Pin-point stimulus needed, not pork-barrel stimulus

The Malaysian government reckons that the fiscal deficit in 2009 will rise to 4.8% of GDP. But the ratings organisation, Fitch Ratings, reckon that the deficit will be about 5.7% in 2009 and, GET THIS, Fitch Ratings reckon that the deficit may increase to 7.4% of GDP in 2010.

These numbers shouldn't scare Malaysians. More than 90% of Malaysian debts are Ringgit-denominated. So the currency risk is minimal. Only 7% of Malaysian debts are foreign-currency denominated.

But, the thing to watch is how the additional RM10 billion stimulus package is to be executed because a poorly executed package will make the seriously high fiscal deficit a long-term economic burden that Malaysian taxpayers will have to bear. The long-term damage to the Malaysian economy will be serious.

The dubious effect of the first RM7 billion stimulus package
The first stimulus package of RM7 billion has a dubious application. As we know, the first stimulus package announced in November 2008 has been allocated mostly to infrastructure projects, which include:

• The building of low and medium-cost houses;

• The upgrading, repairing and maintenance of police stations and living quarters, and army camps and quarters;

• Minor projects like village roads, community halls and small bridges;

• Public amenities such as roads, schools and hospitals; and

• The building and upgrading of roads in rural areas, villages, as well as agriculture roads.

As MIER has correctly questioned, the first stimulus package benefits the construction sector, but what about the rest of the economy? What is the multiplier effect of the first package? How much leakage goes to foreign workers who liberally populate the construction sector?

Principles to observe for the second stimulus package
The second stimulus package, estimated at RM10 billion, has got to be better spent.

Najib will do well to note the cautionary advice generously dispensed by Tengku Razaleigh Hamzah:

22. The world recession is a critical opportunity for us to re-gear and re-tool the Malaysian economy because it is a challenge to take bold, imaginative measures. It lights the fire under our feet to make transformative improvements in governance and politics. It also demands that the government spend boldly on the right things, in the right way, to stimulate demand.

23. Two criteria for ‘the right things” would be those public investments with the widest multiplier effects, over the short and the longer term. Over the short term, there are often tradeoffs between impact on demand and on improved economic capacity. Over the long term, the two are the same. The “long term multiplier” is nothing less than the improved capacity of the entire system.

24. So we must think carefully about what we spend the “fiscal stimulus” on. There is no such thing as a free lunch. We will be going into deficit to finance this stimulus, so it can’t be about just spreading money around. So far there has been no impact from the stimulus package announced in November, nor was it clear what the economic thinking was behind that measure.

25. We don’t need another stimulus “package” of spending here and there. What we need, and what the crisis gives us a chance to implement, is a set of bold projects with an economic story behind them to help Malaysia make the developmental leap we have been missing. We have a once in a lifetime economic challenge. We must meet this challenge with a historic sense of purpose. That means, not with a “stimulus” consisting of ad hoc pork barrel expenditures but a set of public investment projects guided by a vision, designed around a strategy and governed with bullet-proof integrity.

To be reminded of the bold projects that Ku Li spoke of click here for his ASLI speech. Read, in particular, paragraphs 27 to 37.
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Postscript: It is always nice to know that one is in good company. Maybank Investment Bank (formerly known as Aseambankers) has written a piece entitled The second economic stimulus package should focus more on micro measures which appear to be consistent with the propositions put forward by this blog over the past months.