Thursday, October 6, 2011

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


  1. Tun M said that
    "That's easy to spend money when we do not have." !!

    any comments???

  2. Chalk up another support for petrol tax!

  3. @Living Seed

    I'd give them a pass on the numbers - I don't believe them to be realistic at all. The important thing to me is to get the policies right.

    In any case, I'm not overly concerned about our debt level or ratio. Reducing the deficit right now is not a priority.

    Besides, Tun's a fine one to talk - it's like the pot calling the kettle black.

  4. Bro, this post is a good heads-up on the Alternative Budget. I like your idea on a tiered approach to minimum wages.

    On the matter of "hand-out" for women, I feel it isn't a disincentive to work because there are single mothers who need to prioritize child care at home over a "latch-key" problem of kids being left home alone.

    Good stuff from you.

  5. bro de minimis, thank you.

    On the subject of handouts, you have a good point. But in those cases a targeted transfer would probably be cheaper than a blanket approach of every unemployed housewife in households earning less than RM18000 a year.

    Still, can you imagine trying to manage such a system? For it to be "fair" you have to collect the data, then have social workers ensure that nobody's "cheating" on it i.e. collecting the stipend while selling nasi lemak at the market for example. For another problem, how would part-time workers be treated? Or Avon ladies? Or people like my sister who is a free lancer? This idea is ill thought out.

  6. Good analysis Hisham. Appreciate if you could compare this with the govt budget within the context of structural reforms that Malaysia needs. Thanks.

  7. bro hishamh

    there's a major change in Federal State Relationship re their proposed Capitation Grant reform strategy.

    Parameters are mentioned as a function of needs, contribution and income disparity. They even want to introduce "equalization" component to balance those with lower tax base.

    No clear details but this would would require fundamental changes to Capitation Grant Act by amending the 10th Schedule of our constitution.

  8. bro hisham,
    I wonder what is your point of view when 10 000 teachers will be trained and RM 200 million will be allocated to address the shortage of Chinese, English, Tamil and religious teachers, as well as an additional RM 200 million to be immediately disbursed to improve existing buildings of SRJK (C), Sekolah Agama Rakyat (SAR) and SRJK (T) schools in particular... but not trying to strengthen Sekolah Kebangsaan.. since mass of the rakyat sending their children to Sekolah Kebangsaan.. why not strengthen Sekolah Kebangsaan.. right?

    ~ OnDaStreet

  9. @bro satD,

    Yes, I wondered about that, but I'm not qualified to comment on it - really don't know the implications. Somehow, I suspect if they ever get into power, PR will find a way to renege on that one.


    My first reaction was where are they going to find that many teachers? It sounds like a serious non-starter, though the money is little enough.

    And I agree with the misplaced priorities in education.