Friday, October 9, 2009

DAP Alternative Budget

I did a quick flip through of DAP's effort at presenting their version of what Malaysia's spending priorities should be in the next fiscal year - obviously not doing much justice to the evident amount of work put in. Once you get past the political polemics, there is a lot to like. In no particular order of importance (or relevance!), my comments on what struck me the most:

1. I like many of the proposals regarding education, especially keeping PPSMI, as well as decoupling university payscales from civil service pay grades.

2. Ditto healthcare.

3. While there is no doubt public transport is in a mess, I'm not sure adding another layer of bureaucracy by creating transport authorities at municipal, state and federal level is a great idea.

4. On the other hand, will all political parties work together to bring back local council elections? Please!? This won't just have the effect of promoting accountability and reduce opportunity for corruption at the local level, it should also serve as a good training ground for young politicians.

5. Getting back to transport, I have reservations about the proposal to nationalise toll roads. I won't argue with the financial aspects, but I am concerned about efficiency - the toll concessionaires have an incentive to provide a quality product and service. I seriously don't think JKR will do as well, either in maintenance nor in keeping future costs down.

6. Tying state grants to a formula is a good idea - but basing it mainly on a per capita formula is not. We want to promote regional development (particularly in the East coast and Sabah and Sarawak), and while there is a transfer mechanism, I don't think it goes far enough.

7. The proposed revisions of the poverty line income calculations are great, and comments about income inequality (as measured by the Gini coefficient) are very apt. But I would rather see more detailed studies in this area, mainly because to me, inequality is and would be less of an issue if the lower income groups have sufficient income for a decent quality of life, and also if income growth keeps pace with the economy (implying that inequality in incomes is not reflecting inequality in economic opportunities). If both these conditions are met, then I don't see relative inequality as an economic as opposed to a political problem.

Unfortunately, the way the Gini coefficient is calculated tends to overlook this, as it really basically only compares the highest income brackets against the lowest. You don't get a sense of how the middle-classes really stand in relation, and from a political point of view (and I'm departing from my economics focus here), that's where the crucial votes and vote leaders really lie.

8. One critique I have is the characterisation of the BN government as being grossly fiscally irresponsible. I don't necessarily see that at all. While it's true that oil revenues have underwritten an increasing portion of government expenditure, looking back at the historical data provides some perspective. First the fiscal balance as a ratio to nominal GDP (annual data up to 2008):

Note that apart from a short period in the mid-1990s, the government has always run a deficit. The deficits run this past decade are just par for the course. Second, while the absolute value of the national debt has increased, its ratio to nominal GDP began falling when Pak Lah took over:

There will of course be a substantial increase this year and next (both relative and absolute) due to the stimulus packages, but very few will argue against the political if not economic necessity of that. What isn't shown in the data is that over the past few years, the Treasury has basically gotten rid of almost all our foreign borrowings. Here's Malaysia's net foreign asset position (public+private) up to 2007 (ratio to nominal GDP):

That means the government only has to worry about domestic uptake of government securities issuance - and no that doesn't necessarily mean there is a risk of crowding out (FI reserve balances with BNM):

There's so much excess liquidity sloshing around that banks might actually be glad to put their money in something both highly rated and earning some interest. Even at the rate the government is borrowing this year, I don't see any risk of crowding out of private investment until at least 2011 at the earliest, and the likelihood of that is pretty small.


  1. Bro

    Your views are well-considered. You have provided a balanced analysis of the so-called alternative budget. Hopefully, the good stuff will be picked up and, the bad stuff left out by the current policy makers.

  2. A few observations.

    On point (4), other than bringing back local council elections, there's also the need to take a long hard look at the need for, and number of, local councils in various jurisdictions. Does Perlis need any? Does Penang require 2?

    On point (5): is it the case that the toll concessionaires have incentives to maintain a quality product and service when there's really no competition? And there's a sense in which roads are something of a "natural" monopoly, uless one wants to senselessly multiply roads.

    On point (7): there really isn't such a huge problem with the PLI provided one doesn't make a fetish of it as some magical cut-off. Rather, it's only a measure to indicate a trend with regards to the lowest income levels in the country.

    As for the Gini, I think you have got it precisely wrong. The Gini is actually most sensitive to movements in the middle of the income distribution and less so to the extremes; hence the need for other measures of income distribution that are more sensitive to movements at the extremes, especially at the lower end.

    On point (8), yes, you're right to say that the BN government hasn't been hugely fiscally irresponsible. It's not the overall deficit level that's at issue, but the way the money is spent. And you are right about the huge amount of liquidity in the system -- the domestic savings rate shows that.

    That said, the net (public + private) foreign asset position is not a measure of the foreign debt position. The latter hasn't changed much in recent times (BNM figures). The net foreign asset position's move into positive territory in recent years is a measure of the large increase in outward investment, i.e., Malaysian capital going abroad. Now, we seem to have a perverse obsession with inward FDI as an engine of growth, while neglecting why it might be that domestic capital is going abroad at increasing rates.

    As for crowding out, isn't that not only an issue of the amount of liquidity in the system, but also of the direction of spending?

  3. 1. Too right, but we'll have to guard against gerrymandering.

    2. What I was thinking of at the time I wrote that was the overpass collpase at the MRR2 a few years back, the stadium roof collapse in Terengganu earlier this year, and the recent roof collapse in the mosque also in Terengganu. On that basis, I'll live with a private monopoly if I have to.

    3. Again, I agree. In fact it seems to me that poverty isn't really the pivotal issue here. I rather deliberately wrote "lower income groups" rather than "the poor" for that very reason. Looking at the household income statistics, better than 50% of the population are in the RM3k to RM1k bracket, compared to less than 10% in the under RM1k bracket. This is where policy ought to be directed, rather than just the "poor", hence my subsequent comments in the post.

    4. I stand corrected. I was just looking at the Gini Wiki page - I find it ironic that we have a Gini number less than that of the United States.

    5. I was responding to quite a few statements to that effect in the DAP alternative budget for this point.

    Regarding the use of NFA, I used it in lieu of external public debt because it's a less readily available data series, and I do try in this blog to bring out data that you might not find elsewhere. While it is of course a composite number, the actual correlation with external public debt is better than 70% for the period up to 2000 (it goes way off thereafter of course).

    And I've just reviewed the external public debt data again - starting from RM10b in 1996, debt climbed to RM37b in 2003, and has fallen to RM20b in 2008. The ratios show even more movement - from about 22% of the national debt in 2002 to 6.6% in 2008. That looks like substantive change to me.

    LOL, I was actually going to put that point about outward investment in this post as well, but dropped it at the last minute. IIRC, I wrote more or less,"Nobody is addressing the elephant in the building which is that while we have an apparent savings crisis for labour, gross national savings is high which implies all the savings is being done by corporates."

    That further implies two problems that I see: first, the marginal returns to labour and capital have been skewed to the latter (much like it has in the US), and two, since domestic investment is low, corporate savings are being channeled outwards. The government appears to be a little schizophrenic on the latter score, simultaneously encouraging FDI while at the same time pushing our companies to invest elsewhere.

    On your last point regarding crowding out, can you please expand? I'm not sure I follow.

  4. Sorry, I should have added that a further RM5.9b of external debt was repaid this year. The current total is RM14.2b, which is about 4.2% of the total national debt.