A post-Covid19 economic agenda for Malaysia
Listening to the brief economic related parts of Prime Minister Muhyiddin Yassin’s speech on 10th May made me wonder if the Government has ever known what needs to be done to save and keep the economy going. For instance, Bantuan Prihatin Nasional was a fire fighting measure when Malaysians were dealing with the economic shock of the first MCO between 18th March and 31st March. By now, 8 weeks later, the fire has probably burnt down everything. It’s time to talk about rebuilding from ground zero.
To frame our thinking in this respect, it can be instructive to return to basics, and consider constituents of GDP in a simple economy. GDP = C + G + I + NX, or (consumption + government spending + investment + net exports).
Malaysia will have to think through how our existing economic model will be affected by Covid-19 and to pre-empt, to remedy and surge ahead.
The consequence of not thinking through and not acting fast enough would mean lots of sufferings including job losses, bankruptcies, starving, instability etc.
The world and Malaysia are likely to face the following shakeups in the weeks and months to come. Some of these trends may result in long-lasting effects to our economy, perhaps for decades.
1. Threat to the export-led manufacturing and trading nation model
For the last fifty years, Malaysia has been highly dependent on export-led industrialisation and the trade associated with it. Malaysia produces finished consumer products to serve United States and European markets as well as intermediary goods that are parts of an elaborated global supply chain.
Covid-19 pandemic will force global and local corporations to shift from Just-In-Time (efficiency) to Just-In-Case (resilience). Developed economies are likely to focus on reshoring some of the manufacturing that now happens in developing economies, and as a result the global supply chain will shrink somewhat. The question is how and to what extent Malaysia would be affected.
An obvious first-order effect is reduced exports and reduced foreign direct investment, which will result in job losses. We may even lose technical capabilities and technological know-how if firms were to shut down en masse
2. Major disruptions to services sector
Covid-19 and the lockdowns impacted heavily on the services sector. Airlines, hotels, fine dining, mass tourism and other related sectors will suffer for many months to come if not years. Even after a vaccine is found, it may take a much longer time to restore services sector to where it was.
Again, this will lead to a decrease in exports, since tourism, conventions etc. count as export of services. We will have to be prepared for further job losses and the consequent decline in the wellbeing of those who lost their jobs and its associated living standards, which may be hard to restore. Many in the services sector are informal sector workers without the minimal formal employment protections. Their predicaments would be even more severe.
3. Commodity crunch
The historically low petrol prices will have a huge impact on government revenue, as well as on jobs in oil and gas. Palm oil price is also low and when petrol prices are low, there is no added incentive to switch to biodiesel. Soil in peninsula Malaysia is comparatively less fertile than those in Indonesia. Wages are much lower in Indonesia as well. The crisis will push planters to rethink whether it is more viable to go into food agriculture. But again, the big firms may be able to change quickly, it is the hundreds of thousands of small owners whom the Government will have to guide with grants, incentives and agriculture research.
Altogether, these three externally-driven trends highlighted above will have deep and long-lasting effects for our economy, first of all on the level of disposable income and private consumption, and secondly on domestic sectors dependent on private investment.
4. Consumption-led growth hitting a snag
For the last decade or so since the 2008 Global Financial Crisis, Malaysia has been increasingly dependent on debt-fueled domestic consumption. Domestic consumption is largely debt-fueled due to the stagnation of wages in the last two decades.
The household debts have been more than 80 percent to GDP for more than a decade. If many Malaysians start losing their jobs or facing drops in real incomes, and generally fearing the uncertain economic situations to come, they will consume less. Worse, savings rates will not increase since existing debts will have to be serviced.
Retail depends heavily on this disposable income-based consumption. The economic fallout for, say, pasar malam stall owners would be very serious, not to mention bigger firms such as shopping malls and businesses selling consumer goods. Further job losses would result, triggering a dangerous vicious circle.
5. Property glut, construction and the banks
It is mindboggling to drive though the numerous condominiums, the many shopping malls and office blocks in and around Kuala Lumpur. A property glut is also present in other states and cities.
The property sector relies to a considerable extent on domestic private investment, e.g. families purchasing one or two investment units. With a decline in disposable income and indebtedness already at high levels, this model may be defunct.
Most Malaysian banks’ loan portfolios heavily linked to property and car loans; and the GLCs and GLICs are holding substantial shares in major property developer companies. The construction sector is heavily dependent on private developers for works.
The burst of the property bubble would have a direct impact on GLCs and GLICs, and, worse, it would introduce significant extra risk in the entire banking and financial system, which would stress the economy further.
Engineering a “soft-landing” for the property sector requires strong political will and very clear minds not bound by past glories and practices, as well as vested interests.
The consequence of doing nothing.
In summary, the scenarios described above all lead to a substantial decrease in consumption, private investment and exports, and by extension, GDP as a whole will decline. There will be huge social and political consequences if the government chooses to do nothing or do the minimal. Worse still, if the government fails to understand the magnitude of the crisis, we are all doomed.
We will have to deal with heightened economic insecurity as a result of various economic stresses to individuals, families, corporations etc. Malaysians who lost their jobs in Singapore would have no choice but to return to Malaysia without a job. They would need help. There will be health consequences of losing jobs. Mental health, suicide, substance abuses are some of the challenges on this front. People who lost their sources of income resorting to crime will be a challenge too. Next on the list, groups who felt economically aggrieved turning to violent extremist ideas and causing political instability
There is one variable that we haven’t discussed yet in our simple economy, and that is the “G”, or government expenditure. The government will have to act using all the policy tools available to the state to “soften the blows” of this massive once-in-a-century crisis. And only the state has the resources and the tools to act effectively. Leaving businesses to their own devices means many would pack up and fold, and millions more would lose their jobs in due course. Charities would not be able to cope with the vacuum left by the government.
While we know business as usual won’t work, the government will also have to grapple with the fact that it will receive less revenue than previously, not in the least tax receipts. The government will have to make the big call of either borrowing more (expanding deficits) or do less. And with political uncertainties and competing personal interests in Perikatan Nasional, this government may see roll back in gains on the anti-corruption front, which means more leakages from an already dwindling source.
But it is very important to know that government financing is but one of many tools available in the government’s toolkit.
Objectives and roles of the State
Back to basics, we must ask what would be the policy objective of the State.
Until now, the Malaysian state has placed delivering GDP growth as its key objective in managing economics. It is assumed that this growth would trickle down and improve the general wellbeing of the society. Bank Negara sees itself as maintaining the stability of the financial system, interest rate and inflation rate to support broad-based growth. The role of GLCs/GLICs are more convoluted. Some aimed at supporting Bumiputra businesses, some just to meet KPIs, which may be of cross purposes with other objectives of the state. If it were to blindly follow this objective, in these circumstances, the government would have no choice but to make up the loss in the private sectors by increasing its own expenditure.
But in this economic crisis unleashed by the Covid-19 pandemic, the Malaysian state should rethink its primary objective for the economy. I would propose that the primary objective is to create jobs that pay decently. Everything else flows from here. All other objectives should be subjected to this primary objective.
The creation of decently paid jobs should be front and centre as far as economic discourse is concerned.
The State has multiple roles in the economy, for instance, as regulator, investor and coordinator of collective action.
Job generating sectors
The Government must look at the entire arsenal at its disposal to create jobs with decent pay for Malaysians so that most Malaysians could pull through the Covid-19 crisis without too much damage and harm.
To create jobs, the Government will have to possess a strong political will to take on vested interests, make the necessary reforms and coordinate in a massive way to break down silos and inefficiency.
I would like to outline the following ten “Job generating sectors” as a start. This is not an exclusive list. But it just means so much more work has to be done in order to create jobs for Malaysians.
1. Healthcare front-liners and broader care work
Malaysia will need to reform its healthcare system so that the nation is more resilient in facing the long-haul battle against Covid19 and other challenges. Malaysia will need to pay experienced nurses better to keep them from crossing the border to work in Singapore and Saudi Arabia. An increasingly ageing society will need more care workers for the aged while a society which would like more women in the workforce would need to expand childcare too. The broader care work should be a key new sector that employs many more Malaysians.
2. Global medical supplies
Malaysia is a major producer of medical gloves and condoms. We should aspire to be a major producer of N95 masks, PPEs and other medical devices that are needed to ease the world into a post-Covid19 New Normal. Malaysia should position itself as the producer of quality medical supplies for the “bottom billion”. Such a major endeavor would help create jobs, earn foreign currency, and serve the medical need of developing nations. We are in a good position to do so since we produce the primary resources necessary and hence can capture a lot of the value across the supply chain.
3. Reimagining essential services and works
When most parts of the world were in lockdowns, we learned that work needs to go on, but it can be done differently by using technology. This is particularly relevant for a “good jobs” agenda. For instance, Malaysia could reduce the number of five foreign workers as security guards by using CCTV and other gadgets to one well trained and well-paid Malaysian guard. Garbage collection can be partially automated to reduce the workforce from five foreign workers to a truck to one or two well-paid Malaysians to a truck. The list goes on. But in order to do this we have to take on the human trade that promotes the employment of unskilled foreign labour and get Malaysians to buy in to understand that “developed” means using humans to control machines (more automation) and not using human beings (slaving foreign labour) as if they were machines.
4. Food supplies
In the wake of the crisis, food security will have to be taken seriously. We have imported too high proportion of our food while our lands are used to grow commodities, particularly palm oil. That balance has to change. Many jobs and business opportunities for Malaysians could be created along the way.
5. Digital economy/cyber security
Covid19 pushed many into experiencing and living in digital economy on a fast track. In the post-Covid19 “contactless” economy, digital wallets, digital shop and many other activities help people to maintain their living standards and lifestyles while adjusting into the new normal. We also need to strengthen cybersecurity, guarding against the rise of digital fraud, piracy and cyberattacks in both public and private sectors.
6. Creative economy
The digital revolution has propelled digital creative content as a key driver of the digital economy. We need to continually invest in creative skills, increase social safety net for creative freelancers and help creative workers promote their work.
7. Blue economy
Surrounded by abundant waters and positioned next to the busiest shipping straits in the world, Malaysia needs to better promote a sustainable fisheries industry and other scientific exploration of the sea, and encourage the responsible usage of our maritime resources.
8. Green economy and clean energy
Already possessing a strong electrical & electronics industry, we can further support growth in parallel industries, including environmental sensors, IOT environmental monitoring and renewable/clean energy technologies.
9. Urban renewal, transport, logistics and aerospace
As Malaysia’s urbanisation rate increases beyond 70%, cities will be critical engines of growth. A carefully outlined urban renewal strategy will help improve efficiencies in land usage, promote agglomeration economics and develop our urban areas as people- and business-friendly spaces especially rethink how to adjust post-Covid19. Some public work projects could be designed to improve the urban sector in assisting the construction sector.
Transport, logistics and aerospace are huge sectors which could generate more jobs while pushing Malaysia into more sophisticated technological sector.
10. Defence industry
The promotion of Malaysia’s defence industry will grow new manufacturing capabilities that are transferrable to other manufacturing sectors, whilst improving our security capabilities.
Each of these sectors would need the State to coordinate the factors of production to achieve its intended objective of creating jobs. The State would have to examine its regulatory, investor and coordination roles to make things happen in order to create decently paid jobs for Malaysians. This could take the form of direct investments in desirable sectors, tax and other regulatory incentives, for example around foreign workers, and as a major consumer of the output of these sectors. Likewise, GLCs and GLICs would have to massively review what they do and adjust themselves to the new national objective. With such a targeted and clear intervention, private funding (e.g. the banks and the stock market) will soon follow suit and create a virtuous circle for the economy.