Government facing an economic dilemma

The Malaysian Insider

NOV 25 — At least two economic ministers, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah and Tan Sri Nor Mohamed Yakcop, the minister in charge of the Economic Planning Unit, yesterday sounded greater caution on our economic outlook next year.

The European economy is weakening and the finance minister stated that government is “closely monitoring the European situation”. This shows his serious concern as to how low the European economies can go and how much we would be adversely affected.

The economic planning minister at the same time stated that “the global economic recovery is likely to stay weak and bumpy with a higher probability that things could get worse.”

We cannot therefore take it for granted that Malaysia can achieve a 5-5.5 per cent growth in our economy this year and anything near 5 per cent next year. Inflation could exceed 3.5 per cent next year and we could move towards stagflation which means stagnant economic growth and rising prices.

The government is now facing an economic dilemma. It would like to stimulate the economy, but the long-standing budget deficits do not allow even more budget spending, which would worsen the wide deficit. More government spending would also mean more borrowing especially for development expenditure. This, we are starkly reminded, is not prudent financing, particularly in the light of the Greece and Italian experience.

Hence the second finance minister indicated at the 16th ASLI Capital Market Conference yesterday that “Malaysia’s economy would primarily be driven by domestic demand”.

He expects private consumption or consumer spending which constitutes about 55 per cent of the Gross Domestic Product to increase by 7.1 per cent to provide the push for growth. But it may be difficult for consumers to spend more at a time of slower income growth and rising prices.

Minister of International Trade and Industry Datuk Seri Mustapa happily announced that foreign direct investment for the first nine months this year has exceeded the RM9.1 billion for the whole of last year.

This is good news .However it is also important to state how much of our own domestic capital has flowed out of the country. Even more significantly, it would be appropriate to ask what can be done to discourage not only the large capital outflows but also the serious brain drain of highly qualified human resources? Both are vital for our capacity to fight likely recession and to progress towards Vision 2020

This may therefore be the right and an opportune time to make more transformational policy changes that would encourage more Malaysian private investors to invest at home .

We can be gratified by the World Bank’s recent assessment that “the ease of doing business in Malaysia” has considerably improved. But the business climate could be spoilt by insufficient longer term confidence in good governance, and in the prospects of better racial and religious harmony and national unity in our country.

Thus increasingly we have to look at our business climate and outlook in more holistic ways since our domestic investors must feel more comfortable in their business sustainability in the longer term future.

Given the weakening US and European economies, and even the possibility of economic decline in China’s and India’s huge economies which are now our major trading partners, we have to take the signals for greater caution more seriously and prepare for more difficult times.

What we need to do to counter the declining economic trends is to liberalise our socio-economic and political policies further, provide a more attractive business environment and a better a more inclusive quality of life for all Malaysians.

Finally, we can step up public private investment partnerships amongst Bumi and non-Bumi businesses in Malaysia and within Asean and our Asian neighbours, especially for the major productive and income-generating projects like the KL-Singapore high-speed railway.

In effect we have to be more resolute and innovative in facing the great dilemma and grave challenges of our times.
* Tan Sri Ramon Navaratnam is the chairman of the Asli Centre of Public Policy Studies.

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