Category: Politics & government

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Economics Politics & government

[2970] Politics of living costs and the inevitable language of austerity

Extraordinarily, the Economy Minister has been holding press conference for every consumer price index release in the past few months. Extraordinary, because in the past, CPI releases were treated with silence by the government, and from time to time, cited in largely unread government press statements. But the new Minister, Rafizi Ramli, is focused on cost of living issues. He sees CPI statistics as a way to regularly talk about it.

He is not alone in focusing on living costs. Information Minister, Fahmi Fadzil in an interview recently said:

“The people don’t really care about the slogan, they care about the cost of living, prices of goods and internet access. Therefore, it is essential for every minister and ministry to act immediately to resolve issues of concern to the people.” [Fahmi: ‘Govt to solve people’s issues through Malaysia Madani concept’. Bernama. New Straits Times. January 25 2023]

A very, very short history of living costs politics

Component parties of Pakatan Harapan (and previously Pakatan Rakyat) have a long history of stressing on living costs politics. When energy prices were high in the late 2000s, DAP, Pas and PKR were pressing on the cost-of-living buttons furiously, and that played well to popular anger at that time.

Furthermore, the focus on living costs is a way to shift attention away from race and religion, towards more welfare-based issues. That shift is something to be welcomed, definitely.

Regression in policy

But as I have written earlier, while living costs deserve attention, the the politics of living costs is counterproductive in many ways. Such politics is the reason why policy progress Malaysia made in the past 10-15 years with respect to welfare policy has been partially reversed. Specifically, I am referring to the shift from subsidies to cash transfers. Cash transfers in many ways superior to subsidies in terms of welfare enhancing. Therefore, blanket subsidies and cash transfers are meant to be competing policies.

Yet, now, we have both and the government for the past 5 years have taken the two as complementary. The confused policy mix is proving to be expansive. And it does not help that the government is scared of new taxes, and prefer hard-to-implement-but-low/unstable-revenue taxes to easier-and-high/stable-revenue ones, which causes a severe fiscal constraint.

Rafizi, who previously was a strong believer in blanket petrol subsidies, appears to have walked back, perhaps after realizing the state of government finance, He, along with Prime Minister-Finance Minister Anwar Ibrahim, are now talking about targeted subsidies instead, which has been discussed since at least 2019, not long after blanket subsidies were reintroduced. But having both targeted subsidies and cash transfers are still a confused policy mix. The ideal would be to move to cash transfers fully.

Politics of living costs almost always means large subsidies

The politics of living costs is counterproductive because, with its logical framework, the easiest way to address it is through subsidies and price controls. Other ways—wage hikes for one, or competition regulations—are much harder to implement and takes longer to be realized. The thing with subsidies is (in some ways cash transfers too, but at least cash transfers is much, much more efficient in enhancing welfare while it can always be clawed back via taxes if the wrong persons received it), it tends to take resources away from other things, like funding healthcare, investing and maintenance infrastructure or building defense capabilities in a region has been taking peace too much for granted.

You cannot solve these structural long-term things, if politics of living costs that is always in the now, is the ultimate priority.

The language of austerity

Since such politics takes resources away from many things, it sets the tone of belt-tightening: pay cuts, no pay, RM1.5 trillion government debt (and liabilities), etc. When there is so little left for anything else, usually, a lot of people would be scared and pull back what they could, except subsidies.

Anwar Ibrahim, at a forum in Jakarta, quipped that Malaysia was no longer the country of the 1990s in response to a request by an Indonesia luminary for more Malaysian scholarship for Indonesian students.

Rafizi, just this week, said:

“It is like an overweight person. You know your ideal weight and you constantly remind yourself that you are getting worse,” he said at a forum titled ‘Resetting the Malaysian economy’ organised by Parliament.

“The solution is simple. You need to eat less. If you want to eat a lot, you need to run more. Doctors, gyms will tell you that. Most struggle despite the diagnosis.

“That’s where we are as a country. With the current fiscal trajectory, things will get worse. It takes a lot of courage, political will and cohesion with all stakeholders (to carry out changes).”

[Fixing economy like fat person trying to lose weight, says Rafizi. Joel Shasitiran. FMT. January 27 2023]

Fat. Diet. Those are words one typically associates with austerity. We do not have austerity, but using this kind of language, it would impress many that there is one.

And the source of this language, and the wider fiscal problem the government faces is the politics of living costs.

This second Pakatan Harapan government appears to be repeating some of the mistakes of the first Pakatan Harapan government: too much focus on government financial burden that it was accused of running austerity policies, despite the fact, clearly, there was no austerity at play.

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Economics History & heritage Politics & government

[2966] A short history of soft-budget constraint in Malaysia, and the challenge the Anwar administration faces

For the past few days, I have been thinking about the 2020-2022 roles reversal in the Malaysian version of soft-budget constraint, but ended up trying to trace the history of SBC in Malaysia.

First off, a short primer on SBC: soft-budget constraint is usually a problem between a government, and its state-owned enterprises. In Malaysian parlance, those enterprises are government-link companies. It is called soft-budget constraint because the budget of those enterprises is hard to be fixed; company revenue does not provide a hard limit on company expenditure. The government ends up financing those companies beyond what the latter’s revenue provides. That financing comes in the form of subsidies, loans, tax breaks and grants, and designed to meet various political, social or even economic objectives.

This problem is most prevalent in command economies, but it also exists elsewhere where the market is more open, like Malaysia.

Now, let us dive into the history of SBC in Malaysia.

From the 1970s until the 1990s: NEP and privatization

Malaysia had several influential state-owned enterprises prior to the 1980s and this made SBC a common problem, especially with the New Economic Policy running at full steam.

Luckily for Malaysia, raw material prices—petroleum, rubber, tin—were high at that time, making budget constraint problem manageable. These companies’ budget constraint was soft, but government revenue was bountiful.

Troubles came in the 1980s, when global recession depressed commodity prices. Budget constraint suddenly became very pressing, when government coffers could no longer support growing expenditure needs. Here, Mahathir Mohamad, addressed it through rapid and widespread privatization. Market discipline was instilled, and these companies found their budget constraints becoming stricter than in the past.

During the 1990s, through rapid modernization and super economic growth, along with privatization, SBC seemed like it had been consigned to history. SBC became a curiosity. The government enjoyed large growing surplus, and there were fewer companies requiring government support, save several instances where Mahathir insisted on import-substitution industrialization (Perwaja?).

When the Asian Financial Crisis hit Malaysia, all the bailouts meant the return of SBC.

SBC of the 2000s

The 2000s is significant in this telling because it was during this decade that off-budget spending took off earnestly. Government revenue did not grow fast enough to meet the country’s rising spending needs, especially so soon after the late-1990s recession. The government overcame its finance gap by devising clever methods to circumvent various accounting rules, and expand its spending capacity enormously. The methods are complex, and I will not go through it here except by sharing a post I wrote several years back, which explains various liabilities the government carried, but previously undisclosed.

Expanding off-budget obligations necessarily means growing SBC problem. Off-budget approach gave the government extra leverage, but it does not mean the government not having to fund them.

Off-budget approach, and SBC, came under intense scrutiny when 1MDB corruption came into the picture, and brought onto the government severe public demand for transparency. That demand, along with other concerns, led to collapse of the Barisan Nasional government, and the rise of Pakatan Harapan administration.

PH attempted to solve the problem by instituting greater transparency (this is part of the RM1 trillion debt and liabilities controversy), putting some off-budget spending back on budget (this partly raised the 2018 fiscal deficit ratio) and adopting accrual accounting, to make sure all financial obligations get recorded properly. But the SBC problem, intertwined with complex off-budget method, has become so big that it needs time to be addressed. And PH fell short of two years into office.

Reversal of roles during Covid-19 pandemic

The fall of PH coincided with the Covid-19 global pandemic. The new government needed to expand its spending fast to save lives and to preserve the economy’s productive capacity. But those in power were reluctant to boost government spending, possibly out of inexperience while facing a steep learning curve. With that reluctance, they looked to state-owned enterprises for solutions.

This caused a reversal of roles between the government and its companies. The government leaned on its GLCs to support its spending needs, instead of the other way round in the normal SBC problem. This made government budget to be softer than it was. GLC’s capacity became the government’s capacity.

Those financial supports from GLCs to the government come in the form of extremely long delayed payments. More specifically, the government throughout 2020, 2021 and 2022 engaged in massive subsidies and these subsidies were financed by the GLCs. The GLCs were supposed to be reimbursed immediately but that did not happen. To put it more plainly, these GLCs ended up financing the government.

For proofs, I would encourage everybody to inspect some of the largest utilities-GLCs out there. Check their growing receivables listed in their balance sheet (receivables refer to amount owned by buyers to suppliers).

There is another way to understand the roles reversal: these companies’ budget constraint becomes stricter than it was during normal times. Soft-budget constraint at the GLC level becomes really hard-budget constraint.

The problem became more complex in the post-Covid recovery, where subsidies ballooned tracking surging commodity prices.

2023 and into the future

Unlike the government, companies have troubles going over their budget constraint without outside support for too long. The cash crunch is coming.

The new Anwar Ibrahim administration will have the misfortune of having to address the roles reversal problem. It will be painful, involving large payments to be made/reimbursed by the government. Anwar Ibrahim the Finance Minister does not have much time: the cash crunch at several GLCs is coming.

That will add pressures for a broad tax hike, that Malaysia needs even before the pandemic.

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Politics & government

[2965] Anwar Ibrahim and Pakatan Harapan are a means to an end

It has been a long wait. Anwar Ibrahim is finally the Prime Minister of Malaysia.

Many have remarked how he deserves it. Or that he has been cheated out of it before. Or everybody has had their chances and now, it is Anwar’s turn to rule. Or he suffered to get here.

But, I tell myself that it is never about Anwar Ibrahim. Anwar, and Pakatan Harapan for that matter, is a means to an end.

The end is something much bigger than any one of us. The end is a Malaysia where everybody has a place under the sun, living in dignity and as equal, prosperously.

It will not be easy to achieve that, especially when even such a goal is not quite concrete. It is fluffy. It is intangible, at least the non-economic part. In fact, it is clear not everybody will agree—vehemently disagree at that—to the kind of equality envisaged in that kind of Malaysia.

The first step towards that end, is clearly reconciliation between major groups in the country, and some kind of compromise. But that reconciliation cannot be about making everybody happy. There are principles and ground rules to be adhered to. That we are all Malaysians, that we all have dignity that must not be violated. Reconciliation does not mean reconciling everything. Something, like deep fascism, cannot be reconciled with inclusive values.

The meeting ground has to be reasonable.

Ultimately, the core of that inclusive values, to me are (among several others) the end to the means that are Anwar Ibrahim and Pakatan Harapan.

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Politics & government

[2962] 2022 manifesto represents progress in PH policymaking

Going through Pakatan Harapan’s latest 94-plus pages manifesto reminds me how far things have progressed over the last 10 or so years. By things, I mean the current component PH parties’ ability to churn out policy documents, and overall sophistication in promoting policies. Ten or 15 years ago, PH struggled to produce such policy documents.

The inability to do so was among others due to lack of manpower or professionals in various fields within party ranks and volunteers. In the past, most professionals or even experts stayed well in the private sector. If they had political ambition or interest, they would join Barisan Nasional. Contributing to parties like DAP and PKR (or then Pas) then meant career suicide. Few were willing to sacrifice their living standards for partisan politics.

That has changed as the urban middle class now relies less on  government largess, and with private employment opportunities well diversified beyond the reach of partisan hands. That trend, I think, comes as multiethnic urban voters shift their party preference from that of BN to PKR, DAP and their various allies over the years. Now, PH has access to those professionals and experts.

Even when DAP and PKR were weak during those years, they were measured on a harsher scale versus the one faced by BN. BN would be allowed to play on noob mode, but the public insisted DAP and PKR played only the hard mode. Where is your manifesto? Where is your alternative budget? Where is your shadow cabinet? That BN never took their own manifesto seriously was never questioned.

Prior to the 2010s, this was perhaps understandable because most would ask, why change when things are going okay? Reading We Are Marching Now recently, most voters then were interested in stronger checks and balances, but not a change in government. Voters were scared of change and if they were to be convinced of change, then advocates of change would need to surpass a very high bar before any convincing could take place. The status quo was easier and familiar.

But by the 2010s, changes are no longer something scary. And PH is more than capable of providing policy alternative to back its overall rally for federal power.

As for the PH manifesto itself, there are measures that I disagree with. Furthermore, I do feel there is an element of kitchen sink in it. Nevertheless, I suppose I need to remind myself that this is the nature of coalition politics, a compromise between equals. Messy but that is democracy. What is important is that, there has been progress over the years, and that progress as represented by the latest manifesto is not small by any measure.

Progress in developing policy-making skills among PH members have been so significant in the past 10 years that the corporate sector no longer could ignore PH manifesto.

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Politics & government

[2961] Umno’s calls for stability is a racketeering slogan

Stability is Umno and BN’s rally cry for this general election. But it is a disingenuous political messaging given that all recent instabilities are directly caused by Umno and their allies.

Umno’s argument for stability is akin to racketeering. Wikipedia has a concise definition: when somebody offers “a service that solves a problem that would not exist without the racket.” One concrete example involves a shop paying protection money, which the protection is from violence perpetrated by the fee collectors. Yet another concrete example is, well, Umno’s version of stability.

Umno and their allies, and this included Pas until recently, manufactured ethnic tensions throughout the 2018-2020 Pakatan Harapan administration. The manufactured inter-ethnic crisis brought instability to the country, all with the hope that Pakatan Harapan would fall, and be replaced with a government that Umno would be part of. Pakatan Harapan government collapsed under the pressure as Bersatu—naive and shortsighted as they are—fell for the racket.

Ethnic tension quietened once Umno were back in power, which highlights the fact that high ethnic tension during that period was unnatural. It was manufactured by partisan forces that were Umno and Pas. It was a racketeering done at the expense of the country: a dishonest scheme to obtain power and money. To more than a few people, it was a scheme to avoid jail time.

Despite being part of the federal government after the fall of Pakatan Harapan government, Umno members were unhappy that they played second fiddle to Bersatu. To address their unhappiness, Umno sabotaged their own government for their own partisan benefits. Instability ensued until they won. Stability is something Umno want only when they are at the apex of power. When they are out of it, stability is a liability to them and must be pushed aside, regardless the cost to the country.

And the country paid the cost: Malaysia lost anything between 2 to 6 weeks of reaction time during the Covid-19 economic and health crisis. While Umno maneuvered for private partisan gains, thousands paid the price with their lives. More than 36,000 deaths in Malaysia are linked to Covid-19 up to this day. Millions more suffered economic hardship due to incompetent and late handling of the crisis, as the Umno raced to secure their political positions.

Ultimately, the 2018 change in power itself was, in a large part, caused by Umno and their corruption. 1MDB was the straw that broke the camel’s back. It was the final factor that made public anger go bubbling. Without the 1MDB corruption and the subsequent power abuses to cover up the crimes, Malaysians would not have been so angry to do what they have done in 2018. And the people did not make a mistake in 2018 as Umno alleged. The people went out of the their way to make sure the check-and-balance mechanism worked, in spite of all the institutional abuses by Umno.

If Umno really want to label the 2018 democratic change as instability, then everybody should see through the veil: that the source of the so-called instability is Umno themselves. Truly, Umno has no moral authority to campaign for stability and their calls for stability is nothing but a racketeer’s slogan.