No country has spent its way to prosperity

We cannot afford to spend our money frivolously during these times but must engage in prudent macroeconomic management instead.

COMMENT

by TK Chua

Contrary to Hafidz Baharom’s piece “Reviewing the budget: Spend more, not less”, I wish to emphasise that no country has spent its way to prosperity. This is where a little learning or a little knowledge is a dangerous thing. Quoting John Maynard Keynes and a few other big names in economics is no justification for senseless and unsustainable spending.

Many of us are aware that public spending should be anti-cyclical rather than pro-cyclical. In times of a slowdown and recession, we should spend more. On the other hand, in good times we should spend less to build up the reserves.

But have we been doing this? We spend lavishly and without thinking irrespective of our macroeconomic conditions. Otherwise, how could we ever explain why we have had more than 15 years of consecutive budget deficits?

If we had built up our reserves in good times, I am sure we would have had more options available to us today. But this is not the case. Just look at the mandatory (i.e. the non-discretionary) expenditures we have built up over the years. Just look at the public debts we have accumulated. In reality, Government spending and debts are not without limits. Beyond a certain threshold, there will be consequences on the cost of borrowing, crowding out the private sector, inflation and the external value of the ringgit.

It is more than just spending more during a recession. It is “effective spending” which we have never emphasised.

Effective spending has two intertwined components. First, spending must be “value for money” and second, spending must build capacity, not just boost aggregate demand.

If government spending is riddled with overpricing, inflated contracts and corruption, a big budget would hardly achieve much. I think this is one of the most protracted contentions and concerns faced by the country today.

We have big budget allocations financed by our revenue and borrowing, but where is the impact on our spending? Hence, it is not wrong to call for a review of projects to ensure greater professional, transparent and prudent implementation.

In fact, we can draw good lessons from the massive flood we experienced recently. Every year we spent billions on drainage, roads, and other infrastructure.

Surely there are now big question marks on the effectiveness of those expenditures since one big flood has almost crippled all of the East Coast states. It is either the floods were truly vicious or the infrastructure we put in place was very fragile.

How do we rebuild these states devastated by the floods? To me, it is not by dishing out more money given our financial condition right now. Surely a more palatable way is to move the money away from unnecessary and wasteful projects and re-channel it to the East Coast states. This is what re-prioritisation, redeployment and reappraisal is all about.

The second aspect of public spending is to build capacity, which is different from blindly boosting aggregate demand through senseless spending.

Keynes’ idea to create jobs at any cost by boosting demand must be treated with circumspection. The economic implication of dishing out money under BR1M or spending to put up colourful bulbs is very different from spending on skill training and filling up potholes.

One is wasteful consumption spending while the other is capacity building spending which will increase Malaysia’s GDP potential in the future. It is important to differentiate the two.

No country has consumed its way to prosperity. Don’t imitate the USA, it is a unique country with a special currency that Malaysia does not have.

Another issue is capital control and pegging the ringgit as if this is the only solution available to us. It is not.

Stop boasting about what we did during the 1997/98 financial crisis. We imposed capital controls to bail out crony companies and delayed the badly needed reforms of our economy. Korea did not use the approach we adopted. Today, which economy, Korea or Malaysia, is leaner and more robust?

The lesson learned from the financial crisis in the late 1990s was not whether it was the capital controls or market based approaches we chose to use. The lesson was prudent macroeconomic management.

It is all about whether we wish to use our strength to make us stronger and more efficient or squander it and make our country more vulnerable.

It is easy to be reckless and adventurous when dealing with government money. But ultimately, it is the people with little means that will suffer the most. Hafidz Baharom must try to take note of this.

TK Chua is an FMT reader