Without adequate government intervention, the economy will slide, and economic hardship will rise, Jeyakumar Devaraj writes.
What is the most appropriate Budget for Malaysia to navigate the recession the coronavirus pandemic has triggered?
This is the crucial issue we should be discussing so that appropriate solutions can be found. Each country needs to develop a national consensus on how the finite financial capacity of the nation should be deployed to limit the health and economic fallout of the ongoing pandemic. Unfortunately, we in Malaysia have been distracted by political intrigues for far too long.
The Socialist Party of Malaysia (PSM) would like to share our analysis of the current recession and put forward a set of ideas on how we should tackle the economic fallout of the pandemic. We need a clear understanding of the situation we are in so we can plan coherently for the coming year.
Our analysis and suggestions:
1. We cannot ‘talk up’ the economy
Some government leaders and economic analysts seem to believe the main problem is a lack of business confidence. They think this lack of confidence is the reason why businesses are not investing.
So they try to paint a rosy picture of the economy and spout projections such as “the Malaysian economy will rebound sharply in the first quarter of 2021” and “our gross domestic product (GDP) will grow by 6% next year”.
Our analysis: The main problem is a real drop in aggregate demand in the world economy. The lockdowns many countries keep imposing dampen economic activity, reduce household and business expenditure, and undermine market demand for a whole range of goods and services.
Ignoring this reality and trying to promote confidence by painting an optimistic picture is counterproductive. People will think the government does not know what it is talking about; the credibility of government will go down.
2. Pumping in more credit into the system is not going to work
Some people believe that the government should reduce the cost of capital,ie make it cheaper for businesses to borrow. A corollary of this approach is to argue for corporate and individual taxes to be reduced.
The perception is that if business people have more funds, they would invest in producing more goods and services. This investment would create more jobs and the economy would improve.
Our analysis: The availability of credit is only one of the factors that induce business people to expand production and employ more workers.
A far more important factor is effective market demand. If business people cannot sell what they produce, they will scale back on production, however much credit is made available to them. What the top 10% will do is to seek other avenues to invest the credit that is made available to them. This is why the stock markets in so many countries have been having bull runs the past few months despite the real economies of these nations being severely affected by the pandemic.
The government needs to pump credit into the system to ensure that otherwise viable businesses do not become bankrupt because of cashflow problems due to poor demand for their products during this pandemic-induced recession. Such businesses will need easy credit to settle outstanding obligations – wages, retrenchment benefits and debts to suppliers and banks.
The government also needs to pump credit into the system in the form of cash transfers to families with a household income of less than RM1,000 so these families can get the basic necessities – food, shelter and healthcare.
But in both these categories, the provision of credit is to protect the group targeted, not to restart the economy.
3. The government has to take the lead role in managing the economy and protecting the people
The conventional economic doctrine in many parts of the world is that markets are self-correcting and that government intervention should be kept to a minimum to avoid “distorting” the market. This conventional doctrine holds that businesses striving to improve their earnings will create jobs and incomes for the entire population.
Our position: The pandemic has changed everything. The physical distancing measures that we have to tighten each time the number of new cases goes up restrict business activity significantly and undermine efforts to restart the economy.
Relying on the private sector to invest, expand production and create more jobs cannot succeed in the current situation. In the ‘new normal’ we are in, the government is the only agency in society that has the capacity to ensure the damage to the economy and the people is minimised. That responsibility cannot be subcontracted out to the private sector.
4. This is not going to be a V-shaped recession
Some people talk like Donald Trump. They believe a safe and effective vaccine is going to be available before the end of 2020 and imagine that herd immunity is just around the corner. Then we can go back to business as normal without the need to practise physical distancing.
We understand that, though there are some 60 companies and groups working on developing vaccines, there is still no definite proof these vaccines will confer immunity to Covid-19.
The vaccine candidates now in stage three trials can induce antibodies against Covid-19 in trial participants, but that does not automatically mean these antibodies will generate immunity to Covid-19.
The test for active HIV is a blood test that screens for the antibody to the HIV virus. Similarly the current test for hepatitis C looks for anti-hepatitis C antibodies in the patient. In both HIV and hepatitis C, the presence of these antibodies does not confer immunity.
We need to see if the current clinical trials generate evidence that the presence of the Covid-19 vaccine-induced antibodies actually confers protection against Covid-19.
And what is the level of protection? This is critical. In epidemiological terms, we need to bring the rate of transmission (RoT) to below 1.0 if we want to prevent the number of cases from growing exponentially. We now can do that by physical distancing and lockdowns, but this is a big dampener to the economy.
If we want to bring RoT below 1.0 by creating ‘herd immunity’ then we need to make more than 75% of the population immune through the Covid-19 vaccination programme. Only then would Covid-19, with a presumed RoT of 4.0 in the absence of physical distancing measures, not be able to sustain itself in the population. For each Covid-19 infected person would still spread the virus to four persons on average. But three of these four persons would be immune because they have taken the Covid-19 vaccine. So Covid-19 cannot sustain an epidemic in that population.
That means we need to have a safe and effective vaccine made available to almost the entire population of the world so that we can attain the 75% herd immunity we need to return to business as usual without the physical distancing measures.
There are some idiots who believe that letting the natural infection spread through the population can create the herd immunity we require.
Currently (27 October 2020) only 0.086% (28,864 cases out of a population of 33 million) of the Malaysian population is immune to Covid (assuming that the natural infection will lead to immunity – something that is still not established 100%).
Even the US with its 231,254 deaths only has an immunity level of about 2.71%. It would be far too painful to attempt to develop herd immunity by allowing the natural infection to spread through the population.
5. More targeted relief for the poorest families
The bottom 20% of society – those with a household monthly income of less than RM2,500 – are the worst affected by the pandemic. Some of these families have had to reduce their food intake because their income has dropped.
Many of these families work in precarious jobs as daily paid contract workers, eg those washing dishes in restaurants, and loading and unloading goods in factories, shops and small farms. Other families rely on micro businesses for their income.
If business activities contract or if the movement control order is tightened, the daily paid workers and micro businesses may not have any income. Neither of these groups is protected by any unemployment benefits as are workers in the formal sectors of the economy.
In addition, poorer families have much less financial reserves to tide them through difficult periods. Many do not have savings or investments they can liquidate to provide money for this period.
The Bantuan Prihatin Nasional (National Caring Aid or BPN) programme, involving a total allocation of RM10bn that the government implemented in April and May 2020, helped a great deal.
Similarly for BPN2.0, involving cash transfers of RM4.8bn to 10.6 million recipients to be rolled out in October 2020, followed by another payout of RM2.2bn in January 2021. BPN 2.0 will bring welcome relief to many families.
But this is not sufficient for the 10% of families whose household incomes have dipped below RM1,000 per month. These families require regular monthly cash transfers.
But can the nation sustain an outlay of RM10bn monthly for the next two years? (Our total budget for 2020 was RM300bn.)
Our suggestion: Families whose current monthly income is less than RM1,000 should be provided monthly cash transfers of RM500 to RM1,000 – a guaranteed minimum income – so their basic needs can be met.
We estimate that at present around one million families will require such assistance. This works out to RM1bn per month if RM1,000 is transferred to these one million families monthly.
6. A ‘Green New Deal’ for Malaysia
PSM has already called for the following:
- the building of houses by non-profit entities for rent to young families and to families in the bottom 20% of households. We need to expand the stock of social housing in our country
- programmes to repair, rehabilitate and clean up the low cost flats in our cities. Many of them are in terrible condition now
- a reforestation programme to rehabilitate the forests that have been logged
- the upgrading of solid waste management – separation of domestic waste at source, recycling of as much as is possible and safe disposal of the remainder – the cleaning up of our rivers
- programmes to expand the generation of renewable energy
These projects address real needs in our society. Their implementation will generate jobs and incomes for thousands of people, and this will have a multiplier effect in the economy. The improvement of housing provision and the greening of our society will inject hope and positivity into our society at this difficult juncture.
But where will the funds for all these programmes come from? Government revenue will falter in 2021 as corporate taxes will be lower and petroleum prices are depressed.
7. The government should use ‘debt monetisation’ as one of the methods to raise funds for the programmes mentioned above
The Finance Minister Tengku Zafrul Aziz has mentioned that this year’s Budget would have a deficit of 6%. That works out to RM84bn (based on an estimated GDP of RM1,400bn).
The Malaysian government usually meets its deficit by selling government securities to private sectors investors. Generally the government will have to pay a coupon rate of about 3%-4% yearly on these securities. We are already paying RM35bn annually as coupon payments on the government securities that were sold in previous periods.
Unfortunately, even with this additional RM84bn, the Budget might not be
enough for all the programmes suggested above. The government could sell even more government securities to private investors, but this will burden future administrations with higher debt servicing costs.
Debt monetisation is a strategy used by several governments including Indonesia, India, Japan and New Zealand. Under this strategy, the government sells government securities to its own central bank but at very low interest rates (perhaps 0.1%).
This strategy provides the government with the extra funds it needs in a crisis situation without the disadvantage of committing the country to high interest payments in the future.
Admittedly, there are potential downsides to this strategy. If too large an amount is procured through debt monetisation, it could lead to the depreciation of the ringgit and to inflation.
But an amount equivalent to 4% of GDP (about RM56bn) would not cause these negative effects and the government should consider this as a strategy for these challenging times.
Let’s think out of the box!
Several of the ideas put forward by PSM represent a departure from how things are normally done in Malaysia. But there is no denying that we are in a ‘new normal’ and the market is incapable of providing a coordinated response to the current recession.
Without adequate government intervention, the economy will go into a downspin, and the economic hardships faced by households and businesses will rise dramatically. The government has a crucial role to play in helping us weather this combined health and economic crisis.
If we handle it right – by prioritising solidarity and ensuring no one is deprived of basic needs – we will emerge stronger, more united and more harmonious as a nation. Isn’t that something worth working for?
Join us in mainstreaming the proposals that are contained in this write-up. We need to promote a wider discussion of this sort of proposals.