The Scope of the Package
The four so-called thrusts identified by Najib are generalities. Deeper analysis of these elements indicates that these are clichés and make for good sound bites.
It is rather salient that the DMP has made no effort to formulate and present an over-arching policy framework. There is a clear and urgent need to layout policy reforms to enhance competitiveness, correct the distortions, strengthen key agencies and identify areas of future potential growth.
There appears to be a mistaken view that Malaysia can find its way out from the hole it is in by spending billions. There does not appear to be a realization that fundamental reforms are needed particularly in the area of the regulatory framework.
There is no acknowledgement of the fact that the growth environment is deeply affected by rigidities of the NEP implemented mindlessly by the “Little Napoleons” of an inefficient and corrupt bureaucracy. Reform is imperative if Malaysia is to regain competitiveness.
In introducing the specifics of the Package, Najib makes no mention of the fact that there is a need to unite and jointly face the challenges; he fails to acknowledge that with almost 60% of the GDP generated in the Pakatan Rakyat governed states, the Federal Government needs to engage in efforts to work with these state Governments if it is to succeed in mounting the challenges confronting the country. Without the necessary collaboration, the efforts to achieve economic recovery will come to naught.
The DPM refers rhetorically to the fact that the the nation has faced crises in the past and expresses the view that we shall overcome the present crisis. This is not disputed but it is important that we collectively acknowledge that the crisis we currently face is a different order and scope.
The 1997 crisis was a financial crisis unlike the current one which is linked to the real sectors and to a global meltdown. Deficit spending, an exchange rate adjustment to stimulate exports and bailing out over-extended corporate entities were appropriate tools in 1997, they are not appropriate in the present context.
The country cannot hope to export itself out of the current situation. It has to focus on sustaining demand and consumption; massive investment programs are not the appropriate means either. The DPM’s gamble is likely to fail and put the nation in greater peril.
The Minister has asserted that the sharp increase in the fiscal deficit is temporary. This claim rings hollow if account is taken of past actions. So too was the assertion at the time of the East Asia crisis but deficit spending has become a way of life as deficits are now a part of the fiscal policy of the BN Government.
Deficits have become an addiction. It is almost as if the Federal Government’s policy stance has been to spend and spend on infrastructure and expand the size and role of the public sector in the national economy.
The pattern of spending on infrastructure has three salient features. In the absence of transparent and competitive bidding procedures, projects are handed out to well- entrenched party warlords thus contributing to the cancer of corruption.
Secondly, the over-emphasis on infrastructure has meant neglect of funding for research, investment in social services, upgrading the quality of education thus lowering the capacity to compete.
A third feature is that ever growing role of the GLCs and state owned enterprises has been that SMEs and other private sector have been marginalized and not contributed to overall growth. There has been a squeezing out of these entities.
Financing of the growing and persistent public sector deficits has meant that the private sector has been denied access to resources. This coupled with the vagaries of the NEP have contributed to the lackluster investment performance of the private sector.
Returning to the assertion that the deficits will be brought into check, I call upon the DPM to indicate how and when he envisages a return to fiscal policies that will lead to budget surpluses.
It is significant that the BN’s fiscal policy in recent years has broadly mirrored the policies of Japan’s Liberal Democratic Party in countering recessions.
Those policies were based on “stimulus” packages that emphasized infrastructure projects handed over to party stalwarts. It is these policies that accounted for the so-called “Lost Decade” experienced by the Japanese economy.
It would appear that the Treasury Mandarins and their political masters have not absorbed the lessons of such failed policies. Malaysia can ill afford similar policies driven by a myopic vision.
The DPM remarked that fiscal stability remains an important element of policy. These soothing remarks do not cut much ice with the rating agencies that have in recent months downgraded Malaysia’s rating levels. The recent risk analysis by the Economist Intelligence Unit should be a source of some concern to policy makers. However, there is little acknowledgement in official pronouncements that any heed is being paid.
What is also salient is the fact that there are sizable expenditures incurred by off-budget agencies together with the large but hidden contingent liabilities of the Government. These are represented by commitments to large payouts to companies owning toll road concessions, the IPPs and cost escalation clauses in the large scale projects.
The truth of the matter is that the time is approaching when domestic financial resources will be inadequate to finance the public sector’s appetite for resources. There will inevitably be need to resort to seeking foreign financing at high interest rates as Malaysia’s ratings deteriorate . At the extreme, there is a danger that Malaysia may have no option but to run the printing presses ala the Latin American economies in the 1980s and 90s.