June 30, 2022

How not to implode economically

4 min read

Populist policies have a way of coming back to haunt the political leaders who introduced them.

The policies may sound nice and kind and win the hearts and minds of the people along with their votes but, as there is no such thing as free lunch in this world, the generous subsidies are usually the cause of countries getting into financial trouble when their luck runs out a few years later.

In recent weeks, several Latin American capital cities experienced street riots as citizens rose in anger to denounce their government for inflation and unemployment and shortages in food, fuel and medical supplies as well as the austerity measures that their political leaders are introducing to bring back fiscal and financial stability into the economy.

Strapped by their fiscal constraints, government spending in these countries has also been cut, aggravating the unemployment situation and further dampening business sentiments in the private sector.

Thus, with the public sector not spending and the private sector not investing for fear of the worsening political situation, the crisis begins to take on a life of its own.

Lawlessness, corruption and abuse of power have become widespread, with the poor paying the heaviest price for the failed government policies.

In Egypt, a story is circulating to show how the price of bread was so highly subsidised that it became dirt cheap: A man bought several loaves of bread from a shop for his family and was walking home with them when he dropped a few – he did not bother to pick them up because it was not worth the effort. The Egyptian government was wasting the subsidy on this greedy man who was taking home more bread than his family could eat.

The International Monetary Fund (IMF) insisted the government stop the bread subsidy and other wasteful subsidies as a condition for international banks to bail out the country from its self-made economic crisis.

Countries that mismanage their economies have only themselves to blame for their financial crisis. When conditions turn from bad to worse and governments need to borrow urgently to keep public services running, local banks will refuse to lend any more money because the governments have become too risky to lend to. When the leaders turn to international banks and the IMF for bail-out funding, they will be subject to tough conditions to reform and restructure their economic, financial and fiscal systems to restore the national budget to a sustainable level and create favourable conditions for the revival of the private sector.

The political leaders are left with no choice but to follow the conditions imposed on them. As they begin to dismantle the subsidies and goodies, raise taxes and deregulate the economy to facilitate growth, they face widespread protests from the public. The government leaders in those countries must be regretting the politically motivated policies they introduced before.

The lesson we should learn from the experience of these crisis-

ridden countries is that we should not be overindulgent in matters of taxation, electricity and water tariffs, hospital fees, highway tolls, petrol and diesel prices, civil service salaries and pensions, allowances for religious activities, etc, thinking that the more the government gives away, the happier the country.

What we can learn from these troubled countries is that the subsidies and other give-aways will come back to haunt us when we are facing hard times due to external circumstances beyond our control.

Today, the domestic banking system in Malaysia remains confident about the government’s management of the economy and its ability to service its debt. Most of our government debt is owed to domestic and locally-based banks and financial institutions, not foreign, which is a good and healthy indicator of Malaysia’s strong economic fundamentals.

At the aggregate level, Malaysia is historically a savings surplus country. Although the government itself runs on deficit financing, the surplus in the private sector ensures that there is enough funding capacity for local banks to lend to the government to finance its deficit. Thus, our government does not need to borrow heavily from abroad.

In fact, all our five-year development plans since the 1960s have been financed with minimal foreign funding because our national savings rate has always been high enough to provide ample domestic resources to meet the financing needs of the private sector as well as the public sector.

Repayments on foreign borrowing are a claim on the country’s external reserves and can be costly after taking into account exchange rate risks, even though the interest rates are attractively low. Therefore, such loans – like those given by China for the ECRL (East Coast Rail Link) project and the Japanese yen credit – should be analysed to ensure that there are tangible benefits to the country to offset against the risks.

This responsibility for macro planning and project analysis lies on the shoulders of the three central economic agencies: the Economic Planning Unit, the Federal Treasury, and Bank Negara Malaysia. Their functions should be reinforced at the highest level by empowering the select Parliamentary committees to oversee and provide checks and balances on the ministries as well as the GLCs (government-linked corporations) and statutory bodies.

These off-budget agencies should be closely monitored by the central agencies, especially their borrowings, to avoid the recurrence of the 1MDB financial scandal.

Let’s keep the confidence level in Malaysia high through prudent spending for productive purposes and avoiding wasteful subsidies. Government assistance should only be used for the most basic needs. With strong interagency coordination and Parliamentary oversight to ensure the government spends productively for economic and social progress, Malaysia will be safe from the self-inflicted economic crises that we see happening in other countries.


Kuala Lumpur