Doing more of the same won’t help our economy
Albert Einstein was said to have remarked, “Insanity is doing the same thing over and over again and expecting different results.” In other words, doing more of the same really won’t help. It is insane to think that Malaysia can avoid the next economic mayhem by doing more of the same, or worse still, doing nothing.
The Malaysian economy has muddled through without fundamental reforms for an extended period of time, arguably at least since the last crisis in 1997. Is a perfect storm awaiting Malaysia as a result of policy inertia, lack of long-term vision and weighed down by vested interests?
It’s not that there was no attempt to resurrect the economy. Tun Abdullah Ahmad Badawi tried to rein in vested interest groups when he assumed office in 2003 but the then Prime Minister found the economic beast too big to control.
Prime Minister Datuk Seri Najib Razak launched the New Economic Model in March 2010, a year after he took office, in the hope to take the economy to the next level by focusing more on improved human capital and innovation, rather than putting more investments and labour into the economy, which could just mean more sweat shops.
The mildly radical NEM was shelved quickly and in its place a nice sounding marketing ploy named “Economic Transformation Programme” that slowly went back to the Mahathir-era public investments into big infrastructure projects and foreign direct investments. Yet even the ETP gave way to racial chest thumping of PERKASA and the like.
After the election in May 2013, the only preoccupation of the Government seems to be the opinion of the rating agencies. In the name of “fiscal stability”, subsidies are removed, prices are increased and new taxes are imposed.
The symptom of fiscal risks – high deficits and debts – is addressed superficially by raising taxes and cutting subsidies, without taking into consideration macroeconomic risks faced by the nation.
Our potential risks
Currently, Malaysia is already burdened with macroeconomic risks of a potential crisis due to the following factors:
1. Goods and Services Tax, which will be introduced in April 2015, and the spate of price hikes from electricity to toll rates, will eat away disposable income and depress domestic demand, as well as cause inflation.
2. Quantitative easing (QE) is likely to end at some point. The interest rate is likely to be higher in 2015, if not in 2014. A higher interest rate depresses domestic demand further. As the US dollar appreciates, imports would be more expensive. On the other hand, exports may not be too good even with a depreciated ringgit largely because job growth in US and Europe would still be slow, thus demand of our exported goods would not be high. In addition, some US manufacturers currently operating in Asia are likely to be moving some facilities back to the United States, which means room for Malaysia’s export-led growth is limited.
3. Palm oil price is likely to further soften in 2015, if not already in 2014, mainly due to oversupply and a potential soya super harvest next year, despite the Haiyan catastrophe causes short-term shortages of coconut oil. The potential softening of palm oil prices will have major political consequences in Malaysia as small owners in small towns and rural areas depend heavily on commodities.
4. A question to ask: would there be a property bubble? What would be the combined effect of electricity tariff hike, GST implementation, higher interest rate (mostly as a result of QE tapering) and lower commodity prices? The moment someone begins to default, there is risk of a meltdown, especially in the context of very high domestic debt to GDP ratio.
Beyond that, the rating agencies’ greater scrutiny of Malaysia’s poorly managed public finances would likely to result in more expensive borrowing costs to the government and consequently pushing interest rate for everyone else up further.
The fundamental issue is that the Malaysian economy did not grow fast enough to pay for the Government’s excesses. Otherwise if the GDP pie were bigger, the ratio of debts and deficits would be seen as tolerable by the rating agencies as everything is relative to them.
Our economic contradictions
Since the Asian financial crisis, the Malaysian economy has the several contradictions.
First, ever since the first Free Trade Zone opened in Penang in 1971, Malaysia is essentially still an export-oriented economy but with declining share of manufacturing produces and higher dependence on the exports of oil and gas, palm oil and other resources.
Some believe that when it comes to export, there is no difference between potato chip and microchip. I beg to differ. Microchip has much more value-added than that of potato chip. Manufacturing needs nurturing and Malaysia is looking prematurely deindustrialising. The dependence on resource-based export is misguided.
Further, there is no serious effort in making lives easier for small and medium industries to grow into becoming global champions for Malaysia. In a time when the United States and Europe are less wealthy to consume our produces, we need to rethink even our traditional export-led strategies to grow domestic demand as well as deepening linkages with Asian markets.
In this context, Malaysia’s involvement in the Trans Pacific Partnership is more a diplomatic move than one that is guided by clear economic consideration. Unless Indonesia and China are in (which is unlikely as the treaty was designed to exclude China), TPP is just a pact of sunset markets irrelevant to the future of Malaysian economy.
Second, foreign direct investment is still seen as the driver of the economy with the Government giving substantial tax breaks and subsidies running into multiple years of all kinds even if it jeopardises the environment and health, such as Lynas.
On the other hand, the outflow of both illicit and legitimate funds is gigantic in proportion to the size of our economy. Cash-rich GLCs and statutory funds, instead of utilizing their funds to build a deeper technological base for the nation, are all crazy about investing properties and very little else. The case in point is the spate of investments by GLCs into property speculations in London.
Third, Malaysia’s dependence on foreign unskilled labour is enormous given the relatively small size of our economy. On the other hand, brain drain among skilled labour and the professional class is also massive.
The two are linked. The ubiquitous availability of foreign unskilled labour not only resulting in a race to the bottom in terms of wage for domestic unskilled labour but more importantly making skill upgrade and technological advancement relatively costly (then just hiring labour) and therefore undesirable. As a consequence, those who have skills and those who could help technological upgrade are not rewarded sufficiently for them to stay at home.
Fourth, the profiteering state and the predatory crony class eat away disposable income of ordinary Malaysians and forcing many to incur huge personal and household borrowings, ultimately kill the golden goose of domestic demand and also hurt the long-term prospect of the economy as the small guys have no savings not to mention investments.
Time to reimagine our economy
Corruption and government wastages, which drive up deficits and debts, are well known. But full impact of the profiteering state on the economy has not been ascertained.
The profiteering state sees itself not as provider of public transport but dealer of private vehicles (resulting in huge household debts); not as provider of decent public housing (which may not necessarily have to be sold, not everyone needs to own a house!) but as housing developer (government and its linked units of all kinds own substantial shares of some of the biggest developers); not as provider of decent public health care but as owners of private hospitals (most “private” hospitals in Malaysia are owned by GLCs one way or the other).
The various monopolies, oligopolies and privatised essential services held by the crony class are eating away disposable income of ordinary Malaysians and thus their living standards. From sugar, post office, water, internet and mobile phone services to television channels and banking, almost every aspect of the Malaysian life is an opportunity for the well-connected to squeeze out money.
To avoid a perfect storm, we need an open conversation to re-imagine the Malaysian economy. Doing more of the same just won’t help.