Budget falls short of principles

Ah, the Malaysia way. De facto Prime Minister Najib Abdul Razak of the past few months courted international repute in the Wall Street Journal (WSJ) with a March 18 opinion piece on that theme. The article promotes the ‘stimulus package’ released on March 10, while calling on the G-20 to act in a concerted and coordinated manner to lift economies out of this morass.

But Najib, in calling for a spirit of cooperation and trust in the international community, didn’t talk about Umno Malaysia way of fostering unity: make plans behind closed doors, do not consult democratic constituents or reach out for bi-partisan compromise, then demand uniform endorsement.

Do we protest too much? This package stands to inject quite a lot of money – nine percent of GDP over two years – into the economy, and isn’t big fiscal spending the coalescing global consensus (except for rightwing zealots)? No, even if government plans are huge in times that call for massive intervention, this does not mean that anything goes. Najib’s selling of the plan brandished the potential dangers of not doing enough and stressing the importance of efficient implementation, which are fair enough, but failed to address fundamental questions on the efficacy and fairness of the proposed programmes.

Expectedly, this package hardly stirs protest. It performs no slimy bailout of failed cronies, and the nation is transfixed on multiple party and government elections.

Window of opportunity

However, the mini budget falls short of principles widely held to be most economically effective and socially just. We should provide above all the means for those who most adversely hit by the downturn – those who lose jobs or face reduced work hours – to sustain themselves through re-employment or welfare payments. To spur consumption by a general increase in disposable income, we should target either cash vouchers at low and middle income households who are most likely to spend extra money. We should inject more wages, less profits, to boost demand. This is especially important this time around when, unlike in 1997-98, we cannot export our way out of recession.

Public investment can address multiple concerns, from generating employment and creating new capacity to setting new and bold agendas. Private investment is difficult to stimulate when markets get depressed and consumption shrinks, although programmes for credit relief may be necessary and crisis may provide a window of opportunity for bold technological change.

Now consider the distribution of funds in the mini-budget. RM2 billion, or a mere 3.3 percent of the total RM60 billion package, is allocated for reducing unemployment and increasing employment opportunities. RM10 billion (16.7 percent) is to help vulnerable groups. RM29 billion, or 48.3 percent, will be for bolstering private capital, while RM19 billion (31.7 percent) goes toward “capacity for the future”, which amounts to a bonanza for big, government linked business. RM10 billion (16.7 percent) is gifted to Khazanah alone.

In other words, the hardest hit members of society get the smallest portions. The mini-budget outlines programmes for retraining and re-employment, but provides no welfare benefits for retrenched workers. It neglects the concerns of women workers, who comprise a large proportion of the vulnerable workforce in export industries.

Training unemployed may be difficult to oppose, but there is little to convince us that the training programmes are well integrated with the employment generation proposals, particularly the unfilled vacancies and other skilled jobs in the public sector. And what if companies just stop hiring, or worse, keep shed labor? The tax deduction for companies hiring retrenched workers and carry-back of losses are fine ideas, and will help some, but I doubt we can count on these incentives to make a major dent. What happens to those who still cannot find work for months, after retrenchment payments run dry? Don’t look to the stimulus package for relief.

Public works programmes provide an avenue for injecting money and stimulating employment. We find RM2 billion allocated for constructing or renovating school facilities, especially in rural areas, Sabah and Sarawak, and various amounts apportioned for repairing infrastructure and public amenities. Of course, these are salutary projects, but their conception display an untimely lack of imagination. Najib writes in the WSJ about transforming the economy, but lays out these simple jobs in the blandest, most routine terms.

One cannot help but wonder how much of these works projects are an extension of recent decisions to raise the class F contract limit and to award class E contracts without open tender. A hungry army of contractors no doubt stand ready to perform basic repair jobs.

Well, the public procurement system need not be overhauled now, but why not pursue some social and environmental causes in employment-intensive initiatives, like building and renovating bus stops, enhancing public parks and health services, improving disability-friendliness, planting trees, reducing energy consumption of buildings, upgrading street lamps for energy efficiency? Najib appends the thought of green technology as a possibility, not a priority.

The royal share of the stimulus package is to promote private capital. Before getting into the newly created schemes, however, let us give credit where credit is due. Malaysia’s banking system is reasonably stable, with low foreign debt, and controls on foreign banks probably helped avert contagion of the global financial meltdown.

Sweetheart arrangement

Curiously, Najib lauds our financial state in the WSJ , while RM48 billion (80 percent) of his mini-budget launches schemes that operate under the assumption that our financial system is considerably ill-functioning. He devotes 300 out of the speech’s 7,400 words to skim over RM48 billion of taxpayers' money being committed to guarantee schemes, starving us for details on why these schemes are needed so heftily and how they will achieve their objectives.

Under the guarantee schemes for SMEs and for industrial restructuring, each worth RM5 billion, banks will approve loans and set interest rates, but the government will cover 80 percent of defaults (50 percent for large loans). With a weighty share of the risk to banks absorbed by public funds, credit will surely flow. But this measure should have been preceded by a substantive enquiry into why SMEs under-invest in technological upgrading. This is not a current, crisis-related problem; we’ve been sweating over it for years. If it is the banks’ responsibility, why should they be given such a sweetheart arrangement in the form of guarantees? If SMEs have not been proposing viable projects and restructuring plans, will accelerating funds into their coffers suddenly make them high-tech capable?

In addition, one has to wonder how much private banks will adhere to the broader economic policy objectives, particularly to support recession-hit SMEs. The companies who need these credit lines the most may be the least attractive to profit-driven institutions.

It is interesting how ongoing events are inter-related. Paltry support for workers in the stimulus package and another flurry of foreign worker banishment are part of the deep-seated way of doing things in Malaysia. With the abundance of cheap labour, of course SMEs – and industry in general – would not be compelled to change. Why should we expect private interest to coordinate investment and assume risk when the status quo worked fine?

Speaking of the status quo, to build “capacity for the future”, Khazanah gets RM10 billion and infrastructure projects get RM5 billion. Well, that just about says it all. Our future capacity apparently has nothing to do with schools, innovative education programmes, public libraries, health facilities, or research and development.

The Najib way of “[using] the current downturn to forge a new economic model” revolves around national hardware and projects conceived in the high towers of investment agencies, but couldn’t care less about the persistently stifling environment in the institutions that are supposed to nurture future generations. And we wonder why there’s so little innovation, why we’re still slow in becoming a knowledge society.

Najib said in the WSJ that the Malaysian people are the “appropriate judges” of this mini-budget. I hope by judges he meant people whose opinion is independent of the Executive which will very soon be his official chiefdom.

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H LEE is a postgraduate student in economics at the University of Massachusetts, Amherst.