Mini-budget fails to reduce friction and cost of doing business
Economic downturn — call it whatever you like — is a time exactly for that. It is a time for spring cleaning. What we have seen so far only amounts to merely sweeping dust under the carpet, hoping that the dust would go away to somewhere.
Hafiz Noor Shams, The Malaysian Insider
Despite being a person who is generally sceptical of the idea of economic stimulus, I did hold high hope for the second stimulus package or the mini-budget as it is called. I thought this would be the time when we would finally do things differently.
Like a crystal glass thrown into the air only to meet the harsh earth, that hope of my mine was crudely shattered into millions of pieces.
As it turned out, it was business as usual and it fails to reduce the cost of doing business. Same old, same old.
I had expected for a new way of managing the economy that reduces cost of doing business by reducing frictions in the economy. This expectation did not come out of thin air. There were signs to rationalise it.
The biggest was the courage shown to reform the outdated fuel subsidy regime which was costing the country billions of Ringgit in terms of opportunity cost. Meanwhile, as the world economy slugged it out, out came statement from the Prime Minister urging countries not to fall back on protectionism.
And then there is the Deputy Prime Minister expected to assume the Prime Minister’s post soon. He is eager to break from the past and start anew. He wants to differentiate himself from the current administration. Even if he did not want to change, local political circumstances demand change. To ignore that demand is to court doom for himself and his political party. He simply has no choice but to change if he is to survive.
That requirement for change was what fuelled my expectation of continuous reform of the economy. Unfortunately, the mini-budget contained more than a billion Ringgit worth of subsidy to undo reforms of the past. Clearly the lesson of shortage caused by price and supply control in the recent past was left unheeded.
The highway toll subsidy is another disappointment. I have no doubt that the inconsistent nature of the current administration is why that particular subsidy is included in the stimulus package. The users of the highway are no doubt happy about it but I am positively not because I now find myself subsidising them. That is what I call highway robbery.
The story on subsidy does not end there because somewhere in the mini-budget speech is a section on what is called the private finance initiatives. PFI sounds attractive with so-called partnership between public and the private sector but the more I learn about it, the more I think it is a farce.
In truth, it is nothing more than a subsidy re-branded under a different term. It is just a term to sanitise the idea of government subsidising business. Under the programme, the government will in essence subsidise projects that would otherwise be unviable without government intervention.
Malaysia has a lot of these programmes where businesses receive subsidy from the government. They are unsustainable and driven by motives which rarely survive economic scrutiny. They pretend to be public goods so that there is moral justification to subsidize them. It is these kinds of projects which impose efficiency cost on our economy but they continue to not only exist, but unashamedly flourish in our country.
This is the reason why I generally prefer not to have economic stimulus and let the market does its job. The only stimulus I make exception to is generally the one that reduces friction in the economy, like tax cuts. I prefer Darwinisn to rid us of unsustainable businesses so that in the long run, even if we would be dead, at least we could leave our children with a better world.
Economic downturn — call it whatever you like — is a time exactly for that. It is a time for spring cleaning. What we have seen so far only amounts to merely sweeping dust under the carpet, hoping that the dust would go away to somewhere.
By the time the business cycle is complete, we will look back and lament the missed rare opportunity to improve the structure of the economy while stimulating the economy: the stimulus failed to reduce transactional cost. The cost of doing business caused by friction in the economy is not removed.
There were tax cuts announced in the mini-budget but it is far short than how I would have done it. The RM3 billion tax cuts were done in a manner than only profitable ventures would enjoy it while the ones in trouble are the ones that making losses. Reduction or elimination of taxes that contributes to transactional cost is able to address that problem but it is nowhere in sight.
If that bad news does not move you, wait until you read this: not only the cost of doing business sees no reduction, it is being pushed up instead!
Indeed, initiatives of the stimulus like absorption of excess labour possible regardless of business requirement and restriction on foreign labour recruitment increases cost of doing business.
Surely, in times when revenue is stagnating, the absorption of more people into various such organisations adds drag to their overall health. Of particular note will be the government-linked companies which are expected to recruit more people into its programmes of fanciful acronym.
On foreign labour, it is true that the issue requires urgent address but such restriction as proposed in the mini-budget is hardly necessary. There is a Malay saying that appropriately describes the restriction: it is akin to burning the whole mosquito net merely cause of an annoying mosquito.
What requires attention is not foreign labour per se but the recruiting agents and the system. These foreign labours are brought legally complete with permits into Malaysia through our suspiciously porous system without any guarantee of jobs. It is only after they reach Malaysian shores will they start scouring for jobs.
A proper system should do things the other way round because if there is no job, there would be unemployment problem among these foreigners. This will further exacerbate the problem we are already facing in Malaysia in light of weak external demand that is hurting the export sector rather badly. Jobs would have to be guaranteed first before permits are given out.
Cost is further pushed up by resorting to the always popular protectionist policies. Yes, despite going to the international stage to affirm Malaysia’s commitment to not to fall back to protectionism, there are elements of protectionism in the mini-budget.
The restriction of foreign labour itself is a form of protectionism but two paragraphs in the speech by the Finance Minister said it most clearly. One of the two indicates that the “Government will continue to support the development of domestic industries through Government procurement. The Government has mandated the use of local materials, products or services and give priority to local manufacturers in Government procurement.”
This seems that government spending will be done without taking into account the question of price and quality. If the origin of the vendors and manufacturer is the only point of concern, it is likely that the cost of various projects associated with the massive government spending to increase unnecessarily. The lack of competition is known to do that. If the fiscal deficit is to go higher than projected, this is likely to be the principal cause of that.
But clearly, the fiscal deficit is not an issue of concern to the current administration. In order to be popular, these protectionist and Keynesian measures are required.
While the next administration is desperate to be popular, they should be warned of the pitfalls of populist policies. Quick fixes like this have its consequences. Much like the now controversial highway concessionaires negotiated under the Mahathir administration, it will bite back.
