April 3rd, 2011 by Hafiz Noor Shams
You know how that one particular argument against fiscal stimulus goes. There is a temporal mismatch between crisis period and the actual spending. The bureaucracy and incomplete information act to delay the implementation of the stimulus. If transparency is of a concern, then it will further affect the timeliness of the stimulus spending. The crisis may end well before stimulus spending is done, making the stimulus useless and may even hurt the economy by crowding out private spending.
Well, there is not a theoretical concern. Malaysia is a concrete example.
As of March 2011, more than 2 years after the RM67 billion stimulus spending was announced, more than 20% of spending component of the stimulus (which was really RM20 billion and not RM67 billion; RM7 billion of actual spending as announced in the first stimulus package and RM13 billion for the second) has yet to be spent. This is recorded in the Hansard: read page 74 of the Hansard dated March 29 2011.
Twenty percent unspent as of March 2011.
Now, consider that the Malaysia economy might have recovered as early as December 2009. And everybody knows that the first quarter of 2010 grew by 10.1% from a year ago in constant prices. So, how much stimulus money had been spent by the end of 2009?
December 2009 is an important point because it is arguable that the economy did not need any stimulus by then anymore, if one believes in the efficacy of stimulus spending.
If the growth of the stimulus spending had been linear, then by December 2009, about 30% would have been spent, which is about RM6 billion. To be honest, the spending is unlikely to take a linear function. I personally suspect the figure is lower. Nevertheless, it does give you an idea how much money could have been spent by December 2009.
The point I am driving that it is possible that a majority of the spending was useless as far as cushioning the recession.
The 30% figure is obtained by assuming that nothing was spent prior to the announcement of the second stimulus package in March 2009, which is, really, not a bad assumption. We know that by May 2009, only three quarters of a billion of the first fiscal stimulus was spent. Only half a billion was spent by March 2009. Given that the economy lost RM20 in the first quarter of 2009 compared to a year ago, half a billion was nothing.
Contrast the RM6 billion money spent with this: between 2008 and 2009 alone, the economy contracted by RM64 billion in nominal terms. Remember that the source the recession for Malaysia was reduced international trade. In the same period, net exports itself fell by RM23 billion in current prices.
I also wonder how much resources had been deprived from the private sector due to government spending. The crowding out effect is a concern given that a considerable chunk of this spending was done in time when the stimulus is not required. Signs of crowding out were seen as early as July 2009.
If one accepts the excess capacity argument that government spending does not crowd out the private consumption or investment because of excess capacity due to low demand in times of recession, then that argument has become very tenuous with the spectacular growth seen in the last several quarters. Meanwhile, the crowding out argument becomes much, much stronger.
 — Pakej rangsangan ekonomi pertama berjumlah RM6.695 bilion telah dilaksanakan dengan prestasi perbelanjaan mencapai 93.2 peratus. Pakej rangsangan ekonomi kedua terbahagi kepada perbelanjaan fiskal dan bukan fiskal berjumlah RM60 bilion daripada peruntukan fiskal yang berjumlah RM13.26 bilion. Prestasi perbelanjaan setakat sudah hampir 77 peratus. Jadi masih ada sedikit lagi tetapi nampaknya sedang berjalan dengan baik. [Page 74. Hansard. March 29 2011]
 — See Gross Domestic Product at Current Prices 2007 – 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]
 — See page 5 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]
 — See page 48 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]