Sunday, February 1, 2009

Detoxing the Economic Crisis3: - Increase Spending

There is enough news already to create an economic slowdown even if there was none impending in the first place - news of 40.000 layoffs, news of factories closing down, etc. Negative economic perceptions often become self-fulfilling prophesies. Perceptions have to be managed because speculative behaviors impact economic realities.

Clearly, spending is necessary to stimulate the economy. However, under circumstances where unemployment is rising and where the private sector foresees dark horizons in the future, they will cut back on investment expenditure (meaning: no new employment) and on costs (meaning unemployment increases). This as we saw earlier will only start the vicious cycle of further decline in income levels and increase unemployment.

But the economy needs investment. There has to be injection of capital into the economy which will allow resources to be employed and generate income so that the economy can grow by the multiplier effect. This expenditure must come initially from the Government. It is a start to counter falling incomes and rising unemployment. The spending however must be in the sectors that can stimulate employment.

The other approach will be to boost private sector confidence and by giving them the access to capital so that investments can increase. The capacity of the private sector to expand and to produce goods and services must be increased. One good move recently by Bank Negara was the reduction of the BLR. Whether the banks will now renegotiate interests with the business sector and consumers is important for the BLR reduction to be of any real effect.

The consumers (people) must also be given the ability to spend by reducing the various taxes levied that largely reduces the real income of the consumers. The capacity of the people to spend must be increased. I am totally amazed that to date the "brains" in the government have not come up with tax proposals that will confront the economic slowdown.

Increase in government expenditure that does not relate to increase in employment of resources may only cause inflationary pressures for example, if 30% of of the government expenditure goes to "commission" or "corruption", then these money increase will not stimulate the economy.

SMEs need stimulus and assistance because they are important agents of stimulating the economy. They have the ability of becoming "shock absorbers" for economic slowdowns.

Mega projects that does not contribute to a substantial increase in the employment of local resources are useless for the purposes of sheltering or reducing the impact of economic slowdown on locals.

So, increase both spending and the capacity to spend.

Peace.

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