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Conflict & disaster Economics

[2934] Hindsight is 2020, myopia is 2021

We did not know many things about Covid-19 back in 2020. Early on, the authorities and health professionals were urging the public not to panic by highlighting the probabilities of dying from other causes were higher than Covid-19. The intention of avoiding panic was probably good: by end-January 2020, I was looking for face masks to buy but most stores ran out of it. We know better now that the logic was wrong. Covid-19 is serious business.

We made missteps. The Pakatan Harapan government was worried about border closure and its effects on the economy. Nevertheless, travel restrictions were imposed eventually, though not comprehensive.

Then as we were learning about the virus further, party politics got in the way. The unexpected political maneuvering stole from Malaysia several weeks’ worth of lead time to fight the pandemic. At this time, members of Perikatan Nasional and their collaborators appeared unconcerned with the virus and took time to buttress their political position. The new government was lucky because Pakatan Harapan’s last act before their fall was to launch an additional government spending to fight off Covid-19. That bought Muhyiddin Yassin, the Prime Minister nobody elected, a little time as the health crisis worsened quickly.

Eventually, his unelected government got it right: lockdown with financial assistance provided. Lockdown implemention was chaotic, and the accompanied assistance should have been bigger. But the mistakes were forgivable however angering. Year 2020 was a new reality altogether and the hesitance in bringing in the big bazooka was understandable although less than ideal.

Moreover, it was a new government facing a steep learning curve: new ministers on the job had little understanding of fiscal levers, while facing an unprecedented crisis. Like I said, less than ideal but we had to make do.

After several months of mucking around, it seemed Malaysia was succeeding, in large part due to the civil service. The public sector had handled outbreaks before albeit on a smaller scale. That institutional memory served the country well at a time when the executive was scurrying in the dark. Additionally, there were economic response templates from other countries to follow by April-June 2020. Malaysia copied it.

There was damage to many aspects of Malaysian life. Democracy and basic rights were sacrificed. It was a dangerous sacrifice with adverse long term repercussions, but we could argue we skipped the worst. Whether we would pay for our sins is yet to be seen.

In the meantime, we bragged about our success while multiple countries, particularly the US and UK, were bungling their responses.

We bragged so much that overconfidence overcame us. That led us to repeat the same mistake we made in February-March 2020 in the second half of the year. Just like when party politics interfered with crisis management at the start of the pandemic, unreasonable political ambition to take over Sabah state government in the middle of the pandemic brought in the second wave.

This time, the trouble was so not new. There was less excuse to be made. Double-standard regarding quarantine during and after campaigning, and other questionable decisions by the government, made things worse. It was during this period health measures suffered from serious credibility erosion.

But we all need reminding from time to time. Sometimes, we make mistakes because we forget our lessons.

The point is, in retrospect, throughout 2020 we probably would have done things differently. But things should be judged not by how we would have done it differently knowing now things we did not know then. Instead, it is only fair to judge previous decisions based on how they were decided based on the best available information at that time. And we did not have the best information for most of 2020. It was all too new.

We can be angry about 2020. I still am. But that was how the cookie crumbled. Things happened and decisions were made based on the best, or second-best available information.

That excuse can no longer be used for 2021.

If hindsight is 2020, then myopia is 2021. By this year, we know more and we know almost enough information to fight the pandemic effectively. Yet somehow, we refused to use the information.

The disastrous handling of 2021, I think, could be traced back to November 2020, when Budget 2021 was debated in the now suspended Parliament. The budget could have been used to fight the health and economic crises comprehensively.

But we did not use that opportunity.

The government of the day preferred to declare victory prematurely, and engaged in fancy public relations exercise. A sharp V-shape recovery was taken as the base case scenario: base effect was taken in as victory. “This is the biggest budget in history!” declared the government, somehow forgetting the budget of the current year almost always the biggest in history. Rarely does government spending fall. Such was the nature of the government’s meaningless sloganeering to invoke awe in the unenlightened minds.

The budget was big, but it was just not big enough. Budget 2021 rested on rosy assumptions. So rosy that the government intended to resume fiscal consolidation immediately while the economy was still in recession.

So intent the government was on fiscal consolidation that the RM5 billion meant to vaccine-related purchases were not actually included in the Budget. How outrageous could it be?

Constructive criticism came in quickly. The government was told the budget was not big enough. The government was told it should take a more precautionary projection. The government was told to widen the deficit significantly to fight the pandemic off.

Critics were proven right. Budget 2021’s rosy assumptions were dismantled just 4-5 months after it was passed. In November 2020, the government aimed to cut the 2021 deficit ratio to 5.4%. By March 2021, the figure was raised up to 6.0%. It is likely higher now given how things are going. Not only was fiscal consolidation was the wrong policy to pursue at that time, but now since it could not be achieved, the government’s credibility has taken a hit.

The budget should have been rejected: the failure of Budget 2021 is both the fault of the Perikatan Nasional government—including Umno for those still in denial—and Pakatan Harapan. The non-rejection in the House was mind-boggling: we live in a tragic comedy.

Now, as Covid-19 is making its ugliest spread yet, with death toll mounting, health workers exhausted, the Ministry of Finance approved another RM200 million for the public health sector.

What is RM200 million when a vaccine dashboard alone worth RM70 million? What is RM200 million when the total Health Ministry Budget is RM32,000 million a year, and that the public health sector is running out of capacity?

To solve this crisis, we require a much bigger deficit spending: boost the deficit to 9%-10% or even more. Do whatever is necessary to finance the fight. Do it properly instead of through half-baked measures. There is no time for dry powder.

The cost of failing to address this crisis is greater than the cost of higher deficit ratio.

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This blog

[2933] Testing

Please ignore this. This is a test.

Categories
Economics WDYT

[2932] Guess the 1Q21 Malaysian GDP growth

The 2021 first quarter GDP for Malaysia will be out next week. As usual, before we go into the details, let us play some games.

How fast do you think did the Malaysian economy expand in 1Q21 from a year ago?

  • Faster than 10.0% (0%, 0 Votes)
  • 7.6%-10.0% (0%, 0 Votes)
  • 5.1%-7.5% (0%, 0 Votes)
  • 2.6%-5.0% (36%, 5 Votes)
  • 0.1%-2.5% (50%, 7 Votes)
  • 0% or slower (14%, 2 Votes)

Total Voters: 14

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January, February and March industrial figures grew 1.2%, 1.5% and 9.3% year-on-year respectively. That is a 3.9% industrial expansion for the whole quarter. With industrial production representing  approximately a third of the 2020 economy, this is a good sign.

This is especially so when services (60% of the 2020 economy) contracted slightly in the first quarter, falling 0.3% from a year ago.[1] This is likely caused by the second lockdown imposed by the government in January and February 2021. But I do not think that small contraction should not bring down the overall growth (and I do not think agricultural output will be too bad that it would bring the whole GDP growth down).

But we are in danger of getting distracted by growth number. We have been distracted earlier and the belief in V-shape recovery is a proof of that. Now, we are paying the price in the form of bad government response, and bad planning.

Instead of whether the first quarter (or the second quarter for that matter) would grow, there are two benchmarks we should focus on as far as the top line recovery is concerned:

  1. When will the GDP level (not growth) return to pre-pandemic level? This level should be the fourth quarter of 2019, and the answer will determine whether we have somewhat recovered.
  2. When will the GDP level (not growth) match the level it would have been if the 2020 recession did not happen? The answer to this question will tell us the long-term damage the economy has suffered.

Additionally, the real bad news is that, recovery has been uneven and its pace is flagging. March 2021 unemployment rate is stuck at 4.7%, after spiking to 5.3% back in May last year. The reason for the stubbornly high unemployment rate is that people are returning to the labor market, except that the economy is not creating jobs fast enough. Definitely, some jobs have been eliminated permanently.

Bottom line is, even if there is growth in the first quarter, I would not label it recovery just yet. In this situation, I rather not pay Genting Casino a visit. I prefer to err on the side of caution.

Hafiz Noor Shams. Some rights reserved

[1] — I made a noobish careless mistake here. I mistook quarter-on-quarter number for year-on-year. The year-on-year was much worse, and if I had realized it, I would have expected a contraction for the first quarter. Apologies.

Categories
Economics Education Society

[2931] If affirmative action is to end in Malaysia, spending on public service has to increase

Discussions on affirmative action in Malaysia have never gone away but interest in it has increased in recent weeks. The first exciting interest in the topic was Hwok-Aun Lee’s book Affirmative Action in Malaysia and South Africa: Preference for Parity. I have not got my hands on the book (I hope to buy it soon), but I listened in to one of Lee’s webinar on the book and the subject earlier this year. Most recently, is Nazir Razak stating the New Economic Policy—Malaysia’s affirmative action—no longer works.

My thinking of affirmative action has softened over the year. Softened in the sense that while in the past I think I could be labeled as anti-NEP, I have adopted a show-me-the-result position. In fact, I have concluded there has to be a balance between economic and social imperatives. As a relevant side note, I am writing a book (a never-ending project) and in a segment of it, I outlined why I thought NEP might have a role in created a shared identity in Malaysia (perhaps Bangsa Malaysia as a shorthand for this) for a short while in the 1990s. It was a decade or two-long process coupled with rapid industrialization and globalization, that was unraveled during the late-1990s Asian Financial Crisis and later, China’s entrance into the global marketplace. My current thinking is that, though NEP-styled affirmative action worked in the 1970s and the 1980s (dare I say the 1990s despite its official expiry?) situation in the 2020s have changed dramatically that the way Malaysia does it affirmative action need to be rethought. It requires a rethinking because NEP did not work in isolation during the years and the factors (high growth and absence of China) that made NEP work are no longer present today.

Last week, I somehow got pulled into a Clubhouse discussion about NEP where Nazir Razak stood on a soapbox. Near the end, riding on an acquittance’s train of thought, if I remember correctly, Malaysia needs to invest in its public services more. I would like to clarify and expand that idea further.

If affirmative action is to end, then I think it is imperative that public service be expanded further. This is not to say the public service expansion and affirmative action are mutually exclusive. But it is probably good to understand that most beneficiaries of affirmative action probably rely on public service more than others. Removing affirmative action would likely require expansion in other parts of government in order to maintain the beneficiaries’ general welfare.

Here, the maintenance of general welfare is importance for social stability, which in turn is crucial to creating the environment for long-term economic growth, which itself is important to the maintenance of welfare. It is a loop.

By public service, I refer specifically to public education and public health system. By expansion, I mean by making it more accessible cheaply at a higher quality and while this may sound fluffy, I think the best proxy to this is government spending in these areas.

And Malaysia lags in terms of public spending in these two areas when compared to other countries. I have written a short advocacy paper on this matter under REFSA earlier and you can access it here.

A brief look at the World Bank database containing data from most countries will show that Malaysia is a middling when it comes to government spending in education relative to its GDP, while under-spends in public health services.

Malaysia’s government spending on education and health relative to nominal GDP

Malaysia’s 2018 government spending on health was 1.9% of GDP and this compares badly with upper-middle income countries’ average of 3.2%.[1] Malaysia does better in public education, spending 4.7% of GDP in 2017, versus upper-middle income average of 4.1% in the same year (year 2017 and 2018 are chosen because those are the latest year available for year-to-year comparison between Malaysia and upper-middle income average).[2]

So, if ever affirmative action, or NEP in whatever form it persists now, is to be dismantled, I feel is it crucial to boost public spending in government services. Boost spending alone, of course, is not enough. How you spend it matters too.

Hafiz Noor Shams. Some rights reserved

[1] — Domestic general government health expenditure (% of GDP). Open Data. World Bank. Accessed April 7 2021.
[2] — Government expenditure on education, total (% of GDP). Open Data. World Bank. Accessed April 7 2021.

Categories
Economics Society

[2930] The biggest losers in this recession: the young

All recessions have its losers and to claim so is to state the obvious. It is more interesting to know who the losers are. Data from the Department of Statistics shows that the biggest losers in this recession are the young.

From the chart below, it is quite clear the job market for 35 years old and younger is doing badly relative to the market for older cohorts:

The chart is drawn by comparing total employment by age for each quarter relative to a pre-pandemic benchmark. In this case the benchmark is the final quarter of 2019, the last quarter before the pandemic. To illustrate:

  • there were 31,800 fewer employed persons among 15-24 years olds in the first quarter of 2020, relative to the last quarter of 2019
  • there were 202,600 fewer employed persons among 15-24 years olds in the second quarter of 2020, relative to the last quarter of 2019

So, if the number goes down, then it is bad because it shows fewer people are employed relative to the benchmark. If the number goes up, then it is good because it shows more people employed.

The data is from the Quarterly Report of Labour Force Survey. The 2020 fourth quarter report, which is the latest report, was released on February 8 2020.

Increased underemployment among younger cohorts

The change in total employment does not indicate change in employment quality. Here, I am referring to underemployment. Once again, the young are the most badly affected:Unlike in the first chart, an increase here suggests more people working less than 30 hours per week, which could be considered as a definition of underemployment (there are other underemployment definitions). They work less than 30 hours because they are likely unable to work fulltime. Therefore, an increase in this chart points to a worsening situation.

This is relevant because a person is considered employed in official statistics if he or she works for at least an hour per week. As you can see, it is a loose definition. During normal times, it is alright to use it because it works. But the situation we are in are quite abnormal and it challenges our traditional definitions.