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Sakmongkol ak 47

ariff.sabri@gmail.com

Sunday, 15 March 2009

More on the RM60b stimulus plan.

I have wanted to post this article since two days ago. The internet service in my area seems to have broken down which I hope is only temporary. So here I am, posting from one Old Town white coffee in Kuantan.

It's time now for a more sobering analysis.

Let us begin by asking why the Asian economies such as ours are susceptible to the contagion effects of bigger economies. Many of us have heard the saying- when America sneezes; the rest of the world catches a cold. Probably no economy is more impactful than the US economy on the affairs of mankind. At first our economic managers refused to acknowledge the imminent dangers. They said our economy has the resilience to withstand the onslaught of the American financial disaster. As the realities set in, our economic managers became less voluble. Notice how conciliatory the tone of our leaders sounds when they can no longer tai chi the bad news. The usual explanation is that our economy is heavily dependent upon exports. This is of course true. But if I may ask- why is being dependent on exports so especially bad for an economy like Malaysia's?

Probably our vulnerability is caused by the type of products we sell. One answer is that our exports like that of other Asian exports are often consumer durables. This makes purchases of such goods especially easy to postpone. But suppose our exports are more of the services kind? They have proven to be more robust. Maybe, it's time to look into that dimension?

If our economy is designed to that direction, that would require anticipatory planning. Let us say, we have certain types of industry we want to embrace. That would entail preparing our resources to accommodate that direction. Example: I read with keen interest, how Singapore prepares for its gaming industry. Years before the facilities are completed; Singapore's learning institutions started courses relating to the casino business. I don't know anything about the gaming industry, but I presumed it demands a wide range of servicing skills from people involved in it. This is an example of anticipatory planning.

Our economy is also vulnerable perhaps because our producers have chosen high fixed costs in a way that requires steady or rising revenue over time. The usual way of incurring high fixed costs is by excessive borrowings with little collateral. That is their version of being highly leveraged without taking on much explicit debt.

Perhaps, as another lesson, the finance minister may want to instruct his economic officers to study the many different ways there are to leverage businesses?

In other words, I am requesting our economic planners and managers to be careful when giving reasons why our economy is vulnerable. Just by saying, oh! It's because we are export driven may not be satisfying any more. That also shows, that your explanations are no longer absolutely believable.

Actual money into the economy?

One commentator applauded the step taken to provide a financial guarantee scheme for credit facilities that will encourage banks to lend. This he hopes will induce banks will be more willing to lend and companies will start to spend more and that will have a multiplier effect.

Ok, I second the motion. Even though I am not sure whether guarantees are actual injections of money into the system or are just illusory to induce lenders to part with money. We do this to instil confidence- the one commodity that is sorely lacking with the government at this present time. It is like someone commented- the RM60 billion is a mix of some real money and just guarantees - to throw for the next two years to keep jobs and confidence for those in the danger of losing one or both, particularly the politicians.


But how about considering my above suggestions? I said the ones who hoard money are the banks. To induce them to be more charitable, let's impose a tax of excess reserves and stop paying interest on reserves. These can have the effect of making money that stays idle and less productive untenable. It's better to let money circulate and earn revenue by applying them to businesses.

What I am saying is, maybe a more assertive action taken by the government rather than reliance on a relatively passive way of financial guarantees is a better way to induce lenders supply money into the system.

Let's play with some theory here. The monetarist looks at the world in through the eyes of the Quantity Theory of Money.

All over the world, the rage now is we are all Keynesians. Meaning we accept that government's role via their spending is more important than in the variation of interest rates (monetarists prescription) to goose up the economy. Let us view government spending as shocks to the economy. That is, it influences the operation of the V as in Velocity of Money.

Many of us are not doctrinaire economists in the sense that we insist only our way of doing things is correct. Always, our question is, will this policy work? This should be the mantra of policy makers rather than aligning themselves with doctrinaire schools of economic thought. But let us indulge in ourselves and see how this thing about government spending figures in a monetarist framework.

In the realm of theoretical debate between Monetarists and Keynesians for example, it is still possible and reasonable to discuss fiscal policy in a monetarist framework. The monetarists have their quantity theory of money MV=PY, money times velocity equals prices times real output.

In the long run we know that real GDP is pinned down by real factors (labor, capital, technology, institutions and so forth) so increases in M will increase P proportionally. That means in the long run, increases in money supply leads to increase in price only without impacts in output (GDP). But in the short run there are plenty of reasons to think that increases in M can increase Y. That is the principal reason too, why the government wants to inject liquidity into the market. At least they know this part.

But in the equation we also have V which is how fast money turns over. Changes in V can be looked upon as shocks in spending. Now, spending shocks can be caused by consumers and government. This is because government behaves like a consumer too. Its eagerness to spend pulls the economy into a high-employment, high-pressure boom.

M and V in the equation operates in identical fashion and thus logically must have the same effects for the same change. In other words, when you accept that (M) is potent then V must be potent as well and V is fiscal policy. In the short run, just as the supply of money influences GDP, so it is with V that operates in the same manner. Reduction in money supply (credit squeeze, tight monetary policies) withdraws financing ability from the system. Hence, in the current recession for example, apart from decreasing (M), (V) too has fallen by a lot and it is dragging down Y. So what do we do?

We can counter with an increase in M (monetary policy) or by an increase in V (fiscal policy). So even in a monetarist worldview which revolves around the equation MV=PY, fiscal policy is not impossible. This is because MV=PY is not a true model, but a way of looking at things by an economist of a certain persuasion.

Our only reservation is that V driven by government is maybe too slow or too wasteful to work well. The government cannot replace the market system to bring about economic changes. But as we have said above, we won't be caught out in doctrinaire debates. We are talking about livelihood here, jobs, revenues and earnings.

What the finance minister is doing now, if I am looking at it from MV=PY is making V an endogenous function of Y. In other words, he accepts and the rest of us, agree, in these trying times, government spending is the answer to our problem. So we have him saying equally boldly: "We cannot depend on orthodox economic recovery policies. We must be bold in formulating innovative approaches to deal with the crisis."

Will he be tolerant about some unconventional thinking such as this? Providing financial guarantees is not exactly out of the box thinking.

Therefore in order to invigorate the economy, the finance minister must make sure the government delivers. That calls for a sound delivery system. Has he addressed this issue?

Further, the V part will be influenced by good governance, transparency and so forth. Government actions must as far as possible imitate free market actions. It must address the issue for instance the lack of details and monitoring system to track spending of the allocations.

The government has a window of an opportunity to do something with the RM60b( our money by the way). It has the option of fortifying its old ways of doing things- through government agencies execute economic development on behalf of the people or it can shore up freedom of choice for the people. I am only concerned that for people who think it's their money they are spending on us, the little napoleons will be salivating at the prospects of handling the huge amount of money. If that happens, without the monitoring apparatuses which we pointed out above, then the whole stimulus package will be a restatement of Malaysia's old, government-knows-best policies. And like the very apt comment given by an analyst- "It's the opposite of what Malaysia really needs, which is to ditch this thinking and shift to a business climate that encourages private investment and entrepreneurship".

The finance minister has said much about his economic philosophy. (If he has any), but all indicators point to the almost certain fact Najib Razak is no free-market reformer. How so? We have not seen much in the way of steps taken to release money directly into the hands of private spenders- the consumers and investors. He hasn't done much to address the issues of reduction in personal taxes, corporate income taxes that could have released more liquidity into the market directly. We have not seen much about assistance in the form of tax cuts or cash grants. Singapore and Taiwan for example are up and about implementing corporate tax cuts to boost corporate earnings as well as income tax cuts to help boost disposable household income. Not much here in Malaysia- the finance minister has shown little about the means to boost earnings by way of corporate or personal tax cuts. By not doing much in this department, the government misses the opportunity of immediately releasing money to Malaysian households.

Hence its back to the system of father knows best for us. The finance minister is no great reformer in this sense. He has not recognised the profound importance of giving the people freedom of choice. A democratic government such as ours, must conduct is economic planning in a manner which preserves the maximum possible freedom of choice to the individual citizens. Let's see more money directly in our hands.

12 comments:

GreenBug 15 March 2009 at 12:44  

Someone (I won't name him here...) said the main reason why there is a lack of capable and competent people to run some of the key ministries in this country is because the civil service is almsot exclusive and selection and recruitment is not based on meritocracy and very biased. What do you think?

sakmongkol AK47 15 March 2009 at 12:52  

greenBug.
i hv said in front of Navaratnam, in one dialogue session in Pahang, that our civil service's standard went down when the govt started its malay-nisation of the civil service. i am a Malay- but get incensed when capable Malay managers were bypassed by less able ones. if we want to do things, lets do it right the first time. that may be our only chance. choose la the best malays for the job. our civil service is not a dumping ground you know.

Anonymous,  15 March 2009 at 13:32  

1>> people spend (apart on the necessities) only when they are confident that they will have a steady rising income in the future.
2>>People will try to save more of their current income when they do not have as much confidence in their future income.
3>> Savers are squeezed when policies to encourage bank lending are put into place .
4>>The lower returns on savings plus the depreciation of investments including stocks and properties will further erode confidence.
5>>Continuing political turmoil is alienating the people from the leadership to the extent that there is the belief that whatever steps introduced by the government is merely to protect their own's as well their cronies interest at the expense of the rakyat
6>>The general populace is not impressed with the GLCs under the current management.This is due to the many missteps over the last few years ( Maybank acquisition,Telecom paper shuffling,UEM paper shuffles and 2 years delay and bloated costing on the Penang Second Bridge,Sime Darby's Labu,IJN and the merger exercises,MAS paper profits and fuel hedges..the list goes on).Thus the corridors,the Rm 10 billion fund is deemed to be a last ditch life support for GLCs.
7>> People want to have firm decisive leadership.For instance flip flop on the increase in highway tolls (and thus govt giving compensation to the toll operator) in effect meant that a poor Mak Cik in Kota Baru is paying tolls for a Cayenne owner in Damansara Heights.The concept of user pay is basic to all privatisations thus if govt should resolve toll issue at source.
8>>People have no confidence in govt spending on infrastructure due to the bloated costing,the middlemen,the poor quality of design and work and the delays.
9>>creating more govt post is NOT the ideal way to create employment as only those who are unemployable elsewhere will work with the govt.
9>>The mini budget have not addressed govt bloated OPEX.Any responsible CEO will address cost cutting as major part of the "stabilisation" strategy.As such...paycuts for Ministers,Senior govt servants,GLCs bosses..and general ideas such as economy class travel,Hotel Malaysia instead of Hyatt overnights etc will show the rakyat that the leaders are sharing the burden too.

We need the belief..but sadly the Stimulus Packages are doses of the same old tired formula,

Anonymous,  15 March 2009 at 14:21  

Good points...and very telling comments.

Yes,we no longer believe that the govt can deliver the goods due to the glacial progress over the last 8 years.Its like weddings with lots of brouhaha and confetti but no procreation.

We hope PM2B will make drastic changes to his team i.e
**Experienced,professional,clean and intelligent Ministers ( more focused on managing then politics)
**action orientated,well proven entrepreneurs to lead the GLCs.

Good point by Anon on the "cost cutting "..apart from channeling the savings to more useful pursuits,the PR impact is considerable.

And Dato...I agree totally that more money should be put in the hands of the people with tax deferments,breaks and special loan schemes.The middle class are especially hard hit and they are the fountain of consumer spending and entrepreneurship.

The sad thing is that the govt was in denial only a few months back...and a bit subdued now but still in denial.We will be extremely lucky not to see a negative 3.5% for 2009.

And PM2B blog invited the rakyat to contribute ideas for Stimulus 2 >>none of the ideas was adopted.

Anonymous,  15 March 2009 at 15:33  

Govt suppliers and contractors buys materials from smaller manufacturers and mark up 30%..and very often delay or not make payments to the supplier.
Govt should adopt nominated supply contracts..whereby purchase direct and only allow small profit and attendance of 6 % to the main supplier/contractor.
Govt save money,small suppliers can get more profit and sure timely payments.
And with the many expected unemployed graduates can create actually productive post to manage the supply chain.This can help Bumis too.
Like Dato said,must give more money to the rakyat and not only the big boys.

Anonymous,  15 March 2009 at 15:38  

Buat apa bagi lima ribu ringgit untuk kereta?Masaalah nya loan nak beli kereta baru tidak approve..buat lah Dana Kereta macam dulu ada Dana Modal untuk tolong bank.
Ini semua omong2 kosong,idea tak pikir habis2 oleh orang ada kepentingan lain.

Kerajaan kita hanya tolong syarikat besar2 dan korporat.Kalau mereka tidak bagus baik bagi bankrup sebab kalau tolong abis beras saja.Bagi lah peluang untuk yang bernas,jujur dan berkebolihan.

Anonymous,  15 March 2009 at 16:39  

kereta aku 15 tahun lagi bagus dari proton...gearbox tak perlu tukar lagi.Anyway..mana nak fikir beli kereta ,loan rumah pun tak tau mana nak cari???
Gaji kena potong,overtime yilek..nih 5 ribu dah kerja bodoh

Are You Gonna Go My Way,  15 March 2009 at 16:58  

Dato,

As a layman who knows little about economy, can I give few suggestions.

1. let people age 50 to withdraw all saving in EPF. They can still work for another 6 years. That way they would be more incline to invest in business and spend because they have another six years to rely on their salaries so they wont be afraid to spend or do business and they wont worry about getting back ROI fast.

2. Give people at the age of 40 special one time loans to sort out their life. Around RM30-40K would be sufficient to start small business or they can join venture among themselves to raise bigger capital. I believe people at the age of 40 are matured enough and those who made financial mistake in their younger days have a chance to rectify it.

3. For muslim maybe we can use zakat money , tabung haji etc..I agree with you, let the people handle some of the money. If government can allow GLC to lose billions why not try in on the people. We may be better in managing money and make profits.

Anonymous,  15 March 2009 at 17:33  

AYGGMW..

the difference between us and GLCs is we can't do consultant geekspeak stuff (economic profit,Returns referential to irredeemable sophomoric comestibles warrants) ,we don't have multicolor books,we can't draw fancy charts and mindmaps and we don't have Armani 4 button suits.

How can anyone have trust in us then?

Anonymous,  15 March 2009 at 20:18  

Why I am disgusted by the RM60bil stimulus package.

http://www.facebook.com/board.php?uid=39745727767#/topic.php?uid=6778953884&topic=7965

Bontot Ku Bukan Utk Anwar,  15 March 2009 at 20:40  

Anon at 15 March 2009 20:18

If you just want to promote this guy Vijay fcukfacebook link, just go somewhere else. We’re are not interested.

You guys are all the same, change the government to PKR and DAP and all will be living in heaven and all economics problem solved. Never give any good suggestions, just complain here and there. Vijay fcukfacebook are full of malay, umno and islam haters. Go fcukfacebook somewhere else.

Navi 16 March 2009 at 12:23  

Dato,
Let me understand better. The few hundred richest people in Malaysia control more funds than the rest. Do they spend their wealth or hoard them or is their wealth in the form of assets and not liquid cash?
The millions in the lowest category, the wage earners do not save as their earning is probably not enough to meet their requirements. They would probably be in debt.
Like me, millions too would be in debt with banks and finance companies on hire purchases and housing loans.Where is the spending power even if we are holding on to jobs. Today's ringgit was yeaterday' seventy sen.s.
With retrenchment and the large numbers of unemployable graduates, many families are going to find it impossible to have a square meal a day.
Would not the economy be better stimulated if the lower category of people in need had been provided
some form of cost-of living allowances to tide them over during the economic crisis. Every sen given will be be spend. On the other hand giving money to industry to produce more would seem contrary to stimulus, as why produce more when the would be consumers do not have the funds.
What is needed to stimulate the economy is raising salaries of the lower ranking employees, providing COLA for others as well as pensioner, and monthly allowances for all registered retrenched workers and unemployed graduates.
I will stop here before I confuse myself further.

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