Pump priming may not be a cure all

  • Business
  • Saturday, 25 Jan 2003


MALAYSIA is taking a well-trodden path by banking on pump priming measures to boost its economy. In fact, the conventional wisdom is that the quickest way to counter economic slumps is for governments to spend in a big way. 

In the wake of the 1997 Asian financial crisis, this has become a common approach among countries in the region. For example, in 2001, Thailand and Singapore also unveiled hefty economic stimulus packages. 

Thailand's spending programme included a 58 billion baht (100 baht = RM8.90) emergency reserve fund to finance training, programmes to strengthen local communities, and labour-intensive projects in agriculture, tourism and the SME (small and medium enterprise) sector. 

The country's 2002 budget called for a record 1.03 trillion baht in government expenditures. The budget also targeted a deficit of almost 200 billion baht, or 3.8 per cent of gross domestic product (GDP). This was financed mainly by the issuance of government bonds to the public.  

Singapore came up with not one, but two, stimulus packages in 2001. In July, the government announced S$2.2 billion (S$1 = RM2.19) of measures. 

This was dwarfed by the next plan, which was revealed in October. Costing a massive S$11.3 billion (about 7 per cent of gross domestic product), the package's main components were tax cuts and business incentives. 

Naturally, the deficit spending by Malaysia's two neighbours has produced somewhat different results. In Thailand's case, Prime Minister Thaksin Shinawatra can claim some success with the country's economic policies. 

Robust domestic activity and resurgent exports have driven GDP growth in the past two years. In 2001, the Thai economy grew by 1.8 per cent, surpassing an earlier forecast of 1.3 per cent. 

In the first half of last year, the expansion rate swelled to 4.5 per cent and the full-year figure is projected to be 4 to 4.5 per cent. 

Most international economic agencies and other observers agree that Thailand's fiscal measures are instrumental in the rebound. 

For example, in a document issued last August, the International Monetary Fund (IMF) noted that the expansionary fiscal policy stance adopted in 2001 had helped cushion the impact of the global slowdown. 

At the same time, there are signs that it is time for fiscal consolidation. In May 2002, the World Bank pointed out that Thailand's public debt had risen rapidly from 14.5 per cent of GDP in 1996 to nearly 57 per cent in 2001. 

“Concerns about the rising level of public debt have now begun to outweigh the benefits of pumppriming the economy,” it said. 

It appears that the message is getting through. The government has come out to say that it will cap public debt at 60 per cent of GDP. In addition, the 2003 budget will show a 2.3 per cent reduction in expenditures as Thailand starts trimming its fiscal deficit. 

Singapore, on the other hand, is still very much bugged by poor sentiments despite the fiscal measures. As it is an open economy, the island state is to a large extent weighted down by global factors and the health of its major trading partners. The chief concern now is, of course, the possibility of war on Iraq. 

Singapore's economy grew by 2.2 per cent last year but it had a feeble second half that almost dragged it back into recession, technically defined as two consecutive quarters of contraction. The government had earlier forecasted growth of 3 to 4 per cent. 

The feeling is that ramping up government spending further may be an ineffective response to the listless performance. This is because such a step will not address the external elements that have greater sway over Singapore’s economy. 

Projections for GDP growth this year range between 2.0 and 5.0 per cent. According to most observers from the private sector, 3.0 to 3.5 per cent are more realistic. 

For additional evidence that pump priming is not a cure-all, especially when not conceived and implemented well, Japan is an excellent place to start. 

It has been reported that the country has spent well over US$1 trillion since the early 1990s to rouse domestic demand. Yet, Japan remains in economic stasis since 1989, when both its property and stock markets imploded. 

Instead, the spending programmes have only pushed the country to the brink of a public debt crisis. According to commentators, the problem here was that much of the money was poured into projects that were less than worthwhile. 

In July 2001, former World Bank country director for Thailand, J. Shivakumar, pointed out that any stimulus package must be well-targeted, temporary, affordable, able to generate large multiplier effects, and beneficial to the poor. For any government embarking on a pumppriming plan, these must surely be words to live by.

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