August 06, 2016

The Neglected ‘Think-tank’ (Part 2) - Response to the current slow economic growth

6 August 2016
Special interview with Dr. Muzahet

Response to the current slow economic growth

A few days back, I managed to bring my Dad for tea at one of his favorite ‘makan spot’ in Putrajaya, the café at Kelab Tasik Putrajaya. We ordered the usual, dad’s favorite combo there was ‘mee goreng mamak’ and ‘teh panas’. While waiting the food to be served, I posed a few questions on the current economic situation. He seemed quite reluctant to respond at first, but then one question struck his attention:

Azzad: Dad, you mentioned earlier that measures taken by MTEN during 1997/98 economic crisis managed to salvage our economy just within a year.!! Why don’t we use the same measures to rescue our economy from the current prolonged slow growth now?
Dad: You must be joking Son! If you were a doctor would you give the same prescription for patients suffering from diabetes and those who suffer from cancer? And with that prescription you’re expecting both patients to recover from their illness within a year!

Azzad: You mean we cannot use the same prescription.?!
Dad: Definitely not.!! Because the root cause of the problems are different! The 1997/98 crisis was regional in nature caused by currency speculators which seriously affected our banking system and finally spread to other sectors in the economy. Whereas, the 2008 crisis was originated from the subprime mortgage in the US, this affected the international banking system and finally became a global phenomenon.

Putrajaya Lake Club
Kelab Tasik Putrajaya Open Area
Azzad: What do you mean ‘regional’ and ‘global’ phenomena?
Dad: ‘Regional’ means only Asian countries were affected by the crisis. In particular, Thailand, Philippines, Malaysia, Indonesia, Singapore, South Korea and Taiwan, while the rest of the world were not. ‘Global’ phenomenon means almost all countries in the world were affected and experienced slow growth performance in their economy, especially the advanced countries in the US and European Union.

Azzad: Are there any policy implications in terms of measures to be taken by the Malaysian government between these two scenarios?
Dad: Of course they are! Especially the revenue from export. We are an ‘open-economy’ or ‘market economy’ where our revenue from exports accounts for about 130% of our GDP, which is huge. The implication is that, the economic contractions in other countries globally will reduce demand of our export and this will upset the growth performance in our domestic economy.

Kelab Tasik Putrajaya_Outdoor
Kelab Tasik Putrajaya Outdoors Open Area
Azzad: Since we have no control over the world economy, there’s obviously not much that we can do, except wait for the global economy to recover. Right?!
Dad: Indeed, you’re right son, like many other people think. But the reality is that the general public is beginning to feel the pinch – downsizing economic activities, closing down businesses, layoffs, retrenchments, shorter work week (4 instead of 5 days a week), etc.  That’s if we talk about the business among the self-employed. Other sectors are expected to be affected too, especially manufacturing, services sector, housing and property development.

Azzad: So, what’s our option now?
Dad: We cannot solely be dependent on external market to safeguard our continued growth performance. Besides export, we should take necessary actions to stimulate our domestic economy by raising consumption and investment, especially from the private sector.

Kelab Tasik Putrajaya_Makanan
Food at Kelab Tasik Putrajaya
Azzad: I thought the Government has done something in stimulating domestic economy and to increase consumption, such as Bantuan Rakyat 1 Malaysia (BR1M).
Dad: Yes, you are right. The stimulus packages introduced in 2012 Budget, the Economic Transformation Program (ETP), National Key Economic Areas(NKEAs) and low cost housing programs, are among the examples. I think the Government should continue to use this approach. Our previous experience shows that these stimulus packages were very effective in managing the economy during the crisis because they create ‘chain effects’ or ‘multiplier effects’ to increase economic activities in other sectors.

Azzad: What do you mean by ‘multiplier effects’? How does it work?
Dad: For example, when we develop low cost houses, we were actually creating demand for other goods and services – cement, wood, tiles, steel, manpower, workers, draftsmen, engineers etc. Similarly, when the houses were completed you wouldn't move into an empty house. You need new lighting, fans, refrigerators, carpets, sofa, bed, mattress and etc. In such a way that all the related industries and businesses react and create positive impacts to the overall domestic economy, that’s how ‘multiplier effects’ work.

View of Prime Minister's Office from Kelab Tasik Putrajaya
Azzad: Dad, what do you think about BR1M?
Dad: Son! If you were given RM500 cash in hand, how will you spend the money?

Azzad: Well if it was me, I would just save it up in my ASB account. But then again talking about stimulating domestic economy I’d probably buy some new clothes or shoes or a new watch and the balance go for makan-makan!
Dad: Hahaha.!! Do you think your spending will help to stimulate the affected sectors in the economy?

Azzad: Well, to tell you the truth I’m not really sure.
Dad: The intention of BRIM is to increase the real income of people, in particular those who are in the low-income group. By giving additional cash we actually increase their purchasing power so that they can spend for their basic needs, such as food, water, clothing, shelter, education, and healthcare.

MTEN approach was different, we didn’t spend money by giving cash to the people. Rather, the money was spent in the form of projects or programs which could create economic activities and stimulate the affected sectors through ‘multiplier effects’ or ‘chain effects’, explained above, which I feel was the effective way of stimulating domestic economy during the crisis.

Azzad: What else should the Government do to increase economic growth?
Dad: I think to gain support, the rakyat should be informed of what the Government is doing now in managing the economy during this difficult time. In those days, the public were informed through various channels of decisions made by MTEN as a ‘think-tank’. As a result, the Government received full support from the public and they were marching in the same rhythm and tune. As it is now, it seems the Government and the rakyat are marching in different rhythms and tunes

Dr. Muzahet Masruri, Ph.D (Economics),  University of East Anglia, United Kingdom