By Jason Loh Head of Social, Law & Human Rights at EMIR Research
Minister of Finance Tengku Zafrul Aziz’s press release on the performance of the first quarter of 2021 (Q1 2021) indicates that the economy is gradually recovering. The gross domestic product (GDP) for Q1 had only contracted by 0.5 percent year-on-year (y-o-y), i.e., in comparison to Q1 of 2020.
Furthermore, this compares to a contraction of -3.4 percent for Q4 of 2020. This meant that the economic sectors as a whole/on average performed better compared to the last quarter (i.e., Q4 2020).
For example, the growth of the manufacturing sector was at 6.6 percent y-o-y and compared to Q4 2020 at three percent. Services shrunk by -2.3 percent compared to -4.8 percent in Q4 2020, and construction performed more or less in that “league” also – at -10.4 percent compared to -13.9 percent in Q4 2020.
According to Tengku Zafrul, whilst the first two months of the quarter had seen contractions of -3.5 percent (January) and -3.6 percent (February) under the Movement Control Order (MCO) 2.0, respectively, GDP figure shot up by six percent in March (the highest since March 2020). This would be attributed to the positive impact made by the RM15 billion Permai (Malaysian Economic and Rakyat’s Protection Assistance Package) launched in January and the RM20 billion Pemerkasa (Strategic Programme to Empower the People and Economy) implemented in mid-March.
However, we have reached a point where there’s the worry about the government’s fiscal capacity and constraints. This roughly parallels concerns by the rakyat “about rising level of national debt” as EMIR Research 4Q 2020 poll findings has revealed (at 74 percent).
Notwithstanding, there’s a high possibility of either the extension of a MCO 3.0 with stricter standard operating procedures (SOPs), including not least inter-state travel ban or an impending “full lockdown” (i.e., MCO 1.0). Given those two scenarios, the economy will continue to suffer loss – perhaps in the range of RM300 to RM400 million per day like MCO 2.0.
Tengku Zafrul was quoted as saying that overall GDP growth could lower to about 5 percent or 6.5 percent for 2021, compared to the 6 percent to 7.5 percent target forecast by Bank Negara, which probably hints at either of those scenarios – see also “Lockdown to December?” (May 26, 2021) published in The Malay Mail by economists Geoffrey Williams and Paolo Casadio.
Which means that the longer MCO 3.0 persists or if there’s MCO 1.0, which will be a drag on our GDP growth, the more challenged the government’s fiscal capacity and constraint will be.
This means that despite the government’s own confession, it probably has no choice but to increase the self-imposed national debt ceiling or debt-to-GDP ratio from 60 percent to 65 percent for some “breathing space”. Politically, the government should have no problem achieving this but might require the emergency reconvening of Parliament under the Emergency. At the end of the day, the government has to decide whether politics or economics takes priority.
In terms of politics, the government has to confront criticisms of “extremely high” national debt which is supposed to then translate into higher debt burden for future generations like higher borrowing rates and taxes (the “Ricardian equivalence”), leakages and wastages, i.e., fraud and other corrupt practices, and not least our “sovereign default risk” as assessed by credit rating agencies.
On the other hand, based on Keynes, we know that when “aggregate demand” (i.e., as whole in the economy) is weak or sluggish, the only way to ensure “effective demand” (i.e., in relation to available economic resources – input) so as to close the “output gap” (defined as the difference between real and potential GDP) based on national accounting (i.e., measurement of economic activities of all sectors in the economy – the statistical data or otherwise known as “stock-flow analysis” as per economist Wynne Godley also) is for the one institution left in the nation, namely the government, to spend the economy into recovery.
In this, one of the critical variables in determining effective demand is the unemployment level, more precisely youth unemployment (and under-employment) which has always been estimated to be around three times the national average – see e.g., “Unemployment among Malaysia’s youth: Structural trends and current challenges” (June 18, 2020) by Lee Hwok-Aun as published in Perspective (Iseas/Yusof Ishak Institute) and “Malaysia’s monetary, fiscal policy in current economic context” (June 2, 2017) by Jason Loh as published in The Malay Mail, etc.
This requires the fine-tuning of the fiscal deficit goal (i.e., preparing to increase spending above six percent to meet the employment goal) and redefining fiscal consolidation in the “medium-term”.
This is consistent with the government’s ambition to ensure the creation of new jobs driven by digitalisation and green/renewable technology as embodied in e.g., the MyDigital Roadmap which aims to create 500,000 jobs by 2030 and ramp up the contribution of the digital economy to 22.6 percent of GDP by 2025.
As we’re still a nett importer (deficit) of capital goods (especially hi-tech machinery) in contrast to intermediate goods (such as semiconductors), government spending in this regard is critical to catalyse and spur the growth of the digital economy (again as e.g., set out in MyDigital in synchronisation with Jendela or the National Digital Network blueprint and 5G rollout) alongside the green economy (Green Technology Master Plan Malaysia, 2017-2030).
Towards that end also, fiscal policy ought to be supported by monetary policy in the form of lower interest rate (see EMIR Research article, “OPR – Bank Negara’s MPC could have cut further by 250 bps”).
As argued by Piero Sraffa whose Production of Commodities by Means of Commodities (1960) demonstrated some of the internal contradictions of the neo-classical school of the Marginalist Revolution, and thus contributed to the Cambridge Capital Controversy on the side of the “Keynesians”, interest rate plays a pivotal role in the determination of profits, instead of the other way round. To quote Sraffa, “[t]he rate of profits] is accordingly susceptible of being determined from outside the system of production, in particular by the level of the money rates of interest” (p. 44).
Sraffa was a close friend of Keynes who defended him from Hayek (of the Austrian school of economics and sub-set of the Marginalist Revolution) but to be sure was a leading neo-Ricardian (Neo-Ricardianism is an economic school of thought/tradition that’s post-Classical – Adam Smith, David Ricardo).
Minsky’s two-price theory confirms Sraffa’s breakthrough in his “re-switching” and “capital reversing” – by showing that:
- there’s a relationship between “demand price” of capital assets (i.e., what entrepreneurs are willing to pay to invest and, therefore, the expected return, which is influenced by economic sentiments such as sales forecast and expectations) on the one hand and “supply price” (i.e., costs of production) on the other.
If the former is lower/higher than the latter, then the investment (in the capital assets) will be correspondingly lower/higher; and
- a higher interest rate would erode profitability because of its inclusion in the cost of production (and also thereby contribute to inflationary pressure – the contemporary paradox of the positive correlation between interest rate and inflation, as empirically proven e.g., the US, UK, EU, and Japan).
Lower interest rates would provide the necessary environment to induce investment in both capital-intensive and labour-intensive (read: high-skilled) techniques of production in the context of digital and green/renewable economies.
However, as argued by Aldo Caliari (Director, Rethinking Bretton Woods Project) in “Minsky got there without quadrants” as published by the Financial Times (Jan 15, 2013) in relation to the EU, near-zero interest rates and depressing bond yields (quantitative easing) without fiscal policy intervention (expansion) is ineffective.
Of course, we need not go to that extreme – towards a zero-bound or even a negative interest rate policy (NIRP).
The point is the State remains the macroeconomic actor for both “demand creation” (fiscal policy) and “supply creation” (monetary policy).
In this, whilst the existential tension (cognitive dissonance) between political challenges and economic needs will never be, realistically speaking, resolved, at least we can continue to pursue the appropriate balance of the two as well as between lives and livelihoods on the principle of what can be described as a hybrid of politics-economics of empathy.