IDEAS: Expansionary policy not the way to counter recession


EXPANSIONARY fiscal and/ or monetary policy is not the right way to counter recession, said Institute for Democracy and Economic Affairs (IDEAS) senior fellow Dr Carmelo Ferlito.

He said it is necessary to understand why recessions happen in the first place before proposing adequate policy measures.

“The business cycle is the natural dynamic of capitalistic development. Most of the booms are generated or enhanced by credit support. If the government further injects liquidity into the economy, it will only delay the necessary readjustment process of the business cycle.

“The best way to support sustainable growth and to face the recession is to recognise the crucial role of long-term investment projects and the need for them to be financed with sound money rather than easy credit,” Ferlito said in a statement yesterday.

According to Ferlito, apart from the support for long-term investments, another counter cyclical move would be to gradually reconsider indirect taxation, such as the Goods and Services Tax or Sales and Services Tax.

“Therefore, I suggest more comprehensive tax reforms which favour indirect tax collection to prepare the economy for the upcoming recession rather than a simple tax cut,” he noted.

Ferlito was responding to Bank Islam Malaysia chief economist Dr Mohd Afzanizam Abdul Rashid (picture) who said Malaysia could face its first recession since 2009 by the end of this year or the next, and advised the government to loosen up on monetary policy and expand fiscal policies to fuel economic growth.

Among Mohd Afzanizam’s suggestions are reducing the Employees Provident Fund (EPF) members’ contribution to promote consumer spending and tax cuts to ensure growth to the country’s gross domestic product.

Ferlito said Mohd Afzanizam’s prediction of a recession is consistent with the possibility of a property market-driven crisis, as argued in “Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market” report published by IDEAS last month.

In the working paper, Ferlito said the government needs to be ready for the bubble to burst and the risk of an economic crisis.

He suggested that the government should respond with market-oriented solutions as well as pay special attention to households’ financial exposure.

Ferlito said the government needs to downplay its role in the property market by reducing the number of government agencies as well as encourage private sectors to get involved in the affordable housing market.

He said the focus on the high-end segment was justified by high demand and therefore, it is only natural that investments will expand in that sector.

Ferlito, however, said it appears that unexploited profit opportunities are disappearing, thus, a capital allocation restructuring appears necessary.