So what if the economy shrinks 5% in 2020?

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The indices we used to assess the performance of the national economy are no longer relevant in the new normal that we are in now. Jeyakumar Devaraj explores other possibilites.

Many articles in the business section of the newspapers are full of foreboding – gross domestic growth (GDP) will shrink by so much in country A, first quarter growth fell in country B, Malaysian exports are slumping, major airlines are laying off workers, hotels are experiencing dismal occupancy rates, car sales have slumped, the oil market is staring at a glut, tankers are waiting off Singapore harbour, the Kuala Lumpur stock exchange has seen a net outflow of funds, etc.

Yes, it is clear to impartial observers that the world is heading for a serious recession. It will not be “v-shaped” with a sharp recovery to previous levels by the third quarter of this year.

The requirement for social distancing even after the relaxation of the movement control order, the tight restrictions on international travel and the disruption of consumer demand all over the world mean that most economies will have to splutter along for a while.

Some sectors (aviation, tourism, hotels) will have to go into hibernation until the Covid-19 pandemic can be brought under control – by an effective vaccine or by effective treatment. (That may take 24 months!)

But this does not mean we are all doomed! Not necessarily. Come on, surely a middle-income country like Malaysia can produce enough food to feed all its 32 million people on a long-term basis.

Even if the GDP shrinks by 5%, 10% or even 15%, surely we can meet the health needs of our people. Surely we can ensure that no family is evicted because they cannot pay their house rent. And we can certainly provide electricity, water, rubbish disposal and other basic services for the entire population.

Why can’t we do all the above even if our GDP shrinks a few percentage points?

The basic infrastructure – the roads, the clinics and hospitals, the power generation capacity, the water treatment plants – are all already there. We just have to manage these assets and use them to ensure that no Malaysian family is deprived of their basic requirements. It is eminently doable.

But it can’t be left to the market. Private businesses will not take the steps required – they are constituted on the profit motive, and they do not have the access to funds on the scale required.

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Private businesses might be able to play a part in rehabilitating the national economy (and they should be allowed to), but they certainly cannot initiate or drive it. Our government has to provide the leadership.

One crucial step that we have to take in Malaysia is to ensure income support for the two to three million workers who will lose their jobs over the next few months.

An unemployment benefit scheme

The production of basic goods – food, healthcare, utilities – in sufficient amounts is very important, but of itself, not enough. We also need to put in place a mechanism that ensures that all families can avail themselves of these basic requirements. 

In the current system, people earn an income which they then use to buy the things that they need from the market. But we are now looking at a situation where perhaps 20%-30% of Malaysian workers will be retrenched and perhaps half of the small businesses will fold up. (There are 6.5 million workers contributing to the Employees Provident Fund and another two million or so workers who are in the informal sector. We also have one million micro businesses.) 

We need an unemployment benefit scheme that ensures that all those without jobs will get a minimum income so that they can meet their families’ basic needs.

The two provisions that we now have in Malaysia to support retrenched workers are not sturdy enough. 

The first derives from a regulation under the Employment Act, which prescribes a one-off payment (by the employer) that depends on the length of service. A worker with four years’ service will get a total compensation equivalent to two months’ wages. That will not sustain him or her for long! Also, firms that go bankrupt will not even pay out this meagre benefit. 

The second, the Employment Insurance Scheme, managed by the Social Security Organisation (Socso), will pay out 80% of the basic wage for the first month after retrenchment, 50% for the second month, 40% for the third and fourth months and 30% for the fifth and sixth months after which it The scheme does not cover the two million workers in the informal sector. Nor does it cover the one million micro businesses who open stalls at roadsides, the pasar malams (night markets) and food courts. 

These two schemes do not provide sufficient protection given the level and length of unemployment we will probably see. That is why we need to enact unemployment benefit legislation urgently.

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Those who are against introducing an unemployment benefit scheme should consider it.

First, the people who will become unemployed will not be in that situation because they do not want to work or because they are lazy. The economic system has failed. It is not their choice, nor is it their fault.

Second, the provision of this unemployment benefit will help the economy recover. The increase in consumer demand will deepen the domestic market and enable more businesses to turn a profit and keep afloat.

Third, if we do not implement such a scheme, families will go hungry. That is morally reprehensible and will lead to resentment and anger – food riots and disruption of public order might ensue. People will not tolerate seeing their children go hungry.

Fourth, handling the current crisis on the basis of compassion and solidarity will flesh out the concept of “shared prosperity” and will play a big role in creating a more cohesive, tolerant and unified nation. It will strengthen us in the future. An unemployment benefit scheme would be a smart investment for all of us!

Where will the money come from?

That is a fair question. Our federal government debt is already RM750bn billion, and we are now paying RM32bn per year as debt interest. If we borrow more from the financial markets, our debt burden will become even more onerous. 

But there is another way for the government to raise the funds required. Several countries are already doing it – selling government securities to their own central banks. Indonesia, Australia and New Zealand have all used this modality to raise funds in the past one month. They term it “monetisation of debt”. Presumably that sounds better than “printing extra money for the government”- but it can work.

Let’s say we set the unemployment benefit at RM1,000 per month. To support two million unemployed workers, the payout would be RM2bn per month.

These families will spend that money buying basic foodstuff and groceries. This will encourage our farmers to produce more of these food commodities, create business for the factories involved in processing of these commodities, and spawn opportunities for the transport chain and retail outlets. It will generate income for the entire supply chain and this will create job opportunities.

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By pumping in this RM2bn, we would have prevented severe hardship among the families of affected workers, curbed social upheavals and averted the radicalisation of our youth. We would have begun regenerating our faltering economy.

Downsides?

Some economists argue that this injection of money will lead to an increase in imports, which may pour too much ringgit in the international markets. This will lead to a downward pressure on the ringgit. If the ringgit deteriorates in value, the costs of importing essential items like certain foodstuffs (rice and wheat), medicines and machinery parts will rise. 

These economists have a point, but it is unlikely that families on a budget of RM1,000 will spend that much on imported goods. They will spend most of the RM2bn on basic locally produced food. 

New indices needed

We are in a ‘new normal’. The coronavirus has brought the grow-at-all-cost consumerist economy to a shuddering halt. It has forced us to slow down markedly.

The indices we used to assess the performance of the national economy – the GDP growth rate, the amount of foreign direct investments, growth in exports and stock exchange composite indices – are no longer relevant in the new normal that we are in now.

We need to develop a new set of indices to assess the performance of an economy.

The extent to which we meet the basic needs of all members of society should be a major index that we use to assess our performance. 

Food security would be another important parameter. 

The enhancement of a sense of national solidarity and unity would be yet another.

The effectiveness of measures taken to undo environmental damage should also be one of the parameters we use to gauge our success in this new normal.

The coronavirus has forced us to do something that we would have never done ourselves on this scale. It has forced us to stop our mad rush and look at what we, as a society, hold to be important. It has presented us with the opportunity to reconsider our priorities. It has given us the option of a reset button. 

Future generations looking back at 2020 will recognise it as a significant inflection point in humanity’s trajectory –  a point pregnant with the possibilities of striking out in new directions, of building a more equitable and sustainable society. 

Hopefully, they won’t shake their heads and say, “And those idiots blew it!”

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