In the Foreword to Tales from Earthsea, Ursula K Le Guin writes: “All times are changing times, but ours is one of massive, rapid moral and mental transformation. Archetypes turn into millstones, large simplicities get complicated, chaos becomes elegant, and what everybody knows is true turns out to be what some people used to think.”
These words, so skilfully crafted, were written in 2001, but they seem just as relevant for 2026. This is perhaps one of Le Guin’s greatest gifts: her ability to write so beautifully about themes that endure even decades after they were first published. I really cannot recommend the Earthsea series strongly enough.
With everything that is going on in and around the world today, it really feels that our time is “one of massive, rapid moral and mental transformation”. Thinking back over the past four decades of my life — and especially the past two, when everyday political-economic matters have occupied a much larger part of it — it seems that a major crisis has erupted every two or three years or so. It now seems as if these crises happen every two or three months. We just cannot catch a break.
Confining the discussion to economic matters, at least for now, when things change so dramatically, we typically try to make sense of them by turning to economic models or to history.
But, I do wonder, how useful might this actually be?
In August 2011, S&P downgraded the US’ sovereign credit rating from AAA to AA+, citing the country’s fiscal trajectory and the political turmoil surrounding the debt ceiling. It was still relatively early in my career, and I remember expecting the consequences to play out as standard economic models would suggest: The dollar would depreciate and US bond yields would rise sharply.
Instead, what happened, despite S&P effectively saying “US sovereign debt is slightly less creditworthy than before”, was that the dollar barely moved and US Treasury yields dropped considerably. When the market reopened, following the US credit rating downgrade, Treasury yields fell 24 basis points. Indeed, over a two-month span from end-July to end-September, the US Treasury 10-year yield fell from around 2.94% to 1.72%. The market responded to lower American creditworthiness by buying more American credit!
So where did I go wrong? In the case of something that enjoys such “exorbitant privilege” as being the anchor of the global financial system, I failed to take into account the fact that markets still viewed the US as a global safe haven. As the world became riskier — even if that risk was partly emanating from the US — US Treasuries became relatively more attractive precisely because they remained a safe haven. It is worth noting that both the Swiss franc and yen also appreciated sharply, since Switzerland and Japan are themselves seen as safe havens.
Coming back to today, what can that teach us — or me, at least? As Le Guin puts it, “Archetypes turn into millstones”: We may still be carrying around ideas we inherited that no longer help us make much sense of the world. What archetypes are we carrying that have become millstones? Or, perhaps more subtly, what relationships do we treat as structural when they are actually contingent on the macroeconomic regime in which they are observed? And if the regime changes, how do those relationships change?
Khazanah Nasional Bhd chief economist Shafizal Shafaai has made some very interesting observations on this matter. For one, many of the things that contributed to structurally lower inflation from the 1970s to the 2020s have reversed, and so we are likely to operate in a more inflationary environment. But here are some others. From 2010 to 2020, the stock-bond correlation, a hallmark of portfolio diversification, was negative at between -0.4 and -0.6. Since the inflation shock of 2022, it has flipped to 0.5.
Next, even the traditional role of Treasuries, yen and francs (and gold) as crisis hedges has become less reliable. During the initial phase of the Iran war in February and March, Treasuries, the yen, franc and gold fell simultaneously, at the expense (pun intended) of cash, Treasury Inflation-Protected Securities and commodity-linked foreign exchange. From a production perspective, we can no longer assume that countries will prioritise efficiency; instead, they are increasingly targeting supply-chain resilience and, where possible, domestic production. As a corollary, capital, which has historically been highly mobile across borders, is now concentrating much closer to home.
So, if some of the relationships that we held to be (generally) true are now unravelling, it is worth revising some mental models as well. I have argued, many a time in this newspaper, that I believe in industrial policy, particularly one that increases economic complexity, as a critical ingredient for economic growth. And, as an extension, that we really need to focus on creating large, complex firms that compete globally for Malaysia’s economic development.
Some tweaking is now needed. I still believe in industrial policy and in increasing economic complexity, but I am beginning to think that systematically developing a relatively small number of large, complex firms should not remain our primary route towards those objectives. In a world that is de-globalising, that sees weakening domestic demand nearly everywhere, that is trying to bring supply chains back home as best as possible, what we need is deeper resilience, not necessarily deeper economic leadership by a few large firms. Banking on a few large firms to drive our economic complexity and, therefore, our economic prospects seems like having a few chokepoints that can be blown up. Think Death Star.
This does not imply that we should not try to have large global Malaysian players in complex industries. We should, but more opportunistically. If there is a chance to create a globally competitive firm that does high-value-added stuff that is — and this is crucial — an ecosystem builder or developer, by all means.
But where we should really be programmatic is to develop a really strong set of mid-tier companies that, collectively, export all kinds of goods all over the world. For clarity’s sake, I am not talking about small and medium enterprises that only do domestic services; I am talking about companies that are already or close to exporting or seeking to export abroad and have developed sufficient scale. Do they need to produce complex things? Not necessarily; a highly capable firm does not necessarily make the most glamorous of products. In fact, some of the strongest businesses in developed markets are those that sell glassware to cars, or hoses for swimming pools and so on. Not everyone needs to be a TSMC, or an ASML, or an Nvidia, or a Novo Nordisk.
If what we need is to build a more resilient economy — one that creates jobs for many, and is able to pay higher wages — a model that might be more appropriate is one in which we have, say, thousands of companies exporting hundreds of different goods (and services) to a multitude of countries, drawing on largely uncorrelated supply chains. That would give us a much more diversified and, therefore, much more resilient economy. There is no single “supplier” or “customer” risk whose disappearance cripples the system, no Lucky Strike to our Sterling Cooper Draper Pryce.
And, so, my prior on systematic development of large, complex firms has evolved towards one of systematically building a broad base of scaled, export-oriented companies, while being more opportunistic about large ecosystem-builders. I may ultimately be wrong about this, and perhaps my original stance is the better option. But evolving our mental models to fit evolving times does not seem like a bad idea, lest we fall into the trap — or habit — of what Le Guin describes as “what everybody knows is true turns out to be what some people used to think”.