Malaysia is only second to Singapore (and Brunei, of course) in terms of its openness in the region, both in terms of trade as well as investment. As Malaysia is an open economy, it is essential for us to consider Malaysia in the context of the world as well as the regional economies. Hence, it is necessary to begin with some remarks about international economic prospects.

It is important for us to recognise how difficult and unpredictable the world economic situation is. Both Europe and Japan are relatively moribund at this point, and prospects for sustained US economic recovery are uncertain despite the rather strong recovery towards the end of 2003. After some initial job creation, there is renewed talk of 'jobless growth' and even a 'job-loss' recovery.

Most importantly, the US recovery is riding on the back of twin deficits. The US trade deficit, in particular, is largely related to trade surpluses in the East Asian region. The US fiscal deficit has been financed by US Treasury bonds. A vast and growing majority of such Treasury bonds have been bought by governments in this part of the world. East Asian reserves come to about US$1.4 trillion, mostly held in US Treasury bonds.

Most problematic about the current situation is the fact that the three different advanced industrial regions all see recovery as predicated on devaluation of their own currencies. Hence, what is likely to happen is a situation of competitive devaluations, leading to a 'beggar-thy-neighbour' situation, which can be unstable, even chaotic.

An inability to co-ordinate these devaluations is likely to result in greater currency volatility and monetary instability at the global level. There have already been calls, of course, for another 'Plaza Accord' to 'co-ordinate' US dollar devaluation, as happened after the September 1985 meeting at the Plaza Hotel in New York.

Devaluation offers a false solution to these problems. There have been two previous episodes of devaluation by relatively strong Republican presidents. In 1971, US President Richard Nixon destroyed the Bretton Woods system. At the beginning of his second term in 1985, another American president, Ronald Reagan, also attempted to solve US problems by devaluing the greenback at the Plaza Accord.

But the current situation is even more likely to lead to a great diversion of investible resources for currency speculation, which will only exacerbate, rather than ameliorate international economic volatility.