Copyright Notice


Sakmongkol ak 47

Sunday, 19 July 2009

Re-charging the Economy.


Next year (2010), our economy is expected to shrink by 4-5%. Simply put, that will mean reduction in our national income. The government will have less income to tax from. This will mean cutting back on certain expenditures, less development, less capacity building, less of everything. Jobs will be lost as plants and factories scale down. Our exports will decrease. A shrinking economy will create reversed multiplier effects.

Banks will not want to lend money or they will make it more stringent to lend money. The psychology associated with sub prime loans will be so pervasive that bankers will be paralysed with fear. They will lend to people whom they are comfortable with. They will lend to the same old boy network. Productivity has shrunk or will shrink means that the labour market is not responsive to changing market environment.

What can the government do? There is universal agreement among policy makers that this condition is brought about by insufficient aggregate demand. The slack in aggregate demand is caused by several factors. Tight liquidity, people are not confident to spend, investors are not wiling to expand, labour isn't as productive and competitive. How then to bolster the aggregate demand?

Use either fiscal or monetary policies. Spend and tax. Ease liquidity or reduce interest rates. That's monetary measures. Which to use?

All over the world, the economic recession is pointing towards the failure of the market system. And since the economy depends on demand from households(C), Investors (I), Government spending (G), and net exports(X-M) - it remains for the authorities to manage these variables. Further, it is generally accepted that now, the only variable manageable by the authorities and seen to be the most potentially effective, is government expenditure. The government must step in to correct the market.

Let' see what the government has done. First the government introduced the RM7 billion package. This was followed by the RM60 billion. That's a total of RM67 billion to be spent over a period. What have the packages achieved? The answer who knows?

The man who announced the stimulus packages then was the finance minister. He is still the finance minister and now Prime Minister. He must have gotten advice from the Malaysian Keynesians. Like Keynes in the 1930's, the basic idea was simple: to keep the economy fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession. Keynesian economists want governments during times of economic crisis to pick up the slack by increasing government spending and/or cutting taxes.

Note the two important key elements here: - run deficits and finding answers as to why is the non government sector reluctant to invest, increase production so as to reverse the recession? We will have to come back to this issue later.

In order to justify specific expenditures, economist will offer empirical tests. The best expenditures economists argue are those that give greatest multiplier effects. This is the idea that an initial amount of spending leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending. Suppose an investor invests RM 1 million to build a factory. The money spent becomes wages to builders and revenue to suppliers etc. The builders will have higher disposable income and provided they spend, consumption rises as well, and hence aggregate demand will also rise. Those who supply goods and services to te builders/consumers, in turn receive additional disposable income will further raise consumption and demand.

The rationale is this. In order for the government to have money to spend, it taxes the economy. Nobody likes to be taxed. But suppose, more income can be generated from the taxed amount, then the decision to tax can be defended. But the government must know that more can be generated if the money is applied to economic actors capable of generating surplus revenues. So now, the government must find: - (a) those who when receiving doses of money, know how to apply it and make more money (b) apply the money to economic activities that are capable of creating more money.

In other words, spend more that you tax. If you have been taxing RM100, spend 150. That RM50 is the fiscal stimulus. That RM50 is also deficit spending. How do you finance the deficit? The deficit spending must be financed from government reserves (if any) or net borrowing from private or foreign investors. If the money is borrowed, it must eventually be paid back with interest, such that the long term effect on the economy depends on the trade off between the immediate increase to the GDP and the long term cost of servicing the resulting government debt.

So it is not easy after all to manage the economy responsibly. People will start question, what happened to our reserves? The government answers, we have plenty. That is good news, but now we want to know, whether the reserves will be applied wisely so that more income can be generated. It is reasonable to impute, the people say, that if the government can fritter away the billions of money it receives from PETRONAS, our reserves can also be wasted away.

We can dovetail the issues thus: - find ways to induce the public to spend more. This will depend on whether the households have more disposable income. They can have more disposable income if taxes on them are reduced. For example, the government can reduce payroll taxes (EPF contributions and other compulsory payments) so that disposable incomes increase. Investors spend if cost of capital is reduced and more importantly, if the ease by which to borrow is enhanced. Millions of SMEs want to borrow easily and quickly. But if loans to SME's are cornered by a few people, then the idea to finance as many SMEs and entrepreneurs to re-start the economy falls flat. There are vicious rumors circulating that loans for SMEs are cornered by some well connected people only.

Government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, and increasing individuals' incomes. As incomes increased, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending.

Whose disposable income should be increased?

Who do you give the money to? Milton Friedman, who is associated with the permanent income hypotheses, says that the marginal propensity to consume is more pronounced in poorer people. That is, if poorer people receive more money they will spend while richer people spend less if they received additional income. The policy implication then is to raise the income of the relatively less well off than the richer people. Give them more money.

Just suppose that the economic institutionalists are right- that our economy is also slowed down because of misfeasance and malfeasance by bankers and industrialists, or incompetence by government officials. This school of economists believed that much of the problems in our economy are caused by the institutions that exists – bureaucratic controls and regulations, bankers and financial intermediaries doing dirty work( the subprime loans in America were caused by bankers colluding with unqualified borrowers).

Suppose these institutional elements are in fact a substantial contributor to our depressed aggregate demand, they actually produced artificial blockages to liquidity. What can the monetary authority do? Then the public would certainly welcome what Milton Friedman suggested that a monetary authority do to escape a liquidity trap; we bypass financial intermediaries to give money directly to consumers or businesses. This is referred to as a money gift or as helicopter money. The term helicopter money is meant to portray the image of a central banker dropping money on people from a helicopter.

Maybe the government needs to look at mechanisms where it can give money directly to people? Perhaps this will be the new deal which Tengku Razaleigh has in mind?



Greenbug 19 July 2009 at 12:34  

Dato Sak, we have one of the highest tax rates in the region for both corporate as well as personal income taxes. Pak Lah has promised to reduce the rate by 1% per year but after the first year in office, he forgot about it, and that was like 4 years ago. He also promised to reduce the deficit but I guess he also "slept" on it.

Anonymous,  19 July 2009 at 16:02  

TR isn't the current finance minister. NR is. What is NR's economic plan for the country? Is that not the more pressing question?

donplaypuks® 19 July 2009 at 17:52  

This helicopter money strategy is exactly what Obana and Brown having been raining down on corporate America.

With Malaysia, my worry is that we don't know over where this helicopter will be hovering to drop its largesse selectively.

We still don't know where all that stimulus money went to and what skeletons there are in the cupboards of Khazanah, PNB, Prasarna, Valuecap, EPF, Petronas etc.

Until we do, our M'sian copters may be hovering up there forever and crash down when they eventually run out of (subsidised)fuel!!!

Anonymous,  19 July 2009 at 19:31  

Forget about the economy. It will be politics from now on. The stupidity of one agency has now blown apart any semblance of direction. This is a stupidity egged on by the politicians.

I think we are going to find a flat battery.

walla 19 July 2009 at 23:57  

This post is going to amble a bit...

First, it's a catch-22.

If people don't spend, producers won't invest. But if people spend, they will get into debt later and then new investments made by producers will be at risk.

Because producers have to put up more money upfront, one expects producers to be more rational than consumers. And since producers know this as well, they will be right-sizing their own estimation of market upswings in which case they will temper their investments.

The question then is whether they temper it too much which results in less jobs being created to generate income for folks to continue spending and to pay off their accumulated debts whose growth may reduce their confidence to spend more in the future come one tipping point stage.

What keynesians in governments do, and please correct me, is to inject an energy tonic into the cycle by artificially intervening to stimulate the economy so that producers will invest more to create more jobs that will pay people so that they can continue spending and so swing the economy up from the trough of the u-curve which by itself will steepen to a nike-tick if external demand pulls up at the same pace.

This argument, again correct me, would only work if, as for a rational domestic market, the world's other markets will also be doing the same. The question then drops to how bad their situations are before that nike-tick can take off here. If it's going to take too long for them, the investors here may get jittery and down-size again.

The palliative for that seems to be to diversify. But to diversify calls for fresh inputs from new types of skills, new types of business or production processes, and certainly new types of markets. Are our industries equal to the new nimbleness required, assuming their captains have not lost their guts?

Second, we should be careful of things. We must ask, and answer, whether we can just take comfort from continuing to do 'business as usual', that is, run the economy in the old way of pump-priming infrastructure and construction each time there is a problem.

If we recall the past from way back, each time there was a feel-good ripple in the market, it was pinged from relaxing some rules or other that on hindsight shouldn't have been there in the first place. Like an innocent released from incarceration, you feel good to see some sunlight again but it doesn't remove the root challenges, which, for the prisoner, remains justice and redemption, and for our market, the factors of relevance by competitiveness reflected in productivity, creativity, ingenuity and blue-ocean, value-adding, activities.

In other words, we mustn't fall back into the same paradigm trap that was the case each time we had recovered in the past because we hadn't done anything intrinsically remarkable in each of those instances, and also because we just continued to respond to renewed external upshots in demand.

As indications of some of those feel-good ripples, consider one report saying Malaysia has some USD85 billion in reserves:

and another report saying the worst is likely to be over because it thinks the 1Q09 massive inventory drop is unlikely to happen again:

Yet another report alludes to 'najibnomics'; we recall not too long ago another personage was similarly iconized.

The question to ask is what can we do to raise general income levels before the net oil deficit bill hits across all industries? When it does, not only will production costs go up and consumption goes down, the vaunted reserves will disappear very fast because recurring expenditures remain high which cannot be ameliorated by more value-adding activities because we haven't yet developed the skilled manpower needed. Since a value-adding project needs about three years, we need them now because we may be a net oil importer by 2012.

walla 19 July 2009 at 23:57  

Add the fact that Petronas' overseas investments are a black-box, we do not know for ourselves whether this country can depend on future income streams from them to the extent of covering for any shortfall between what we produce and what we spend when the net oil bill hits.

We are in the old surreal situation of seeing some encouraging numbers laced with generous doses of positive comments but when we look at things at ground-zero, especially in terms of what people do for a living across the country, in their offices, factories, plantations, and so on, there isn't very much that one can consider value-adding. Making the next best water heater or water-filter..maybe. Concocting the next white coffee..perhaps. But where are the big ticket items? Indeed, that could be a harsh requirement, considering we are a relatively young nation and still struggling to navigate our way through the maze of education, skills development and institutional reforms.
But if we don't engage those issues now, we will fall back into that old paradigm trap. Be assured no one will help us to get out of it.

Having mumbled all that, one is highly tempted to say throw caution to the winds and go laissez faire on taxes, duties and rules. That means all the national institutions will have to reinvent themselves within the next twenty hours so that they can battle inbound forces without the benefit of domestic protection. Probably they will have to downsize, amalgamate or shave off unprofitable subsidiaries. Certainly they will have to take a scalpel and go into the fats. One weakness is supervisory efficiency. A sore point when you see how staff operate in the absence of management direction...

But one thing competition will do is to raise temperatures and energy levels. And open eyes on what has been going on in the world for that mindset transformation to expand each silo into a worldview.

Worldviews provide the real economic geographies of the world in which one must thrive in order to survive change.

So what's a possible worldview now? One, everyone's suffering. Two, everyone's looking to see who will recover first. Three, we have some palpable good signals. Four, we must quickly capitalize on them. Five, we must avoid at all costs making the same mistakes of the past. Six, we need a new uplifting vision. Seven, we need a new wave of activities to carry that vision. And eight, to hedge our bets, that vision must already be rooted in some things which are essentially 'us' which can be story-boarded to turn this country into a magnet for ideas, capitals and things. Yes, things.

Thus, the critical measures to have are new capabilities for the next twenty years. That means high thinking powers, knowledge focus, agile and efficient execution, and curiosity about the future.....we must be able to see things in new ways..

So it remains to say what is only left to say...

"Malaysia as the cheapest, nicest, freest, kindest and most engaging place to do fast high value-adding things, post-2008 crisis."

Anonymous,  20 July 2009 at 15:52  

Whatever the measures it will not filter down to the masses within next 2 years.

Thus any restructuring program needs to incorporate certain provisions of safety net mechanisms to give breathing space for the "followers".

Eventually,the success of the plans relies on the involvement of the "followers"; thus alienating them now will erode the confidence in the leadership.

The New Deal is about confidence that the country have a greater future and all citizens will have the opportunity to share in that future.And it will not be an overnight transformation but a long difficult struggle to be shared equally by all citizens.

Thus if I am hungry now and see my friends being accorded direct nego contracts with disproportionate profits or paid millions to head a GLC that does nothing..I will not subscribe to any New Deals.

You can see the recklessness whereby one give toll discounts(for the richer guys) and slam public transport users by increasing rates.

Right now we need the govt to ease our cashflows (eg thru tax deferment schemes), provide retraining or mezzanine level assistance and to give more bite size opportunities to many rather than huge chunks to a few.

Most of all we need to see the fat cut off from our GOVT capex/opex and GLCs mgmt.

I commented on 1Malaysia months ago and did some simple calcs to show that the then -1% GDP growth is bullshit and I predicted a -3.5%.Now..was anyone's head chopped off for not getting numbers wrong by a long2 mile?NO ..cos he's in EPU.

Looking at the current scenario,we won't get out of this funk until 2012...cos only rhetoric n zero action.

Nobody is listening anyway,

  © Blogger templates Newspaper III by 2008

Back to TOP