Given the convolution that we are now seeing in public debate over policy, it may be appropriate for us to back track slightly and disentangle the knots in policy decision.
1. In the early 1990s with massive inflow sof FDIs as well as short-term foreign capital, the fear was that an increase the monetary base would be hugely inflationary situation. The call by economists was to maintain aggregate demand. The political response was to grow the economy at all costs, and suppressed the consumer price index through controlled prices of food items and subsidy. The thinking was, after all, the economic growth would be sufficient to pay for the subsidy.2. The financial crisis hit. All privatisation concessionairs were technically bankrupt. The government stepped in to bail out by printing money, by increasing its debt.
3. As the economy slowed down because of the loss of investment momentum through punitive measures against local investors, subsidy of foreign investments through generous tax holidays, the tax revenue of the government was found to be insufficient to pay for its increasing debt. More debts had to be issued.
4. The China impact hit. Instead of encouraging local economic activities through exports to China, China drew local investors from here. At the same time, commodity prices escalated in the world markets as speculators try to corner the China market for commodities. China, with its strong economic growth of 10% pa was undeterred, and inflation soared around the world.
5. Global inflation of commodity prices hit Malaysia. The price control of items in the CPI policy of Malaysia is found to be costly. As the Malaysia economy falters, the government finds it hard to maintain the artificial apparatus of the local economy of government-deficit funding of massive projects to prop up the economy while at the same time keeping the cost of living down for the general public. This is now the situation we now face in economic policy in Malaysia.
Proposed Policy Responses
1. There is a policy proposal to reduce the subsidy by letting retail petrol prices rise to market level. This will reduce the government burden as well as reduce private consumption.
2. There is a policy proposal to introduce a GST ostensibly to replace the SST. This will raise government revenue and reduce private consumption.
3. There is a policy proposal for the government to undertake massive projects funded by further debt. This may or may not raise the GDP growth nor create employment for the local people.
1. What is the policy to encourage private investments, other than the stock market and the property market? Where is the value-add in the whole new world of VAT, or will the VAT be just another round price fixing.
2. If inflation is a problem, why are deposit interest rates so low? Are depositors being forced to pay for the mistakes of bankers and borrowers?
3. If the economy is so great, why is the ringgit exchange rate so low? Is the exchange rate policy rationing the local consuming individuals in favour of rich exporting companies?
4. Is the politics killing the economy? Or, is the economy doldrums killing the political regime?
5. Is the degree of corruption an indication of the real cost of living?
6. Can we clean up the economic system painlessly? Or, must we go through political and social unrest.
Anybody, any ideas?