Despite being a person who is generally skeptical to the idea of economic stimulus, I did hold high hope for the second stimulus package or the mini-budget as it is called. I thought this would be the time when we would finally do things differently. Like a crystal glass thrown into the air only to meet the harsh earth, that hope of mine was crudely shattered into millions of pieces.
As it turned out, it was business as usual. Same old same old.
I had expected for a new way of managing the economy that reduces cost of doing business by reducing frictions in the economy. This expectation did not come out of thin air. There were signs to rationalize it.
The biggest was the courage shown to reform the outdated fuel subsidy regime which was costing the country billions of ringgit in terms of opportunity cost. Meanwhile, as the world economy slugged it out, out came statement from the Prime Minister urging countries not to fall back on protectionism.
Then there is the Deputy Prime Minister who is expected to assume the Prime Ministeship soon. He is eager to break from the past and start anew. He wants to differentiate himself from the current administration. Even if he did not want to change, local political circumstances demand change. To ignore that demand is to court doom for himself and his political party. He simply has not choice but to change if he is to survive.
That requirement for change was what fueled my expectation of continuous reform of the economy. Unfortunately, the mini-budget contained more than a billion ringgit worth of subsidy to undo reforms of the past. Clearly the lesson of shortage caused by price and supply controls not too long ago has been left unheeded.
The highway toll subsidy is another disappointment. I have no doubt that the inconsistent nature of the current administration is why that particular subsidy is included in the stimulus package. The users of the highway are not doubt happy about it but I am positively not because I now find myself subsidizing those users. That is what I call highway robbery.
The story on subsidy does not end there because somewhere in the mini-budget speech is a section on what is called the private finance initiatives. PFI sounds attractive with so-called partnership between public and the private sector but the more I learn about it, the more I think it is a farce.
In truth, it is nothing more than a subsidy re-branded under a different term. It is just a term to sanitize the idea of government subsidizing businesses. Under the program, the government will in essence subsidize projects that would otherwise be unviable without government intervention.
Malaysia has a lot of these government-subsidized businesses. They are unsustainable and driven by motives which rarely survive economic scrutiny. They pretend to be public goods so that there is moral justification for the subsidization. It is these kinds of projects which impose efficiency cost on our economy but they continue to not only exist, but unashamedly flourish in our country.
This is the reason why I generally prefer to not have economic stimulus and let the market does it job. The only stimulus I make exception for is generally the one that reduces friction in the economy, like tax cuts. I prefer Darwinisn to rid us of unsustainable businesses so that in the long run, even if we would be dead, at least we could leave our children with a better world.
Economic downturn — call it whatever you like — is a time for exactly that. It is a time for spring cleaning. What we have seen so far only amounts to merely sweeping dust under the carpet, hoping that the dust would go away to somewhere.
By the time the business cycle is complete, we will look back and lament the missed rare opportunity to improve the structure of the economy while stimulating the economy: the stimulus failed to reduce transactional cost. The cost of doing business caused by friction in the economy is not removed.
There were tax cuts announced in the mini-budget but it fell far short than how I would have done it. The RM3 billion tax cuts were done in a manner than only profitable ventures would enjoy it whereas the ones in trouble are the ones that are making losses. Reduction or elimination of taxes that contributes to transactional cost is able to address that problem but it is nowhere in sight.
If that bad news does not move you, wait till you read this: not only the cost of doing business sees no reduction, it is being pushed up instead!
Indeed, initiatives of the stimulus like absorption of excess labor possibly regardless of business requirement and restriction on foreign labor recruitment increases cost of doing business.
Surely, in times when revenue is stagnating, the absorption of more people into various such organizations adds drag to their overall health. Of particular note are government-linked companies which are expected to recruit more people into its programs of fanciful acronym.
On foreign labor, it is true that the issue requires urgent address but such restriction as proposed in the mini-budget is hardly necessarily. There is a Malay saying that appropriately describes the restriction: it is akin to burning the whole mosquito net merely cause of an annoying mosquito.
What requires attention is not foreign labor per se but the recruiting agents and the system. These foreign labors are brought legally complete with permits into Malaysia through our suspiciously porous system without any guarantee of jobs. It is only after they reach Malaysian shores will they start scouring for jobs.
A proper system should do things the other way round because if there is no job, there would be unemployment problem among these foreigners. This will further exacerbate the problem we are already facing in Malaysia in light of weak external demand that is hurting the export sector rather badly. Jobs must have to be guaranteed first before permits are given out.
Cost is further pushed up by resorting to the always popular protectionist policies. Yes, despite going to the international stage to reaffirm Malaysia’s commitment to not to fall back to protectionism, there are elements of protectionism in the mini-budget.
The restriction of foreign labor itself is a form of protectionism but two paragraphs in the speech by the Finance Minister said it most clearly. One of the two indicates that the ”Government will continue to support the development of domestic industries through Government procurement. The Government has mandated the use of local materials, products or services and give priority to local manufacturers in Government procurement.”
This seems that government spending will be done without taking into account the question of price and quality. If the origin of the vendors and manufacturers is the only point of concern, it is likely that the cost of various projects associated with the massive government spending to increase unnecessarily. The lack of competition is known to do that. If the fiscal deficit is to go higher than projected, this is likely to be the principal cause of that.
But clearly, the fiscal deficit is not an issue of concern to the current administration. In order to be popular, these protectionist and Keynesian measures are required.
While the next administration is desperate to be popular, they should be warned of the pitfalls of populist policies. Quick fixes like these have its consequences. Much like the now controversial highway concessionaires negotiated under the Mahathir administration, it will bite back.
First published in The Malaysian Insider on March 17 2009.