When can We Recover?

The G7 predicts that the earliest signs of world economic recovery could possibly be seen in Q4 2009. That is provided all the stimulus packages hit their marks and immediately shore up demand consumption not only for goods and services produced by the home economies but also its impacts upon import and export trade. If most of these G7 and G20 countries are on the mend, then we can see the spill-over effects on to exporting economies such as Malaysia.

Let us look at some excepts of a Daim interview with the Straits Times of Singapore on the Malaysian economy and the issues he has highlighted.


Q: What makes this economic crisis different from the other two Malaysia faced in the last three decades?

A: Unlike the crises in 1985 and 1998, this is a global crisis where all three major economic centres — the United States, Japan and European Union — are all in recession at the same time. The last time this happened was during the Great Depression. Because global growth and exports are contracting, Malaysia cannot expect to export itself out of this crisis. But this time around, Malaysia is much more resilient than in previous episodes. We do not have the problem of over-inflated asset bubbles, and the private sector is not over-leveraged. Quite the contrary, there are more resources to respond to the crisis.

Q: What are Malaysia's options and your views on the stimulus plan proposed by the government?

A: Like other countries hit by the crisis, the most obvious response is to expand the domestic economy because the external sector is declining and foreign capital is either unavailable or highly unstable.
The stimulus package introduced by the government is, in my view, a good balanced package because it recognises the fact that we have to stimulate demand but also maintain a sound fiscal situation. For example, the guarantee on loans where the government shares 80 per cent of bad debts will increase banks' comfort level, and this hopefully increases investment. The effectiveness of the stimulus will of course depend on its implementation.

Q: You aren't a fan of big government. But governments the world over are pursuing stimulus packages that will bring a return to a more dominant role of the state in the economy. What are your thoughts?

A: I am still not a fan of big government. But (US President George W.) Bush left behind two wars and put the whole world into an economic and financial crisis. Therefore, these are extremely difficult times. We can't be rigid in our belief. We must be pragmatic and realistic... As always, in a financial crisis, the government will have to lead the recovery by increasing its investments and consumption. Invariably this will lead to a bigger government... When the economy recovers, the government must reduce its size again.

Q: What do you believe are the main structural problems facing the economy?

A: The main structural problems facing the Malaysian economy are human capital, labour policy, price mechanism and the export-led economic model.
Although Malaysia has a relatively strong human capital, they are not matched with industries and market needs. We must align better the supply and demand for human capital.
For a long time, we kept wages down because we wrongly believed that competitiveness is determined by cheap prices. We must allow wages to move so that they reward productivity, creativity, quality and innovation... This crisis gives the government the opportunity to plan our future economy.

Q: There are criticisms that the oversized roles played by state agencies such as Permodalan Nasional and Khazanah Nasional in the economy have crowded out private capital. Comment.

A: Government-linked companies (GLCs) are given specific roles and objectives, which include socio-economic objectives... Thus, the role and returns to these GLCs cannot be measured by financial indicators alone. At the same time, I am sure the government is also aware of the need for GLCs not to crowd out the private sector. One of the ways to achieve this is for the GLCs to create new business and not compete directly with the private sector in existing business.

Q: Malaysia's dependence on cheap foreign labour has left the country caught in the pincers of a low-wage trap. We aren't productive or innovative enough to move up the value chain to compete with the likes of Singapore, and are too expensive to take on new investment centres like Vietnam. Comment.

A: The dependence on low-skilled and low-cost foreign labour has been a major issue in efforts to upgrade the Malaysian economy, and this will be critical if not addressed soon and effectively.
We all know what should be done and in fact the government has stated its stand on the matter. Unfortunately, the solution also lies with Malaysian businesses. Many are reluctant to change to technology-intensive, higher productivity activities because their focus is short-term costs and profit. So unless businesses think long term, this situation will prevail.
But the government must also be firm in limiting the supply of these workers and showing their true costs.

Daim seems to be quite macro in this interview, talking about structural issues.

MIER on the other hand, which continues to be the barometer of growth analyses and predictions, foresee a downward bias of -2.2% for 2009 as against -1% predicted by BNM. Commercial banks however see the economy contracting up to above 3.5%. Manufacturing, the mainstay pillar of the Malaysian economy moved down 17% in the first quarter but there is consensus that contraction is moderating with hopes of a better scenario by year end.

There is yet no great surge of VSS as of now and so we need to watch the horizon for this indicator. The general fear is the rate of lay-off will increase after 1H 2009.