I would like to start this subject by relaying a conversation that took place between me and my Arabian friend recently: After a lengthy discussion about global economy (as he was soliciting my opinion about it), he turned the question by asking me about Malaysia: is it affected by the current Global Crisis? My answer to him was as follows: Malaysia went through a severe economic and financial crisis in 1998 and after that we never manage to get ourselves up and running; in fact over these past years we have been trying to crawl out of our predicament. Since we are crawling, the current storm as it pass, will not affect us as much compared to those who are already running (for example: Singapore, Hong Kong, South Korea and China). We are in fact still sick, and therefore any additional sickness will not be felt as much as those who are healthy and suddenly got sick (i.e. additional fever to an already feverish person will be felt lesser compared to those who do not have the fever yet). He was laughing at my explanation as it is in a way correctly describes the situation.
In fact that is the case that we have in front of us. Malaysia, never managed to come out of the last economic crisis fully. Our government budgets has been in shambles for the years; our economic indicators are barely on the borderline of being good; the worst part, we do not even have a clear economic driver for the growth and the country do not have clear direction forward. Off course the whole problem started with the economic crisis, but what follows was a clear crisis of leadership – Mahathir being the one who left the whole country pretty much in an unfinished state; and the next leadership he appointed are among the least capable of the lot. A whole decade since the Crisis has been squandered – less by economic factors, but more of the weak political leadership. (I am amazed that some people still admire and idolized Mahathir for his whining and crying through his website – which makes the readers feel like a Catholic Priest hearing confessions from a sinner).
Now lets us delve into more serious stuffs: What is the state of our economy and what will happen over the near future; and what can and needed to be done?
The state of the economy: As the full impact of the Global crisis reached us, the impact will be quite dire as the economy slows down to about 2% to 3% growth rate. What do these rates mean? It simply states that the economy grows only because of population growth but not due to additional activity (as the rate coincides pretty much with population growth rates). On each individual basis in aggregate, the growth is zero. Which in lay man’s term translates as follows: very tough business environment, sales will drop dramatically (save for basic consumer items), many layoffs will happen, income will either be reduced or not increase at all and so many other forms of hardships. However the effect will not be drastic as what happened in 1998; rather it will be more like slowly creeping problems that will slowly erode the economy throughout the year. In another word, there won’t be sudden massive layoffs, but as the economic situation deteriorates further, more and more people will be laid off from their jobs.
Here lies the real danger of this crisis, compared to 1998, that is its crunching effects are gradual rather than a drastic one, and hence, the government are less likely to take strong action (and in fact they were denying that we do have a problem until of late). This explains why the first announced fiscal stimulus is rather small (RM7 billion or 2% of our GDP), and only of late another fiscal stimulus will be announced (the amount of which is unknown yet). Poorly planned action (as well as inaction) will prove that, they are not only useless to counter the problems, but also a waste of useful resources. Unless the Government admits the full scale of the problem, planned ahead and tackle the problem head on, then only it will be effective (and that is exactly what China and Singapore did announced).
So, what are the solutions to overcome the impending crisis? The first correct and natural answer will be a large enough fiscal stimulus to overcome the slack that will be left by the slowing economy. The problem is how to determine the size of the stimulus, and where to spend such money, and where do we get such amount of money?
The standard answer would be between 10% to 20% of our GDP – which means somewhere in the range of RM40 billion to RM80 billion. Where do we spend the money? This is where the real problem lies. Our government has been very inefficient in its actions and poor track record of years of wasteful expenditure (purchase of the Helicopter for the army is a good example); and more importantly, the lack of transparency and sincerity thereof. Economy is the result of collective action by the government and the public. Expenditures of such magnitude without the society also taking the same stride, will render the spending to be useless no matter how big. Because what matters is not the amount of spending, it is about confidence. No matter what action been done, the private sector will remain unconvinced and hence they will not do their part to participate and be part of the solution. This is where the problem lies.
In regards to the last question: where the money come from? The answer is easy – deficit spending and borrowing. The only problem is – politics and accountability. The public will not agree to deficit spending and large governmental debts, unless they have confidence that it will be spent wisely, since the money does not belongs to UMNO, but the taxpayers. They are the party that will eventually be responsible to erase the deficits and pay back the debts. And again, the same problem becomes the major issue: lack of confidence in the Government. Therefore, at best, I can describe the situation that we are in, as a quagmire of lack of confidence and weak leadership.
By the same token, how could President Obama is daring enough to plan a fiscal stimulus of gargantuan in size and deficit spending for the American Economy? First, due to the confidence of the public in him (approval ratio of above 80%); Second, having a strong team to advise and implement the plan; and third, promise of transparency to the public (even a website is dedicated for the public to view what it will be spent on and track the spending program). Malaysia has none of the three counts.
Are there any other alternatives? Yes there are many other alternatives that can be done beside fiscal stimulus. This will be addressed in Part II of this article.