Some Brief Musings – Macroeconomic Policies Under & Post-Covid-19

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By Head of Social, Law, and Human Rights at EMIR Research, Jason Loh.

Covid-19 has forced us to reconsider our thinking on the macroeconomic fundamentals of debt and deficit – moving past orthodox and mainstream assumptions towards a more pragmatic and flexible approach in tune with real-world and empirical findings. It does not necessarily mean, however, that orthodox and mainstream economics are irrelevant and, therefore, needs to be totally jettisoned. What it calls for is simply the recalibration and readjustment of macroeconomic policy thinking to fit the exigencies of the time. 

Even the World Bank and International Monetary Fund (IMF) – generally known for their adherence to neo-classical (i.e., mainstream, and orthodox) economics as epitomised by the Washington Consensus whereby e.g., loans are given on the condition of strict fiscal discipline which usually involves austerity and cutbacks on public spending – have acknowledged that countries need to ramp up the deficit and borrow more to counter the impact of Covid-19 on both the economic and public health fronts.

World Bank chief economist Carmen Reinhart was blunt in advising governments to turn on the fiscal tap and worry about paying the bill later (“World Bank’s Reinhart Says Win the Covid War First, Pay for It Later”, Bloomberg, Jan 29, 2021). And IMF chief economist Gita Gopinath has been calling for governments that could afford to spend more whilst USD1 trillion were provided to vulnerable countries with weak fiscal. She has called for, “… [g]overnments [to] continue [providing] income support through well targeted cash transfers, wage subsidies, and unemployment insurance. [And to] prevent large scale bankruptcies and ensure workers can return to productive jobs, vulnerable but viable firms should continue to receive support – wherever possible – through tax deferrals, moratoria on debt service, and equity-like injections”. (see e.g., her article in the IMF Blog: “A Long, Uneven and Uncertain Ascent”, October 13, 2020).

In January, the IMF chief economist had praised India’s job guarantee scheme known by the initials, “MGNREGA” (Mahatma Gandhi National Rural Employment Guarantee Act) and urged that the government spend more on cash transfers for the poor and infrastructural projects. But to balance against unmitigated or unmanaged fiscal injection, Gita Gopinath was also on record in calling for reduction in wasteful spending by the Modi administration which has been lately hard hit by massive opposition to its proposed de-regulation of the agricultural sector.

Yet according to Oxfam, the conditionality associated with the Washington Consensus remains in place with 84 percent of the loans extended, i.e., 76 out of 91 so far – requiring cuts to public spending and targeting “deep cuts to public healthcare systems and social protection”, among others (Behind the Numbers – A Dataset on Spending, Accountability, and Recovery Measures included in IMF Covid-19 loans, Oxfam) despite the talk about debt relief which to be fair isn’t the same as debt restructuring.

Perhaps debt restructuring could be included in what ought to be a Fair Trade Agreement (FTA – Fair) especially in light of the on-going impact of Covid-19, rather than a typical Free Trade Agreement (FTA), involving the G20 countries which include the EU as well as other multilateral and regional groupings with debt distressed countries, particularly e.g., in Sub-Saharan Africa. This will provide the latter with more fiscal and policy space to manoeuvre relative to China as now one of the world’s leading creditors and architect of the Belt-and-Road Initiative (BRI) that spans the African continent as well.

An FTA-Fair would also enable African countries to break free from the shackles of a fixed-exchange currency and current account deficits. In “Trade and Current Account Balances in Sub-Saharan Africa: Stylized Facts and Implications for Poverty” (UNCTAD – United Nations Conference on Trade and Development), Nicole Moussa showed that current account surpluses enjoyed by Sub-Saharan countries were either due to a) internal devaluation aimed at suppressing demand (including imports) which applied to only 7 out of 45 countries; or b) “strong surge in exports thanks to the commodity price boom”. In other words, not due to heavy industrialisation policies that would attract long-term foreign direct investment (FDI) which could be facilitated in the context of a FTA-Fair, among others (that takes the form of a barter where primary commodities exports are exchanged for industrial and semi-processed inputs to produce manufacturing outputs for exports).

An FTA-Fair can then gradually evolve to a FTA proper in due course. The point is, contrary to orthodox assumption, comparative advantage and international division of labour entails an initial protectionist stage for economically weaker countries in the current scenario. Historically speaking, economic powers have tended to engage in asymmetric protectionism which comports with historical data and facts (as highlighted by renowned Cambridge economics professor, Dr Ha-Joon Chang in e.g., Kicking Away the Ladder: Development Strategy in Historical Perspective, 2002).

In the early years post-Merdeka, we pursued an import-substitution industrialisation (ISI) policy which translated into the Pioneer Industries Ordinance (1958), Investment Guarantee Act (1959) and the Investment Incentives Act (1968). Macro-economic policy planning and development was, therefore, oriented and geared towards a mild type of protectionism of the domestic manufacturing sectors. State intervention only shifted gear in tandem with British “divestment” of the economy post-1970 and the third wave of globalisation post-Bretton Wood (of fiat currencies).

Asean too could play a role in this regard. The Malaysian Technical Cooperation Programme (MTCP)’s Third Country Training Programme (TCTP) which provides capacity-building and knowledge transfer at a government-to-government (G2G) level should be expanded to include government-to-business (G2B) – and finally business-to-business (B2B) – collaboration as well as the scope of beneficiary countries, particularly from the African and Latin American continents. This will strengthen bilateral alongside multilateral economic cooperation (trade and investment).

Domestically, we should capitalise on the current state of Emergency by imposing the financial market flushed with ample liquidity of some RM150 billion, particularly in reference to the banking sector, to buy Malaysian Government Securities (MGS), Government Investment Issues (GII) and sukuk so that two things can be achieved simultaneously, i.e., the government can roll-over existing debt to keep within the margins of the 60 percent to GDP (gross domestic product) ratio and the banks themselves have more than enough capital buffer against non-performing loans (NPLs) either for future loans or current moratoria (targeted, tailor-made).

New debt by the government should now pave the way for targeted or sector/industry-specific stimulus packages such as tourism, aviation, and retail. At the same time, vouchers (and e-vouchers) should be issued to the B40, lower end of the M40 and unemployed – that can be used for staycation (social distancing applying to the rooms and limited number of guests), retail purchases, groceries, etc.

Under a targeted scheme for small-and-medium sized enterprises (SMEs), the government should issue bills that are related to ensuring the survival of both the targeted and non-targeted sectors/industries. Furthermore, unlike the voucher scheme, the bills are only issued against output (production of goods and services) to safeguard against possible inflationary momentum. This follows the example of the Mefo bills designed by Hjalmar Schacht, the Finance Minister during the Third Reich who was sent to the Dachau concentration camp and acquitted at the Nuremberg Trial. Ultimately, the commercial banks will redeem with Bank Negara via their bond holdings of Bank Negara Monetary Notes/BNMN, i.e., discount or coupon-based. This is one example where fiscal policy is coordinated with monetary policy.

Perhaps a tax credit certificate (TCC) scheme can also be implemented for SMEs as well as those in the tourism and aviation sector here – as it is being done in the EU, particularly in member-states such as Italy. A TCC is issued free of charge by the State and is circulatable via being transferable from one recipient to another in the economy. The TCC allows recipients to claim tax rebates and credits (in the form of deductibles) in amounts equivalent to its face value (i.e., on the certificate), and to be used in lieu of cash. This in addition to the creation of credit by means of (other kinds of) note/bills that can also be used for invoice factoring.

The government should and will be able to increase spending (directly and indirectly) whilst leaving space for fiscal consolidation later on – by readjusting mainstream and standard macroeconomics policy paradigm whilst incorporating pragmatic and unorthodox policy measures for what are unprecedented times.

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