ECONOMISTS often use “signal extraction” to glean information from data that is partial, unclear or comes too slowly when we need a quick answer. This technique is particularly useful now to help us extract some signals on the Malaysian economy from recent statements by the senior politicians in charge.
For example, in an interview on Sunday, Prime Minister Tan Sri Muhyiddin Yassin told us that the third movement control order (MCO 3.0) was designed to reduce the economic impact below that of MCO 1.0, which he estimated had cost RM2.4 billion per day. He said if the same full lockdown is imposed now, it will cost RM500 billion. Extracting the signal based on this estimate, MCO 3.0 would last 208 days, until December.
The cost would be huge. Even if MCO 3.0 costs only RM300 million per day, which is the lower estimate for MCO 2.0, it will cost RM62.3 billion, or nearly 4.7% of gross domestic product. At the upper estimate of RM400 million per day, this would be RM83.2 billion, or 6.2% of GDP.
This is not quite the end of it, because Finance Minister Datuk Seri Tengku Zafrul Tengku Abdul Aziz has said MCO 3.0 could cost 1% of GDP. Extract the signal from this estimate, and the cost would be around RM13.4 billion, or RM515 million per day for the planned MCO 3.0 period. If this period is extended to December, the cost would be RM107 billion, almost 8% of GDP.
Indeed, as Tengku Zafrul also quite rightly pointed out, the longer and deeper the damage, the more difficult it is to recover, and the economic “scarring” may not heal. The daily losses may well rise over a longer period as the negative impact gains momentum. He has also signalled a lower growth forecast for this year of 5% to 6.5% from the earlier 6% to 7.5% expected before the lockdown.
To avoid this outcome, some are calling for further fiscal stimulus. For example, former finance minister Lim Guan Eng has suggested RM45 billion, or around 3.3% of GDP. This figure can be justified in a number of ways. First, it is roughly the losses due to the lockdown from January 13 to June 7, totalling RM43.8 billion using the conservative estimate of RM300 million per day for 146 days.
Of course, since the MCO 3.0 from May 12 to June 7 costs more, according to Tengku Zafrul, this estimate is too low and should be closer to RM50 billion. If the costs of the earlier lockdown are towards the upper end of estimates at RM400 million per day, then the losses are closer to RM60 billion.
Another way is to look at how RM45 billion can help the people. There are around 2.91 million households in each of the B40 and M40 categories. If there was a RM1,000 cash handout each month until the end of the year, and beginning in May, when the RM45 billion was proposed, this would cost RM46.6 billion. Of course, now, this is too low, and if the gap is RM60 billion and the cash assistance starts in June, it will be closer to RM1,500 per household.
Whatever the amount, there are two further issues in considering a new stimulus package that need to be addressed. The first is, where the money will come from, and the second, how the money should be allocated.
Since the prospect of the government raising extra money through taxes is vanishingly small, the two remaining options are borrowing or printing money. Tengku Zafrul said there is no more fiscal space, so borrowing might be difficult unless the self-imposed fiscal constraints are suspended.
An alternative is to print money. Since there is no underlying inflation, this is an option. Core inflation is only 0.7%, and non-oil inflation is very low, too.
In terms of allocation, it is important to avoid what one might call a “political market economy”, in which the government uses public money to support special interest groups through selective allocations in the mistaken belief that politicians know better than the people about how to spend the latter’s money.
This “wish list” approach is a typical politician’s response, usually with no evidence that any of the schemes and packages are needed or would be effective. For example, the latest Laksana Report reveals that allocations under Geran Khas Prihatin for micro SMEs are equivalent to less than RM300 per month for the period of the crisis from March last year.
Alternatively, in a free market economy, the money would be placed directly into people’s pockets, so that they can spend it as they choose. This provides new demand for hard-pressed businesses that are short of customers. The question of which areas to prioritise would be driven by the market, not politicians. Firms would supply directly to meet the demand revealed through consumer choices.
Normally, this should be the preferred option, but unfortunately, under the current circumstances, the market is traumatised and businesses may be unable to respond efficiently, or at all, even if there is a strong upturn in demand.
An alternative to these two extremes is the social market economy, which combines a free market economic system with social policies that establish fair competition, equality of opportunity, and social equity. This is the foundation for successful market-driven economic growth.
The social market approach will provide direct cash support to those in need and strategic groups to help sustain growth and provide new sources of future growth. It focuses on preserving human and social capital investment, and extracting value from previous investments.
Direct cash assistance prioritises those without an income, as well as vulnerable groups, such as young workers who have seen their salaries sharply cut. The next target is those who are underemployed, with the aim of returning them to work as soon as possible.
The basic idea is to sustain the one-off effect of an increase in consumption and growth through supporting fundamentals, particularly disposable income, and creating partnerships with businesses to slow down closures, save existing jobs and create new ones.
There would also be an exit strategy, because contingent cash assistance would end when incomes return to normal levels. It is essential that cash handouts, the wage subsidy scheme and salary reductions, such as those that have devastated young workers, not become the new market norm, and that we can return to the system of a fully functional competitive social market that drives sustained economic activity. – The Vibes, June 15, 2021
Paolo Casadio is an economist at HELP University and Prof Geoffrey Williams is an economist at Malaysia University of Science and Technology
