Wednesday, June 23, 2010

Consequences of mismanagement‏

Dear All : After Idris Jala, here is Dr. Lim Teck Ghee on Malaysia's future

Malaysia : A ‘bankrupt’ nation ?


CPI Writings


Written by Dr Lim Teck Ghee

Thursday, 10 June 2010 17:53

What is 'financial crisis?’

Readers following the great national debate initiated by Minister Idris Jala in the Prime Minister’s Department on the possibility of the country going bankrupt must be thoroughly confused with the mixed messages from government.

On the one hand, we are told that the country is more prosperous than ever before and that absolute poverty in the country, for example, is almost completely eradicated. We are also told that the country’s economy is in good hands and that the finances of the country are well-managed.

Every few days or so, we are reminded of how fortunate we are to be living in Malaysia and how much foreign investors love us. Just a short while ago, it was trumpeted that our competitiveness had shot up this past year so that we are now ranked number ten in the world – ahead of many advanced economies.

We regularly receive a barrage of statistics and data on not only how well the economy is performing but also how, thanks to the outstanding economic management of the government, we will soon reach dizzier heights of prosperity and affluence.

The New Economic Model, it is claimed, will transform the Malaysian economy to become one with a high income and high quality growth. Presently, per capita annual income in Malaysia stands at RM23,100; under the NEM plan, that figure would more than double to RM49,500 by the year 2020.

Lucky Malaysians – according to the government’s plan – to be able to live in a land of milk and honey with fistfuls of ringgit to throw around and to be standing side by side with the developed countries in the foreseeable future.

We have been fed with this optimistic and glowing picture of the country’s economic prospects for so long that many of us can be forgiven for believing that we stand on the threshold of unprecedented economic prosperity if not greatness. Never mind that doubt –in the way of the impoverished in our slums, squatter and ulu areas – is often just around the corner, many Malaysians prefer to close their eyes to this reality.

Idris Jala’s wake-up call

Fortunately or unfortunately, thanks to Minister Idris, we have now received a dose of reality that our economic situation is more complicated and a lot worse than what earlier leaders and the government-controlled media would like us to believe.

Although a few recalcitrant leaders are still living in denial and claiming that the minister has misled Malaysians on the true state of the country’s financial health, a closer look at Idris’s speech during the open house on ‘subsidy reduction’ shows that his concern and warning on the country becoming bankrupt (in the same way as Greece is) was absolutely correct and spot on.

Idris’s warning is based on a number of economic projections including:

* the country’s GDP would grow at 3% annually
* government debt continues to grow at 12% annually

Both assumptions are not unreasonable.

Average GDP growth has been slowing down in the past two decades. Prior to the Asian financial crisis of 1997-98, the country’s growth rate averaged 9% from 1990-1997. Between 2000 and 2008, growth rates fell to an average of 5.5%. If the trend of slowing growth continues, then the assumption of 3% GDP annual growth for 2011-2020 may well prove correct.

If there is no quick recovery in the global economy and we have a prolonged double-dip recession which seems more likely now following the ongoing financial crisis in the Euro zone, then even 3% annual growth in the GDP may seem optimistic.

As for the country’s debt, government debt in 1997 was RM90 billion. This has grown at a rate of 12% per annum to RM362 billion today. Based on a similar annual increase of 12% over the next nine years, the country’s debt will balloon to RM1.16 trillion by 2019.

The government’s own Performance Management and Delivery Unit’s calculations show that by the year 2019, the following economic scenario will be faced by the Malaysian government:

* The country’s projected debt will be 103% of GDP
* The fiscal deficit will reach RM449 billion or 38% of GDP

At that point, what will happen is that government revenue will not be enough to service its debt and to operate the hospitals, schools and other government services. In other words, the country will go into sovereign debt crisis, which is a polite way of saying that the country will become bankrupt.

The bigger subsidies are …

Where Idris went wrong is not in his assumptions and projections but in his focus on subsidies as the main culprit in the country’s perilous financial state. Addressing a public audience and as a member of the Barisan Nasional government, however, he was not in a position to finger the colossal wastage, inefficiency and corruption that has characterized Barisan rule and economic management of the country.

Yes, subsidies are part of the cause of our potential financial downfall but it is not subsidies to the poor that are to be blamed – in fact, the entire food subsidy bill in 2009 was only RM3.4 billion or less than the cost of the two recently purchased low-quality diesel submarines that cannot even dive properly! What is being spent on tolls, sugar, flour, cooking oil, school books, etc. is only a tiny fraction of what goes into the country’s black hole of defence expenditure (see attached box).

Instead of being fixated on subsidies to the poor, let us open the books on the subsidies that have gone to the ruling political elite and its business allies – the cronies, middlemen, consultants, and agents that are key to the massive binge of irresponsible government procurement in all sectors, especially defence.

Finally, it is also the subsidy of a huge, bloated and unsustainable civil service that is swallowing much of public revenue and helping to pile up our debt. Subsidies that have kept the cost of living down for the average Malaysian are only a small part of the larger subsidy equation.

The Black Hole of the Country’s Defence Expenditure


(Source:http://www.janes.com/articles/Janes-Sentinel-Security-Assessment-Southeast-Asia/Defence-budget-Malaysia.html)


Although Malaysia publishes an annual defence budget figure as part of the government's state budget, it is split into just two sections - operating and development expenditure - and it is widely thought that real defence spending is significantly higher than the official budget suggests.

The official budget, for example, does not include defence industry funding, nor does it cover certain procurement items which are sometimes settled by other arrangements including barter agreements. What is certain is that actual spending has exceeded the official budget regularly in recent years. According to the Malay Ministry of Defence, expenditure in 2006 (the most recent year for which expenditure details are available) was 8.5 per cent higher than the budget allocation, with the majority of the overspend coming in the operations budget.

This was not unusual as the degree to which military spending exceeded budget allocations has been steadily increasing since 2003, going from 3 percent in that year to 3.8 per cent in 2004 and to 5.5 per cent in 2005.2007 and 2008 saw further budget increases, fuelled in part by sustained economic growth of around 6 per cent in real terms, while the government has also seen increase in its revenues and expenditure. However, during 2007 and 2008 overspending was also recorded in the operations budget by 1.7 percent and 6.5 percent respectively with 2008 entailing an operations expenditure of MYR10.597 billion, whereas the actual allocation was MYR 9.939 billion. The 2009 allocation appears to have reflected this with MYR10.65 billion

Consequences of mismanagement

So what happens when the country becomes bankrupt?

When ordinary citizens or businesses become bankrupt, they can hide behind a court order and return to some kind of normal life thereafter. Those who have borrowed from Ah Longs, of course, cannot throw themselves at the mercy of the courts. They are more likely to be forced to rely on family members or friends to help them reach some kind of settlement or have to flee their aggressive creditors by changing their residence or even identity.

Countries that are in default do not have the luxury of changing their identity or getting a court to provide some measure of protection. In Argentina which defaulted on sovereign borrowings and debt repayment in 2001, the consequences were horrendous. The country experienced a brutal spiral of inflation followed by hyperinflation, soaring unemployment soared and a collapse in the currency.

The economy imploded, shrinking by 13 per cent in a year and the government was forced to cut public sector wages, slash the state pension and other social benefits. Unable to pay for goods with cash and with banks rationing withdrawals, citizens had to resort to bartering. Imported goods became unattainable.

Economic shock was followed by social trauma and political crisis. The quality of life of the average Argentinian was lowered drastically and many businesses closed or went bankrupt. Argentinian society has still to recover fully from the mismanagement of the country’s economy during the late 90s.

Let us pray – but prayer is not enough – let us make sure that the government never mismanages the Malaysian economy to the stage when we have to go through what the people of Argentina have had to suffer.

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