Malaysia needs to do more, and do it faster, for the economy

The Malaysian Insider has an interesting op-ed piece under the same title:

The Prime Minister-in-waiting's job has just gotten harder. Fighting political fires over the weekend, Datuk Seri Najib Razak now needs to wrench his attention away to focus on the economy as Asia's outlook rapidly deteriorates.

The International Monetary Fund yesterday roughly halved its growth forecast for Asia to 2.7 per cent, on worsening expectations for China and South Korea. Just two months ago, it had expected Asia to post 4.9 per cent growth in 2009.

While Asia was not the epicentre of the current crisis, Asia "has been hit hard", said IMF managing director Dominique Strauss-Kahn. "A worse outcome cannot be ruled out," he said at a briefing in Washington.

His words should dash hopes that Asia would experience only a mild downturn. This, in turn, means Malaysia needs to do much more, and do it faster, to cushion the impact of the year ahead. More importantly, the government needs to lay important groundwork to hasten the recovery that the IMF expects to come in 2010.

So far, the government's track record has been disappointing.

Since the RM7 billion from its first stimulus package, announced in November, has yet to reach the ground, few expect much at this time from the second stimulus package which is to be unveiled this month.

Little else has been done other than glossing over bad news and assuring Malaysians that the country's financial sector is buffered from the global crisis.

Retrenchments appear to be gathering speed, as multinationals mull over three-day weeks. Malaysia's top trading partners — Singapore, Japan, the United States, China and South Korea which are destinations for 50 per cent of our exports — are in recession. A massive reality check is just around the corner.

The problem is the country has relied far too long on initiatives to boost public demand, through stimulus packages and in the past massive infrastructure investment, to get through times like these.

What the government should have been doing, and needs to start doing today, is implement policies that will unleash domestic demand. Domestic demand is household demand, and household demand is boosted when income improves, so measures like tax breaks and tax cuts will have the most immediate impact.

Read more of the piece here. 

Aggregate investment supersedes aggregate demand as an economic recovery factor

But, after you have read the piece, especially the part that deals with the purported importance of consumer spending, I implore you to read the criticism that blogger etheorist has made about household demand (i.e. consumer spending). etheorist, quite correctly, suggests that the real key to meeting Malaysia's current economic challenges is private investment. etheorist makes the important observation that aggregate investment in Malaysia has fallen quite seriously:

The job of the government today is indeed to stimulate the economy. Government deficit spending is helpful, but it is important for the government to re-establish private sector confidence in this economy as the place where fortunes can be made by those who choose to work hard. This is why there is constant flux in the election results - because the people cannot seem to be able to find politicians whom they can have confidence in in looking after their (the people's) basic welfare.

Read etheorist's seminal views here.

The Edge Daily also carries a follow-up report on Nazir Razak's comments on the Malaysian economic challenges (which was featured by me a few blog entries ago) in a piece entitled, Focus on strategies, not just stimulus.