Never one to waste my own free labour, I was reminded recently of a piece drafted in August that never made it to publication. Having read it again, it is still resonant and relevant as the year approaches an end. A fundamental reminder that economic institutions are critical to prosperity and not to be taken for granted. Happy reading!
Malaysia must resist sleepwalking towards an erosion of economic institutions
Trust in economic institutions faces looming catastrophe under a tsunami of political interference. Confidence in the key pillars underpinning the global economy is reaching a dangerous inflection point as the lines between the political, real and financial economies blur.
Attacks on institutions ignore their criticality
A collective amnesia is spreading across democratic power centres as political leaders attack critical institutions with increasing regularity. Not even a year since Daron Acemoglu, Simon Johnson and James Robinson won the Nobel Prize for careers demonstrating the importance of inclusive institutions to long-term economic development, states and leaders backed by anti-establishment ideologues and nationalistic fervour are dismantling the rules, norms, and organisational infrastructures that support economic prosperity.
Recidivists seem to lack a fundamental understanding of how modern economies work and where modernity’s extraordinary riches come from. The complex economies of 2025, replete with rapidly circulating money and a highly specialised division of labour, are built upon stable and reliable institutions, rights, rules and norms. Things like central bank independence, timely and unbiased economic data, property rights and consumer protections, together with robust anti-corruption laws, bank regulations, and disclosure requirements, support households, businesses, and governments to confidently engage in mutually beneficial economic exchange.
Dependable institutions mean a minimally educated person can safely and confidently buy everything from fresh papaya plucked from a nearby orchard to a semiconductor-filled smartphone with inputs sourced from over 40 countries. Or they can wire electronic payments or fly themselves to thousands of global destinations without the faintest knowledge of physics or engineering. Institutions widen the circle of trust to include thousands of complete strangers, letting an infinitely more complicated contemporary version of Adam Smith’s invisible hand do the rest.
Political interference harms institutional functioning and sets a worrying example
In the high-income democracies that best exemplify the benefits of robust institutions, increasingly insidious and flagrant political interference threatens a disastrous unwinding of essential economic foundations. Political office is being exercised for personal power and financial gain in a manner that is normalising corruption, overriding laws, and punishing bureaucrats for acting professionally.
The United States, once a beacon of liberal democratic ideals and a staunch defender of constitutional protections, separation of powers, and inalienable rights, has become the poster child for political encroachment. Its abrupt and overt institutional backsliding is all-encompassing, with economic institutions among the prominent targets. Among the Trump administration’s alarming and highly disruptive policies are open warfare with the Federal Reserve and its chairman, using punitive tariffs as a geopolitical weapon, granting the first presidential pardon for a corporation (BitMEX) that was prosecuted under anti-money laundering laws, and firing the Bureau of Labor Statistics commissioner over unfavourable job numbers. It has also waged ideological campaigns against major universities, gutted government agencies including USAID and the Environmental Protection Agency, and pursued bitcoin policies and Middle East deals that directly benefit the Trump Organization. Systemically important questions arise from these, including whether economic data on the world’s largest economy remains free of political interference, if the world’s most important central bank would help avert a financial crisis under Trump’s watch, and what certainty remains if the President can pursue economic policies that clearly violate US law?
Institutional erosion of a less profound but more pervasive variety is also being normalised as major shocks dent the confidence of policymakers. Financial crises, wars, trade wars, extreme weather events, and pandemics have exposed the limitations of international (and national) governance and prompted a steep rise in ‘sovereign’ policymaking. Instead of encouraging the institutional deepening necessary to forge a more effective collective response to future shocks, countries are pursuing individual band-aid solutions in the name of ‘resilience’. Protectionist trade measures and the popularity of industry policy interventions are rising globally as governments clamour to restore regulatory powers that were removed to support international business growth. The result is seldom increased resilience but regulatory overreach that widens the rift between policymakers and businesses, with circumvention of economic institutions an increasing consequence.
Malaysia must resist backsliding and build inclusive institutions to harness AI
Malaysian policymakers must not take inspiration and instead stay the course on (albeit slow) institutional deepening. Malaysia’s leading economic agencies are well regarded, it has resisted reciprocal tariffs, and Malaysia had a landmark year reaching number one in the Open Data Inventory global rankings. But it still lacks a dedicated Finance Minister, robust, transparent and sustainable medium-term budgeting, competition in key sectors dominated by government-linked companies, and a convincing narrative to support critical tax and expenditure reform.
Putrajaya has struggled to deliver meaningful economic reforms in the face of popular pressure. It has taken the easy route on highly anticipated petrol subsidy rationalisation, missed an opportunity to strengthen whistleblower protections and tackle wasteful government procurement, dented confidence with poorly designed and communicated consumption tax increases, and gifted RM100 in cost-of-living relief with headline inflation at four-and-a-half year lows.
But perhaps most importantly as the age of artificial intelligence (AI) dawns, it must build the inclusive and credible institutions necessary to harness AI’s potential for societal benefit. AI may invoke fear about its potential applications and impacts but it has already joined the invisible forces that raise economic productivity potential. The challenge is not for everyone to understand how it works, rather for institutions to make AI as trustworthy to consume as your local farmer’s papaya.
Stewart Nixon PhD 