10 reasons why it cannot be business as usual

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With household debt and federal government debt indicators rising and natural resources being depleted, it cannot be business as usual for the Malaysian economy. Anil Netto says it is time for a radical re-think of the economy.

The Malaysian economy has entered a critical phase. Integrated into the global trading system as part of an export-led economy and driven by foreign direct investment, the economy today is feeling the effects of a global slowdown.

Compounding the problem are other structural weaknesses in the BN government’s economic model that tell us that it simply cannot be business as usual for much longer.

Unfortunately, the mainstream economic framework does not have an integrated world-view that encompasses a broad range of inter-connected issues. The framework does not look at how economic policy is contributing to widening income inequalities, indebtedness (individual and national), the weakening position of labour, sustainable development and climate change.

This article is not meant to be an indepth analysis. Rather it brings together some of the fundamental issues affecting us all and calls for them to be adequately integrated into mainstream economic planning.

1. Massive corruption and rent-seeking

This is sapping the life-blood out of the domestic economy. Many large projects appear to have an element of rent-seeking. And when it involves government-related projects, the cronyism can be blatant.

This is closely related to the phenomenon of ‘money politics’ – a euphemism for the institutionalised intertwining of business and political interests in the country. Large contracts are often awarded to well-connected companies, whose substantial shareholders invariably include figures who are politically well-connected. Look no farther than ‘Cowgate’.

Or in some cases, the contracts or concessionaires may be awarded to major industry players, who become the substantial shareholders in a company holding the concession. But obscure or ‘shell’ companies may invariably hold the minority interests in the concessionaire company. The shareholders of these obscure companies tend to be unheard of individuals, raising suspicions over how these companies were selected in the first place.

2. Neoliberal policies

The ‘Father of Privatisation’ in Malaysia, former premier Mahathir Mohamad introduced Thatcherite policies in Malaysia as state-owned assets were privatised to private companies, many of them crony companies or linked to politically well-connected individuals.

Because some of these were essentially monopolies, they reaped super profits that served to enrich the ruling political-business elite.

Having lowered corporate tax and income tax (for the higher bands) over the years and with its expenditure now spiralling, the government now finds itself faced with persistent fiscal deficits.

It is thus forced to reduce subsidies and find new ways of raising funds. So now the public is faced with the prospect of GST, electricity tariff hikes, and 1Care.

Even the acquisition and installation of traffic cameras is reportedly being privatisated in a move that could rake even more money for the government – and certain companies.

State-run essential services – especially health care and education – are stuck in a rut and their quality has suffered. In search of better quality services, many, not just the rich, are forced to turn to the private sector, where they have to pay higher tariffs.

3. Trickle down or gush up?

Ever since Malaysia embarked on export-driven investment and achieved impressive GDP growth figures (except for cyclical slumps or recessionary periods), the theory fed to us is that somehow the increase in the GDP would filter down to the rest of the population.

For a while that happily seem to be the case, but then real wages found it hard to catch up with productivity and have remained relatively stagnant.

As Big Capital sought larger and larger profits and engaged in increasingly speculative activity to park excess liquidity, profits became increasingly concentrated in the top 10 per cent.

The growing income divide is not just limited to Malaysia, it is also happening in other economies. The author-activist Arundhati Roy of India put it succinctly when she observed that this was not really a ‘trickle down’ of wealth, but a ‘gush up’.

Notice, the gap between the top 20 per cent and the bottom 40 per cent grew wider after the Mahathir administration embraced privatisation and other neoliberal policies from the late 1980s (see Box 1).

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Box 1

income inequality widens over the years

Wages for the working class have been suppressed through a policy of relying on migrant workers (with labour recruitment agencies raking in huge fees).

Aggravating this problem is the ‘casualisation of labour’ otherwise known by the euphemism of ‘labour flexibility’. Essentially this is a policy that leaves workers with little protection under the law even as large companies resort to labour contractors or labour outsourcing to supply their labour needs. You can only imagine what sort of terms of employment these workers have under their labour contractor bosses.

With the Malaysian domestic market being prised opened by free trade agreements that will allow more MNCs to set up shop in Malaysia, what hope is there for labour rights and distributive justice in Malaysia?

4. Central government debt

The Malaysian public sector debt level has risen to worrying levels – reaching 53 per cent of GDP just short of the 55 per cent threshold level for concern. And we have been posting persistent fiscal deficits for years now – no thanks to neoliberal policies, corruption and wasteful spending. How long can we go on like this? (See the cover story ‘Towards a bankrupt Malaysia?‘ in Aliran Monthly Vol 31 Issue 10 by Dr Subramaniam Pillay.)

5. Debt-driven demand

The low-wage policy has in turn left many struggling to make ends meet. Not surprisingly, many have turned to borrowing for their various needs, pushing up the household debt to GDP ratio in the last few years (see Box 2).

Box 2

The main components of household debt in Malaysia are housing loans (49%), car loans (27%), loans for personal use (9%), loans to buy securities (8%), and credit card debt (6%).

While our household debt as a percentage of GDP of 78 per cent may not be exceptionally high, our household debt to disposable income of 140 per cent is worrying (see Box 3).

Box 3: Household debt to disposable income for selected countries:

•    UK – 176% (2007)
•    Malaysia – 140%
•    US – 130% (2008)
•    Japan – 120%
•    Singapore – 105%
•    Korea – 101%
•    Germany – 95%
•    France – 93%
•    Italy – 70%
•    Thailand – 53%
•    Indonesia – 38%

Sources: Penang Monthly; OECD Factbook 2010 as published in Finfacts Ireland; CAP as published in The Malaysian Insider.

Now you know why many Malaysians don’t feel so well off despite years of GDP growth, with this level of household debt.

About half our disposal income goes to servicing debt.

What are some of the factors driving the high household debt/disposal income ratio?

  • High growth in consumer-driven spending
  • Low interest rates encourage borrowing
  • Easy credit by banking institutions due to financial liberalisation (translating into fat profits for the banks?!)
  • Rising house prices especially in KL and Penang where the average house price to average income ratios are much higher, and of course,
  • low income/wages

6. Development for whom?

The type of development we have witnessed has been largely determined by the needs of Big Capital rather than for the common good of local communities.

In the absence of local democracy, controversial infrastructure projects (e.g. highways, tunnels, dams, refineries) are being pushed through with minimal public consultation.

More and more people are being driven out of their land and their homes by such development projects. They have become development-induced displaced persons (DIDPs).

The people now are reacting. More and more communities are stirring to protest against development that they feel is not in their best interests. We have witnessed protests and rumblings of discontent in several locations across the country notably:

  • Kuantan residents protesting against Lynas Corporation’s rare earth refinery;
  • Manjung, Perak residents opposing a RM4bn iron ore hub and jetty project being undertaken by Vale International SA of Brazil.
  • Pengerang, Johor residents opposing the RM20bn Petronas Refinery And Petrochemical Integrated Development project because of worry they could be displaced and that the project will degrade fishing waters.
  • natives in Sarawak who could be displaced by the Murum and Baram Dams

This raises the question as to whether such projects are really for the benefit of local communities – or are they mainly meant to reap huge profits for large corporations and certain individuals behind these projects.

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Perhaps we wouldn’t have had so many local protests if such projects had first got the green light from municipal councils, in which local councillors were elected. (See article on ‘How local democracy shut down Japan’s nuclear power plants’.)

7. Climate change and environmental problems

Increasingly, climate change will have an impact on Malaysia. We saw how Bangkok suffered massive floods in October 2011 and KL too was hit by floods in December 2011 and again in March 2012.

Expect such flash floods to increase in frequency. After all, we don’t seem to be too bothered by the emissions we release into the air, the forests we are chopping down and the concrete and tar we are covering the soil with.

The loss of green cover and the wiping out of biodiversity (due to the establishment of oil palm and monoculture tree plantations) will have adverse consequences for the environment in the years to come.

The way we measure our economic performance is itself part of the problem. It only measures the rate of growth in the production of goods and services. It ignores the bads – the environmental costs and the way the wealth is distributed to workers and other ordinary Malaysians (See accompanying article on ‘The Problem with GDP’).

8. Resource depletion and environmental degradation

Natural gas and oil reserves are running out.

If no new discoveries are made, oil production is expected to gradually decline in the coming years.

The problem is that oil revenue reportedly makes up around 45 per cent of the government budget. And this could spell trouble for federal government debt.

It will lead to higher fuel prices for Malaysians. Our dependence on private motor vehicles will aggravate the burden while the massive investment in (tolled) highways (and bridges) will leave us ill-prepared to deal with a scenario of higher oil prices.

As for natural gas, Malaysia may be the third largest exporter in the world, but domestic reserves are only expected to last until 2025 (although this could be stretched by a few years with new technology squeezing out more). Already supplies for domestic power producers have been constrained for whatever reason. (See Box 4 at the end of this article.)

Our pristine rainforests are rapidly disappearing. Look at Sarawak to see how the primary rainforests have been raped through the indiscriminate granting of timber concessions to well-connected firms. And our rivers and seas are becoming increasingly polluted, affecting the catch of fisher folk and depriving the people of fish at affordable prices.

9. Financialisation and speculation driving up prices

Property-centric development, low bank interest rates, easy credit and speculation have driven up house prices. High house prices in turn have an inflationary effect on other essential goods while wages simply cannot keep pace.

One way out of this would be to spread residential and work areas out of already heavily congested urban areas and introduce a better network of public transport. Tighter controls should be introduced to prevent foreign speculation in domestic property and to tighten up bank loans. New rules should be formulated to ensure property can only be sold after construction is completed.

In this way, inflationary pressure on urban land areas and property would be reduced.

10. Food security not addressed

We are not self-sufficient in our food production and still import 30 per cent of our rice requirements. And it doesn’t help that Bernas’ monopoly on rice imports has been extended by 10 years to 2021; so there is less urgency to step up domestic rice production.

Yet, we are converting more and more of our land for property development while we spend RM92m on food imports – every day.

We are not even producing enough vegetables. Vegetable production in Malaysia is 800,000 tonnes per year – well short of the domestic requirement of 1.1m tonnes annually. No wonder vegetable prices have been soaring, further burdening the poor Malaysian worker.

In view of climate change and rising food prices, we need to reduce our dependence on food imports.

But corporate agriculture is not the way to go. It disempowers farmers and promotes the use of chemical fertilisers and hazardous pesticides. Corporate monoculture reduces biodiversity and depletes the soil of nutrients.

We need to consider organic farming initiatives that would provide us with wholesome food.

Possible solutions

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To narrow the income divide, we need to have a progressive taxation policy. Neoliberal policies should be reversed, and massive investment in essential public sector services is needed. A comprehensive affordable housing programme – average prices should be correlated to average income levels to ensure they are affordable – should be formulated.

To raise government revenue and wipe out persistent fiscal deficits, we need to eradicate corruption, plug leakages, reduce wasteful projects, re-evaluate infrastructure projects using independent cost-benefit analyses, implement open tenders, and wipe out rent-seeking.

We need to take a critical look at the whole nature of the BN’s development model. Are projects chosen because they will bring real benefit to the people without harming the environment? Or are they simply chosen because they will benefit a few cronies and favoured corporations?

To strengthen the position of workers, trade unions must be given more freedom to operate. The business of labour subcontractors must stop and workers’ rights upheld.

It is no longer enough just to think of the economy in terms of FDI and GDP growth. We need to integrate our approach to the economy so that it considers quality of life, the position of workers, conservation of natural resources, reduction of pollution, and sustainable development. We have to move towards a new just, sustainable and ecological economic model.

Anil Netto is honorary treasurer of Aliran

Box 4: What has happened to our natural gas?

Total Malaysian production of natural gas plus imports from Indonesia and purchases from joint development areas add up to 2000 million standard cubic feet per day. Of this, Petronas has committed 950mmscfd (at lower prices) to the power sector, which actually falls short of the power sector’s requirements of 1150mmscfd.

This shortfall is the reason why Tenaga has been operating under severe constraints. To make up the shortfall, it has to seek alternative fuels at substantially higher prices.  (Note: Petronas’ 20-year agreement with Tenaga expires in 2014.)

On the other hand, according to the Edge weekly (26 March 2012), natural gas capacity in East Malaysia has been allocated under long-term contracts (20 years) to China, Japan and South Korea.  If this is true, then it is strange that natural gas should be committed to exports while leaving Tenaga to deal with a severe shortage, which could lead to higher electricity tariffs for the public.

At present, the international price of natural gas is reportedly RM45 per mmbtu, while the local price for power generation is RM13.70 and for industry, RM18.35. Petronas figures its lost revenue from the lower prices amounts to RM20bn per year, adding up to RM130bn over the years.

Who has profited most from the lower domestic natural gas prices? The well-connected independent power producers who enjoy huge capacity receipts (despite a 40 per cent-plus reserve margin in the power sector) at the expense of Tenaga? The domestic corporate sector that has profited from cheap electricity?  All this is money that could have benefited Malaysians had Petronas not lost the revenue on supplying cheap gas to the IPPs and industry.

“The IPPs and exports combined account for more than 85 per cent of the [country’s natural gas] capacity.  The issue to address urgently is the allocation of existing natural gas capacity. If the existing supply is not enough to cope with the demand, the government should restrict and/or ban the export of natural gas or reduce the consumption, or shut down an IPP plant,” Datuk Seri Stanley Thai, executive chairman of glovemaker Supermax Corp Bhd, was reported as saying (in The Edge).

In the future, Malaysia will have to import more and more natural gas to meet domestic demand – but this gas will be closer to the global market price, much higher than the current domestic price. Regasification terminals are now being built to facilitate the import.

What this also means is that electricity tariffs are bound to rise as domestic gas prices are reviewed and brought closer to market prices. In fact, the six-monthly periodic hike in gas prices and review of electricity tariffs scheduled for December 2011 was deferred – presumably till after the general election? (The previous hike was in June 2011.)

Unless the Malaysian government seriously looks into clean renewable energy with minimum hazardous waste, the era of cheap electricity (which has subsidised our exports) will draw to a close.

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1 COMMENT

  1. The bottom 40% of Malaysian income earners will even have less disposable income after the 13th. GE if UMNO b and BN win the elections. They will implement the regressive GST, 1M Care, periodic increases in electricity tariffs, cooking gas and petrol.

    In addition to rampant corruption and leakages and other factors stated above, the flight of invisible income by the over four millions foreign workers to their home countries will cause our economy to stagnant or regress. Everyone suffers except the top 20% Malaysians. It is Time to CHANGE the Regime!

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