Published November 10, 2008

MALAYSIA INSIGHT
KL must mind waste in pump priming

Skip projects with little multiplier effect, and ensure transparent tenders

By S JAYASANKARAN
KL CORRESPONDENT
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THE worst is over, thanks to the coordinated action of world central banks in pumping liquidity into the system and then, aggressively slashing interest rates.

It is true that world stock markets remain troublingly volatile but going by the action on interbank markets and the commercial paper market, it would appear that panic may be giving way to a cautious calm.

Even so, growth may be seizing up. So far, the response has been to cut rates but that alone cannot suffice. Governments will have to step in. The economist, John Maynard Keynes, wrote about this years ago, that during high unemployment and low growth periods, the government should hire people to dig holes in the ground and employ others to fill them up. In short, it is time for Keynesian economics because the private sector cannot now be depended upon to be the engine of growth.

That would be easy if one were a China with its huge current and budget surpluses. It would also be fine if you were an America, which although its current account deficit is the largest in the world, has assets - dollar and government bonds - that rank as safe havens.

But Malaysia has a budget deficit of 4.8 per cent of gross domestic product which makes massive spending out of the question. Even so, it will have to prime the pump but in ways that must perhaps be tempered with prudence.



First, government contracts that have no significant multiplier effect have to be ditched. This will include most defence purchases and that is why the deferment of RM1.6 billion (S$676 million) worth of attack helicopters from Europe - the so-called Eurocopters - is a step in the right direction. More should follow because it makes no sense now.

Meanwhile, Finance Minister Najib Razak has, among other things, singled out low and medium cost houses as a priority where spending is concerned. Yet there is a glut right now. He would do better to concentrate on urban transport and lengthening the reach of the light rail transit systems in the Klang Valley. Highways in Sabah and Sarawak would also be a good idea as the roads there are not the greatest.

The other project that has to be continued is the plan to pipe water from Pahang to Selangor through the mountains. It is expensive but can no longer be deferred because that risks Selangor, the most industrialised state in the country, facing an acute water crisis by 2012. Rejecting the project because the state is controlled by the Opposition is tantamount to cutting off one's nose to spite one's face.

Government spending on infrastructure has lasting benefits but it is no magic bullet. It takes time and, in Malaysia's case especially, is very often wasteful. Mr Najib could at least reduce much of the waste by insisting that government contracts for building be made through an open, and competitive, bidding process. This is government 101 but here it has just been talked about but rarely acted upon.

Mr Najib's plan to cut the mandatory 11 per cent contribution by employees to the Employees Provident Fund by three percentage points is, however, an excellent idea made even better by making it voluntary. If agreed to by everyone, it will add almost RM5 billion to overall purchasing power and do much to keep consumption, long a driving force of the economy, buoyant.