Tag: government spending

Categories
Economics

[1994] Of fiscal stimuli did not factor in Q1

Whatever the results may be for the gross domestic product growth rate for the first quarter of the year, let us be clear about one thing. The two fiscal stimulus packages have only insignificant impact, if not at all, to Malaysian economy in that period.

Any effort to paint the stimulus packages as having helped to cushion the impact economic slowdown we saw in the first quarter should be received with extreme skepticism.

One has to remember that, while the first fiscal stimulus package was announced by the Abdullah administration in November 2008, there was no real spending done even as February 2009 passed us by with the speed of a tortoise. The government at that time was still scrambling to distribute money to various ministries and not actually spending it.

This has been admitted by the Second Finance Minister himself. In early March, he was reported as saying that barely half a billion ringgit from a total of RM7 billion had been spent.

Two months later — by May 12 2009 — according to a website established by the Treasury to inform the public of the status of the two stimulus packages, only a further quarter billion ringgit was spent from the RM7 billion.

Given the horrifying demand gap caused by weakened external demand, actual spending derived from the first fiscal stimulus is very much irrelevant to the GDP growth figure for the first quarter of the year.

If one insists that the RM750 million did cushion the fall that certain Ministers claimed it would earlier in the year, perhaps I am obliged to share the following analogy: it is only akin to preparing a mattress on the ground with the intention of saving a person who has just jumped off from level 88.

One also has to remember that the second, much larger, stimulus package was only announced on March 10 2009, which was already close to the end of the first quarter. Furthermore, it is impossible to believe that the second stimulus package came into effect immediately, especially accounting for the kind of lag suffered by the first stimulus package.

How much of the second stimulus worth RM15 billion of government spending has been spent is unclear. The same website commissioned by the Treasury is coy about divulging the same information it shares when it comes to the RM7 billion stimulus package. Nevertheless, experience tells us to be rational and not to expect too much.

Consider this: if the government faces trouble in spending RM7 billion even after approximately 7 months have passed, how exactly does one expect the government to spend another RM15 billion within just over 2 months?

That skepticism should be strengthened further with the knowledge that the government only began to borrow massively in April. We know that the second fiscal stimulus needs to be financed through borrowings. And we know that April is not part of the first quarter.

The best hope of making the second stimulus relevant is the RM3 billion tax cuts as well as the loan guarantees attached to the second fiscal stimulus, or the mini-budget in the language of the government. Alas, information about that is not so forthcoming for us to move beyond mere speculation.

Hence, the effect of tax cuts and guarantees notwithstanding, the effect of the two government spending-based stimulus packages has to be largely discounted if we are interested in explaining the results of the first quarter for the year 2009.

What might make the two stimulus packages all the more irrelevant is the manner which the economy behaved in the first quarter. While the jury is no doubt still out there, early indications do not bode well for proponents of government spending as the heart of fiscal stimulus.

The reason is that the economy — as indicated by various indicators — is arguably performing better with each passing month since January, on the margin. It is better in a sense it has been less bad than before; to be precise, the change of sign of the second derivative.

This happens in spite of the lack of significant interference in the economic cycle as planned by the two fiscal stimuli. The significance of this is that it may prove to those who lack confidence in the market that the economy does not desperately need government spending. This also provides a damning evident that we do not need a third stimulus package at all.

So far, the best factor to explain possible turning of the economy may be the very factor that brought the economy to a tailspin in the first place: external demand.

It is hard to resist connecting the improved local condition with the health of the blessed Chinese economy. Even in the US — another major destination for Malaysian goods — talks of green shoots are aplenty.

If the trend continues, we may see a bottoming out soon enough even without additional government spending as allocated by the two fiscal stimuli. Indeed, the chances that the economy gets better before the full effect of the stimulus packages kick in are becoming brighter now than anytime before.

As it may turn out, the billions of ringgit of government spending may only increase our public debts. That will increase the cost of borrowing in the future and possibly later, the imposition of higher taxes for all, on average.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on May 26 2009.

Categories
Economics

[1937] Of Brown, Obama and permanent interest

Libertarians typically have no reason to protest the typical annual meeting of Group 20 (G20). G20 is of course the grouping of the richest and most influential countries in the world. This year’s meet up in London however is not a typical gathering. It is extraordinary because of the global economic turbulence we are witnessing at this very moment. In trying to address the problem, both the Obama and the Brown administrations are advocating large spending and they will likely call for others to do the same at the G20. This call — probably made for the first time in recent memory — gives libertarians a reason to join the protest against the G20, particularly, against the US and the UK.

Both administrations have been building the spending momentum for weeks, if not months now. Indeed, both countries are leading the way in economic stimulus with government spending as a major pillar. Much has been spent but both English-speaking countries — especially the Obama administration — content that too many are not spending enough. The idea is that the problem is not spending too much. Rather, it is about doing too little.[1]

In Malaysia, the Finance Minister Najib Abdul Razak has unfortunately embraced that idea. With as much as RM67 billion worth of stimulus plan with another RM5 billion injected into the equity market with much opacity by the Malaysian government, the credential of the expected next administration of Malaysia — the expected Najib administration — as a big spender is not in question. This is by no mean that Malaysia is following the footstep of the US and UK. Indeed, the current administrator of Malaysia is gloating by the fact that they did it first during the Asian Financial Crisis when the US was dead against it. The Malaysia’s administration takes the current trend as a justification of their past action.

Momentum or not, both Obama and Brown administrations’ effort to lobby for more spending from other countries is meeting resistance, especially from Europe and Latin America. For regions not known for their love for free market, this is certainly refreshing when the traditional advocates of free market are taking steps in the wrong direction.

Germany called United Kingdom Prime Minister Brown’s method as crass Keynesianism.[2] Although eventually capitulating by increasing its spending but still short from what the Brown and the Obama administration had hoped for, Germany was unhappy at what they saw as them bailing out imprudent others. Germany had worked hard to keep its accounts in order and it despised the idea of spending their money to correct others’ mistakes, while undoing Germany’s successes.[3]

Czech Premier who also holds the presidency of the European Union went as far as calling Obama’s call for greater spending as the road to hell. He has been reproached by other European leaders for the harsh words but nevertheless, it exhibits the sentiment of the member states of the European Union.[4]

In Latin America where Brown and later the Vice President of the United States Joe Biden flew down earlier, both faced similar but more politely put opposition. The hero of the moment was Chile, as President Michelle Bachelet, an economic left, practically rehashed argument forwarded by the Conservative Party led by David Cameron in the United Kingdom to Brown.[5]

Judging from the results of these meetings, both Obama and Brown are likely to meet heavy resistance at the table of G20 when it comes to how to address the global economic crisis.

In all likelihood, the reversal of roles probably has little to do with philosophical difference and much to do with the fact that the economic crisis has unequal effect across the world. In Europe unlike the United States, far more comprehensive social safety nets are in place. The automatic pervasive mechanism as advocated by economist John Taylor is already in place.

Germany meanwhile had saved enough in good times that they believed that the country was able to ride on the wave safely. The same argument is applied by Chile when Bachelet effectively said no to Brown’s call for support for greater spending, which he is expected to repeat at the table of G20.

For Asian countries especially for the export-driven economies, while the pain is undeniable, it is unlikely to go as bad as in the US. And indeed, the different nature of economic crisis in Asia demands different solutions. What the US and the UK are asking is but only a one-size fit-all policy.

Also, there is a sense of the often used German word which has found its way to mainstream English language: schadenfreude. Schadenfreude means pleasure derived from watching others’ misfortune. The latest prominent leader seemingly to enjoy the scenario is the Brazilian President when Luiz Inácio Lula da Silva. He reminded all that this crisis was caused by “white people with blue eyes.”[6] This schadenfreude however has become excessive lately and risks of becoming masochism.

For libertarians, the opposition mounted against the US and the UK is something to be supported of, even when the causes of opposition differ. As it goes, there are no permanent allies and no permanent enemies. There are only permanent interests.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — In this crisis, doing too little poses a greater threat than doing too much. Any sound economic strategy in the current context must be directed at both creating the jobs that Americans need and doing the work that our economy requires. Any plan geared toward only one of these objectives would be dangerously deficient. Failure to create enough jobs in the short term would put the prospect of recovery at risk. Failure to start undertaking necessary long-term investments would endanger the foundation of our recovery and, ultimately, our children’s prosperity. [Obama’s Down Payment: A Stimulus Must Aim for Long-Term Results. Lawrence Summers. Washington Post. December 8 2008]

[2] — Mr Steinbruck questioned why Britain was “tossing around billions” and closely following the high public spending model put forward by 20th Century economist John Maynard Keynes.

“The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking,” he said. [Germany questions UK rescue plan. BBC News. December 11 2008]

[3] — German Chancellor Angela Merkel said in a speech to Germany’s parliament on Thursday that her government was doing more than most to support the world economy through higher spending and lower taxes. Germany’s stance could come under pressure from financially weaker countries within Europe as their economies sink deeper into trouble, economists say.

Struggling EU countries range from Ireland and Spain, where housing-market bubbles have burst, to Hungary and Latvia in the continent’s post-communist East, where capital flight has forced governments to seek IMF aid.

Although Germany is in its worst recession in 60 years, Europe’s biggest economy has relatively strong public finances and enjoys the trust of capital markets.

That means Germany could be doing more to raise its domestic demand through higher government borrowing, say critics. Germany’s reluctance to do so means its neighbors’ recessions will be worse than necessary, says Julian Callow, European economist at Barclays Capital. [EU Rebuffs Calls to Increase Fiscal Stimulus, Aid. Marcus Walker. Adam Cohen. Wall Street Journal. March 20 2009]

[4] — BERLIN, March 25 — The president of the European Union on Wednesday ripped the Obama administration’s economic policies, calling its deficit spending and bank bailouts “a road to hell.”

The comments by Prime Minister Mirek Topolanek of the Czech Republic, which holds the E.U.’s rotating presidency, startled some U.S. and European officials, who are preparing for President Obama’s visit next month to several European cities, including Prague, the Czech capital. [E.U. President Blasts U.S. Spending. Craig Whitlock. Washington Post. March 26 2009]

[5] — Gordon Brown suffered another setback over his diplomatic offensive yesterday, as the Chilean president inadvertently echoed Conservative attacks on the prime minister’s handling of the economy. [E.U. President Blasts U.S. Spending. Craig Whitlock. Financial Times. March 26 2009]

[6] — Mr Brown’s decision to use the South American leg of his trip to call for a G20 $100bn (£70bn) deal to support world trade was overshadowed when Luiz Inácio Lula da Silva, the Brazilian president, blamed the financial crisis on “white people with blue eyes”. [E.U. President Blasts U.S. Spending. Craig Whitlock. Financial Times. March 26 2009]

Categories
Economics

[1926] Of mini-budget fails to reduce friction and cost of doing business

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.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on March 17 2009.

Categories
Economics

[1921] Of back to the definition of stimulus

Have you ever engaged in animated conversion with friends, debating intently on a point only to find out later how off tangent the discussion had become? How about a time when asked what was the original contention, all involved in the little discussion somehow had trouble answering the question? Well, something like that has happened to the discussions surrounding the stimulus package for Malaysia.

I think I have seen a fair share of suggestions and criticism related to the composition of an economic stimulus. The perception I have is that a majority of them involves the typical tools of macroeconomics: fiscal and monetary policies. Between the two, the debate on fiscal policy is probably the one that takes center stage, as proponents of government spending and tax cuts rattle sabers only to come to a uneasy compromise of having a little bit of both.

While the two giants wage an intellectual war against each other, a notable minority refuse to participate in the age-old debate. Instead, they are convinced that in order to stimulate a faltering economy, we must go beyond fiscal and monetary policies. Almost always in place of traditional policies, they propose long term measures which perhaps nobody could argue against.

How could anybody say no to their suggestions?

It is impossible to say no to them because more often than not, they touch on the need to improve the framework of the economy. This includes improvement of rules and regulations. The enlightened few have cited Nobel Prize laureate Douglass North on emphasizing the need for strong working institutions, which sadly, Malaysia sorely lacks these days if events of recent weeks are anything to go by. Others call for improvement of real income of Malaysians by pushing industries in the country up the value chains. To put a cherry on top of cake of wonderful ideas, CEO of CIMB group Nazir Razak suggested for the country to focus on strategies and not just on fiscal and monetary policies.

These paths beyond fiscal and monetary policies must be taken and that is for sure. The crucial caveat is that they have to be taken regardless of economic situation.

Sure, as the cliché goes, behind every crisis there is an opportunity. It is in times of crisis when it is easiest to stress the importance of these efforts. We saw how the inefficient fuel subsidy regime in Malaysia — as well as in other countries — was finally reformed much to the benefits of the long term health of the economy. Without the energy crisis, such liberal reform would be unlikely and Malaysia would continue to waste good money on artificially supporting the economy rather than investing in things that matter — like in our education, our security, our instititutions — that really build up the economy.

One however does not have to wait for disaster to strike to commit to structural improvements. To commit to those improvements only in times of crisis is to take that cliché too close to heart and miss the entire reason for those structural improvements.

Those structural improvements, be it diversification of export markets, closer integration among ASEAN members state for a European Union-style entity, revision of the New Economic Policy, strengthening of the judiciary, greater investment in human capital by way of having better curriculum and teachers, etc, are developmental in nature.

That is right. These measures beyond the traditional fiscal and monetary policies are meant to develop the countries in the long run. It takes time, almost definitely far longer than it is required to complete a business cycle.

That of course does not mean any of those improvement, if it has not started yet, should be delayed. The point which I want to stress again is that these structural improvements of the economy should take place regardless of business cycle. Because it is developmental in nature, it almost by definition takes the noble long term view.

I am reluctant to quote Keynes mostly because I abhor half-baked Keynesianism practiced in far too many places at the moment by newly self-discovered Keynesians, which is worse than Keynesians calling for proper Keynesian counter-cyclical policy. Nevertheless, his words here at this juncture are most appropriate for rhetorical purpose: ”Long run is a misleading guide to current affairs. In the long run we are all dead.”

Malaysian trade fell by about 30% in January on year-on-year basis. How exactly do these long term proposals immediately deal with immediate fall in external demand?

In the first week of March, Flextronics shared that nearly 1,400 workers of its workers in Shah Alam, Selangor were laid off. How exactly do these long term proposals immediately deal with the immediate increase in unemployment rate or the immediate reduction of disposal income of Malaysians?

Structural improvements do not address these immediate concerns. If a person’s goal is to address immediate concerns, then he or she will face an obvious temporal problem.

That very reason is why most structural improvements of the economy if not all — while it may help in no little way in future crises — does little to address the current crisis.

The idea of a stimulus is to address these immediate concerns. It does not seek to address developmental concerns, which forward looking structural reforms — regardless of philosophies — are meant to do.

Notwithstanding criticism directed at government spending as a stimulating tool that I personally agree with, it at least seeks to solve immediate problems. So too tax cuts except that it seeks to do it in a faster manner while maneuvering away from the weaknesses of government spending. The effect of monetary policy is probably even faster in this age of light speed communication. One announcement by the Governor and everybody from single individuals to large institutions will quickly react to it.

This is why fiscal and monetary policies remain and will remain the thrust of the economic stimulus in Malaysia, or any stimulus for that matter. The pillars of economic stimulus will remain revolve around fiscal and monetary policies, even if they are becoming stale and frustrating.

Hence, the fixation with fiscal and monetary policies is not a symptom of short-termism, as some have begun ridiculing the advocates of government spending, tax cuts and monetary policy. Quite the contrary, the focus on fiscal and monetary policies is about putting one’s feet on the ground and settings eyes on the targets, which many have unfortunately forgotten to do.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on March 9 2009.

Categories
Economics

[1914] Of the naive are shocked

A number of individuals are surprised at the slow rate of distribution of the RM7 billion government spending announced in November 2008. Not even a billion of it has been spent. The Second Finance Minister Nor Mohamed Yakcop divulged that information in the Dewan Rakyat earlier this week while answering a question from MP Jeff Ooi.[1]

Am I surprised?

I am shocked. I am shocked not because only a tiny weenie fraction of the stimulus has been spent. I am shocked that there are individuals who are shocked that is so.

Gasp!

How can that be?

But seriously, the lag exhibits is inherently part the nature of government spending. It is its weakness. Those with libertarian sympathies have always known this. Those outside of libertarian circle acknowledged this.

The libertarian argument against government spending can be divided into two categories: philosophy and practicality. Philosophical argument relates to the size of government. Practicality argument relates to the usefulness of such spending due to its temporal issues.

Philosophical argument is debatable but the argument about usefulness is backed with empiric. Usually, it is hard to argue against hard data.

Libertarians have been proven right yet again about the usefulness of government spending. While it is enjoyable being right, the damage has been done, all for flawed thinking aligned with government spending advocates which I now call lemmings. It is becoming increasingly clear to me that a lot of people are advocating government spending simply because other countries are doing it, without proper economic rationale.

Again, being right is enjoyable but the damage is done. The role of government has been enlarged and as history has shown, resizing the government is a Herculean if not an impossible task.

Yet, to a lot of people, they are still oblivious to this fact. A statement from MIER — Malaysian Institute of Economic Research — is most telling.

Mohamed Ariff said that allocations under the second stimulus package must be spent very fast to provide a quick positive impact on the economy.

According to him, there is also a need for transparency in implementing the package in order to gain the confidence of consumers and investors.

“If transparency is not there, credibility will be a question and it will have an impact on consumers and investors’ confidence. Without confidence, nothing will happen,” he said. [MIER unfazed about financing budget deficit. Bernama via The Malaysian Insider. March 3 2009]

As written earlier, there is a trade-off between the two demands transparency and speed. You cannot have your cake and eat it. To demand for both is too Obama-like. Enough of yes-we-can mantra. Put your feet on the ground.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — A while ago, Second Finance Minister Nor Mohamed Yakcop told the Dewan Rakyat that of the RM7 billion pledged for the economic stimulus plan announced in November, only RM567.9 million had been spent thus far — after four months had gone by.

That works out to roughly 9% of the pledged money that had gone into the system for pump-priming. [Long fore-play to a stimulus. Screenshots. March 2 2009.