Not handouts, but a hand up

Steven C.M. Wong Institute of Strategic and International Studies Malaysia New Straits Times Kuala Lumpur

New Strategies Towards Stimulating the Nation's Economic Growth, or the Government's package of 90 economic measures released last week, was altogether a different animal. No wonder then National Economic Action Council (NEAC) executive director, Mustapa Mohamed, was heard to speak with quiet pride about the "paradigm shift" in policy thinking after its launch.

Contrary to what had been expected, i.e., a stimulus package, what was unveiled looked and sounded more like a supplementary or "mini" budget instead. What is the difference? On the surface, the distinctions are not all that obvious unless one is an economic specialist. Underneath, however, they are as different as chalk from cheese.

Financial markets had been trying to second-guess the size and cost of the pump priming since April, when it was originally due to be announced. They were caught largely unawares by the host of other equally significant measures introduced. The result has been a degree of myopia and under-appreciation of the package's policy strengths.

A stimulus package attempts to inject the largest possible amount of public expenditure in the shortest possible time. Extreme measures are called for in extreme situations, just as in the TV series, ER, where a defibrillator is used to induce a 400- volt charge to restart the heart of a person that has stopped.

The alternative is more comparable to a growth hormone program. Here the patient is alive, although in need of medicine that strengthens and enhances. New Strategies does both and combines short- with long-term and fiscal with nonfiscal measures to ensure that not only are current economic growth prospects improved, but also sustainable.

The implications are also far reaching. Short-term counter- cyclical economic policy is fine so long as the risks of running ever-larger public deficits do not get out of hand. This should not happen if the amounts spent are reasonable and the upturn comes fairly quickly, but this cannot always be guaranteed.

The problem is that once on this course, many developing countries have tended to become too dependent on government spending and pay scant attention to getting their economies to get fighting fit and increasingly attractive. Without the latter, the end result is one too many "quick fixes" that bring their economies to the point of collapse.

No quick fixes in New Strategies though, and this is clear just from looking at the four main strategies of the package, namely, (1) promoting private investment, (2) strengthening the nation's competitiveness, (3) developing new sources of growth and (4) enhancing the effectiveness of the delivery system.

Almost the entire RM7.3 billion devoted by the Federal Government and its agencies are to funds that support economic sectors rather than undertake the activity themselves. Put in another way, the government expects to realize the goal of increased economic activity through the private sector rather than instead of it.

The tendency to spend one's way out of trouble by depending on large-scale infrastructure projects has been avoided. This is important because it lessens the risk of "crowding-out", or where the private sector has to compete with the public sector for resources such as finance, labour and goods.

Another important distinction is that while it is common in such cases to speak of "handouts", implying gratuitous "nostrings-attached" giving, the money made available is actually by way of a "hand up". It is subject to being invested in productive uses and not for conspicuous consumption.

(Of all the measures taken, only the half-month bonus for government servants qualifies as a handout and only a most modest one at that.) Yet an additional feature of the package is the emphasis on small and medium enterprises (SMEs), particularly microenterprises or those of sole proprietors and family enterprises with less than four workers. Now this is surely development economics at its best.

Focusing on thousands of individual and small production units is certainly not the fastest or easiest way to boost economic growth, but it is arguably the most sure-footed. Even though many will, for one reason or another, close down within a couple of years, those that remain will tend to be highly dynamic and have strong linkages to the local economy.

Coming at a time when direct foreign investment is drying up and large firms are scared to over-extend themselves, harnessing the energy, skill, nimbleness and application of individuals is a rational and considered response.

This, of course means, on the downside that the entire plan flies or falls on SMEs. This sector has long been stressed, but whether measured by gross output, value-added and employment, large companies are still the dominant force. It will take patience and consistency to engineer the structural shift to a situation where SMEs are the engines of growth.

What has gained a degree of appreciation is the fact that far from seeking to shut the world out, the intention is to engage foreign businesses in a bigger way. The removal of obstacles to foreign ownership constitutes a clear invitation to participate, even though it is not immediately obvious from the way the measures are constructed how they will translate into practice.

From an economist's viewpoint, however, one of the centerpieces of the New Strategies package is Projek Harapan, which provides incentives for new and first-time house buyers, and the accompanying decision of the National Housing Corporation to build 150,000 affordable houses over five years.

This accelerates the trend towards a home-owning democracy and provides a spur for economic activity that has multiple year consequences, strong linkages to the domestic economy and relatively low "leakages" in the form of imports. The attempts to address the situation in the property sector have probably not been given the credit that they deserve.

The crowning glory of the package is the adoption of the fourth strategy, "enhancing the effectiveness of the delivery system". Among other things, this shows that heed has been paid to numerous representations made over the years with respect to bureaucracy and red tape, especially at the State and local levels.

The fact that Malaysia can grow economically without an additional dollar of consumption or investment but merely by introducing streamlining changes that reduce inefficiency and time wasting has not been lost on the Government. In reality, however, it will again take consistent effort to combat the bureaucratic delays that open the door to corruption.