These developments raised the questions as to how the country
got to such a terrible economic mess and whether the RM3 billion economic
stimulus package is the proper and adequate answer.
The economic stimulus package of measures announced by the Prime Minister must be seen in context. Politically vulnerable, he continues to be obsessed by GDP growth numbers. To attain his growth objectives, he has resorted to further pump-prim the economy.
It is patently clear that the major thrust of the package is to inject
resources into infrastructure projects and to a lesser extent encourage
private consumption.
The emphasis on infrastructure development represents more than pump
priming; it is an undisguised and blatant channeling of resources to crony
corporations, a failed policy that has been pursued for the past three
years. It merely complements the policy of bailouts.
It is truly amazing that infrastructure development is being given pride of place in the strategy to counter the short-term recessionary effects of the US slowdown. The BN Government has failed to take account of the fact that such expenditures are only likely to have boost output in the longer term. Furthermore, these will neither enhance the competitiveness of the economy, and nor contribute to an increase in the volume of sagging exports.
The Prime Minister appears to be oblivious of the lessons from the Japanese experience over the past decade. For over a decade the Japanese authorities failed to address the problem of poor corporate performance, a large corporate debt overhang and pursued policies that were based in the hope that export growth and massive rounds of fiscal stimulus would enable the economy to correct fundamental weaknesses. There was a clear unwillingness to act in support of corporate restructuring and reforms. The package of policies that combined bailouts and huge injections of finance for infrastructure development, along with a loose monetary policy deepened and prolonged the Japanese recession. These failed policies explain in large measure the reasons for the dire straits in which the Japanese economy has got into.
It would appear that Mahathir has chosen to ignore the obvious lessons to be drawn from the Japanese experience. It would seem that he has blindly opted to continue with a Look East policy, oblivious of the fact that shadowing the Japanese is inappropriate in Malaysia’s circumstances. The Nikkei Index has been out-performed by virtually all other indices. Japan has limped along largely because of the size of its economy. Malaysia does not have that luxury.
That the package of measures is inappropriate, has been powerfully demonstrated by the negative market reactions. The KLCI indices have taken a tumble and are now at their lowest levels over the past too years, despite the orchestrated rigging through purchases by Government controlled funds.
The Prime Minister’s lamentations about the performance of the market therefore make curious reading --- either he has lost all sense of how markets work, or his statements are a cynical manifestation of the fact that he does not any longer care as to what happens to the economy, so long as his immediate goal of saving cronies is met.
The so-called social spending, incorporated in the package, will do little for the marginalized members of Malaysian society as the sums ear-marked are small. The Prime Minister appears to have turned his back on the many Kampong Medans that are in our midst. There was little in the allocations that would attack the ills that were made so visible by the violence that erupted just weeks ago.
The package of measures contained little to address the slide in investor confidence. Nothing was done to arrest the negative perceptions --- lack of corporate restructuring, the loss of credibility in the institutions of the country, a willingness to abandon failed economic policies of capital controls and the currency peg. For that matter, there was nothing in the pronouncements that indicated that Mahathir acknowledges the dangers from domestic capital flight, which has accelerated in the recent past.
In brief, the nation now stands on the verge of an economic crisis of unprecedented proportions. That crisis is not merely one attributable to external circumstances --- it is a crisis engendered by a failure of domestic policies and the absence of leadership. It is a crisis that is likely to rock the very foundations of the economy and its ability to remain competitive and meet the challenges posed by globalization.
The current fiscal and monetary policies are clearly unsustainable. Financing the public sector deficit at current levels is unsustainable. The government has commandeered domestic savings and there is some evidence of the private sector being crowded out. With virtually no inflows of FDI, total private investment is likely to plummet further. In the next several months, the Government is likely to seek market loans from global financial markets to finance it’s rising need for resources. It is more than likely to pay a high premium over prevailing market rates as lenders are likely to factor in the financial and political circumstances facing Malaysia. Having earlier turned its back on both the World Bank and the IMF, the Government is unlikely to go to the Breton Woods institutions to meet its needs. In any event, turning to these institutions will represent an about face and will need to be accompanied by a reversal of many of the ill- conceived policies.
The other hope that the Government clings to is a revival in private consumption. Here too Mahathir and Daim appear to be whistling in the dark. Private consumption is unlikely to increase, particularly if export earnings lag and there are sizable layoffs of workers. It is significant that the package of measures announced made no provision for using public resources to provide a cushion for those that are laid off.
(7/4/2001)