Published in Malay Mail<\/a>, Business Today<\/a>, Astro Awani<\/a> & Focus Malaysia<\/a>, image by Business Today<\/a>.<\/em><\/p>\n\n\n\n

Minister of Finance Tengku Zafrul Aziz\u2019s 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.<\/p>\n\n\n\n

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).<\/p>\n\n\n\n

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 \u201cleague\u201d also \u2013 at -10.4 percent compared to -13.9 percent in Q4 2020.<\/p>\n\n\n\n

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\u2019s Protection Assistance Package) launched in January and the RM20 billion Pemerkasa (Strategic Programme to Empower the People and Economy) implemented in mid-March.<\/p>\n\n\n\n

However, we have reached a point where there\u2019s the worry about the government\u2019s fiscal capacity and constraints. This roughly parallels concerns by the rakyat \u201cabout rising level of national debt\u201d as EMIR Research 4Q 2020 poll findings has revealed (at 74 percent).<\/p>\n\n\n\n

Notwithstanding, there\u2019s 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 \u201cfull lockdown\u201d (i.e., MCO 1.0). Given those two scenarios, the economy will continue to suffer loss \u2013 perhaps in the range of RM300 to RM400 million per day like MCO 2.0.<\/p>\n\n\n\n

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 \u2013 see also \u201cLockdown to December?\u201d (May 26, 2021) published in The Malay Mail<\/em> by economists Geoffrey Williams and Paolo Casadio.<\/p>\n\n\n\n

Which means that the longer MCO 3.0 persists or if there\u2019s MCO 1.0, which will be a drag on our GDP growth, the more challenged the government\u2019s fiscal capacity and constraint will be.<\/p>\n\n\n\n

This means that despite the government\u2019s 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 \u201cbreathing space\u201d. 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.<\/p>\n\n\n\n

In terms of politics, the government has to confront criticisms of \u201cextremely high\u201d national debt which is supposed to then translate into higher debt burden for future generations like higher borrowing rates and taxes (the \u201cRicardian equivalence\u201d), leakages and wastages, i.e., fraud and other corrupt practices, and not least our \u201csovereign default risk\u201d as assessed by credit rating agencies.<\/p>\n\n\n\n

On the other hand, based on Keynes, we know that when \u201caggregate demand\u201d (i.e., as whole in the economy) is weak or sluggish, the only way to ensure \u201ceffective demand\u201d (i.e., in relation to available economic resources \u2013 input) so as to close the \u201coutput gap\u201d (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 \u2013 the statistical data or otherwise known as \u201cstock-flow analysis\u201d as per economist Wynne Godley also) is for the one institution left in the nation, namely the government, to spend the economy into recovery.<\/p>\n\n\n\n

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 \u2013 see e.g., \u201cUnemployment among Malaysia\u2019s youth: Structural trends and current challenges\u201d (June 18, 2020) by Lee Hwok-Aun as published in Perspective<\/em> (Iseas\/Yusof Ishak Institute) and \u201cMalaysia\u2019s monetary, fiscal policy in current economic context\u201d (June 2, 2017) by Jason Loh as published in The Malay Mail<\/em>, etc.  <\/p>\n\n\n\n

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 \u201cmedium-term\u201d.<\/p>\n\n\n\n

This is consistent with the government\u2019s 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.<\/p>\n\n\n\n

As we\u2019re 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).<\/p>\n\n\n\n

Towards that end also, fiscal policy ought to be supported by monetary policy in the form of lower interest rate (see EMIR Research article, \u201cOPR \u2013 Bank Negara\u2019s MPC could have cut further by 250 bps\u201d).<\/p>\n\n\n\n

As argued by Piero Sraffa whose Production of Commodities by Means of Commodities<\/em> (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 \u201cKeynesians\u201d, interest rate plays a pivotal role in the determination of profits, instead of the other way round. To quote Sraffa, \u201c[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\u201d (p. 44).<\/p>\n\n\n\n

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\u2019s post-Classical \u2013 Adam Smith, David Ricardo).<\/p>\n\n\n\n

Minsky\u2019s two-price theory confirms Sraffa\u2019s breakthrough in his \u201cre-switching\u201d and \u201ccapital reversing\u201d \u2013 by showing that:<\/p>\n\n\n\n

a. there\u2019s a relationship between \u201cdemand price\u201d 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 \u201csupply price\u201d (i.e., costs of production) on the other.<\/p>\n\n\n\n

If the former is lower\/higher than the latter, then the investment (in the capital assets) will be correspondingly lower\/higher; and<\/p>\n\n\n\n

b. a higher interest rate would erode profitability because of its inclusion in the cost of production (and also thereby contribute to inflationary pressure \u2013 the contemporary paradox of the positive correlation between interest rate and inflation, as empirically proven e.g., the US, UK, EU, and Japan).<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

However, as argued by Aldo Caliari (Director, Rethinking Bretton Woods Project) in \u201cMinsky got there without quadrants\u201d as published by the Financial Times <\/em>(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.<\/p>\n\n\n\n

Of course, we need not go to that extreme \u2013 towards a zero-bound or even a negative interest rate policy (NIRP).<\/p>\n\n\n\n

The point is the State remains the macroeconomic actor for both \u201cdemand creation\u201d (fiscal policy) and \u201csupply creation\u201d (monetary policy).<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.<\/em><\/p>\n<\/div><\/div>\n<\/div><\/div>\n