Economic Crisis: Ignoring Lessons of the Past

A Kadir Jasin

PARDON me for this lengthy article but I feel that it is necessary to refresh our memory of the two major recessions that we had gone through in 1986 and 1997-98 respectively. It may also be helpful to students of economic, finance and politics.

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Although these crises were caused by different factors, the swift and decisive handling by the government had limited their effects on the country and its people.

The 1986 crisis was caused by the collapsed of commodities prices all at the same time. This is the curse of dependency on commodities. Demand and hence prices could fall suddenly, resulting in crisis.

On the other hand the 1997/98 recession was financial in nature. It was triggered mainly by the private sector borrowing heavily in the US dollars. When speculators attacked Asian currencies, many private sector companies became insolvent.

Many such corporations in Malaysia, Indonesia, Thailand and South Korea did not have enough money to pay their debts when the exchange rate of domestic currencies tumbled. When governments went into the market defend their currencies, they lost the money. In the case of Thailand, almost all its currency reserves were lost. Most of them ended up being rescued by the International Monetary Fund (IMF).

In the first major recession, the government was aware of the problems faced by the people due to the collapse of commodities and took care of rubber tappers, smallholders and those working in the palm oil plantations. It took care of petty traders too. But more importantly it showed that the government was serious about helping those facing problems.

The Cabinet took a pay cut. Ministers’ allowances were also reduced. It was to show to the rakyat that ministers too were willing to sacrifice at the time when the people were facing a difficult time. The rakyat appreciated the gesture and they felt that the government was serious in trying to overcome the crisis.

It was this trust that made it easier for the government to implement its recovery plan. The Prime Minister then was Tun Dr Mahathir Mohamad and Finance Minister was Tun Daim Zainuddin.

The government reduced development expenditure to match revenue and made it clear that from that point onward we would live within our means. This was an opportunity for the government to restructure the economy.

The civil service was bloated and revenue was used mainly to pay civil servants. The government froze new recruitment and, in the future, new employees would not get pension directly from the treasury. Instead, a pension fund would be established.

To reduce the number of civil servants and save government spending privatization was sped up. Tens of thousands opted to become employees of the privatized companies, generally with better salaries. The government saved on salaries and was no longer responsible for their operating and capital expenditures (opex and capex).  This saved the government a lot of money.

The government decided that the country must not rely entirely on commodities and must shift to manufacturing and services. Laws were amended or relaxed to make it more attractive for foreign investors. The policy was so successful that it created jobs not only for Malaysians but also for foreigners.

The government then focused its attention to rebuilding and strengthening the financial sector. It cleaned up banks, insurance companies and deposit taking co-operatives. The number of financial institutions was reduced through mergers and acquisitions (M&A) to created larger companies that could better withstand future shocks.

The government’s clear direction and forceful implementation helped to restore the economy and boosted the confidence of the people. It was so successful that growth rate, measured by the Gross Domestic Product (DGP), was consistently above eight percent and this added to the income of the people.

In the case of the 1997/98 crises, the situation was different - there was no recession in the world economy and, as such, our exports continued to do well and brought in a lot of money for the country.

lt was the private sector that faced problems and our banks were badly affected  and had to be saved. The government formed Danamodal and Danaharta. The first was to save the banks and the second to buy up assets of troubled companies. The government also helped companies facing trouble.

To halt speculation against the ringgit, the government introduced what we called limited currency control, which was condemned by almost whole world. The exchanged rate of the ringgit was fixed at RM3.80 to a US dollar and the movement of capital in and out of the country was monitor. It created certainty for the business people.

The success in overcoming both crises was largely because people trusted the government. They were confident that the government knew what it took to save the country. They did not suffer too badly and only for a short time. The proof of their support was the Barisan Nasional won with two-third majority in both general elections held after the crises.

The Present Crisis

What immediately comes to mind is the question, what is government doing about it? Whatever the government is doing, the rakyat don’t feel that their hardship is being eased.

Instead, subsidies were reduced or abolished in order to make government finances look good. If that isn't bad enough for the people, rates and charges were raised and, to top it all, the goods and services tax (GST) was introduced.

Some ministers and deputy ministers thought that all the rakyat are uninformed and went on to make stupid statements that GST would reduce prices of goods and services.

This is the problem when the Prime Minister is also the Minister of Finance. Many in the Cabinet disagreed with the Finance Minister but had to agree and support the Prime Minister.

For sure the government is not honest with the people. Ministers, senior government civil servants and editors spin everything in the hope of fooling the people so much so that they sound like idiots.

Yes prices of commodities had fallen. But that had happened before, but the government was able to overcome the problem in a relatively short time. The people did not suffer a prolonged period of suffering.

To make it worse, there is the billion ringgit 1MDB scandal. Its debts as of the beginning of this year, according to PAC, had risen to RM50 billion. It has caused the government a huge trust deficit.

The government keeps saying that our growth is high and is better than most countries. No, it is not true. Our GDP growth is declining and is lower than most developing Asean countries. Even if there is growth, what good is it if the people do not feel its benefit?

The present government of (Datuk Seri I Mappadulung Daeng Mattimung Karaeng Sandrobone Sultan Abdul Jalil) Mohd Najib Abdul Razak and of Tun Abdullah Ahmad Badawi before that are obsessed with growth.

To be truthful, the present day so-called economic architects are pale in comparison to the likes of the late Tun Abdul Razak Hussein and Tun Tan Siew Sin, Tun Dr Mahathir, Tengku Razaleigh Hamzah and Daim.

As leaders, Mohd Najib and Abdullah are clueless about finance and economy. They relied on outsiders like (Tan Sri) Nor Mohamed Yackop, (Datuk Seri) Idris Jala and (Datuk Seri) Abdul Wahid Omar.

Not all of these people have good record of economic and business management yet were given so much power to manage and manipulate the economy. They were just too happy to deliver growth to their bosses without any consideration for cost and the long-term effects of their so-called consolidation and transformation.

They are best known for accumulating debt. Our external debt had increased to RM848.24 billion in the second quarter of 2016 from RM809.09 billion in the first quarter of 2016. This is mind boggling considering that external debt averaged only RM186.05 billion from 1990 to 2016, reaching an all time high of RM852.86 billion in the third quarter of 2015. External debt is reported by Bank Negara.

According to Bank Negara, as at the end on June 2016, total outstanding debt of the Federal Government amounted to RM655.7 billion or 53.4 per cent of the estimated 2016 GDP.

We can never be sure of the true situation. In recent months the government had resorted to juggling with the figures to show positive development. It recently moved about RM22 billion civil servants’ housing loans to a new statutory agency called the Public Sector Home Financing Board. The board immediately established an RM25-billion bond programme guaranteed by the Government. It’s the case of moving the debt from one pocket to another.

During 1986 recession, the government also froze civil servants’ increment. It made sure that everybody sacrificed. You can’t ask rakyat to sacrifice and yet civil servants are treated differently. The rakyat pay all kind of taxes to fund the government’s Opex. But under Mohd Najib, civil servants are given salary increases and special bonuses at the time when rest of the rakyat are suffering a high cost of living.

Civil service keeps bloating. In fact, under Abdullah and on the recommendation of Nor Mohamed, new agencies were created with overlapping functions outside the purview of the Public Services Department (PSD). Unknown to the public, Nor Mohamed was politically ambitious and had used these agencies to build his political base. He went on to contest the Tasek Gelugor parliamentary seat for the Barisan Nasional in the 2008 general election and won. But he was unpopular. He was rejected by his own division. He was involved in the failed Bank Negara forex operations in the 1980’s and is deeply involved in the management of 1MDB.

I have mentioned many a time of the fact that our household debt is among the highest in the world. With growth tapering and unemployment rising, household debt is becoming less manageable. Many young Malaysians are today officially bankrupt.

The rakyat are more concerned with the bread and butter issues than economic statistics. It’s a double whammy when they have to pay GST on goods and services that have gone up in prices due to the GST.

GDP growth alone is not the measure of the state of the economy and the welfare of the people. There are other factors like fair distribution of wealth and sustainability that have to be taken into consideration.

If people are suffering and not happy because they can’t afford to pay for their daily needs, what good is the government’s growth figure?

And what good is the so-called good news that we have escaped the middle-income trap, when income gap is widening and the number of poor and indebted households is rising?

The Khazanah Poser

And would the authority be able to deny (or clarify) that some senior managers at government-owned companies (GLCs) like Khazanah are rumoured to be earning as much as RM250,000 a month and many are earning RM100,000. Even a retired university professor is rumoured to earn RM70,000 a month?

And what about children of a wealthy former minister, a private sector company chairman and even an expatriate being given or offered scholarships on the pretext of meritocracy?

No wonder children of the ordinary rakyat who excelled in International Baccalaureate studies at the Malay College Kuala kangsar and other institutions are unable to get funding despite being offered places by the best universities in the UK.

And no wonder too the people are angry.

Mohd Najib had gone to town asking for suggestions for his 2017 Budget. Normally budget dialogues are held in June or July in order to give sufficient time for officials to act on the feedback. But now he is asking for feedback in September and budget is in October. He can’t be serious. The most logical proposal is perhaps to ask him to step down as Finance Minister.

And what madness it is to ask Khazanah to spend RM650 million on a recreational park in Kuala Lumpur?

All these goes to show just how insensitive and wasteful the government is and how indifferent it is to the suffering of the rakyat.

The government does not have to force Khazanah to be a park developer and possibly wasting another RM650 million of taxpayers’ money. If it wants a park for the people, all that it has to do is to gazette Bukit Kiara as the Cabinet had agreed a long time ago.

Is this the government that listens to people and fulfills its promises as enshrines in its “Janji Ditepati” election?

Wallahuaklam.