DOES having a balanced budget really matter?
No, according to Prof Jomo Kwame Sundaram.
The prominent economist stresses what’s important is how the Government spends its money annually to generate meaningful growth for the country’s economy. But sadly, that is something that is sorely lacking in the Malaysian context.
Not one to mince his words, Jomo says Malaysia has been running on “humdrum” budget deficits for the last two decades, without any serious effort to put the country’s economy on a sustainable growth path.
As he sees it, the country is presently mired in a political crisis that has led to a paralysis in effective economic policy making. Reform measures have somewhat stalled, and there is a self-defeating illusion that the country’s economy is moving in the right direction, and that it will become a high-income nation in the next four years.
Jomo says Malaysia needs bold leadership to implement bold measures that can take the country’s economy to the next level of growth.
A visiting senior fellow at Khazanah Research Institute (KRI) and visiting fellow at the Initiative for Policy Dialogue, Columbia University, Jomo holds the Tun Hussein Onn Chair in International Studies at the Institute of Strategic and International Studies, Malaysia.
He has been based in Malaysia since coming back about a year ago after having been based overseas for about 12 years.
The former United Nations assistant secretary-general for economic development is one of the keynote speakers at the upcoming Malaysian-French International Conference entitled “Malaysian Capitalism in Comparative Perspective” that is jointly organised by KRI, the Embassy of France in Malaysia and Malaysia-France University Centre.
According to Jomo, there are enough people in the country who know what ails the Malaysian economy.
But unless we come to terms with where we are, where our potential lies and how we go forward from here, he says, we will not go very far.
Jomo shares his thoughts on Malaysia’s economy with StarBizWeek in an exclusive interview. Below are excerpts of the interview:
How far have we come since the 2008/2009 Global financial crisis?
One would think that we would have learnt some lessons from past crises, but unfortunately, we haven’t really learnt many lessons from them.
We have seen some of the same forces which are pushing for financial liberalisation and globalisation continue to do the same thing again in recent years through so-called free trade agreements, investment treaties and so on so forth.
These same kind of forces (which have led to economic bubbles) are at work; we seem not to have learnt many lessons from it. We continue to allow these processes to go on.
But of course, it is difficult to fully anticipate what is going to happen next. I don’t think anybody can claim prior knowledge of where the next vulnerabilities are going on.
Is Malaysia in a good position to respond to another potential economic downturn?
There is paralysis in economic policymaking.
To me, this is the most important problem in the country.
We have a profoundly deep political crisis right now which has overtaken everything else. We need to have some kind of bold leadership to get out of this.
This Government is so profoundly debilitated by the 1Malaysia Development Bhd (1MDB) scandal and the considerations of political survival that it is not about to undertake the bold initiatives which are needed.
This is a very sad situation that we are confronted with and there has to be some kind of resolutions to this dilemma.
My concern is that there are so many powerful vested interests who will fight to preserve and protect their interests and that they will resort to all kinds of means – more foul than fair – in order to protect their interests and the future of the country is at risk.
Your thoughts on Budget 2017?
Frankly, these are hardly important issues anymore. It is a bit more of the same, a little tweaking here and there.
The budget today is not of much significance, given the larger malaise the country is facing.
And I think it is very important to recognise that now we have so many supplementary budgets, we can be sure there will be a supplementary budget before the next general election.
On achieving near-balanced budget by 2020:
There are many people who have been telling me that everything is going to collapse because Malaysia does not have enough to pay and service debts. Most of these claims are due to exaggeration or a lack of understanding of public finance.
As far as balancing the budget is concerned, if you don’t know the situation in 2020, why do you promise to balance the budget by 2020?
Rather than making a promise that may or may not be realised, I think what we need to understand is that the Government in general should have what I call a counter-cyclical policy.
The budget can be a useful tool in trying to smoothen business cycles.
When the economy is doing well, you would want to have a balanced budget and settle as much of your accumulated debt as possible.
Conversely, when the economy is not doing so well, you would want to stimulate the economy with the help of government spending, especially that which is well-spent, rather than just giving jobs to the boys, which is not going to do very much in terms of stimulating the economy.
Then, is it not a concern that Malaysia has been running on fiscal deficit since 1999 and the Government’s debt level has been rising in recent years?
It is a concern because we did not take bolder measures to revive the economy.
We have been more or less having humdrum budget deficits for the last two decades but no serious effort to put the economy back on a sustainable growth path.
So I would say the problem is not so much of a budget deficit problem, but rather we are not on a growth path which is sustainable and which would ensure living standards rise.
Have we made much progress in adopting a new economic model?
There were some good elements in it (the new economic model that the Government unveiled in 2010), but they remain very much on paper.
Besides the measures to provide more for the lower-income group – such as the minimum wage policy and the 1Malaysia People’s Aid (BR1M), which has been implemented with good effect – I cannot say I’m terriby excited by the model as a whole.
It puts a lot of emphasis on modern services, by which it implies financial services more than anything else, maybe some IT services. But we do not have supportive measures.
We have been historically so heavily dependent on foreign direct investments rather than helping to nurture Malaysian industrialists and entrepreneurs in ways which will eventually enable them to become internationally competitive.
If we think about Japan, South Korea and even more recently China, it is those kind of nurturing policies which made it possible for these countries to grow, industrialise and transform themselves very rapidly.
This is why I think we are under a lot of illusion if we think we can leapfrog the industrial stage and go straight to services.
We cannot compare ourselves to Hong Kong or Singapore because we are a different type of economy and we cannot neglect that.
For example, when we look at the agriculture sector, which has been greatly neglected in Malaysia, we have to think in terms of modern agriculture. But we have not been able to have that kind of supportive measures to gain much from the sector.
We need to fundamentally rethink this and stop following international trends as espouse by international institutions such as the World Bank; and really begin to have a better understanding of the Malaysian economy – of its strength, of its potential and then building on that.
Let’s face it, many of the elements of this so-called middle-income trap are actually of our own making.
On the huge number of foreign workers in Malaysia, we need a medium-term development strategy which is far less reliant on cheap foreign workers.
I’m not suggesting we totally do away with foreign workers because we may well want foreign workers to supplement the skilled resources that we need, but we must move away from low-wage economic model. Unfortunely, there has been very little commitment in this area.
Do you think Malaysia is still stuck in a middle-income trap?
I don’t agree with the idea of a middle-income trap. It is an empty slogan and profoundly misspecifies the nature of the Malaysian problem.
The problem is, while Malaysians in general have higher incomes now, they are not directly based on the economy. We have an economy where living conditions and wages are very low in agriculture, and we as a nation benefits from the (cost) competitive agriculture that we have.
We have also abandoned our past policy emphasis on industrialisation; we have not progressed sufficiently to higher and more rapid industrialisation.
Can Malaysia achieve high-income status by 2020?
We are under an illusion of becoming a so-called developed country.
By 2020, I’m not surprised that we will achieve the status of high-income economy (as defined by the World Bank as having a gross national income of US$12,475 in 2015).
We can easily do it by statistical means. For example, if you continue to deny the number of foreign workers in the country, then your denominator for calculating per capita income goes down tremendously. So, you can reach the supposed high-income status.
There are about six to seven million of foreign workers in Malaysia and that makes up about 30%-40% of the country’s total labour force. And many of whom work and live in far worse conditions than even the poorest Malaysian workers.
We have a huge underclass, which is foreign, and which we are almost in deniable about.
These numbers are significant and we are kidding ourselves.
Is Malaysia losing its competitiveness to its regional peers?
A country’s competitiveness is not defined in terms of regional competitiveness. It is defined globally.
So, what are we doing to be globally competitive?
We should be happy that other countries in the region such as Indonesia are progressing, but that should spur us to continue to excel.
But you don’t think of excelling only in terms of your neighbours. You have to think of excelling because globalisation is a real phenomenon.