A LARM bells are ringing. Global recession is imminent. Growth is slowing in China and Europe. The partial government shutdown, geopolitical tensions, and trade wars will hit US growth.
Brexit will also impact growth in the UK and Eurozone. All these signal an impending recession. As a precaution, the US Federal Reserve has stopped increasing its benchmark interest rate even as it plans to expand credit.
To tackle economic revival, Prime Minister Tun Dr Mahathir Mohamad has announced the creation of an Economic Action Council. Here are four ways that the government can soften the hard blow of a global recession.
First, the government has to expand aggregate demand. Economist John Maynard Keynes argued for pumping money into the economy in times of recession, even if it involved the unproductive employment of workers to dig holes and fill them back again.
Milton Friedman, a Nobel-prizewinning economist, advocated an even more radical way to put more cash in the hands of consumers. He suggested that that a government drop free money from a helicopter! We suggest that the government do no such thing. However, the point these renowned economists made is that increasing consumption can resurrect a moribund economy.
The government can expand consumption by increasing the social safety-net of the bottom 40 per cent of the income pyramid. It can do so by enlarging the Bantuan Sara Hidup, or cost of living aid, to this vulnerable group. Comprising two thirds of all households, this group has the highest propensity to consume. It will kick-start the multiplier effect to generate further rounds of income and consumption.
With a low threat of inflation and financial instability, the government should encourage credit expansion including cutting the main interest rate. This will boost private investment as the cost of borrowing becomes cheaper.
Public investment, too, should be boosted. In our quest to reduce the budget deficit we have often taken the easy way out by cutting development expenditure. As a result, development expenditure as a share of the total annual expenditure has declined by one-third since the early 2000s.
Sure, increased handouts and public capital expenditure will widen the budget deficit. Paul Krugman, a Noble-prizewinning economist, argues that budget deficits are a necessity in times of slower growth. Without pump-priming the economy we might descend into a recession.
In a similar vein, Richard Koo in his 2015 book The Escape from Balance Sheet Recession and the QE Trap argues that budget deficits are not all that bad if it is to promote the country’s productive capacity. We can pursue deficit reduction more aggressively during better times.
Second, Finance Minister Lim Guan Eng’s recent announcement that foreign direct investments are pouring in on account of the country’s astute fiscal management is indeed encouraging. We should make this pour a flood. That would require greater policy clarity on the economic front. Apart from fiscal incentives, investors desire policy certainty.
Decisive policies on economic growth will include a comprehensive infrastructure development plan to illuminate policy announcements over project deferment. Similarly, against the back-drop of industrial compression, the government should articulate strongly its policy on the sustainability of manufacturing and economic growth. This will include the identification of new sources of growth and tackling climate change.
These policies should be inspired by an overarching economic model. The 2010 new economic model served such a purpose in drafting the 11th Malaysia Plan.
The first National Economic Action Council, set up in the wake of the 1998 Asian financial crisis, formulated an economic recovery plan. A similar plan to expand the economy will give a comforting assurance to investors that the government is on a surer footing over its economic agenda.
Third, as with policy clarity, political certainty is part of an investor’s risk management calculation. To grow the economy, the ruling coalition should project a united front.
Albeit abated, political infighting and controversy over national-leadership succession could raise investors’ anxiety. We do not want the incoming tide of investments to slow down, or worse, reverse.
Fourth, with exports constituting 70 per cent of the gross national product, or GDP, the government should boost national competitiveness by enhancing productivity. Innovation is the key and it comes from research and development (R&D). A study on private R&D expenditure suggests that over the long term, every 40 per cent increase in the R&D budget will register a five per cent increase in GDP.
Germany increased its research allocation in the decade following the global financial crisis. That has put its economy in good stead while burnishing its industrial credentials. The government should therefore consider increased funding and higher tax allowances for R&D for Malaysia to be in the global innovation race.
To overcome the problem of limited resources, public R&D expenditure could be better targeted.
This is being done in Sweden and Finland. There, R&D funding across universities is based on their past research performance and potential to forge links with industry for greater value-for-money research. We should consider adopting this method.
The time to act is now to avert a recession.
The writer, a former public servant, is a principal fellow at the Graduate School of Business, Universiti Kebangsaan Malaysia