Friday, June 11, 2010

10th Malaysia Plan, 2011-2015

The 10MP begins next year with the intention of charting the course of the economy as well as the social well-being of the citizens of Malaysia in the next five years.

The three key targets are an economic growth of 6% per annum in real terms, a reduction from 5.3% to 3% in the fiscal deficit and, as a result, a need to ensure that private investments will have to grow at 12.8% or RM115 billion annually.

The key to the economic success of Malaysia in the next five years, or anytime, is private investments. If private investments are not forthcoming, economic growth will fall below 6% per annum. In the 9MP, the average growth was 4.2% per annum. So equally, if we do not watch out, the economy could manage just to grow at 2-3% per annum which will be about the rate of growth of the population.

The rest on social development has to do with the distribution of government funds. The point I wish to make here is that while most people think that better growth will lead to better distribution (studies show otherwise), the situation we have here in Malaysia is that distribution may be affecting growth especially private investments.

In my mind, it is jolly well and good to have a nicely prepared plan. But the implementation must be done fairly and demonstrating social justice. Otherwise, the risk is to lose the support of the public.

The best of luck to Malaysia!

Thursday, June 10, 2010

Subsidies & Inefficiency

The latest official clarification paints the following picture:

1. Direct subsidies RM18.6 billion in 2009, indirect subsidies RM55.4 billion.

For the latter, there are two types:

(a) "...contract obligations, financial supports and rebates, assistance to MOF Inc companies...."

These are clearly part of the government's attempt at taking so-called "strategic stake" in various parts of the economy and may not have been that commercially feasible so that the government has to pump in lots of money to keep things up. This is the portion that needs cleaning up. Otherwise, you have incompetents running around acting like big corporate leaders when they are still wet behind their ears.

(b) "...cost-based financial assistance including emoluments for education and health."

This is part of social welfare as well as important KRAs which are fundamental to the shape of our future society. Without this, all education and healthcare will be at full cost.

Even here, there is a case for ascertaining how much of the "costs" or "subsidies" goes into paying for exorbitant capital cost of construction, and how much to real high value-added services from experts which are being enjoyed by the general public and therefore leading an improvement to the over general well being of society who, at the end of the day, are paying for those services through their taxes.

2. The country's national debt was RM234 billion, I presume last year, and this is purely the external debt of both public and private sectors. The government debt stands at RM362 billion, I presume on the latest count at some time this year, is made up of domestic debt (96%) and foreign debt (4%).

From above, the foreign debt of the government is estimated at RM14 billion which therefore means that the private sector foreign debt is RM220 billion. There should be no mystery as to the size of the foreign debt of the private sector as it captures all the GLCs as well, as a result of the earlier attempts at privatisation to solve the government deficit problem.

The government's financial situation today is a product of creative public finance policy in the past. When the public debt balance was cleaned up through privatisation which triggered a huge round of public spending unfortunately funded through short-term capital funds which on exit were then taken over by the national debt such as MOF Inc and shining entities as GLCs. These are all creative accounting exercises.

The economics is that the economy has lost its engine of growth which must always be private investments and which are now being replaced by public deficit spending.

It is probably high time that the government downsizes itself, and cut its operational and development expenditures by returning the bulk of the economy to the private sector and staying out of business. If not, we could be running an economy where the cream is harvested by the elite paid for by the general public in the generations to come through deflation and depreciation as their purchasing power diminishes over time.

Malaysia may not go the path of Greece but it could go the path of Latin American countries such as Argentina and Brazil. Fortunately for them, of years gone past, as these LA countries appear to be recovering.

The thing to do for Malaysia may not be to cut directly the subsidies per se but to strenghten governance and efficiency and to streamline our economic strategic position so that the need for subsidies is reduced resulting in a more transparent and efficient economic system.

To discuss what to do with subsidies in the context sugar, flour and cooking oil is to be pedantic.

Wednesday, June 9, 2010

Licence to Kill

This is a classic case of an inept government policy.

When it is discovered there was a shortage of price-controlled items such as sugar, flour and cooking oil in some Malaysian towns, the Ministry of Domestic Trade, Co-operatives and Consumerism, in its infinite wisdom, decrees that all shops selling these price-controlled items should have an annual RM10 licence with immediate effect (1 June) or postponed (1 July), failing which:

(a) The shops are not allowed to sell - which will heighten the problem of access to these price-controlled items for the general public, or

(b) The shops will be selling the price-controlled items illegally - so the logical reaction of the association of shopkeepers is not to bother with the licence nor the selling (no hassle, small loss).

Many other possible causes.

(1) The shortage is caused by foreigners buying in Malaysian border towns. Administrative problem of restricting the purchase by foreigners.

(2) The shortage is caused by smuggling. Then the border police must work.

(3) The shortage is caused by smaller dispatches by factories. Talk to the factories. (The factories say they are not the problem.)

(4) The shortage is caused by customers stocking up. Could be caused by visibility of lower stock in shops. One-off abnormal demand triggering panic buying.

(5) The shortage is caused by shopkeepers stocking up (hoarding). Why? Again, fear of possible shortage.

As we can see from the above, the last thing the government should do is for the ministry to impose a licence on shopkeepers - unless, of course, the ministry wants to disallow foreign shopkeepers from selling smuggled Malaysian-subsidised price-controlled essential goods. Akin to asking thieves to legalise their operations (oops, the sports betting inept).

According to textbooks on war economies or totalitarian regimes, the most crucual aspect of price controls is the physical management of supply to demand. Demand is always there for "essentials" regardless of price. The supply lacks motivation because of fixed but small margin.

Yes, taking the lid of the price is the answer - in the long run - but producers are already circumventing the price control by value-addition to the products and making them non-essential or luxury.

So the price controls should be serving a very small section of society but the most politically potent because of their undeserved relative poverty.

Tuesday, June 8, 2010

Subsidies, Investments & GLCs

I suppose the main issues have already been raised in my preceding post, but I cannot help myself from going at this subsidy thing again because there are many worrisome things about the way the subject matter has been raised and is being dealt with by the government and the government men.

1. The first worrisome thing for me is that the subsidy issue could be dealt with in isolated. One argument is that the subsidy, if maintained, will grow over time. Obviously. If the population grows and the economy grows and if the value of money falls. This happens because the subsidy is a percentage of the economy. How, is it not a wilful misrepresentation of statistics to quote a figure projected over time and presents the absolute number as a ballooning number. I am not necessarily in favour of subsidies, but I would like the facts about them to be present properly.

2. The second worrisome thing is that the justification for the removal of subsidies, apart from (1) above, is not clear either. If it so that the government can spend on other projects or is it to reduce the deficit. If the deficit is the issue, subsidies and other projects may have to be cut. And, by definition, going for a reduced budget deficit as per the GDP without any improvement to the investment climate, is a policy move that will definitely induce a recession in the local economy.

3. The third worrisome thing is investment. We should discard this old Keynesian thought (not necessarily Keynes') that even wasteful government projects will trigger off renewed growth in the economy through the multiplier effect. Recent local economic history has disproved this hypothesis. Given the leakages in the economy, and even the GLCs are now going abroad to investment, the income multiplier of any government expenditure is likely to be less than the sum spent on projects. There should be a clear cut strategy to encourage local private investments, the most important element of which is confidence of the people in the consistency of government policies.

My optimism is that the government has taken some positive leads especially in the NKRAs re corruption and education. The biggest challenge is the NEM which must be about the encouragement of local private investments. There is a serious need to review the mandate of the GLCs which seem not be building the productive capacity of the economy; GLCs are presenting crowding out local private investments through their monopolies, hallowing out the economy by investing abroad and concentrating on obtaining financial returns to financial capital. We need real economists in charge of GLCs.