The slew of economic news – both global and national –in the last week is indeed very depressing.
The international business media reports that China’s exports fell in November for the first time in seven years. The country’s exports are expected to contract further in 2009. Brokerage houses suggest that the US$ 589 billion stimulus package (4 trillion Yuan) will be insufficient to off-set the loss in exports.
The Japanese economy deteriorated sharply in October 2008 according to the Japanese composite index of business conditions. The October economic data released by the government indicated that the slump was considerably deeper than of that of the US. There is widespread concern that increasing unemployment could turn into a major social problem.
The news from the US is no better. US clothing imports have decreased considerably due to a slump in sales. Analysts suggest that global suppliers exporting to the US have dropped from 22,099 in July to 6,262 in October 2008, a reduction of 70 per cent.
A recent World Bank report notes that global oil demand will collapse in 2009, the high commodity prices seen earlier this year will be a thing of the past and world demand for raw materials will fall.
Specifically, oil demand will drop 450,000 barrels a day in 2009, as compared to 50,000 barrels a day in 2008. Further, the commodities boom of the last five years which saw a price increase of 130 percent has effectively come to an end. The report concludes that the global economy faces “the worst recession since the Great Depression”.
The Asian Development Bank in its second forecast in three months downgraded 2009 growth in the Asian (excluding Japan) region from 7.2 percent in September to 5.8 percent in October. The regional bank notes that 2009 growth will be slowest in the last eight years.
Clearly, estimates and forecasts are fast changing as yet more depressing news emerges. While the exact severity and extent of the economic crisis is yet to be determined it is abundantly clear that the world faces the possibility of a catastrophic downturn in its economic wellbeing.
Domestic News Equally Depressing
The fact of the -Chinese, Japanese, US and regional – economies going into an economic tailspin has enormous implications for Malaysia’s exports, revenue, employment, business and sustainability of the economy.
The Malaysian Institute for Economic Research (MIER) has indicated that unemployment will increase from 3.5 percent in 2008 to 4.5 percent in 2009. These figures are historically high given that the country’s unemployment rate has generally been between 2.2 and 2.5 per cent over the last few years. The unemployment figures could be potentially much higher as the full extent of the crisis has yet to be realised.
MIER also reckons that Malaysia has a 40 percent chance of falling into a technical recession in 2009 and 30 percent chance of experiencing a real recession. Thus the probability of the country facing a recession cannot be discounted.
The Minister of International Trade and Industry, Tan Sri Muhyiddin Yassin, told the local media in early November that the country’s exports to the US decreased 9.3 per cent between January and September 2008. The electrical and electronic sector registered a 14.6 per cent decrease in exports, the largest decrease of any export sector to the US.
The deeper implications for Malaysia’s economy should be obvious. The industry employs some 462,000 workers or 43 per cent of total employment in the manufacturing sector and contributed 62 per cent of total manufactured exports.
Electronics companies, especially US owned electronics factories such as Intel and Motorola are reducing overtime work, and are planning production shutdowns in the coming weeks. The profits of these companies are decreasing. Unisem, the country’s second-largest listed semiconductor assembler, posted a second quarter profit decline.
A drop in global demand for electrical and electronics goods, and a deep-seated crisis of profitability, have negative consequences for employment, the survival of small and medium industries and the growth of the manufacturing sector and the economy as a whole. It also exposes the level of vulnerability of the economy – especially manufacturing – to foreign demand.
Just last week, the Statistics Department reported that the country’s industrial production fell for a second month in October largely as a result of a decrease in demand in electronics output.
But even primary commodities are not immune to the economic malaise. Palm oil sales decreased in the same period. Exports dropped for the first time in 15 months.
These are depressing times as the global economic downturn begins to hurt exports.
Stimulus or Rescue Measures
In the face of such widespread devastation governments have been forced to act, sometimes having to admit that the market is not always “right”. For example, the Australian government distributed about A$8.7 billion (US$5.2 billion or RM18.9 billion) in cash to families and pensioners to boost confidence, improve retail sales, protect jobs and stall further contraction of the economy. Two million families were given A$1000 for every child and four million pensioners were given about A$1000 each.
The government wants consumers to spend A$8 billion in the days leading up to Christmas. It predicts that the boost in spending or increase in demand would increase GDP by 0.5–1 per cent and would create about 75, 000 jobs.
However, analysts warn that the country’s spending package may not be enough to lock in long term growth. And given that it is a temporary package any growth in the consumption side will be offset in the first quarter of 2009.
In a similar vein, the Japanese government announced an US$ 43.8 billion package of emergency measures for its already recessionary economy. It involves funds for tax cuts for home owners, business making capital investment and grants to local government with the aim of creating jobs.
However, analysts suggest that the impact of the emergency measures would be limited and at best will only help to slow down a further decline in the economy.
A recent World Bank report’s findings are consistent with warnings of the limited impact of stimulus packages in Australia, Japan and even of China: that such packages can only “cushion” these economies against the full impact of the crisis but cannot compensate for the collapse in external demand.
Specifically, the fiscal and monetary stimulus measures announced so far – by China, South Korea, Malaysia and Thailand – cannot be expected to compensate fully for lost output as exports have collapsed, along with domestic investment and consumption in many economies.
Malaysia’s response to the crisis
The challenge for Malaysia going into 2009 is critical. Oil, palm oil and LNG will no longer fetch high prices. Domestic demand growth will drop. New investment by local and foreign firms will be limited. That much is clear.
The most recent Economic Intelligence Unit prediction notes that Malaysia’s GDP growth will be 1.5 per cent for 2009 as compared the government’s 3.5 percent target.
Recession or not, a serious downturn is in the making. The question for Malaysia and other countries is how to reduce the severity and decrease the length of the crisis.
How do we cushion the economy from the full impact of the global crisis and yet initiate long-term structural changes that are most definitely needed?
It is suggested that the answer is an extensive and coordinated national and regional stimulus programme.
The regional dimension is critical. Taken individually, most economies are simply too small and vulnerable to effect significant changes on their own. Malaysia needs to work together with its ASEAN partners and under the ASEAN plus three umbrella in formulating a joint and coordinated response given the magnitude and severity of the crisis.
This could involve a coordinated fiscal and monetary policy including currency swaps and foreign exchange intervention to ensure the stability of the regional currencies and a commodity exchange programme.
On Saturday, the leaders of Japan, South Korea and China Japan, China and South Korea agreed at a North Asia summit to bolster cooperation to tackle the global financial crisis, putting aside decades of animosity. This shows what can be done if the political will and leadership exists.
By contrast, Malaysia’s response to the crisis has been both slow and lacklustre. In order to have any chance of succeeding, the response must be timely and targeted. Both these critical elements appear to be lacking. Indeed, the government’s foot dragging is likely to exacerbate the crisis.
One example illustrates the point. In October the Minister of Human Resources Minister, Datuk Dr S. Subramaniam, told Parliament that his ministry is in the process of studying the setting up of a retrenchment fund. The study would take another six months after which a decision will be made.
This suggests that the fund might be operational beginning 2010, if at all. In the meantime, one can expect more than 80,000 lay-offs if the parallels with the 1997 financial economic crisis hold good.
What is abundantly clear as the country enters tough times is that, the government does not have a coherent policy to mitigate the loss of jobs, livelihoods and human suffering. There are no social safety nets to protect workers – whether in the service or manufacturing sectors. Still less is there a system of social protection for other vulnerable groups such as women, farmers, fishermen, contract workers and informal sector workers.
The short- to medium-term consequences should be obvious to all. Job losses will lead to human suffering on a wide scale, including increased incidence of hunger and higher levels of school drop-outs; bank loan defaults will lead inevitably to evictions and homelessness; and a general decrease in consumption spending will further undermine a loss of confidence in business and a contracting of new investments.
Clearly, we have not learnt important lessons from the 1997 economic crisis. How is the government going to cope with high levels of unemployment which involves workers returning from Singapore, retrenched local and migrant workers and workers in the informal sector?
Government inertia and the absence of a social safety net threaten to turn the economic crisis in to a full blown social crisis.
It should be obvious to everyone that some drastic steps need to be taken. As an urgent priority the government should commit to a RM 3 billion retrenchment fund as an immediate initiative to mitigate the negative snowball or multiplier effect of job losses, given that we are a demand-led economy. This would create confidence in the business community, workers and people at large.
Just as importantly, the retrenchment fund would alleviate human suffering. Among other things, it could provide or expand unemployment benefits including food stamps or vouchers to neutralise the income losses of unemployed workers and vulnerable groups.
By putting money into the hands of these groups, retrenched workers would still be able to pay their mortgages and rents and keep their homes, continue buying consumer goods, boosting demand in the sector and subsequently in the capital goods sector. A workers’ retraining programme should be part of the package.
In this way, we could ensure that workers and vulnerable groups maintain at least a minimum decent quality of life while continuing to generate new demand in the domestic economy. This would ensure that local small and medium industries (which employ 56 percent of all workers) continue to invest and are protected from bankruptcies. This is a win-win situation for all stakeholders.
By contrast, the government’s injection of RM10 billion into Valuecap in order to prop up undervalued stocks was poorly thought-out and misguided. It amounted to throwing good money after bad – into a bottomless stock market. The money would have been better invested in the real economy through a coherent retrenchment programme.
Instead the people have been subjected to a policy that is simply too little and too late. The timing of the government’s RM7 billion stimulus package scheduled for implementation in early 2009 clearly does not seem to reflect the required urgency. It should have been implemented in the last quarter of 2008 as a strategy to cushion the economy from further contraction in 2009, especially with negative economic data pouring in.
More worrying still is the government’s apparent complacency. Second Finance Minister Tan Sri Nor Mohamed Yakcop suggests that the package is “adequate to sustain economic growth during the current economic situation”.
In reality, the RM7 billion should merely be the first step in a much larger fiscal stimulus package to deal with the enormity of the problem facing the people and the economy. Prudent analysts are not convinced that the multiplier impact of the stimulus package will be felt in the economy in the short run. Much more needs to be done.
Put simply, the government should announce a bold and imaginative fiscal stimulus plan for 2009.
One can’t help feeling that for the government it is business as usual. With their short-term interests on the line UMNO and its Ministers are busy campaigning for the forthcoming March 2009 elections and jockeying for position. They play the race and religion cards in order to stoke populist sentiment and win cheap votes. In the meantime, the political masters are fiddling while the economy burns.
This is disastrous.
The people of Malaysia deserve much, much better.
Charles Santiago
Member of Parliament, Klang
Vice President of DAP Selangor
Charles Santiago 
