Economy January 2015

It is early in the new year and we are already making adjustments to our expectations and resolutions.

The first thing to note is that the current developments in the world economy is not a short-term blip and will prove to be a major structural adjustment in the global economy.

We are probably witnessing the end of nearly three decades of expansionary monetary policies by both Japan and US. Standard monetary easing evolved into "quantitative easing" as the central banks ran out of papers to buy from financial institutions instead bought governments papers directly. This was when money flooded the global economy and China boomed, as the US and Japan governments tried to spend their way out of recession.

The US reckoned that its economy has adjusted enough and that early shoots of a recovery can be seen as evidenced by job growth. QE can now taper. This signals to US money all over the world to go back to motherland because US interest rates will be the first to rise. The US dollar strengthens as funds go back to the US after having sold down stock markets in Asia. This is where we are as a fundamental factor.

The second thing is that the discovery of shale oil in the US. This must be seen as a strategic move by the US to regain control of the global economy. This go-ahead on shale oil is to make the US less dependent on oil imports. The lower the cost of fuel also helps to strengthen the economic recovery. The IMF revised US growth to 3.6% in 2015 (from its October forecast of 3.2%).

The third thing is the regime change in China which requires that a major structural change is required for the Chinese economy. The old political power which has gained control of real assets must be eliminated by triggering a consolidation in the property market. The IMF expects China to grow 6.8% in 2015 (from the October forecast of 7.1%) down from 7.4% in 2014 and 7.7% in 2013.

The increase of oil from shale and the slowdown in China, the price of oil has come down to US$55 per barrel, from US$100 before.

It is in this context that the Malaysian government is reviewing its situation.

The adjustment is basically financial. Because of a loss of revenue from oil, and in some part made less painful by the resultant cut in oil subsidy from the oil price drop, government expenditure must be cut accordingly. The government decides to cut operating expenditure while keeping development expenditure unchanged, probably on the thinking that OE is boring spending stuff and DE is major capacity expansion stuff. In truth, massive projects cannot be simply abandoned without wastage, and trouble must be taken till completion. While unnecessary OE should be cut, there should be increase in OE in order to improve the efficiency of the government further, by putting in more machinery to do the work with human cannot or are unable or unwilling to do.

The government budget deficit rises from 3% to 3.2% of GDP. Economic growth is revised down one percentage on the lower end to 4.5% which optimism is kept at 5.5% on the upper end of the forecast range. The deficit increase would more likely be seen from the smaller denominator.

There is no word of the GST which presumably means that the government is pushing ahead with its implementation on 1 April 2015. Without the GST revenue, the government finances could become worse. The GST has come in time to replace oil as a revenue for the government.

Isn't it time for the government to size down? Or rather, to cut down on its massive development projects? This supposedly "counter-cyclical", "stimulative", etc fiscal expansion has been going on for too long. There is a need for the government to expand to increase economic efficiency so that more growth can be squeezed out of existing assets. Capacity expansion should come in when decent efficiency levels are reached. It is not good to cover up inefficiency through side-way expansion. It doesn't create high income for all; it create high income disparity.

The world is undergoing a structural change. At home, we are shuffling things about.

We should create a better ecosystem for entrepreneurship. Not the type of entrepreneurship that go after government projects (a legacy of sustained development expenditure of the government). The key word for entrepreneurship is efficiency and competitiveness. We should operate in moderate sizes. It should not be a world dominated by conglomerates and monopolies. The government should be small and efficient. The private sector should dominate the economy, be big and efficient. People should be busy cracking their brains, rather than playing politics.

In the face of the loss of revenue from oil and gas, are we building our non-oil economy?