Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on November 1, 2021 - November 7, 2021

Glaring and growing inequality, a global phenomenon made even worse by the pandemic, has lent credibility to voices criticising globalisation, capitalism and finance that are deemed, in different proportions, as contributing towards the phenomenon. It is essentially a criticism of markets as a mechanism of pricing and allocating resources. These market failures naturally point towards governments for the solution, and the management of the pandemic was somehow seen as evidence of the indispensability and even efficacy of governments.

I do not share such sentiments because I firmly believe that where inequality has worsened, it is the government that has failed. It is governmental failure — be it the result of incompetence, corruption or fractious politics, or some combination of all of them — that has failed to manage and regulate the well-known excesses and instability of unfettered markets. The inequality of the inequality phenomenon globally shows that some governments have handled these market dynamics better than others and obtained much better outcomes.

The US is a study of how government policies have created one of the most glaring inequalities in the world. Ronald Reagan’s election as US president in 1980, together with Margaret Thatcher’s appointment as prime minister in the UK, brought about the so-called conservative revolution that can be distilled to simply the lowering of taxes. Of course, the rhetoric was more elaborate: making the government smaller, increasing self-reliance, promoting greater reliance on market mechanisms and even including an allusion to religious values.

Two things did not happen. Government did not become smaller as conservative governments are averse to social programmes but love defence spending and cutting taxes, so the government just reallocates its resources while cutting taxes and thereby increasing deficits. As we see it ourselves in Malaysia, political power is the great leveller; any ideology — political or religious — ends up being debased when endowed with political power. Reagan racked up massive deficits because his tax cuts were accompanied by massive increases in defence spending. He is, however, remembered for the small government ideology and as the leader who won the Cold War.

The resulting under-funding of social and educational programmes, and deregulation of all kinds, sowed the seeds for the inequality and emergence of dysfunctional politics that we are seeing in the US today. Working class communities, many of which were displaced by globalisation, suffered and deteriorated as social safety nets were drastically reduced and schools were under-funded in these communities.

The second thing that did not happen is that the private sector did not fill the void created by the absence of government. In other words, market failures remained. The theory on this is robust — public goods have externalities that distort its pricing, resulting in its under-provision if left to markets to decide. Hence, they are called public goods, to be provided by the government.

But politics can be detached from economic realities because politics can appeal to emotions instead of rationality. The very people who were short-changed by ineffective governments, those marginalised and displaced communities, are the same ones opposed to policies addressing inequalities!

Malaysia’s case

Malaysia too is seriously afflicted with this failure of government, one that has resulted in inequality. And like the case in the US, the rhetoric remains one of identity — of race and religion. Successive governments in the last 20 years have racked up massive debts by continuous deficit spending and expanding the size of government. Malaysia’s government has grown without getting better, or being more developed. It therefore lacks the depth and rigour to plan and execute effectively to develop the country and manage the vagaries of growth, especially those related to inequality.

There has been no shortage of plans. The planning role of the government was always there right from independence. The existence of the Economic Planning Unit and Implementation Coordination Unit as central agencies in the government, powerful and large entities within the Prime Minister’s Department, is a legacy of this economic planning. But they too have been ineffective, as the numbers show.

I have always believed that effective planning is a whole lot more demanding than relying on markets and, therefore, it requires a much higher level of competence. The tools are more sophisticated as are the informational and data requirements. Economics as a field has developed many such tools that evolved from data-intensive input-output models to more incentive-driven mechanism designs that relied on informational as well as behavioural inputs. But these more reasoned bases of making allocation decisions have given way to lobbying, thereby diminishing the technical competence within government while making public spending itself ineffective.

This path towards incompetence was also accompanied by the loss of an ideological anchor: why it is doing what it is doing in the way it is being done. At times, the New Economic Policy was invoked as an objective. But even then, there was no depth to the thinking. In the recent 12th Malaysia Plan (12MP), the government even resorted to introducing a dual equity market, having made bumiputera equity ownership a central policy objective while promoting the idea of private investments driving growth in new areas, from environmental, social and governance (ESG) practices to the digital economy.

While there is a certain superficiality of mouthing the latest buzzwords without relating them to the present circumstances, there is absurdity in addressing the different constituencies distinctly as if the problems of each constituency are compartmentalised and not connected to each other. There is no belief in guiding principles that select and bind choices coherently, just a set of objectives, a list of things that ticks a list of constituency boxes.

That was my feeling when the 12MP was tabled recently. I am one who does not see such five-year plans as serving the purpose they once did, which is to provide a macro view of the economy and identify the public investments required to achieve some national economic objectives. At the end of it all, it is a list of projects that will be financed by development expenditure of the budget during the five-year period. But today’s fiscal situation has reduced the size and, therefore, the significance of public investments.

As budgets have been in deficit during the last two decades, the share and contribution of public investments to the economy have declined. More worrying is that these public investments have not induced private investments the way they had in the past. As a result, investments’ share of the economy has been declining in the last 20 years. In simpler terms, the productive capacity of the economy — its ability to upgrade existing production and invest in new production — has been declining. The low income phenomenon is a direct result of this.

Not only has the public investment lever become smaller, its ability to influence private investments too, has diminished. Fiscal policy has clearly been a case of doing more — and having to pay more — and getting less. Despite its heft, the 12MP lacks granularity in how it guides development expenditure in the next five years.

There has been a disconnect between actual development expenditure and the budgets. The last 10 years or so have seen a significant amount of development that was implemented and funded outside of the budget. Big projects such as the East Coast Rail Link, Mass Rapid Transit, expansion of the Light Rail Transit and even construction of government quarters and university campuses have been financed outside of the budget, which reduces the coherence of the Malaysia Plans as a public investment strategy financed by development budgets. This practice, an apparent lack of financial control, has weakened the fiscal position of the government. All of them are being financed by borrowings at rates that are higher than the government’s direct borrowings. And since none of these projects are financially able to generate surpluses, their debts will have to be serviced by the Treasury via operating expenditure.

I am as unenthused by the 12MP as I was with the previous plan as there has not been an honest reckoning of the state of affairs and the adoption of a different approach. There was none of that, again, just more gloss.

There are things that the government can do that will have a huge impact on the economy, much more than the 12MP, and it will not cost the Treasury any money. Be serious about tackling corruption and the rule of law. Ensure strict separation and independence of powers between the branches of government. Reform and empower parliament and subject the various services commissions to parliamentary oversight, from public services to education to the police to anti-corruption. It is not revenues that are inadequate, it is the will and courage to change that have been inadequate.

Governmental incompetence and integrity are major issues but despite that, we have to depend on the government to solve problems that the private sector cannot. Until and unless the fundamental problems of government are addressed, the malaise will continue with the disparities and discontent fuelling an increasingly toxic environment.


Dr Nungsari A Radhi is an economist

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