Expanding the Aggregate Demand Curve

In the past 18 years since 1990, ever since the success of opening up the economy to foreign direct investments hit infrastructure bottlenecks, the Malaysian economy has been undertaking mega projects to expand the infrastructure capacity of the local economy - that is, expanding its aggregate supply curve.

This expansion of the aggregate supply curve had proved so lucrative to the policy makers that even as a solution to the problem created by it in 1997-98, the solution remained additional expenditure on infrastructure. This "counter-cyclical fiscal stimulus" has proven itself so easy to propose and implement that many politicians and poorly-schooled economists may be tempted to imagine themselves to be brilliant economists.

Infrastructure projects are probably one of the easiest projects to implement (so long as one has the money) because there is no accountability to their economic or commercial viability.

So, since 1990, Malaysia's aggregate supply curve has been pushed further and further out to the right.

The idea of building more infrastructure facilities is to expand the productive capacity of the local economy so that there is more room for private-sector business investments to increase and in the process generate growth in the economy.

If private investments are unchanged and the aggregate demand curve stays the same, the sustained expansion of the aggregate supply curve means that operators of infrastructure facilities will lose money due to insufficient demand - and the only way to ensure profitability is to raise the prices high enough, and this is easy to do for monopolies. (Note Khazanah's strategy to turn around GLCs, as an example.)

In the meantime, having expanded the supply side, Malaysia undertook no extra effort to expand the aggregate damand for infrastructure. When the Japanese and others looked to China after the 1997-98 crisis, the local operating environment hardened further for domestic direct investment. The clamour for lucrative government contracts (on the supply side) led inadvertently to a government machinery that has become hostile to homegrown investments.

Easy money policy therefore led not to an increase in local direct investments in factories and plants for exports or businesses of entrepreneurs, but to an increase in the collateral assets for banks - namely, real estate and even financial assets. With this came the consumption boom - of cars and credit cards - which thought great for the local retail trade but is no good for the secondary sector of the economy - the real economy of producing things they can be sold to the world.

Malaysia needs to expand its aggregate demand curve, by encouraging direct investments, not only from foreigners but also from Malaysians themselves. Opportunnities must be created for investors to take risk and keep the fruit of their efforts rather than have rules and regulations that strangle confidence and the animal spirits and the long-term faith in the economy. To invest is to keep faith with the country.

The monetary policy is easy enough - interest rates are low enough and banks are very keen to lend. The fiscal policy has become so elongated that we may have to raise debt to finance it. But there is a need for policy and the government process and machinery to take an enlightened view of the workings of reality.

The current global financial meltdown shows that wealth as most people perceived it is a figment of their own personal imagination, while the richness lies in the openness of society out there - of the money that is yet to be made. Assets are nothing but relics of dead people that the living merely sit on.

The expansion of the aggregate demand curve by consumption is a drive in the wrond direction as the current financial meltdown also shows. There is a need to invest by putting resources to productive use, productive in the sense that we are continually extracting more and more out of the available resources for the benefit of society, rather than to feed the greed of individuals or the fancy of a group.

Let Malaysians BE ALLOWED TO invest in Malaysia and stake a claim in the future of their own homeland - rather than be over-run by billionaires and foreigners!