What is now being labeled the Great Recession began in mid 2007 as the sub-prime fiasco in the United States began to unfold. The economic slowdown gained momentum in 2008. As the gathering, storm clouds gathered over the horizon, Governments began to react and take counter recessionary measures.
The Barisan Government for its part remained in a state of denial. Ministers dismissed with some arrogance the notion that the Malaysian economy would succumb to the global slowdown. They argued rather smugly that Malaysia enjoyed a certain immunity as it had decoupled from the global economy. Despite the key economic indicators pointing to a weakening in terms of industrial output, declines in FDI flows, lower exports and indications of capital flight, they continued to forecast robust growth.
The markets for their part made their own assessments and lowered the ratings. The Budget for 2009 presented in August was based on unrealistic and rosy assumptions of growth and buoyant commodity prices, especially of petroleum, and the Government announced a humongous increase in spending both on the recurrent and development budgets. An increase of RM 20 billion was unprecedented.
In the months that followed, as it begun to become crystal clear that the global crisis was likely to be severe, the Finance Minister, the Second Finance Minister and the Governor of Bank Negara indulged in soothing sound bites about the state of the economy even as the indicators pointed to a slowdown; they persisted in sticking to untenable estimates of growth, made light of the weaknesses and refused to use the instruments at their disposal to make policy corrections.
Thus when almost every country was lowering interest rates, Malaysian policymakers remained in a state of paralysis. In late 2008, as it began to become abundantly clear that the economy was indeed weakening, panic measures were taken.
Interest rates were lowered marginally; a Stimulus package of RM7 billion was hurriedly put together; RM5 billion was channeled to up the stock market; there were additional off budget measures taken. At a minimum some RM 32 billion were injected.
Despite this massive infusion of resources the economy continued to spiral downwards. It is patently clear that the remedies adopted, namely propping up “friendly “corporations, massive spending on less than urgently needed infrastructure projects, and handouts to party warlords were not the right mix of measures to stem the hemorrhaging.
The ad hoc packaging of projects with long gestation periods was clearly inappropriate to address the immediate effects of the economic slowdown with consequences for employment and income levels. It is also starkly clear that without policy reforms there would be a failure in coping with the recessionary effects. These lessons were not learnt and sadly have not been applied in crafting the Second Stimulus Package.
The truth of the matter is that Datuk Seri Najib Razak as the Finance Minister was either asleep at the wheel or had his eye on dubious schemes and narrow politicking in the context of UMNO politics. The Second Finance Minister cut a sorry figure as he went about repeating like a broken record that the Malaysian economy would continue to grow; the Minister responsible for the EPU was neither heard nor seen; the Governor of Bank Negara was hamstrung and failed to move by adjusting interest rates or by allowing a true float of the ringgit.
This is a sorry indictment about the competence of the BN government in piloting the economy through stormy and uncharted waters. Najib is scheduled to assume the helm in approximately two weeks. His performance as the Minister of Finance leaves open the question as to how he will steer the ship of state. The omens are not encouraging.
(to be continued)