Socio-economy

Najib shot in the foot by non-political minister

(WITH UPDATES BELOW)

Many people are talking about Idris Jala and his prophecy about Malaysia going bankrupt by 2019. Here is what he said:

‘We could go bankrupt by 2019’

MALAYSIA will go bust by 2019 if it continues to accumulate debt at the current rate of 12 per cent a year, a minister said.

To avoid the “Greek incident”, Minister in the Prime Minister’s Department Datuk Seri Idris Jala said the subsidies given to various sectors must be rationalised.

“Our debt currently amounts to RM362 billion. We don’t want to end up bankrupt like Greece with a debt of E 300 billion (RM1.2 trillion).

“If we continue to borrow money at the current rate, we will go bankrupt in 2019 with a debt of RM1,158 billion,” said Idris, who is also the chief executive officer of the Performance Management and Delivery Unit (Pemandu).

Okay here is what I understand. According to him:-

1) Malaysia will become bankrupt when our debt reaches RM1.15 trillion. This figure he gets by compounding 12% rate each year to our current debt figures (RM362 billion).

2) Subsidies must be rationalised because if we do not do that, our debts will escalate and we will become bankrupt.

3) Malaysia does not intend to service the debts until 2019 that is why the debts will accumulate to RM1.158 trillion.

That is what I get from his explanation.

Now, why on earth would he want to accumulate our debts just to juxtapose Greece’s economic tragedy to his own prediction of our economic future?

KPI Minister

It doesn’t makes sense. Malaysia has positive GDP growth all these years. Plus, we have balance of payments, government have billions of ringgit in revenue, we have low inflation, we make payments on any borrowed loans, etc. The current budgetary deficit is only 5.6%.

Why don’t Idris Jala accumulate the revenue earned until 2019? Let’s see if that bring some balance to his argument.

This morning, at the PEMANDU NKEA (Economic Transformation Programme) seminar, Idris Jala said “I’m not a politician, I just give facts”. This was in defense to his ‘bankrupt’ remarks.

In the first place my dear minister, by just being a minister, you are already a politician.

Secondly, if you see yourself as a non-politician (which is a very misplaced view really), you are working FOR a politician. You cannot jump the gun unnecessarily and creating panic over some ludicrous mathematical crunches.

And true enough, the other politicians from the other side of the divide has already begun to spin his remarks.

Now let’s get some other views on what is currently being said about this issue.

Tackling Subsidies And Their Myriad Manifestations

M. Bakri Musa

Idris Jala, Minister in the Prime Minister’s Department and PEMANDU CEO, has yet to convince his cabinet colleagues, in particular the Prime Minister, of the need to reduce subsidies specifically and government spending generally. He has to do that first before taking his Subsidy Rationalization Lab road show to the rest of the country.

Responding to the first “Open House,” Prime Minister Najib indicated that he would “leave it to the people to decide on whether they [the subsidies] should be maintained or abolished.” In doing so he abrogated his leadership on a critical economic issue. He is following instead of leading public opinion; a wet-finger-in-the-air type of leader.

While I do not share Idris Jala’s dire prediction of Malaysia becoming bankrupt in nine years – nations, unlike corporations and individuals, cannot do that – nonetheless the grim picture he painted is not far from the likely reality. His likening Malaysia’s future to today’s Greece may or not be valid but there are enough useful lessons from the current Greek tragedy.

Greece is not bankrupt, nor will it ever be; the Greeks are suffering because of economic mismanagement by their leaders. Subsidy for the poor or for essential goods was only a minor part of the mess. The Greeks were borrowing beyond their capacity to pay; they borrowed just to keep their bloated government afloat.

The other pertinent lesson is that even when faced with a catastrophe, people who have long enjoyed subsidies and special privileges would not readily give those up. This is true of the Greeks (the ugly mass demonstrations and strikes there attest to that) as well as others. Americans long used to generous subsidies for their home mortgages and health insurances would severely punish their leaders at election time should they dare even touch either issue. And America has a deficit much worse (twice as bad, as a percentage of GDP) than Malaysia.

As a reminder, the current global economic turmoil was triggered by the American expansion of its housing subsidy through “sub-prime mortgages.” Again, this was facilitated primarily through two government-sponsored (and thus subsidized) corporations, Freddie Mac and Fannie Mae. It was done with the best of intentions, making housing affordable to the poor.

Those factors notwithstanding, in the many deliberations on the current economic crisis, I have yet to hear an American leader or economist suggest doing away or even trimming the housing subsidy. And America does not lack for wise leaders or smart economists!

So if Idris Jala or anyone thinks that Malaysians would readily give up their subsidies, he is blind to the universal precept of human behavior. Likewise with special privileges, which after all are subsidies manifested differently; so do not expect Bumiputras to give that up easily either.

Choosing An Easy Target

Idris Jala showed the frightening and unsustainable trend of rising debt and increasing deficits. There are only two ways out: increase revenue through economic growth, and reduce spending, or more accurately, curtail expenditures that do not contribute to economic growth. As any businessman knows, you sometimes have to spend money to generate money.

I wish Idris Jala had concentrated only on those two central themes. Instead he focused on ending subsidies, specifically on petroleum and essential food items. Thus he is being portrayed as targeting the poor, and not without good reasons. That distracts him. It is easy and tempting to prey on the poor; though large in numbers they lack economic and political clout.

Of the record RM74B spent on subsidies in 2009, about 57 percent were on social services; 33, fuel and energy; 7, infrastructures; and 3, foods. As for the beneficiaries, only 2 percent were farmers, fishermen, and the poor.

Those subsidies on social services and infrastructures could be viewed as investments as they could potentially enhance our human and physical capital, and thus the nation’s productive capacity. Even here we could increase the efficiency by plugging the leakages.

Ending subsidies for foods would address only a tiny part of the problem (3 percent). Besides, the per capita consumption of such staples among the poor is comparable to or only minimally less than the rich, but the poor has to expend proportionately more of their income.

Idris purported to show that Malaysians enjoy the cheapest price in the region, with cooking oil costing only RM3.30 as compared to RM8.70 in Singapore. In making that comparison, Idris used the exchange rate instead of the purchasing power parity (ppp) or the Economist’s Big Mac Index. Had either been used, the price differential would be less impressive. I do not know whether Idris is disingenuous, trying to mislead, or being intellectually dishonest in using the exchange rate.

Idris proposes mitigating measures to help the poor. That would inevitably require massive administrative machinery, thus consuming whatever savings being generated. For the amount involved, it would be preferable as well as politically wise to leave things where there are, except for sugar. I would remove its subsidy not for economic but public health reasons. With rampant obesity and diabetes, any initiative that would lower sugar consumption would be good. Likewise I would hike taxes on alcohol, tobacco and gambling, but not high enough to stimulate a thriving contraband industry.

Petroleum however is different; its per-capita consumption among the rich is considerably higher. Consequently, its subsidy disproportionately benefits the rich. Again here Idris proposes cash rebates to motorcycle and small car owners. Another bureaucracy!

I am for ending petroleum subsidy, phased in slowly to minimize dislocations since it is such a crucial fuel literally and figuratively in a modern economy. However, instead of cash rebates I would eliminate taxes on buses, taxis and other conveyances to transport passengers. That would effectively half the price of a Proton to be used as a taxi, making it easier for owner-operators.

I would subsidize season tickets for bus and rail to ease the burden on commuters, as Canada is doing. Vancouver has a per capita income many times that of Malaysia, yet its car-ownership figure is considerably lower. Consequently the air in that city is not polluted with car exhaust, and the streets a pleasure to stroll. Singapore uses differential toll rates and efficient mass transit to discourage city driving.

Ending subsidy on petroleum would save not only money but also the environment. Focusing only on petroleum and sparing food subsidies (except sugar) would also make the exercise an easier sell. Besides, petroleum subsidy is massive, while food subsidies are small change in comparison, and evoke considerable emotional response. It is just not worth expending political capital and risking public wrath for the promised minuscule returns.

Hidden Subsidies

Idris should not stop with the obvious and massive petroleum subsidy. He should pursue other equally expensive and rapidly growing but hidden ones. They are pernicious precisely because they are not overt; the public is not apprised of the costs. There are no available figures to be put on fancy graphs and pie charts for your Power Point presentation.

One is the preferential awarding of contracts to Bumiputras. However noble the objective may be, unless we know what the added costs are, we cannot begin a cost-benefit analysis or assess the program’s efficacy. Few would quibble with the extra 5 or 10 percent to have a contract awarded to a Bumiputra in the name of social equity and correcting past inequities, but many would grumble if that figure were to balloon beyond 30 percent.

It is customary that contracts below a certain amount be awarded exclusively to Bumiputras. Even if the added costs were only 10 percent each (a very conservative estimate!), in the aggregate they would impose a considerable burden on the government. I suggest that Idris’s “lab” do a study on this.

Then there are the overt as well as hidden subsidies to the myriad GLCs. Many are perennial “corporate welfare bums,” forever hooked on government bailouts. The Malaysian corporate scene is littered with the carcasses of the likes of Bank Bumiputra. Again I challenge Idris to analyze that!

Such studies would require much thought and wise analysis; they cannot be done by posing simplistic questions via SMS.

The only difference between the recipients of cooking oil subsidy versus those preferred Bumiputra contractors and “corporate welfare bums” like Bank Bumiputra is that the former are weak while the latter, powerful.

If Idris Jala had been diligent and fearless in analyzing the twin problems of ballooning deficits and increasing spending, he would begin with the obvious and massive petroleum subsidy, then flush out the hidden subsidies represented by non-competitive bids of government contracts, and then get rid those money-losing GLCs. That would definitely make a dent on our deficit and spending problem. That would also invigorate our economy, thereby enhancing the revenue side.

He does not need a road show for that; all he has to do is convince his colleagues in the cabinet, beginning with the Prime Minister.

Here’s another article retrieved from The Malay Mail:

The economy: Time for subsidy withdrawal symptoms?
Only if govt shows how savings benefit rakyat

I AWOKE this morning (May 28) to the misfortune of having to read the headlines of two local English dailies of impending doom for Malaysia as a result of the manner in which our economy is structured, that being the various subsidies which, since gaining our independence, has been a pillar of the economy and magnanimously and benevolently extended to the rakyat by the government.

Malaysia is truly a blessed country. We are a multi-racial, multi-religious and multi-cultural country. We coexist in peace. We have various natural resources and fairly good infrastructure.

We can also be very proud of the various government-linked corporations that the Federal government has established or incorporated. Petronas, our national oil company, and Tenaga Nasional Berhad (TNB), our national electricity company, are fine examples, and the list goes on.

I am just an average individual who works to earn a living and I have benefited from the magnanimity and benevolence of the government. As such, I cannot help but wonder how such gestures by the government these past decades can be the cause of impending economic doom for Malaysia. Truly amazing!

Only recently, it was announced by the government and published in the newspapers that our growth rate in the first quarter of 2010 was at a 10.1 per cent. What a really fantastic growth percentage for Malaysia. And all this while, other countries worldwide are posting somewhat significantly lower growth rates.

After all, Petronas has consistently posted huge and enormous profits since its incorporation. TNB, with its monopoly in the distribution of electricity in peninsular Malaysia, also continues to record profits. And yet, the government now has plans to remove most subsidies which the rakyat enjoy. I really wonder why. And now because of the various subsidies, Malaysia may be faced with impending economic doom.

Are we not a country having some reserves of a sweet and light crude oil which sells at premium prices? Is Malaysia not a net exporter of crude oil when compared to our neighbouring ASEAN countries with Brunei being the exception?

Why does the government compare our petrol prices with that of Somalia, Singapore, Thailand, developed  countries around the world and other countries which are net importers of petroleum? Why is there no comparison being made with net exporting countries? Any comparison must be on an apple-to-apple basis.

During the past 15 to 18 months, issues relating to the profits recorded by Petronas have been raised by various parties. By removing the subsidies for petroleum and diesel, there will inevitably be price increases for most goods and services. How then will the government extend the benefit of the profits of Petronas to the rakyat?

It appears, to me at least, that the government, whether knowingly or not, keeps going back, again and again to tax the rakyat. I am quite sure that most individuals would not mind having to pay a bit extra for better services and conveniences. But how can the government expect the rakyat to pay any additional amounts when services and conveniences are substandard, well below par and not up to the rakyat’s expectations?

The Lembaga Letrik Negara (LLN) or Central Electricity Board (CEB), as TNB was previously known, served social purposes as well. Included in the LLN budgets previously, were amounts for the expansion of infrastructure into the rural areas. These days, TNB talks not merely of profits but economic profits. When an  entity has a monopoly, there should not be talk of profits, much less economic profits.

It is easy to talk about raising tariffs to justify profits, making TNB seemingly a good investment for fund managers, but what about the rakyat? If TNB did not have a monopoly, by all means, increase the tariffs and let the rakyat choose which service provider they want. Level the playing field first!

These are the types of arguments and contentions which give rise to further questions. What will happen to all the monies which will be made available as a result of the withdrawal of the various subsidies? We have all been told and have heard of the responses from the government that such monies will be utilised or have been used for projects which will benefit the rakyat.

I would be most grateful if the government could provide details of such projects and please do not omit pertinent information, such as specifications and relevant costs involved. Most development projects can be calculated on a per square meter basis.

I am not against the proposal to withdraw the various subsidies. However, the government should and must produce more detailed proposals with regard to the usage of all monies that the government will purportedly save from withdrawing of the various subsidies.

Please remember what Abraham Lincoln said: “You can fool some of the people all the time, all the people some of the time but you can’t fool all the people all the time.”

Bhadarul Baharain Sulaiman
Jalan Bukit,
Petaling Jaya, Selangor

Will continue tomorrow… (UPDATE : 1 JUNE 2010)

Blogger De Minimis wrote an interesting article about subsidies. Can be read below:

Subsidies make Malaysians a ‘spoilt’ lot

I borrowed the annoying and grating title from the news report here. It is annoying because it reflects an uninformed and highly condescending school of thought that assumes that Malaysians chose to be widely subsidised.
Did Malaysians choose to be subsidised?
Or, was it the past political masters who decreed, in their infinite wisdom or, infinite folly, that the path to popularity was by way of introducing consumption subsidies a’la Brunei and the Arab states?
DR. R.THILLAINATHAN wrote a useful historical excursus into this matter of government policies that introduced consumption subsidies that escalated and ballooned to the present unwieldy structure. You may wish to read the paper here. I urge you to read it.
To whomever it may concern, please stop calling Malaysians a “spoilt lot” because we never asked for consumption subsidies.
We were coping fine with our personal struggles and, we would have found our own comfortable level of living.
We did not ask to be subsidised.
Now that the shit has hit the fan; now that the Malaysian Government cannot cope with dishing out subsidies, I am not about to go on a witch-hunt. I am not interested inchasing after retired political masters. That is a job for other politicians, if they wish to do so.
Like every other Malaysian I am interested to see how this “subsidy addiction” that is not of our asking is managed by the Malaysian Government as it is currently constituted.
The immediate thing that I want to say is that the laboratory (not “lavatory” although many Malaysians mispronounce it, whether deliberately or otherwise) conducted by Idris Jala and his team has somehow avoided educating the Malaysian public about how Malaysia has arrived at the the brink of bankruptcy due to subsidies.
That is why, a historical context is needed…unless the present Administration does not think that Malaysians are intelligent enough to appreciate the need to know how the shit has hit the fan…or, unless the present Administration does not want to incur the wrath of political masters past whose shadow still writs large…
Whatever be the reason, just stop calling Malaysians a “spoilt lot” because that is absolutely unfair and untrue and annoying and grating on our nerves.

The Malay Mail is on a rampage. Another article refuting Idris Jala’s claim was sent to The Malay Mail today:

ECONOMY: We won’t go bankrupt

Solid financial base and subsidy smart moves will not bring us to Greek ruins

THE prospect that Malaysia will be bankrupt come 2019 if government subsidies are not withdrawn, seems overly dramatic.

Sure, subsidies eat into Malaysia’s fiscal position, misallocate resources and distort more effective use of available funds for development, and therefore, should be phased out after social safety nets are put into place.

As of now, subsidies have been given to the wrong income group, and those who are meant to benefit from
it — the lower income group — have not benefitted due to the ‘one-size-fits-all’ subsidy policy which is unsustainable and socially unacceptable.

A reduction and restructuring of subsidies would be far more effective. Rather than looking at subsidy cuts from the ‘bankruptcy’ angle, subsidy reforms should be looked as a means for greater efficiency gains.

The economy moves towards market prices, therefore, removing distortions in the market, and lastly, lowering fiscal deficits and government debts.

Malaysia’s budget deficit is far off from that of Greece, whose shortfall is an unacceptable 13.6 per cent last year compared with our’s which has been brought down from seven per cent to 5.6 per cent during the same period.

Compared with Greece, Malaysia’s deficit is respectable and this is expected to shrink further in next year’s
budget.

Greece’s total national debt is 113 per cent of its gross domestic product whereas Malaysia has a strong current account surplus and a big reserve.

Also, our prudent financial management and tight monetary policies do not allow for dubious cross-country swaps like what happened in Greece that further aggravated its debt situation.

Above all, Malaysia is not caught in the euro capsule like Greece. We have our own money, and therefore, can deal and manage our costs and prices.

The abovementioned and many more reasons like abundant resources and a diversified economy that we have, are reinforcing factors that will guarantee Malaysia will not plunge into bankruptcy come 2019.

Nevertheless, phasing out the subsidies is a pragmatic move and a sound economic decision we must make and proceed with.

I hope the public realises this and there seems to be a positive general acceptance towards the plan to reduce
subsidies.

Datuk Dr Noressah Mohamad
Kuala Lumpur

7 thoughts on “Najib shot in the foot by non-political minister

  1. ” I do not know whether Idris is disingenuous, trying to mislead, or being intellectually dishonest in using the exchange rate.”

    Remember our 20 year old economic student that you linked to sometime back. He appeared more clever than this Minister on understanding ‘purchasing power parity’ .

    Can’t be!!!

    I think this Minister is “intellectualy dishonest”.

    mohamed

    Like

  2. Read this click here

    There are some similarities between M’sia and Greece, especially the bloated civil service of 1.2 million for a small population.

    So, we cannot afford to be complacent!

    dpp
    we are all of 1 race, the Human Race

    JMD : Yes, the civil service is bloated (4% of the population) Not only that, it is inefficient. But having bloated civil service alone will not make Malaysia bankrupt unless, we do not pay our debts from now until 2019. Corruption will also have an adverse effect on the economy. I don’t think we are at that stage yet where we have to give extra money just to get our driving licence or paying extra when trying to issue a passport. Our borrowings are small when compared to our GNP (about 40%). Other issues can be improved through good governance (how we achieve this, is another issue altogether!). And yes, we must not be complacent! Thank you.

    Like

    • Bro

      Clearly there has been considerable mismanagement of the economy by UMNO/BN for many years!! I agree however that we are not quite near bankruptcy as Najib and Jala’s scaremonger tactics would seem to suggest even though national debt stands at a record whopping 40% of GDP at $362 billion!!

      Certainly not when we look at last Q’s GDP growth of 10.1% ( a little skewed because of recession in Q! 2009), low inflation and mix of economy which has commodities, manufacturing, services and tourism in reasonable balance.

      I would have liked Jala to talk more about arresting the $28 billion leakages (read as, corruption) the Auditor General fingered in 2009. More than that, the Govt should be re-structuring the monopolies/cartels mafia from sucking the Rakyat’s blood dry where IPP, toll highways, water, AP and other licences and contract are concerned.

      Out of the $74 billion, only $31 billion refers to subsidies for petrol, electricity etc. The rest, $43 billion is for debt servicing, education, pensions, welfare etc and so Najib and Jala deliberately misled us with huge red herrings! We cannot burdern the 40% poor by suddenly removing subsidies of which they are the main target beneficiaries.

      If they attack all these and stop dealing with croneys for land in Sg. Buloh, Sg. Besi, Jln. Duta (Matrade) and Cochrane Road, trim back civil service/GLC staffing by 10%, cancel national service and defence contracts like the $8 billion for ‘light manoeuvrable tanks for UN observation duty in Afghanistan’, we will turn the corner easily.

      Otw, disaster loom!!

      refer to my blog on this click here

      dpp
      we are all of 1 race, the Human Race

      JMD : Of course there is mismanagement. Nobody doubts that. I agree with most of the comments above. Thank you.

      Like

  3. Dear JMD.
    Jala has some compelling evidence. Its too much to place it here but really if the debt grows greater than the money supply rate (assuming no high powered money entering the economy) then bankruptcy is a forgone conclusion UNLESS
    a) Sell of GLC assets and equity
    b) Cut civil service
    c) Trim development budget – Pak Lah tried to do that in 05 & 06 and Mahathir used this to attack him.

    I am thinking of starting a site devoted to economics. just a thought..

    KJ OR BUST

    JMD : Thank you for the comment. Yes, IF the debt grew greater than the revenue which I am sure the government will ensure that will not happen. Please read the article I just posted. I agree with your points except the last one. Pak Lah did not trim development budget. In fact, it became fatter during his time as compared to his predecessor. Some of the projects had costs that were overly inflated. Please look at the figures again.

    It is good you will have a blog writing about the economy. Will definitely come visit from time to time. Maybe me and readers out there can learn a few things.

    Thank you.

    Like

  4. Dear JMD

    The staggering debt of 12% compounded per annum is assumed loans/bonds matured but require re-finance. It means we pay interests and principal but yet revenue is not enough to cover expenditures. A govt may not be able to tackle revenue < expenditure if they are not good managers. Same as ordinary folks who have escalating personal borrowings and credit card debt. I am not certain whether our country will be bankrupt by 2019, but if mismanagement continue to prevail, it's just a matter of time. If a country/company else where can bankrupt, we are no exception.

    Comes to fuel subsidies, the govt was the one who created such environment and make it artificially low and therefore, leading to lower wages. But when they could not finance subsidies anymore, the first thing to do is to stop subsidizing and tax more. So in the first place, it is true that we weren't the one who asked for subsidies but we are born into such environment.

    Healthcare and education subsidies is part of govt's way of developing brains and taking care of the needy. It's a fundamental and primary role of the govt even in many countries all over the world.

    Perhaps, the govt is just unwilling to swallow the bitter pill that a bloated expenditure is due to rampant corruption.

    Like

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