This article attempts to provide some context to a high debt cost
when Mahathir lead the BN govt,esp during the 1970s & the following 1980s. The operative word here is attempt.
Recently I came across a
tweet from Rahman Dahlan whom is the Minister at Prime Minister's Department in charge of EPU.
I believe It was in response to Rais Hussin(Bersatu Strategic Director) article to Malaysia Kini entitled
Debt spiral signals death of fiscal Malaysia and the likes of those article.
Rais Hussin article is largely misplaced. In fact his article where he
demonizes govt debt is counterproductive to Pakatan's reform agenda.
Govt debt is one of the most important tool to uplift quality of life
for ordinary Malaysians.
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| Debt/Govt revenue % |
Rahman Dahlan on other hand failed to provide context to higher
level of debt charges during Mahathir's time.
Hence this post attempts to give some background to high level of govt
debt cost in the 1980s & early 1990s when Mahathir was leading BN's
govt.
1970s
One of the more pivotal events in 1970s was the 1973 oil shock or First Oil Shock. It began
when Arab Oil producing countries via OAPEC instituted an embargo on
nations perceived to support Israel in the Yom Kippum War. Countries
targeted were the USA, UK, Japan, Canada, Netherlands.
Global oil price quadrupled. Initially, Malaysia experience windfall gains since it was an oil producing nation by then. Although inflation rate in Malaysia was
18% in 1975.
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| Source : Malaysia@50 by Jomo KS & Wee CH 2014 |
Eventually, this had an adverse effect to Malaysia. Higher oil prices lead to stagflation(high inflation, recessionary growth) in developed countries. This reduced direct foreign investments in developing countries like Malaysia. Direct foreign investments fell 40% btwn 1974 & 1975 & did not reach 1974 level until 1979.
Declining foreign investment was exacerbated with decline in private investments by Malaysian Chinese businessmen as they respond to the uncertainty created by the NEP policy. Malaysia.
Its not just investment that was affected by the oil shock, other commodities such as rubber were adversely affected.
Malaysia's real GDP declined from over 8% in 1974 to 1% in 1975 (
Bowie & Unger , 1997) . Thus sliding into a recession in 1975.
Hence this naturally lead to significant govt debt build up as tax revenue fell & govt picked up the slack in private investment spending.
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| The Impact of Global Financial Crisis: The Case of Malaysia |
Then came the 2nd Oil shock in 1978. The collapsed of Shah of Iran which lead to decline in Iran's oil output & resulting uncertainty from that lead to speculative hoarding. This and surging global demand lead to doubling of oil price btwn 1979 & 1980. The resulting shock tripled cost of oil in USA. This exacerbated inflation in the USA which was already bad.
When Volker became Federal Reserve Chairman in 1979,inflation in USA was above 11%(with unemployment at 6%). By this time, fighting inflation was seen as pivot in achieving Feds dual mandate of price stability & full employment.
Similar scenario was happening in UK & Canada too. UK had one of the worst inflation records in 1970s. Retail price inflation averaged 12.6% & peaked at 26.9% in 1975. Thatcher's first administration took power in May 1979.They were convinced that inflation can only be controlled via growth of money supply , that income & price policies used previously would be futile. The idea was simple,control the rate of growth in money supply and growth in prices wld remain under control too. However,that didn't work & I hope to explore this some other day.
1980s
Besides targeting reserves growth rate, Volker increased federal funds rate from 11% to 19% in 1981. This combined with the oil shock sent the USA economy into the worst recession since Great Depreciation. It lasted from 3rd quarter of 1981 until October 1982. This recession perpetuated a global slowdown. Global commodity prices took a hit which adversely affected Malaysia's current account surplus.
Mahathir assumed PM-ship in mid 1981. Evidently, there was significant govt debt build up in the 1970s already. The govt also had accumulated significant foreign borrowings despite the higher real interest rate from 1980s.
Malaysia avoided sliding into a 1982 recession by spending its way out of it i.e counter-cyclic spending.
Budget deficit for 1982 for instance was 16% of GDP.
However, the global slowdown due to Volker's rate hikes continue do drag on. Soon, the economy finally succumbed to recession in 1985/86.(Jomo KS 2014) This particular recession was particularly damning one. Malaysia entered the 1980s being a richer country then South Korea on per capita GDP basics. By end of 1980s, South Korea was richer country then us and Singapore raced ahead
Mahathir-Daim shld have continued the counter-cyclic spending instead of opting for selective austerity measures after 1982. Soon after winning the April 1982 elections, govt announced austerity drive which cut back earlier public spending & rolling back earlier job creation commitment.
In Daim's maiden 1985 budget speech(October 1984) , govt forecast-ed Malaysian economy would grow by 6.7% in 1985, yet actual growth in real terms declined by 1%. Per capita Income declined by 5.7% in 1985 to $4581 and was expected to decline to $3993 in 1987. By end of 1986, unemployment rate hit 8.7%.
The NEP policy was partly to be blamed in the debt build up here.Its discriminatory practices discouraged private investment from the Chinese business class.Mahathir sort to
reverse some of this.
Mahathir responded to the 1985 recession with greater deregulation , tax incentives to prop up private investments. Govt's ability to spend here was limited as oil price plummeted to under USD10 a barrel in early 1986. Major primary commodity price , palm oil & tin had also collapsed while the electronics industry hit bottom.
The economy rebounded in 1988. GDP growth remained above 8% until the Asian financial crisis in 1998. Govt budget recorded a surplus between 1993 and 1998 which largely attributed to the positive external conditions from late 1980 onward.
Lastly,
The recessions in 1970s & 1980s and weak recovery all entailed lower tax revenue & higher govt spending which meant greater cost of debt. Externalities that wasn't induced by Mahathir.
Comparison has to be within context. It is time to Najib to provide context for the rapid build of debt build up as well. According to KS Jomo , debt/gdp ratio increased significantly from
41% in 2008 to 53% in 2009. While that rapid increase can be attributed to revenue shortfall & stimulus during the GFC.
For it to persist at that rate after 10 years , shouldn't there should be a more compelling justification such as (much needed) significant expansion in public healthcare & education social sector.
