The dynamic tension between politics and the economy to continue stabilizing the economy in the Covid-19 era – Jason Loh | What you think
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MAY 28 – The press release from Finance Minister Tengku Zafrul Aziz on the performance of the first quarter of 2021 (Q1 2021) indicates that the economy is gradually recovering. First quarter gross domestic product (GDP) only contracted 0.5 percent year-over-year (year-on-year), i.e. compared to the first quarter of 2020 .
Also, this compares to a -3.4 percent contraction in Q4 2020. This means that economic sectors as a whole / on average performed better compared to last quarter (i.e. fourth quarter 2020).
For example, the growth of the manufacturing sector was 6.6% year on year and 3% compared to Q4 2020. Services decreased by -2.3% compared to -4.8% in Q4 2020, and construction has performed more or less in this “league” as well – at -10.4% against -13.9% in Q4 2020.
According to Tengku Zafrul, while the first two months of the quarter saw contractions of -3.5% (January) and -3.6% (February) under the Movement Control Ordinance (MCO) 2.0 , respectively, GDP climbed 6 percent in March (the highest since March 2020). This would be attributed to the positive impact of the RM15 billion Permai (Malaysian Economy and Rakyat Protection Assistance Program) launched in January and the Pemerkasa (Strategic Program for the Empowerment of People and Culture). economy) implemented in mid-March.
However, we have reached a point where there is concern about fiscal capacity and government constraints. This roughly matches the concerns of the rakyat “regarding the increase in the level of the national debt”, as revealed by the results of the EMIR Research 4Q 2020 poll (at 74%).
Nonetheless, there is a strong possibility of extending an MCO 3.0 with more stringent Standard Operating Procedures (SOPs), including but not limited to an interstate travel ban or impending ‘full lockdown’ (i.e. i.e. MCO 1.0). Given these two scenarios, the economy will continue to experience losses – perhaps in the range of RM300-400 million per day, like OLS 2.0.
Tengku Zafrul reportedly said that overall GDP growth could decline to around 5% or 6.5% for 2021, compared to the 6% to 7.5% target set by Bank Negara, which likely alludes to the either of these scenarios – see also “Lockdown to December?” (May 26, 2021) published in Malaysian mail by economists Geoffrey Williams and Paolo Casadio.
This means that the longer MCO 3.0 persists or if there is MCO 1.0, which slows down our GDP growth, the more fiscal capacity and government constraint will be tested.
This means that, despite the government’s own admission, it probably has no choice but to increase the national debt ceiling or the self-imposed debt-to-GDP ratio from 60% to 65% for a certain “respite”. Politically, the government should have no problem achieving this, but could require the emergency convening of Parliament in an emergency. At the end of the day, the government has to decide whether politics or the economy is a priority.
Politically, the government faces criticism of the “extremely high” national debt which is then supposed to translate into higher indebtedness for future generations like higher borrowing rates and taxes (“the Ricardian equivalence ”), leakage and waste, that is to say fraud and other corrupt practices, and in particular our“ sovereign default risk ”as assessed by credit rating agencies.
On the other hand, based on Keynes, we know that when “aggregate demand” (that is to say as a whole in the economy) is weak or sluggish, the only way to ensure “effective demand” (i.e. relative to available economic resources – input) so as to close the “output gap” (defined as the difference between real and potential GDP) on the basis of national accounts (i.e. i.e. the measurement of economic activities of all sectors of the economy – statistical data or otherwise known as “stock-flow analysis” according to economist Wynne Godley as well) is for the only institution that remains in the nation, namely the government, to spend the economy in the recovery.
In this, one of the critical variables to determine effective demand is the level of unemployment, more precisely youth unemployment (and underemployment) which has always been estimated at around three times the national average – see for example ” Malaysian Youth Unemployment: Structural Trends and Current Challenges ”(June 18, 2020) by Lee Hwok-Aun as posted in Perspective (Iseas / Yusof Ishak Institute) and “Malaysia’s Monetary and Fiscal Policy in the Current Economic Context” (June 2, 2017) by Jason Loh, published in Malaysian mail, etc.
This requires fine-tuning the budget deficit target (ie preparing to increase spending above 6 percent to meet the employment target) and redefining fiscal consolidation to ” middle term”.
This is consistent with the government’s ambition to ensure the creation of new jobs driven by digitization and green / renewable technologies, as embodied for example in the MyDigital roadmap which aims to create 500,000 jobs by 2030 and increase the contribution of the digital economy to 22.6%. of GDP by 2025.
As we are still a net importer (deficit) of capital goods (especially high-tech machinery) unlike intermediate goods (such as semiconductors), public spending in this regard is essential to catalyze and stimulate growth of the digital economy (again as for example, defined in MyDigital in sync with Jendela or the national digital network plan and the deployment of 5G) alongside the green economy (Green Technology Master Plan Malaysia, 2017- 2030).
To this end too, fiscal policy should be supported by monetary policy in the form of lower interest rates (see EMIR Research article, “OPR – Bank Negara’s MPC could have fallen by another 250bp “).
As Piero Sraffa maintains, whose Production of commodities through commodities (1960) demonstrated some of the internal contradictions of the neoclassical school of marginalist revolution, and thus contributed to the Cambridge controversy over capital on the ‘Keynesian’ side, the interest rate plays a central role in determining profits, instead of the other way around. To quote Sraffa, “[t]The rate of profits]is therefore likely to be determined from outside the production system, notably by the level of interest rates on money ”(p. 44).
Sraffa was a close friend of Keynes who defended him from Hayek (of the Austrian School of Economics and Subset of Marginalist Revolution) but was certainly a prominent Neo-Ricardian (Neo-Ricardianism is a school economic thought / tradition is post-classical – Adam Smith, David Ricardo).
Minsky’s two-price theory confirms Sraffa’s breakthrough in his “re-commutation” and “capital inversion” – by showing that:
a) there is a relationship between the ‘demand price’ of fixed assets (i.e. what entrepreneurs are willing to pay to invest and, therefore, the expected return, which is influenced by economic sentiment such as sales forecasts and expectations) on the one hand and “supply price” (ie production costs) on the other.
If the first is lower / higher than the second, then the investment (in fixed assets) will be proportionately lower / higher; and
b) a higher interest rate would erode profitability due to its inclusion in the cost of production (and thus also contribute to inflationary pressure – the contemporary paradox of the positive correlation between interest rate and inflation, as has has been empirically proven, e.g. in US, UK, EU and Japan).
Lower interest rates would provide the necessary environment to incentivize investment in both capital-intensive and labor-intensive (read: highly skilled) production techniques in the context of digital and green / renewable economies.
However, as Aldo Caliari (director, Rethinking Bretton Woods Project) argues in “Minsky arrived without quadrants” published by the Financial Times (January 15, 2013) For the EU, near zero interest rates and depressing bond yields (quantitative easing) without fiscal policy intervention (expansion) are ineffective.
Of course, we don’t need to go to that extreme – toward a zero or even negative interest rate policy (NIRP).
The point is that the state remains the macroeconomic actor in both “demand creation” (fiscal policy) and “supply creation” (monetary policy).
In this, if the existential tension (cognitive dissonance) between political challenges and economic needs will never realistically be resolved, at least we can continue to seek the appropriate balance between the two as well as between lives and livelihood on the premise of what can be described as a hybrid of politics-economics of empathy.
* Jason Loh Seong Wei is Head of Social, Legal and Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malaysian courier.