February 11, 2018
February 11, 2018
February 11, 2018
January 23, 2018
The hazards of relying solely on gross domestic product as a measure of overall economic activity have become obvious over time, especially as corporate profits have outpaced GDP growth in key economies. But none of the flaws in GDP are fatal, and policymakers should focus on fixing them, rather than seeking an entirely new framework.
ZURICH – Respected economists have long pointed out that gross domestic product is an inadequate measure of economic development and social well-being, and thus should not be policymakers’ sole fixation. Yet we have not gotten any closer to finding a feasible alternative to GDP.
One well-known shortcoming of GDP is that it disregards the value of housework, including care for children and elderly family members. More important, assigning a monetary value to such activities would not address a deeper flaw in GDP: its inability to reflect adequately the lived experience of individual members of society. Correcting for housework would inflate GDP, while making no real difference to living standards. And the women who make up a predominant share of people performing housework would continue to be treated as volunteers, rather than as genuine economic contributors.4
Another well-known flaw of GDP is that it does not account for value destruction, such as when countries mismanage their human capital by withholding education from certain demographic groups, or by depleting natural resources for immediate economic benefit. All told, GDP tends to measure assets imprecisely, and liabilities not at all.
Still, while no international consensus on an alternative to GDP has emerged, there has been encouraging progress toward a more considered way of thinking about economic activity. In 1972, Yale University economists William Nordhaus and James Tobin proposed a new framework, the “measure of economic welfare” (MEW), to account for sundry unpaid activities. And, more recently, China established a “green development” index, which considers economic performance alongside various environmental factors.
Moreover, public- and private-sector decision-makers now have far more tools for making sophisticated choices than they did in the past. On the investor side, demand for environmental, social, and governance data is rising steeply. And in the public sector, organizations such as the World Bank have adopted metrics other than GDP to assess quality of life, including life expectancy at birth and access to education.
At the same time, the debate around gross national income has been gaining steam. Though it shares fundamental elements with GDP, GNI is more relevant to our globalized age, because it adjusts for income generated by foreign-owned corporations and foreign residents. Accordingly, in a country where foreign corporations own a significant share of manufacturing and other assets, GDP will be inflated, whereas GNI shows only income the country actually retains (see chart).
Ireland is a prominent example of how GNI has been used to correct for distortions in GDP. In 2015, Ireland’s reported GDP increased by an eye-popping 26.3%. As an October 2016 OECD working paper noted, the episode raised serious questions about the “ability of the conceptual accounting framework used to define GDP to adequately reflect economic reality.”
The OECD paper went on to conclude that GDP is not a reliable indicator of a country’s material well-being. In Ireland’s case, its single year of astonishing GDP growth was due to multinational corporations “relocating” certain economic gains – namely, the returns on intellectual property – in their overall accounting. To address the growing disparity between actual economic development and reported GDP, the Irish Central Statistics Office introduced a modified version of GNI known as GNI*) for 2016.
The gap between GDP and GNI will likely close soon in other jurisdictions, too. In a recent working paper, Urooj Khan of Columbia Business School, Suresh Nallareddy of Duke University, and Ethan Rouen of Harvard Business School highlight a misalignment in “the growth in corporate profits and the overall US economy” between 1975 and 2013. They find that, during that period, average corporate-profit growth outpaced GDP growth whenever the domestic corporate-income-tax rate exceeded that of other OECD countries.
In late December, this disconnect was addressed with the passage of the 2017 Tax Cuts and Jobs Act. By lowering the corporate-tax rate to a globally competitive level and granting better terms for repatriating profits, the tax package is expected to shift corporate earnings back to the United States. As a result, the divergence between GDP and GNI will likely close in both the US and Ireland, where many major US corporations have been holding cash.
Looking ahead, I would suggest that policymakers focus on three points. First, as demonstrated above, the relevant stakeholders are already addressing several of the flaws in GDP, which is encouraging. Second, public- and private-sector decision-makers now have a multitude of instruments available for better assessing the social and environmental ramifications of their actions.
And, third, in business one must not let the perfect become the enemy of the good. We have not solved all of the problems associated with GDP, but we have come a long way in reducing many of its distortions. Instead of seeking a new, disruptive framework to replace current data and analytical techniques, we should focus on making thoughtful, incremental changes to the existing system.
December 26, 2017
In the tenth year since the start of the global financial crisis, the US economy reached a new high-water mark, and the global economy exceeded expectations. But whether these positive trends continue in 2018 will depend on a variety of factors, from fiscal and monetary policymaking to domestic politics and regional stability.
Michael J. Boskin, a senior fellow at the Hoover Institution and the T. M. Friedman Professor of Economics at Stanford University,Palo Alto, California
STANFORD – All major macroeconomic indicators – growth, unemployment, and inflation – suggest that 2017 will be the American economy’s best year in a decade. And the global economy is enjoying broad, synchronized growth beyond what anyone expected. The question now is whether this strong performance will continue in 2018.
The answer, of course, will depend on monetary, fiscal, trade, and related policies in the United States and around the world. And yet it is hard to predict what policy proposals will emerge in 2018. There are relatively new heads of state in the US, France, and the United Kingdom; German leaders still have not formed a governing coalition since the general election in September; and the US Federal Reserve has a new chair awaiting confirmation. Moreover, major changes in important developing economies such as Argentina, Saudi Arabia, and Brazil have made the future outlook even murkier.
Still, we should hope for the best. First and foremost, we should hope that synchronized global growth at a rate of just under 4% will continue in 2018, as the International Monetary Fund projected in October. Growth not only raises incomes, but also makes vexing problems such as bad bank loans and budget deficits more manageable. As former US President John F. Kennedy famously said in an October 1963 speech in which he promoted his proposed corporate and personal tax reductions, “a rising tide lifts all boats.”
For my part, I predict that the global recovery will continue, but at a slightly slower growth rate of around 3.5%. The two most obvious risks to keep an eye on will be Europe, where a cyclical upturn could stall, and the oil-rich Middle East, where tensions could flare up once again.
Second, let us hope that the Fed, guided by the steady hand of its new chair, Jerome “Jay” Powell (pic above), will continue or even accelerate its monetary-policy normalization, both by raising its benchmark federal funds rate, and by shrinking its engorged balance sheet. And we should hope that economic conditions allow the other major central banks, especially the European Central Bank, to follow suit.
On this front, I predict that the major central banks will continue to normalize monetary policies more gradually than is necessary. The biggest risk here is that markets may try to test the Fed under its new leadership, for example, if inflation rises faster than anticipated.
Third, let us hope that the Republican tax package will, if enacted, deliver on its promise of increased investment, output, productivity, and wages over the coming decade. Here, I predict that the legislation will pass, and that investment in the US over the next few years will be relatively higher than if no action had been taken.
To be sure, whether investment will rise from its currently subdued level will depend on many other factors than the corporate-tax rate. But the tax package can still be expected to boost output, productivity, and wages. The question is not if, but when.2
If the full effects of the legislation are not felt before the 2018 or 2020 elections, that lag could prove politically consequential. The biggest danger is that its benefits will be delayed, and that its key provisions will be reversed whenever the Democrats are back in power.
Fourth, let us hope that governments everywhere begin to address the looming crisis in public-pension and health-care costs, which have been rising for decades. As social programs become costlier, they crowd out government expenditures on necessities such as defense, while generating ever more pressure to impose higher growth-suppressing taxes.
Europe, in particular, must not let its cyclical rebound lull it into complacency. Many European Union member states still need to reduce their government debt, and the eurozone needs to resolve its “zombie bank” crisis. Beyond that, structural labor-market reforms of the kind French President Emmanuel Macron is pursuing would be most welcome.
Unfortunately, I’m afraid that progress on structural reforms will be sporadic, at best. The danger is that slow growth will not lead to sufficient wage gains and job creation to defuse the ticking time bomb of high youth unemployment in many countries. Another risk is that reform attempts could provoke a political backlash that would be harmful to long-term investment.
Fifth, let us hope that the eurozone can avoid a currency crisis. This will depend largely on whether German Chancellor Angela Merkel can form a coalition government and restore political stability to Europe’s largest economy.
Sixth, we should hope that the EU and the UK can agree on a reasonable Brexit deal that will preserve fairly strong trade relations. The main risk here is that localized declines in trade could spill over and cause broader harm
And, beyond Europe, let us hope that negotiations between the US, Canada, and Mexico over the North American Free Trade Agreement (NAFTA) will result in an arrangement that still facilitates continental trade. For trade generally, the biggest risk is that the Trump administration could start a lose-lose trade dispute, owing to its understandable eagerness to help American manufacturing workers
Seventh, let us hope that new policies targeting information and communication technology (ICT) strike the right balance among all stakeholders’ competing and legitimate concerns. On one hand, there is reason to worry about certain Internet companies’ concentration of market power, particularly in online content and distribution, and about the effects of new technologies on personal privacy, law enforcement, and national security. On the other hand, new technological advances could deliver immense economic gains.
It is easy to envision a scenario of too much regulation, or of too little. It is also easy to envision a large-scale public backlash against the major technology companies, particularly if poor self-policing or a refusal to cooperate with law enforcement leads to some horrible event.
Here, I predict that achieving an appropriate policy balance will take years. If some future event strikes an emotional chord, the public’s mood could swing dramatically. Ultimately, however, I suspect that competition and innovation will survive the forthcoming regulations.
Finally, and most important, let us hope that terrorism is thwarted everywhere, conflicts subside, democracy and capitalism regain some momentum, and greater civility and honest dialogue return to the public domain. Should that happen in 2018, it will be a very good year indeed
Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.
November 6, 2017
Why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?
By Dr. Lee Hwok Aun@www.freemalaysiatoday.com
Statistics are meant to inform, but sometimes they confuse. Take Malaysia’s household income figures. We keep hearing complaints of stagnant incomes and difficulties coping with the rising cost of living. But since the release of the Household Income and Basic Amenities Survey Report 2016 last month, an official success story is making the rounds – all the way to the 2018 Federal Budget speech.
The speech celebrates the rise in median household income, calculated from the Household Income Survey (HIS), from RM4,585 in 2014 to RM5,288 in 2016. Simultaneously, average household income rose from RM6,141to RM6,958, or at an annual growth rate of 6.4%. In real terms – that is, accounting for inflation – income grew 4.3% per year. The rest of this article refers to growth rates in real terms, which more accurately reflect purchasing power.
By the government’s account, household incomes have been growing quite substantially. Yet the budget is stacked with lavish handouts and financial relief, as though income growth has been sluggish, insufficient. Granted, this is an election budget, but a clearly the proliferation of social assistance is also addressing areal groundswell of economic discontent.
Statistics should be validated by the reality they intend to measure. If the government reports that the Malaysian economy has grown by 10% this year, most of us would disbelieve that outright. It can’t be that high; the economy is not ballooning like the early- to mid-1990s! But looking at Malaysia’s steady international trade, investment and domestic consumption, visible construction projects, low unemployment, and economic conditions as a whole, the actual figure of about 5% GDP growth seems credible and plausible.
So why does the official report of rising household income seem incredible and implausible? Is Income really stagnating, or is it flourishing but Malaysians are a whiney lot?
An examination of empirical evidence exposes three enigmas in the official household income statistics, raising questions about the reliability of the government’s high growth report.
First, income gains of the past half-decade are driven by inexplicably rapid growth in the 2012-2014 period, during which real household incomes expanded8.2% per year – faster than in the booming 1990s (Figure 1). Furthermore, households in the bottom 40% (B40)enjoyed stupefying 14.6% income growth per year. Suchhyperrates are usually the exception but were supposedly the norm – during a time of modest 5.4% economic growth.
Two years ago, when the 2014 Household Income Survey Report documented a spectacular fall in inequality from 2012 to 2014, I raised concerns that those results departed too far from reality (http://www.themalaymailonline.com/what-you-think/article/malaysias-spectacular-drop-in-inequality…-for-real-lee-hwok-aun, https://m.malaysiakini.com/news/315933). This phenomenal success bypassed attention. It was not mentioned in the 2016 Budget speech; the government was apparently not taking its own statistics seriously.
In releasing the 2016 income statistics, the government reaffirms the questionable 2014 calculations – without explanation. Of course, we might point to two outstanding policy shifts as income boosters: minimum wage, which came into full effect in 2014, and BR1M, introduced in 2012. Their possible effects cannot be ignored.
But upon examination, these turn out to be the second and third enigmas in the income statistics.Minimum wage and BR1M fail to explain the rise in household income.
The official household income statistics aggregate various income components (the proper term is gross household income):
A breakdown of these sources shows that the share of wages and salaries in gross household income has declined, while the share of property and investment income and transfers have increased (Figure 2). Therefore, it is most unlikely that minimum wage contributed to high overall income growth.
Furthermore, when we compute growth rates household wages and salaries, we find modest numbers for 2012-2014 and 2014-2016 (Figure 3). Happily, we can compare this particular finding with calculations from another data source. The growth of individual wages and salaries, based on the Wages and Salaries Survey data, registered similar rates. Minimum wage surely boosted wage growth to some extent, as indicated by the higher rate in 2014 when it took effect. But it fails to account for rapid household income expansion.
BR1Mis the last big factor standing. The share of transfers in household income increased – so far so good.
But the case for BR1M as an explanation for income growth soon crumbles. First, the BR1M payments are popularly known by the annual amounts paid, whereas household income is handled on a monthly basis. When investigating BR1M’s impact on household income, we must convert into their monthly amount. The problem with the BR1M explanation is that the quantum per month is so minuscule relative to household income per month. In 2012 and 2016, B40 household’s income averaged RM1,847 and RM2,848, while BR1M payments for households earning below RM3,000 per month, were RM42 and RM83 (RM500 and RM1000 divided by 12). BR1M accounted for only 2.3% and 2.9% of the household income of the B40, its principal recipients.
The second pertains to timing. BR1M was introduced in 2012 at RM500 per year, increased to RM650 in 2014, then RM1,000 in 2016. The big differences took place in 2012 and 2016, not in 2014. However, the huge leap in household income occurred between 2012 and 2014!
In light of these enigmas, discrepancies and gaps, the government’s household income calculations for 2014 and 2016 remain implausible and demand a fuller accounting, particularly to provide reasons for the unfathomably high growth in property and investment income and transfers received.
There are empirical grounds, not just anecdote or intuition, to question the veracity of the official statistics, and to restrain celebration of Malaysia’s purported achievements in raising household income.One can speculate some possibilities. Perhaps transfers have been over-counted, or imputed rent over-estimated. For those living in houses they own, the gross household income numbers include an imputed amount of rent – that is, an amount they would receive if they rented out the house. Imputed rent, although it is not actual income received, is a useful piece of information. But it is misleading to include imputed rent in household income and report the sum as an indication of purchasing power and material well-being.
The Department of Statistics must be commended for publishing increasingly detailed reports on the 2014 and 2016 Household Income and Basic Amenities Surveys, but the disclosures are still inadequate. In line with the government’s commitment to Open Data, the natural next step should be to make the raw datasets accessible, to facilitate collaborative and constructive work and arrive at a fuller comprehension and credible measure of this vital issue of household income.
Dr. Lee Hwok Aun, Senior Fellow, Yusof Ishak Institute– ISEAS, Singapore
November 2, 2017
The Budget is a tool or instrument for presenting a statement about the state of the economy, its prospects, and policy announcements for improving governance. A well-crafted budget statement should be an objective and honest presentation meeting the goal of accountability.
Sadly, the budget he (Najib Razak) presented fails these basic tests. His speech of almost 12,000 words was more akin to a laundry list of giveaways, expenditure allocations both real and imagined, and vague statements about the economic consequences that would result.–Lim Kit Siang
MP SPEAKS | Prime Minister Najib Razak described Budget 2018 being about “gifts, rewards and incentives.” It is a most mistaken view.
The Budget is a tool or instrument for presenting a statement about the state of the economy, its prospects, and policy announcements for improving governance. A well-crafted budget statement should be an objective and honest presentation meeting the goal of accountability.
Sadly, the budget he presented fails these basic tests. His speech of almost 12,000 words was more akin to a laundry list of giveaways, expenditure allocations both real and imagined, and vague statements about the economic consequences that would result.
The speech omitted any reference to urgently needed policy changes to restore the competitiveness of the economy that would enable the nation to escape the middle-income trap it finds itself in. The speech was silent about measures to correct the stagnation in real income, and address the looming danger associated with the mountain of debt – public, corporate and household.
The budget has been turned into an unabashed and irresponsible first salvo in the campaign for the 14th General Election. Page after page of the speech detailed expenditures and proposed allocations; no group was ignored in the largesse being extended.
Najib’s laundry list of giveaways, expenditure allocations both real and imagined, and vague statements.-2018 BUDGET
Little was said about how the proposed expenditures were designed to advance the overarching economic goals; no reference was made to how the addiction to deficit spending was to be overcome.
The projected deficit was itself a meaningless figure as the profligate spending in some measure would be financed outside of the budget, and nor did the PM in his speech or in the economic report provide details about the level of contingent liabilities or the new liabilities being assumed.
The PM chose to describe the budget as the “mother of all budgets”. Ironically, he was on target as this budget was an exercise in deception and was an unvarnished sales pitch seeking votes in the upcoming election.
Najib’s claim about “good news” needs to be taken with a large pinch of salt. The reality is that the news as reported in the budget statement is more in the nature of “fake news”. The budget framework is built upon dubious interpretation of statistical data in a highly selective manner.
The PM gloated over the growth numbers but was being selective. He failed to make any reference to issues of a structural nature raised by the World Bank and the International Monetary Fund (IMF) in particular in the latter’s Annual Article IV Consultations and reported on its website.
Economic growth rates
Najib also made much about the revised growth rates issued by the International Financial Institutions and attempted to claim credit. He omitted to indicate that the revisions pertained to almost all countries – Malaysia being one in the group.
The revised growth rates should not therefore be interpreted as an approval of the competence of the government in managing the economy. Growth rates are revised to be higher because of global economic developments, primarily resulting from changes in monetary policies by the US Federal Reserve Bank and its counterpart the European Central Bank, and the partial recovery in prices for oil and gas.
The PM has been selective in the use of data. This is best illustrated by his use of the year 2009 as the base for measuring change. There is no rational reason for this choice other than an attempt to glorify his own tenure of office. It is also pertinent to note that 2009 marked a global recession. The choice of this low base amplifies the recovery in the years since.
Najib, however, chooses to remain silent about the negative developments, for instance, in the losses in the country’s external reserves (from a peak of US$ 140.0 billion in 2012 to US$101.2 billion in Sept 2017; total reserves as a percentage of external debt fell from a high of 121.1 percent in 2007 to 47.2 percent in 2016 or the decline in the value of the ringgit from US$1 = RM 3.34 in 2007 to US$1= RM4.20 in September 2017. These are not indicative of “efficient governance and prudent discipline” as he claimed.
Putrajaya’s fiscal situation
For two decades the government has operated with a deficit; the reported federal government debt now approximates 55 percent. Additionally, the Putrajaya has concealed its borrowings and the true size of its debt by making government-linked companies and other quasi-government entities undertake borrowings to finance public sector projects under the guise of so-called public-private projects.
The government has, at the same time, accumulated large hidden contingent liabilities by extending guarantees for borrowings by GLCs and other entities.
The fiscal situation has been worsened by corruption, mismanagement and other abuses including non-competitive acquisition of goods and services. The absence of competitive bidding results in price distorted costs. Tax revenues have been eroded by way of so-called “incentives” extended to government cronies without resulting in any discernable rise in private investment.
The reference in the speech to the New Economic Model (NEM) is more in the nature of a throwaway remark.
Certain clear-cut goals and policies adopted at the launch of the NEM have fallen by the way side. It should be recalled that there was a commitment to pursue further privatisation of the government’s non-financial public enterprises and reduce the government’s holdings in the GLCs which in reality function as state-owned enterprises.
It is significant that the speech contained no reference to the pursuit of these stated goals.
The findings from a recent highly professional study led by Terence Gomez has highlighted the dominant role played by GLCs in almost all sectors of the Malaysian economy, from aviation, banking, manufacturing, plantations to various modes of transportation.
In 2013, a total of 455 companies (including subsidiaries) were classified as government-linked investment companies (GLICs). There were 35 publicly listed companies which were among the top 100 companies listed on the Bursa Malaysia. The latter account for an overwhelming percentage of the capitalisation of the exchange.
Without a doubt, the government’s footprint is large in the business and commercial sectors. The entities in question act as monopolies or privileged entities, thus stifling private enterprise. This has led to flagging private investment despite tax and other incentives.
Of late several entities (e.g., Mara, Felda, Tabung Haji) have become mired in financial scandals. There is little or no accountability by such entities.
Furthermore, it is strange indeed that while Malaysia as a upper middle income country seeks to attract FDI flows, yet government linked agencies are currently exporting capital. These endeavors taken represent contradictions. But, more troubling is the fact that they give rise to abuses and corrupt practices.
The claims of successes in employment creation merit comment. While indeed some 2.3 million jobs have been created in the past eight years, most of these have been low paying jobs with many filled by migrant workers.
Serious shortages of skilled workers exist; paradoxically the brain drain continues unabated. These labor market developments along with the stagnation in wages are indicative of a failed set of policies that are contributing to the loss of competitiveness and entrapment as a middle-income country.
The self-congratulatory remarks about export growth are yet another example of delusion. While the current level of exports are expressed in ringgit terms, the PM has chosen to ignore the fact that he is comparing values based on different exchange rates.
The comparison of international reserve levels is rather devious – this is the only comparison linked to 1997!
The reporting of an increase in income per capita from RM27,819 in 2010 to RM49,713 in 2017. This trend is contradicted by the World Bank as the following numbers show:
The significance of these numbers points the extent to which Malaysia is lagging in terms of achieving “high income” status which in 2016 was set as income levels in excess of US$12,235.
Indeed, taking account of the current level of GNI per capita, projected exchange and growth rates, it is patently clear that the much-touted goal of achieving “high income” status by 2020 is a fading dream.
The budget allocations for 2018 are projected at RM280.25 billion, an increase of RM20 billion, with RM234.25 billion for operating expenditure and some RM46 billion for development.
While further details are highlighted, Najib chose to be silent about a large item, namely debt service which amounts to 11 percent of the operating expenditure. The increased allocations are largely to restore cuts that were imposed earlier in the year.
Revenue collection in 2018 is projected at RM240 billion, an increase of approximately nine percent from RM220 billion in 2017.
No details are given either about the sources of revenue, or the amounts reduced by way of tax cuts and exemptions. The projected growth lacks credibility given GDP growth rate, reductions in revenue attributable to the exemptions from GST granted for big ticket items alongside the reductions in income tax rates.
In brief, the rosy estimates of modest growth in expenditure coupled with unrealistic levels of revenue receipts follow a pattern. Revenue projections are pitched high whilst expenditures are restrained in the budget.
Thus, there are inevitable supplementary expenditure requests later in the year. These approaches in budgeting enable the government to put out massaged numbers for the deficit. These practices appear to be sharpened in the preparation of the 2018 Budget.
Lip service was paid about fiscal consolidation without mention of how the PM proposes to reduce debt levels. While he was upbeat about all manner of “progress”, no mention was made about the record concerning deficits. It is noteworthy that it is now more than 20 years since Malaysia enjoyed a budget in surplus.
Once again total debt along with contingent liabilities will rise in the year ahead. These will represent burdens passed on to future generations. With an ageing population, the burden will be all the greater. The nation’s long-term interests are being sacrificed for short term political gains.
The claim that this budget will chart the course for building the nation for the next 30 years is a farfetched assertion. This is all the more questionable considering the fact that the Budget hardly lays out any long- term policies and goals but is only concerned with the “here and now” issues assumed to be of interest to a highly jaded electorate.
Most remarkable, however, is the PM’s assertion: “Since we declared Independence, we have been fortunate as our forefathers have governed and administered this country embedded with shariah requirements”. Najib appears to be rewriting history by ignoring the fact that the country adopted a secular constitution and up until recently shariah played no major role in administration.
To claim that for six decades a shariah framework has operated with the federal constitution playing a secondary role is an outright distortion of the facts. The formulation used by the PM ought to raise a red flag about his coalition’s intentions regarding the status of the Constitution.
While acknowledging that “the framework has not been written in any government documents, but its practices are reflected in all inter-related national philosophies and policies” Najib appears to be outlining a position that the government will adopt in the event it is returned to power. It is thus a signal of how the secular federal constitution will be further sidelined.
Trends in investment
The PM set out several targets dealing with investment and trade. The statistics about trends in investment were selective.
Once again by choosing a low bench mark year (2009), a year that recorded a global recession, and inflated targets for 2018, he attempted to project progress.
These statistics appear impressive in attributing performance of private investment. A closer review, however, paints a different picture.
Given that the GLCs dominate the private sector, and that they largely operate as SOEs, much of the “improvement” can be attributed to government initiatives handled by these entities.
The process permits the government to by-pass concerns about the debt ceiling and at the same time permit nefarious projects as evidenced by the 1MDB saga.
The trends in private investment are erratic as inappropriate policies and political uncertainties have impacted on private investment, both domestic and foreign. The failure to announce corrective policy measures will result in sluggish investment patterns along with continuing outward capital flows
Passing reference is made in the 2018 Budget to accelerating exports. However, no indication is given as to what policies will be introduced to develop capacities in new products and promoting industries involving new technologies for instance the use of artificial intelligence.
No mention is made about how the government proposes to deal with the withdrawal of the US government from the TPPA; the PM was silent about what posture it intends to take viz. other trading arrangements within ASEAN or with the EU and the China-led proposals for a regional trade arrangement.
The claim that “…for the first time in the history of the nation’s budget…” a large allocation “is provided to assist farmers, fishermen smallholders and rubber tappers” appears to be a most strange claim. Every Five-Year Plan, every budget over the past six decades has contained allocations for these groups; it is disingenuous indeed to make claims that are short on a factual base.
The mega rail transportation projects that have been announced raise multiple concerns. For a start, cost benefit and feasibility studies have not been disclosed, assuming these have been done.
It is worthy of note that the projects will be financed by loans from China; the terms of these loans have yet to be announced. Reports in the media appear to suggest that major parts of these projects will be assigned to China’s enterprises who will invite some Malaysian entities to collaborate.
Najib evaded the entire issue of port expansion using loan funds in the face of overcapacity in the nation’s major port, Port Klang, following the departure of a major user. Many of the other transportation projects highlighted in the speech will not be financed from the Federal budget.
The following quote from his speech is most remarkable – it projects self-glorification and is somewhat insulting of past holders of the office of Finance Minister:
“This Budget that has never been crafted so well, even during the last 22 years or the past 60 years of our own nation, and marked in history, making this Budget the Mother of All Budgets.”
Ironically, this Budget may indeed qualify as the “mother of all budgets” for reasons other than those offered by the PM. The speech represents an open attempt to create fake news in pursuit of gaining credibility with an electorate that is largely disenchanted by the workings of a government tarred by endless scandals, led by someone viewed as a kleptomaniac.
The current budget also qualifies as such for its extensive giveaways, without a realistic vision or any demand for sacrifices. It provides no coherent strategies to permit the nation to escape the middle-income trap.
Malaysia urgently needs a course correction if it is to regain dynamism to enable it to move forward on the road to greater prosperity.
LIM KIT SIANG is DAP Parliamentary Leader and MP for Gelang Patah.
October 24, 2017
by Jomo Kwame Sundaram and Raisa Muhtar
COMMENT | Malaysia has a problem with debt. Government debt is about 53 percent of GDP, just below the already increased 55 percent debt-to-GDP ratio threshold. The big jump in such government debt from 41 percent in 2008 to 53 percent in 2009 followed the last change of Prime Ministers.
Recently, the government has been borrowing from abroad at an unprecedented pace. The latest level has been attributed to the increased domestic debt of RM15.8 billion and additional foreign debt of RM2.2 billion last year.
Also, by encouraging Malaysian investors, both private and public, to invest abroad, and by sharply increasing borrowings and portfolio investments from abroad, the country has unnecessarily become much more vulnerable to international financial volatility and instability.
Contingent liabilities refer to debt commitments related to government guaranteed loans. With contingent liabilities growing rapidly, the overall consolidated public sector debt-to-GDP ratio has risen to 68 percent of GDP.
These have risen sharply, with government-guaranteed liabilities rising to RM195.7 billion, or 15.2 percent of GDP in 2016, from 12.8 percent in 2011, an increase by almost a fifth. Observers are concerned that pre-election ‘projects’ are causing a new debt spike in 2017.
An unexpected shock to growth, an increased interest rate in the West (e.g., with the end of ‘quantitative easing’ [QE]) or the sudden exit of foreign portfolio investments would all threaten the Malaysian economy due to its greater self-induced vulnerability.
Most current contingent liabilities abroad have been accrued after the last prime minister’s tenure. Abdullah’s reduction of the budget deficit bolstered the country’s debt ratings, making it cheaper for the federal government and government-linked companies (GLCs) to borrow overseas at a time of QE-induced low-interest rates in the OECD economies.
Such debt has more than doubled since Prime Minister Najib Abdul Razak took office in 2009, as government-related entities borrow abroad to fund infrastructure projects and ventures such as 1MDB. This is quite unprecedented as most new foreign borrowings have not been invested in ways likely to generate foreign exchange earnings.
Such government spending is needed to sustain growth, but all too often, has been abused to fund large-scale projects for crony companies (‘jobs for the boys’) with ‘kickbacks’ for key decision makers. The growing burden of such debt is inevitably borne by taxpayers.
PPPs: Public risk, private gain
Malaysia’s relatively high contingent liabilities include those due to public-private partnerships (PPP) where the government or GLCs bear the bulk of the risk, while the lion’s share of profits typically goes to the crony private partner.
DanaInfra Nasional Bhd (MRT), the company created to fund infrastructure projects, recently recorded a 43 percent spike in such liabilities!
Meanwhile, contingent liabilities associated with 1MDB’s default in August have been estimated at 2.5 percent of gross domestic product (GDP). According to Moody’s Ratings Services Vice-President Christian de Guzman, 1MDB, which defaulted after missing a bond repayment deadline, raised the risk for contingent liabilities the government is exposed to, increasing the cost of government debt from abroad.
Recently, Malaysian authorities established the Fiscal Risk and Contingent Liability Technical Committee to evaluate the government’s fiscal risks and to propose appropriate measures to address them. After failing to meet previous targets, the authorities have promised, yet again, to achieve ‘near-balance’ for the federal budget by 2020.
But such promises may not have renewed confidence, especially as the deployment of borrowed funds by 1MDB and some other GLCs has not convinced the market that public finance management in Malaysia is improving irreversibly.
JOMO KS and RAISA MUHTAR are Malaysian economic researchers.