The traditional understanding of economic growth has its fair share of criticism.  It has been criticized as being overly materialistic and overly focused on production with disregard for its side effects. Those with esoteric worldviews would accuse such progress as spiritually empty and unfulfilling.

While it is true that such understanding of growth does not take into account our human experience comprehensively—and possibly nothing can—it is very important nonetheless.

Try living in a period when the gross domestic product and its typical variants that measure the mainstream idea of economic growth register a contraction. All the fancy criticism will take a backseat as very real economic pain hits far too many persons.

It is in that sense that the traditional idea of economic growth matters. There is something profoundly substantive about it; when economy does not growth, you will feel it, whatever your reservations about the mainstream understanding of the economy.

Yet, this piece is not a defense of the status quo, even as I do sit in the status quo camp.

Rather I write this to criticize those who pursue growth for growth’s sake. The way a society grows matters even within the current status quo framework. As a result, there is such a thing as mindless growth and mindless growth is one that focuses fully on how fast the GDP grows and not how it grows.

The clearest example happened on the days after the official GDP figures for the second quarter of 2012 were announced in the middle of August.

The Malaysian economy grew by 5.4% from a year ago in real terms. The growth rate beat market projection and forced the gloomiest of private economists to upgrade their economic projection for the whole year.

While external factors continued to exert strong negative influence on growth, the domestic economy grew strongly still. The primary reason why the domestic economy grew was due to extraordinarily strong private consumption.

It is hard to explain fully why consumption in the private economy—primarily spending of households as well as private firms—grew as strongly as it did. Troubles abroad should affect domestic sentiment despite the excitement surrounding various projects related to the Economic Transformation Program embarked by the government. But it did not affect sentiment too badly.

One explanation for the strong private consumption growth was the cash transfer program (Bantuan Rakyat 1Malaysia or BR1M) which was introduced by the federal government. The cash transfer increased household wealth for some periods. The increased wealth effect in turn encouraged households to spend more. In a big way if I might add.

The commentariat has shared its piece of mind on the matter. Some has praised the cash transfer for boosting economic growth in Malaysia. The business section of the Straits Times in Singapore is one of which have sung praises to the cash transfer for the GDP growth that it had brought.

Unfortunately, this kind of growth is not the best of all growth possible. Such cash transfer is always merely temporary and growth arising from such temporary measures is not sustainable.

While cash transfer does have its merits within wider context—for instance, cash transfer is more efficient and less wasteful that subsidy in improving individual welfare from microeconomic point of view—growth arising from cash transfer should be received with a measured nod, and not by throwing in a party. One should acknowledge the growth the cash transfer program brought but one must also understand that without it, growth would have been less fantastic.

The counterfactual is important because it describes the more sustainable growth going forward.

Consumption growth arising from freebies from the government is not nearly as good as consumption arising from returns from productive investment or simply real growth in income won from effort. Growth from the latter is the sustainable growth and it is sustainable growth that will determine the long-run or future state of the economy, but a one-off freebie.

To put it differently, one wants growth from productive enterprise and not from an effort at redistribution.

Redistribution of wealth—whatever its merits income or wealth egalitarian perspective—cannot really be created by merely redistributing wealth. At risk of committing a tautology, one has to create wealth to create wealth in the big, long-run picture.

In contrast, to put it simply, cash transfer is only an act of borrowing from the future to consume today.

This is one aspect which growth for growth’s own sake is wrong. To repeat the message, how the economy grows matters.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on September 21 2012.

5 Responses to “[2598] Growth yes, but not by all means”

  1. on 22 Sep 2012 at 22:03 hishamh

    Ah, but did BR1M have that big of an impact, considering it was only about RM2.5+ billion? Even at the most generouos multiplier estimate (2x) and spread over half a year, it doesn’t explain even a quarter of the increase in private consumption this year. Given an estimated MPC of around .5 and a more realistic multiplier of 0.6-0.8x, I don’t think BR1M was a big factor at all.

  2. on 27 Sep 2012 at 12:05 Hafiz Noor Shams

    I’ve revisited the issue just now and I did a back-of-the-envelope calculation. It showed BR1M may have some significant impact.

    Assuming the RM2.5 billion was fully spent in 2Q2012 (with 2Q2011 private consumption NGDP RM101.3 bilion and 2Q2012 NGDP was RM122.9 billion, i.e. 21.3% growth), substracting out the RM2.5 billion does suggest that nominal growth would have grown by 18.9%. That’s 24ppt difference.

    Using 2Q2012 sort of deflator, it suggests real growth would have been 6.6% instead of 8.8%. With this, overall RGDP would have been 4% instead 5.4%.

    But I admit it’s unrealistic to expect the recipients to spend all of the money in just one quarter.

    But even if we applied 0.5 multiplier, nominal growth would have been 20.1% (versus actual 21.3%) and real growth would have been 7.7% (which suggests a typical 7%-ish real private consumption growth that we have seen in the past recent quarters). This further suggests that RGDP for the quater would have grown by only 4.7% instead of 5.4%.

    So, I do think BR1M could explain a huge chunk of the extraordinary consumption growth in 2Q.

  3. on 27 Sep 2012 at 16:55 hishamh

    Hafiz, nominal private consumption in 2Q2012 was 112.9, not 122.9.

    Regressing the nominal private consumption series against a trend variable (with a structural break in 4Q2008), the 2Q2012 number is pretty much on the trend line.

  4. on 27 Sep 2012 at 17:52 Hafiz Noor Shams

    Haha, yeah, you are right about the 2Q numbers. Silly mistake. My bad.

    But the corrected number results in about the same real growth figure.

    Take RM1.25b (=0.5*RM2.5b) worth of BR1M off RM112.9b, the nominal growth would have been 10.2% (vs. actual 11.4%).

    In real terms, it might have been RM1.03b worth of BR1M (with 1.22 deflator). Take that off RGDP RM92.6bn, the real growth would have been 7.6% (vs. actual 8.8%). So in fact it has a (slightly) bigger impact since it involves a smaller (but truer hah!) number.

    I’ll look at the regression soon after the budget. But being on trend line does not solve my problem. It still raises the question, “is consumption on trend because of BR1M or regardless of BR1M?”

    If consumption is below trend after discounting for BR1M, then we may be looking at a continuing slowdown. If it is still on trend after discounting, then we can safely say BR1M was insignificant.

    I’d imagine it would be really hard to model this through regression.

  5. on 28 Sep 2012 at 15:16 hishamh

    Yes, after I posted that reply it occured to me we’re staring straight at the Lucas critique.

Trackback URI | Comments RSS

Leave a Reply

*