board press release, May 5, paragraph 28. Return to text

9. See Per Jansson (2013), “How Do We Stop the Trend in Household Debt? Work on Several Fronts,” Leaving the Board speech delivered at the SvD Bank Summit, Berns Salonger, Stockholm, December 3, p. 2. Return to text

10. For a discussion, see Min Zhu (2014), “Era of Benign Neglect of House Price Booms Is Over,” Leaving the Board IMF Direct (blog), June 11. Return to text

11. These questions have been explored in, for example, International Monetary Fund (2013), The Interaction of Monetary and Macroprudential Policies (PDF) Leaving the Board (Washington: IMF, January 29). Return to text

12. The IMF recently discussed tools to build resilience and lean against excesses (and provided a broad overview of macroprudential tools and their interaction with other policies, including monetary policy); see International Monetary Fund (2013), Key Aspects of Macroprudential Policy (PDF) Leaving the Board (Washington: IMF, June 10). Return to text

13. See the Policy Statement on the Scenario Design Framework for Stress Testing at Regulation YY–Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies (PDF), 12 C.F.R. pt. 252 (2013), Policy Statement on the Scenario Design Framework for Stress Testing. Return to text

14. For a related discussion, see Elliott, Feldberg, and Lehnert, “The History of Cyclical Macroprudential Policy in the United States.” Return to text

15. Adam and Woodford (2013) present a model in which macroprudential policies are not present and housing prices experience swings for reasons not driven by “fundamentals.” In this context, adjustments in monetary policy in response to house price booms–even if such adjustments lead to undesirable inflation or employment outcomes–are a component of optimal monetary policy. See Klaus Adam and Michael Woodford (2013), “Housing Prices and Robustly Optimal Monetary Policy (PDF),” Leaving the Board working paper, June 29.

http://www.federalreserve.gov/newsevents/speech/yellen20140702a.htm

Thanks to Matthew Goldman. For reaction to Chair Janet’s Speech read this:

http://www.acting-man.com/?p=31577

The Muslim World’s Challenges–Part 1


May 28, 2014

The Muslim World’s Challenges

By Dr Farhan Ahmad Nizami

ISLAMIC PAST: Legacy was built on Muslims’ confidence in Islam, sustained by material prosperity, combined with political and legal stability

Dr Farhan Ahmad NizamiFOR about a thousand years, roughly from the 7th century onwards, the people under Islamic rule made striking advances in their material and intellectual culture.

The contribution of those advances to modern Western philosophy, sciences and technology has been extensively studied. But I want to speak about their distinctively Islamic qualities.

The area under Islamic influence stretched overland from the Atlantic in the west to the borders of China, and across the Indian Ocean to the islands of the Malay archipelago.

This vast area was commercially interconnected with much continuous and profitable exchange of goods. It was also culturally interconnected, with prodigious traffic in books and ideas, scholars and travellers.

Its people busied themselves in seeking knowledge and writing it down. So much so was this that, to this day, there remain huge quantities of manuscripts, from different ends of the Islamic world, yet to be catalogued and studied.

The regional diversity and assimilative embrace of Islam as a civilisation is manifest in the names by which great figures in Islamic scholarship are best known: al-Qurtubi, al-Fasi, al-Iskandari, al-Dimashaqi, al-Baghdadi, al-Isfahani, al-Bukhari, al-Dihlawi and al-Jawi.

The language of communication among scholars was mostly Arabic, with Persian and Turkish becoming important later in the east. This dominance of Arabic was not the result of any policy to diminish local languages. It was simply a gradual extension of the authority of the language of the Quran and its teachings.

Muslims believed that the way of life defined by the Quran summed up the best of the teachings of the past. They expected that non-Muslims, too, would have knowledge, skills and virtues. They expected to learn from them and to fit that learning with Islam.

Islamic civilisation thus self-consciously set out to co-exist with and absorb the cultures of others. It did so from a position of political strength.

The House of Wisdom (Bayt al-Hikma) in Baghdad, funded by the Caliph, is the best-known example of this attitude. Translations were commissioned of works in every branch of learning, from metaphysics to the science of making poisons. Once translated, these works were studied critically, then improved and extended.

The dominant streams in this flood of knowledge were Hellenic, Persian and Indian. The Chinese script proved too severe an obstacle to the absorption of Chinese philosophy and science. However, Chinese influences are found everywhere in the material culture of the Islamic world, in decorative motifs, and in the skills of making paper, ceramics, glass, metal-ware, textiles, dyes and drugs.

The Quran presented the teaching of all God’s messengers as a unified legacy. Muslims set out to harmonise older traditions of learning with that legacy. This effort was not universally admired.

In particular, the presentation of Islamic teachings in the style of Greek philosophy remained controversial for centuries. In the end, it had a more enduring influence on the medieval Christian world than on Islam.

Such controversies did not dampen Muslims’ self-confidence. In general, Islamic norms continued to encourage intellectual adventure and achievement. Muslims were aware of living in prosperous, stable societies, and comfortable with non-Muslim communities among them. They considered themselves forward-looking, inventive and multi-cultured.

Their best scholars made innovations of lasting importance in mathematics and experimental science, and applied them in technical instruments, manufacture, and engineering. And the wealthiest royal courts competed to own and display the results.

Al-Jazari’s famous water-clock illustrates this well. Its water-raising technology is Greek; the elephant, inside which the great vat of water is hidden, represents India, the rugs on its back are Persian; on top of the howdah sits an Egyptian phoenix; on its sides are conspicuously Chinese red dragons. This deliberately multicultural device was constructed shortly after the Crusades.

All that said, while Muslim societies were stable, their governments were often not: regime change was usually violent and disruptive. Politically, the Muslims became ever weaker and more divided.

Little now survives of their cultural self-confidence; even less remains of the personal and political skills they had developed to manage life alongside different communities and confessions.

Their ways of organising long-distance commerce and regulating free markets have vanished completely. The material remains of the rest — all the thinking in all the books, colleges, libraries and hospitals — interest only medievalists, museums, and tourists.

The past still has presence in the public spaces; you still hear the call to prayer, even in secularised city centres. There is still a feel of Islam in private homes and personal manners.

We can objectively map the movements of books, ideas and scholars from one end of the Islamic world to the other in every century until the modern period.

The recovery following the Crusades and Mongol conquests included the building of madrasa and colleges that taught a rich, varied curriculum.

There is little evidence of that during European colonial rule. The madrasa of that era were not well funded. They could afford to focus only on Islamic sciences narrowly defined.

For the rest of their education, Muslims had to leave the cultural space of Islam. A division became established between religious and secular education, between old and modern, with Islam on the side of the old. That division is at the heart of the present challenges facing Muslims in every part of the world.

When we memorialise the legacy of the Islamic past — when naming public institutions, or presenting past glories in books and museums — we should remember that this legacy was built on Muslims’ confidence in Islam.

This confidence was sustained by material prosperity, combined with a sufficient degree of political and legal stability. Without prosperity and stability, the constraints on political and economic decisions are too strong for people to make their own choices for their future.

We need only look at the difficulties in post-recession Europe to know that feeling powerless to shape the future is not special to Muslim societies. It is not related to their being Muslim but to the material conditions in which they are Muslim.

The end-goal is hardly a matter of dispute among the vast majority of Muslims. It is to re-establish connections between Islamic upbringing and education and modern secular, technical education.

The latter provides the means for individuals to make their way in the world, to have things to do in it and to enjoy doing them successfully. The former provides them with their religious orientation and identity.

Religious orientation is not itself the goal. The aim is not to have people identify as Muslims; the vast majority already do that. Rather, the aim is to enable them to prosper in the world in ways that express and test, inform and improve, their identity as Muslims.

As the Chinese saying puts it, the journey of a thousand miles begins from where your feet are. We in the Muslim world can only set out from where we stand in reality. That reality needs to be stated bluntly.

Today, Muslim identity is not sufficiently relevant to how things are done in the world, especially in the collective spheres of life.

Muslim identity is not the engine of prosperity, of either the production or the distribution of wealth. Muslim identity is not the engine of knowledge, of collecting it, or adding to it, or disseminating it. (This is true, rather unexpectedly, even of knowledge about the past legacy of Islam.)

Muslim identity is not the engine of political and legal order. Or rather, it is not so in a positive way. Instead, we see mainly negative expressions of it. We see it in a despairing withdrawal from the evils of power: in the attitude that the status quo, however bad, is still better than chaos.

We see it also in despairing violence intended to erase the status quo, without any labour of understanding and analysis about what will follow.

The end-goal is to make being Muslim relevant and effective in the quest for knowledge, in the quest for prosperity and in the quest for political order. Except in the sphere of personal courtesies and private concerns, being Muslim is no longer the currency of exchange neither among Muslims themselves, nor between them and non-Muslims.

To make it so again is a task of huge scale and complexity. Our first priority must be to establish institutions and forums so that the present challenges are properly identified, and then try to guide expectations towards realistic, achievable goals.

The hurdles in the way are real and substantial.First, there is the hurdle, as I said, of determining what is do-able and specifying it intelligently, in the light of local realities; in the way that sustains momentum towards the next objective; and without losing sight of the end-goal.

Second, there is the hurdle of co-ordinating effort with other societies and states. Priorities can vary sharply with local conditions. Therefore, there will be a need for trust among policymakers, with tolerance for variable levels of competence and energy.

Thirdly, there is the hurdle of rejection by those who oppose any attempt to bring religious concerns into the public sphere. The response will sometimes be concession, compromise and conciliation. At other times, it will take the form of steadfastly holding one’s ground. In either case, alert flexibility — the readiness to adjust to different circumstances — is essential.

Among general objectives, the most inclusive is to build up the commercial, financial, trade and cultural ties between Muslim societies.One measure of the need is the low values and volumes of bilateral trade between Muslim-majority countries, compared with their trade with non-Muslim countries.

Another measure is the low values and volumes of trade outside the dollar-dominated banking system.

Another is the low numbers of Muslims travelling for higher education from one Muslim country to another; the general preference, for those who can afford it, remains Europe or America.

Yet another measure is the massive inflow of cultural product from the non-Muslim into the Muslim world — the information and imagery people get from their televisions and computers; the advertising that influences the things they want to own; the time they give to sports and other entertainments.

All of this shapes people’s horizons, and their understanding of what is important and what is possible.

For the states that make up the Islamic world, the need to work together is clear. Modern technologies make it much easier to do that than it used to be. The sacrifices needed for cooperation to succeed are widely understood. But we should also highlight the benefits of a strengthened economic base in Muslim states, through increase in trade and long-term investments in human development.

The distribution of resources favours Muslim nations, but they lack the will and confidence to manage them to best advantage. If only because they are Muslim nations, their leaders have a special responsibility to nurture that will and confidence.

Their aspirations and policies should be consciously linked to the history, culture and faith that Muslims share. If enough far-sighted individuals have the courage of their Islamic convictions, what seems desirable but unrealistic can become a realistic and achievable goal.

Muslims are commanded to “bid to the good and forbid from the evil” (amr bi-l-ma`ruf wa-nahy `ani l-munkar). This entails commitment to the direction and quality of the whole social ethos. Not just traditional forms of family life and neighbourliness but also religiously valid ways of earning a living, co-operatively with others and with the natural environment.

As I mentioned, in the past, Muslims traded globally. The expansion of Islam’s influence followed the trade routes out of its Arabian heartland. For Muslims, economic effort is an integral part of responsible living.

We have a reliable record of how the Prophet and his companions went about discharging that responsibility. Muslims may not engage in practices that deliberately and systematically deprive others of their livelihood, and then, in response to a separate impulse, give charitably to relieve the distress their economic practice has generated.

Rather, the effort to do good works and the effort to create wealth must be sustained as a single endeavour. Both means and ends must be halal.

More Muslims need to join, with each other and with non-Muslims, in the urgent need to balance the creation and distribution of wealth so that a good life is available to all, including future generations.

Muslims’ efforts to develop techniques of financing and investment that are free of usury and uncertainty (speculation) are pertinent to the wider concerns about ethical investment, fair and genuinely free trade, and abolishing the export, through debt-slavery, of poverty, instability and pollution to the poorest and weakest on this earth.

We have seen over the last forty years massive growth in the stocks of Islamic financial capital. But these stocks are not being deployed to develop the economic capacity of Muslim countries. It seems that the wealthiest Muslims, individually or as sovereign powers, prefer the safe, quick returns from investment in the non-Muslim world.

In many Muslim states, economic infrastructure and activity remain linked to servicing the economies of former colonial powers. Those linkages are not sustained only by fear, but by individual and institutional inertia — by lack of will and imagination on the part of officials to take the necessary steps to put in place the needed skills and systems.

One reason that Muslims do not invest their wealth and talents in Muslim countries is that those countries are unstable, unsafe and unproductive to work in.

This vicious circle is not a function of those countries being Muslim: similar socio-economic conditions elsewhere have similar effects — an exodus of energy, talent and money.

Many Muslim states inherited their political boundaries from the colonial era. Those boundaries increased dependence on the colonial power to keep order. The anti-colonial struggle provided a shared history for communities separated by ethnic and religious differences. In the post-colonial era they have not been able to find common ground. Solidarity is not a precondition, but an outcome, of the effort to identify common purposes. It is something that has to be, and can be, constructed.

To make Muslim identity effective in the world, a major policy commitment must be to make justice and fairness the decisive value for all modes and levels of governance.

This means allowing independent centres of authority to emerge and recognising their concerns and aspirations. It means a redistribution of opportunities to acquire wealth and influence, so that decision-making is not concentrated in the same few hands.

This must be a process, not a gesture. It must be given the time it needs, according to local conditions, to happen gradually.

In this way all parties learn to trust and work with each other to mutual benefit. If government is seen to be in the service of the people as a whole, its security is guaranteed by them.

Tomorrow: Part II

Dr Farhan Ahmad Nizami presenting the Perdana Putrajaya Lecture at the Putrajaya International Convention Centre yesterday. Bernama pic