Politics and Policy: Postpone policies that will cost jobs, economist tells government

This article first appeared in The Edge Malaysia Weekly, on July 13, 2020 - July 19, 2020.
Nambiar says that as companies resume operations, they will find that global demand is weaker than they thought it would be. (Photo by Patrick Goh/The Edge)

Nambiar says that as companies resume operations, they will find that global demand is weaker than they thought it would be. (Photo by Patrick Goh/The Edge)

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WITH economic indicators showing that Malaysia will experience a much sharper contraction than was anticipated at the start of the Covid-19 pandemic, rushing the introduction of disruptive technologies would be a wrong move.

Mammoth infrastructure projects that require foreign labour should also wait, says Malaysian Institute of Economic Research (MIER) senior research fellow Dr Shankaran Nambiar.

“The immediate priority must be job preservation. We do need technological upgrading, tech-intensive production, 5G rollout, automation and technology-driven productivity, but it would be prudent to wait for six months to a year before introducing these policies. In this context, it was very sensible to delay the launch of the 12th Malaysia Plan,” he says.

Last month, the World Bank revised downwards its forecast for the Malaysian economy, projecting that its gross domestic product would contract 3.1% year on year due to the impact of the pandemic. This was a further revision of its projection in April when it forecast that the country’s economy would contract to -0.1% in 2020 from an earlier estimate of 4.5% growth.

The impact of the sluggish economy on jobs will be severe, say HELP University economists Dr Paolo Casadio, Dr Hui Hon Chung and Dr Geoffrey Williams in an analysis published on the Free Malaysia Today news site.

Unemployment figures for April were at 5.0% — the worst in three decades — and were expected to remain at 5% to 7% for the rest of the year, they say.

The Malaysian Employers Federation estimates that two million workers could lose their jobs, which ties with the high side of the MIER’s forecast.

“We will probably see unemployment at its worst in the months to come,” says Nambiar in an email interview with The Edge.

As companies resume operations, he says, they will find that global demand is weaker than they thought it would be, and that supply chain disruptions are not easy to surmount.

This would culminate in a payments crunch, trouble with loan servicing and the like, says Nambiar.

To relieve the pressure on businesses and the people and boost the economy, the government has introduced four stimulus packages to date involving RM315 billion. The latest, announced in early June, was Penjana, a RM35 billion short-term economic recovery plan to save jobs, reduce the burden on businesses, relieve the cash-flow problems of small and medium enterprises (SMEs), speed up digitalisation and draw investments.

While industry representatives have welcomed the relief packages, they have also signalled that the aid would not go far enough to mitigate the impacts of the unprecedented economic standstill.

The wage subsidies, unemployment insurance and training incentives announced for the worst-hit sectors need to be supplemented or broadened, say business groups.

Nambiar suggests that in addition, the government could subsidise rental payments, increase wage subsidies, cut corporate tax for SMEs, reduce the cost of utilities and waive levies for foreign workers.

“The one biggest instrument would be wage subsidies without which the smaller, less capital-intensive SMEs would have no qualms in folding up. The less stake you have, the lower your exit costs, the less the company’s costs in exiting,” he says.

The question is how far the government can go in supporting SMEs. This requires a clear evaluation of the measures taken and their targets, says Nambiar.

Two classes of SMEs will be worst hit. One is companies that are dependent on the external market, especially in areas where the outlook is bleak and will continue to be so.

Supporting SMEs in these areas could be a long-drawn affair, says Nambiar. It is uncertain to what extent the government can go on extending a lifeline, particularly if the environment for these companies is not likely to improve in the next six months, he says.

The other class of firms that are in trouble could arise from the changing nature of doing business.

“If companies are going to shift into a different work environment, be it through the increasing use of the internet or the gig economy, then it would be more rational to support the shift rather than to continue financing outmoded means of production,” says Nambiar.

“Our fiscal space is limited. There is a point where the government will have to draw the line. A blanket intention ‘to support SMEs’ is not enough. There may be little point in supporting SMEs that may collapse anyway. And this is imminent given the conditions in the US, EU, UK and China,” he says.

However, there are many industries for which a deep slowdown is on the horizon and which will recover — these are the industries that need support, says Nambiar.

“We have to adopt a rationed approach to fiscal support,” he adds.

Given this outlook, the government could mitigate the fallout by postponing the advent of disruptive technologies to a later date. Accordingly, it might help to delay the postponement of the 5G rollout, says Nambiar.

“It might help to postpone mega infrastructure projects till the economy is stabilised. Again, this will depend on the extent to which domestic companies and the domestic workforce are involved,” he says.

“It would be foolhardy to rush into projects that will benefit foreign companies and which will use migrant labour. Even if they are important for our long-term development, they should be postponed to a later date when the labour conditions are more stable,” says Nambiar.

It is noteworthy that youth unemployment and underemployment were already a concern before the pandemic.

Some of these issues are long-standing problems that are resurfacing with the Covid-19 pandemic, says Nambiar.

Graduate unemployment has been quite an issue for a while; it is going to be exacerbated under present circumstances, he notes.

On the one hand, this will require a more structural approach to be taken. It will include changing the nature of education, the kinds of courses taught, the vocational nature of teaching and learning and emphasising entrepreneurial skills rather than a mindset of depending on the government to create jobs, says Nambiar.

Alongside that, it is necessary to increase employment generation.

“This is obviously not the time to encourage automation and labour-reducing technologies because along with the reduced need for foreign workers, we may have to lose domestic workers,” he says.

Supplementing the current job protection measures will require new sources of revenue.

“An obvious candidate is the reintroduction of the GST, though at a lower rate,” says Nambiar.

There could also be a reassignment of budgeted allocations, for instance, of defence spending, or a cut in sports funding. In an extreme scenario, he says, the government could borrow from Bank Negara Malaysia.

“While we do not need to be preoccupied with credit ratings at this time, neither do we need to throw fiscal prudence out of the window,” says Nambiar.

At least in the near term, the focus of human capital development planning should change from investing in labour-saving technologies in favour of job preservation for social stability.

“Hopefully, the Covid-19 crisis has laid bare the structural problems that we have: the dependence on unskilled migrant labour, the large number of undocumented workers, the issue of graduate unemployment and the problem of food security,” he says.

“Our human capital development planning should work towards making agriculture attractive to young Malaysians, our industries should be less dependent on migrant labour, and education should be more vocationally and technologically oriented. But these big changes should wait a bit,” he concludes.

 

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