MONDAY, 30 August 2021: The American economist Thomas Sowell is used to repeat that, in policy making, there are no solutions but only trade-offs. In a newly published policy paper, Inflation, Unemployment and COVID-19 Policies: Where Is The Malaysian Economy Heading?, authored by Dr Carmelo Ferlito, Fariq Sazuki and Abel Benjamin Lim, the Center for Market Education critically analyzed the fiscal and monetary policies implemented to help Malaysia navigating through the pandemic, focusing on their unintended consequences and the pace they set for the future of the national economy.

The first part of the paper presents a summary of the different fiscal and monetary policies implemented during the COVID-19 era, focusing on the current trends for GDP, unemployment and inflation.

The second part, instead, places that measures under the lens of a theoretical economic analysis, to stress the unintended consequences they produced and the perilous path they created for the future of the Malaysian economy.

We know that the Malaysian GDP declined by 5.6% in 2020 amid the harsh economic restrictions imposed in the attempt to curb the spread of COVID-19. Stay-at-home orders increased unemployment up to 5.3% and forced the government to intervene with different stimulus packages, supported by expansive policies by Bank Negara Malaysia.

The main critically findings from the theoretical analysis can be summarized as it follows:

  • The expansive monetary policy path followed by Bank Negara Malaysia, by creating abundant availability of financial means despite the recession, is creating a dichotomy between the financial world and the real economy, planting the seeds for an economic crisis (monetary cycle à-la Mises).
  • Expansive fiscal policies implemented to address the damages created by stay-at-home orders may result in temporary effects, but will 1) shift the debt burden to future generations and 2) create more unemployment when the stimuli are over.
  • Most of the same fiscal policies can generate a slower future growth path by decelerating the pace of private investments.

Dr Carmelo Ferlito, CEO of the Center for Market Education, explained that “the policies implemented so far may become the very root of an economic crisis once the COVID-19 emergency is over and the economy is on the path to recovery. Their effects on inflation and unemployment will become more evident when the deflationary pressures currently in play will be no longer in place”.

CME foresees unemployment to be between 5% and 5.5% at the end of 2021, depending on when lockdowns will be lifted and a serious discussion on domestic and international borders will be opened. The figure could stabilize between 4% and 4.5% if the current trend in business openings won’t be stopped by further closures.

In accordance with Fitch’s predictions, CME foresees a flat growth for 2021, with the possibility of an annual rebound between 1% and 2% only in case of a rapid and radical change in policies.

The paper suggests that at this point it is very difficult to propose solutions to problems that were created by policies (lockdowns) judged harmful in light of a sound trade-off analysis. We can now attempt to moderate those negative consequences.

A commitment to a no-lockdown policy would help the system naturally free up resources to be invested consistently with the real structure of preferences, while the government should focus on targeted healthcare investments. Targeted fiscal interventions, directed to strengthen the healthcare system, are the only fiscal tool that in this moment may not produce bad unintended consequences in the future in terms of slower growth, inflation and additional unemployment. Similarly, monetary policy will need to change in order to allow deflationary tendencies to run their course.

Finally, a tax reform, which is based on simplification on one hand and on the introduction of a multi-layered GST (consumption tax) on the other, would favour rebuilding the savings which are necessary not only for the long-term financial stability of households, but also as the sound resources for private investments.

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About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia. As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces. In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities. Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions.