Pump priming may have run its course for Malaysian govt

For some time now, the government has talked up its policy to let the private sector take the lead in growing the economy.

The rationale is that the traditional government spending to boost the economy is not feasible in the long run and will encourage overdependence of the private sector on government contracts.

Even today, despite the talk, the government continues to see the need to pump-prime the economy with public mega projects like the mass rail transit (MRT), highways and expressways.

The economy is addicted to government pump priming, and previous efforts to promote private sector growth have been unsuccessful. The governing party Barisan Nasional, has always been pro-business and promote development by introducing government infrastructure projects, and providing grants and assistance to businesses.

The habit seems hard to break and ingrained in the minds of corporations.

The problem here is that when the country’s infrastructure gears nearer to being fully developed, the need for the government to dish out infrastructure projects would diminish. Smaller government projects would in turn lower the trickle down effects of these projects to businesses and the economy in general.

However, in the last few years, the economy growth was also largely tied to a steep hike in property development that brought in large amounts of jobs for the construction sector.

Like infrastructure projects, there can only be so many property developments and at some point, the need to build houses would also diminish.

As such, pump priming by the government to spur economic growth through infrastructure projects and the robust growth in property development is not economically feasible in the long run.

A good example is China, where its economy is experiencing a slowdown due to slower global economic growth as well as a significant decline in its property development, which had earlier been one of the big driver of its economic growth.

According to a macroeconomic research from the Federal Reserve Bank of Kansas City published in its macro bulletin report dated Aug 25, 2014, China’s government cooling measures pose a downside risk to the country’s near-term gross domestic product (GDP).

The report said: “As real estate investment represented about 15% of Chinese GDP in 2013, this six-percentage-point decline in real estate investment growth suggests a 0.9-percentage-point drag on overall growth.

“This means that, all else being equal, China’s GDP growth could decline from 7.7% in 2013 to 6.8% in 2014 — well below the government’s7.5% target, and the first time China’s growth fell short of its target since 2000,” the report added.

Similarly, the local property development is also experiencing a slowdown following the government’s cooling measures as well as buyers fatigue of steep rising property prices and expectation of an economic slowdown from falling consumption in the near to medium term after the implementation of the Goods and Services Tax in April 2015.

To compound the situation, the forecast of lower revenues from fuel, which is currently entering a bear market following years of high prices, could spell lower government revenues in the future, and thus weaken the government financial stamina for pump priming in the future. In a scenario where fuel prices remains depressed or fall even lower, the need for the private sector to take the lead to drive the economy becomes even more pressing.

It has been widely accepted that the country needs to move up the ladder from labour intensive industries to high end industries as well as more towards higher value-added services.

This can be done through doing away from the country’s over reliance of foreign cheap and unskilled labour which hampers business motivation and the need to move towards higher end industries. The cycle of government-lead growth needs to be toned down and ultimately will be insignificant.

Businesses need to invest in innovation and be cost effective in the global arena.

The government needs to take the first step. It will be hard for the economy and businesses initially but eventually persistence will pave the way for a stronger and more sustainable economic model for the country if it wants to achieve its vision to be a fully developed country by 2020.