Stimulus needed now, not tomorrow or next year

MARCH 9 – Have you ever engaged in animated conversion with friends, debating intently on a point, only to find out later how off tangent the discussion had become?

How about a time when asked what was the original point of contention, all involved in the little discussion somehow had trouble answering the question?

Well, something like that has happened to the discussions surrounding the stimulus package for Malaysia.

I think I have seen a fair share of suggestions and criticism related to the composition of an economic stimulus. The perception I have is that a majority of them involves the typical tools of macroeconomics: fiscal and monetary policies.

Between the two, the debate on fiscal policy is probably the one that takes centre stage, as proponents of government spending and tax cuts rattle sabres, only to come to a uneasy compromise of having a little bit of both.

While the two giants wage an intellectual war against each other, a notable minority refuse to participate in the age-old debate. Instead, they are convinced that in order to stimulate a faltering economy, we must go beyond fiscal and monetary policies.

Almost always, in place of those policies, they propose long-term measures, which perhaps nobody can argue against.

It is impossible to say no to them because, more often than not, they touch on the need to improve economic framework of the economy. This includes improvement of rules and regulations in the country.

The enlightened few cite Nobel laureate Douglass North on emphasising the need for strong working institutions, which sadly, Malaysia sorely lacks these days, if events of recent weeks are anything to go by.

Others call for improvement of the real income of Malaysians by pushing industries in the country up the value chain.

To put a cherry on top of the cake of wonderful ideas, CIMB group CEO Nazir Razak suggested that country focus on strategies, and not just fiscal and monetary policies.

These paths beyond fiscal and monetary policies must be taken and that is for sure. The crucial caveat is that they have to be taken, regardless of the prevailing economic situation.

Sure, as the cliché goes, behind every crisis there is an opportunity. It is in times of crisis when it is easiest to stress the importance of these efforts.

We saw how the inefficient fuel subsidy regime in Malaysia – as well as in other countries – was finally reformed, much to the benefit of the long-term health of the economy.

Without the energy crisis, such liberal reform would be unlikely and Malaysia would continue to waste good money on artificially supporting the economy rather than investing in things that matter – like in our education and our security – that really build up the economy.

One, however, does not have to wait for disaster to strike to commit to structural improvements.

To commit and begin those improvements only in times of crisis is to take that cliché too close to heart and miss the entire reason for those structural improvements.

Those structural improvements, be it diversification of export markets, closer integration among Asean members states for a European Union-style entity, revision of the New Economic Policy, strengthening of the judiciary, greater investment in human capital by way of having better curriculum and teachers, etc, are developmental in nature.

That is right. These measures beyond the traditional fiscal and monetary policies are meant to develop the countries in the long run. It takes time, almost definitely far longer than it is required to complete a business cycle.

That, of course, does not mean any of those improvement, if it has not started yet, should be delayed.

The point which I want to stress again is that these structural improvements of the economy should take place regardless of business cycle. Because it is developmental in nature, it takes the noble long term view.

I am reluctant to quote Keynes mostly because I abhor half-baked Keynesianism practiced in far too many places at the moment by newly self-discovered Keynesians, which is worse than Keynesians calling for proper Keynesian counter-cyclical policy. Nevertheless, his words here at this juncture are most appropriate for rhetorical purpose: “Long run is a misleading guide to current affairs. In the long run, we are all dead.”

Malaysian trade fell by about 30% in January on year-on-year basis. How exactly do these long-term proposals deal with immediate fall in external demand?

In the first week of March, Flextronics shared news that nearly 1,400 workers of its workers in Shah Alam, Selangor, had been laid off. How exactly do these long-term proposals deal with the immediate increase in unemployment rate or the immediate reduction of disposal income among Malaysians?

Structural improvements do not address these immediate concerns. If a person’s goal is to address immediate concerns, then he or she will face an obvious temporal problem.

That very reason is why most structural improvement of the economy – while it may help in no little way in future crises – does little to address the current crisis.

The idea of a stimulus is to address these immediate concerns. It does not seek to address developmental concerns, which forward looking structural reforms – regardless of philosophies – are meant to do.

Notwithstanding criticism directed at government spending as a stimulating tool that I personally agree with, it at least seeks to solve immediate problems. So too is tax cuts except that it seeks to do it in a faster manner while manoeuvering away from the weaknesses of government spending.

The effect of monetary policy is probably even faster in this age of light speed communication. One announcement by the Governor and everybody – from single individuals to large institutions – will quickly react to it.

This is why fiscal and monetary policies will remain the thrust of the economic stimulus in Malaysia, or any stimulus anywhere, for that matter.

The pillars of economic stimulus will remain revolve around fiscal and monetary policies, even if the very mention of these terms have become stale and frustrating.

Hence, the fixation with fiscal and monetary policies is not a symptom of short-termism, as some have taken to ridiculing advocates of government spending, tax cuts and monetary policy.

Quite the contrary, the focus on fiscal and monetary policies is about putting one’s feet on the ground and settings eyes on the targets at hand.

Hafiz Noor Shams is daydreaming at maddruid.com

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