Impressions Of Pakatan Rakyat’s Alternative Budget

Pakatan Rakyat announced their alternative budget proposals yesterday but I haven’t had the chance to read it until just now. My first thought on reading through is that the Opposition are trying to out-populist the government – quite a few measures look like out and out vote buying. But I do have to have to admit that at least this tendency is consistent with their previous platforms.

Before getting into the meat of the proposals, I’ve some nit-picking to do:

1. The document begins with the premise that Malaysia is an unequal society, where the benefits of resource extraction has not filtered down to the man on the street. What level of inequality is tolerable to a given society is of course a value judgement, but the facts are: first, Malaysia’s level of inequality is right on the global median, and second, the relative constancy of inequality over the last 25 years suggests that income growth has been equitably distributed on an aggregate level. A free market competitive economy will ALWAYS have some level of inequality, and generally the freer the markets the greater the level of inequality.
2. Just like the government, the PR Budget assumes that Malaysia is in a middle income trap. I’ve already documented my doubts on that.
3. It says Malaysia needs to find “new sources of comparative advantage”. Given the relative talent level of the politicians in PR relative to BN, I’m disappointed. There’s an enormous difference between competitive advantage, which is what they’re actually talking about, and comparative advantage. The former is absolute, but the latter is relative and means something quite different. The fact that this budget intends to reimpose import duties on luxury items certainly suggest that they have competitive advantage in mind.

Bearing these in mind, I have to say that this document is a vast improvement over their last attempt at an alternative budget a couple of years back. It’s more comprehensive, data-driven, and (by economic standards) reasonably well argued. I love the idea of auctioning APs – if you have to have them (which is not a given), you might as well extract full value. I also like the idea of “top-up” incomes for the hardcore poor. And the proposals for public transport and water and renegotiating IPP contracts.

In fact, I have to admit that there’s not much I’ve found not to like. So take it as a given that I’ve got a good impression of the thing in totality, but with a few albeit major criticisms:

1. Education – this one’s is on less solid footing than the other proposals. While the emphasis on vocational and technical education is fine, the premise is not – there IS a lack of places in tertiary institutions, not an unwillingness on the part of Malaysian youth to try. This lack of both hard and soft infrastructure has not been addressed by the government either. I’m also disappointed that they’ve missed an important point that’s highlighted in the research literature – lifetime incomes are highly correlated with the quantity and quality of pre-school and primary education, and not secondary or tertiary education. Long term, that’s where the real skills shortage has to be addressed. Instead, we get an attempt to entrench vernacular education.
2. Minimum Wage – setting the minimum wage at RM1,100 is, to be blunt, cockamamie. It’s way above the current market clearing wage rate for unskilled workers. While trying to reduce the reliance on foreign workers is probably the right thing to do, its ludicrous to expect such a big jump in wages even at the low end of the scale not to have consequences. First is unemployment – the bigger the wedge between the market wage and a minimum wage, the greater the drop in labour demanded. Second, without a concurrent increase in productivity you’ll either induce inflation (under a closed economy) or a deterioration in the trade balance (under an open economy) – for practical purposes, it’ll be both. The upshot of it all will be an increase in nominal incomes, but a drop in real income per capita. Life isn’t an economic model where everything adjusts immediately. I’d prefer a graduated approach – say RM800 now, and index it to inflation as well as expected productivity increases. Or jump it RM100 per year for 3 years, then do a reassessment.
3. Women – the policy of encouraging the participation of women in the labour force while simultaneously providing an annual stipend for low income housewives is schizophrenic. It’s precisely at the low end of the income scale where getting women into the formal work force would be most beneficial, yet the handout (it IS a handout) gives these women a disincentive to work.
4. Handouts – in fact the whole edifice of handouts to lower income households leaves me somewhat bemused. It’s populist and supports social welfare, but the proposed structure of the benefits will require a considerable bureaucracy to support it. The current eKasih database only covers the hardcore poor – which by all accounts was already pretty hard to do. Expanding it to the bottom 40% of households is going to be a pretty massive job. Administrating the whole thing will be worse. So much for unbloating the government.
5. Democracy – where’s local government elections? Will no one take this on?

One last point: I have to point out that the forecast revenue figures in this document are already waaaaay off. My projections suggest that government revenue will already be close to RM180 billion this year, not next year.

P.S. On my wish list, which I doubt anyone will agree to, is to tax petrol. Promoting green technology and public transport is fine, but you’re not going to get the necessary change in behaviour that long term we need to have.

Technical Notes:

2012 Pakatan Rakyat Alternative Budget