On Malaysia’s debts and ‘growth at all cost’

by Pak Sako
Centre for Policy Initiatives

I refer to the article in The Malaysian Insider/New Mandala on reducing Malaysia’s debt burden by Nurhisham Hussein, an economist with Malaysian Rating Corporation Berhad and former employee of Permodalan Nasional Berhad.

It is encouraging to have him participate in this national conversation on Malaysian debt.

Close to 20 prominent Malaysian academics, comprising economists and political scientists, had earlier urged the Barisan Nasional and Pakatan Rakyat to state the steps for remedying the worrying situation of Malaysia’s finances (see ‘Academics call upon Barisan and Pakatan to declare policy positions on national finance and debt‘, Centre for Policy Initiatives, 8 April 2013).

Here I reply to Nurhisham’s claim that the Malaysian government’s debt-to-GDP ratio of 52.9% “is below any critical threshold”, and that concerns regarding government debt are greatly “overblown”.

I also respond to his claim that it is extremely difficult to address household debt (“changing the behaviour and financial incentives faced by thousands of households”).

Malaysia’s debt is a symptom of deeper issues that conventional economic thinking cannot adequately solve. As Albert Einstein observed, “no problem can be solved from the same level of consciousness that created it”. An out-of-the-box approach is needed.

The unreliable debt-to-GDP ratio

The debt-to-GDP ratio is but one measure of a nation’s debt level. It does not give a full picture of a country’s debt situation, just as a 40-year-old man’s age and vital signs give no clue about whether or not he is prone to a heart attack.

Garbage in, garbage out: the debt-to-GDP ratio is only as good as its underlying numbers. There are more than a few questions about the true amount of debt that the Malaysian government is exposed to.

Bank Negara statistics themselves imply that Malaysia’s total debt in 2012 was a whopping RM1.743 trillion, a trillion more than the official figure of RM737.6 billion. The amounts of ‘hidden’ debts such as contingent liabilities are unclear; they “are not systematically reported in a consolidated manner” (IMF, ‘Malaysia: from crisis to recovery’, Occasional Paper No. 207, 2001, p. 47).

On the GDP side, it is questionable whether Malaysia’s economic growth is truly sustainable. It is completely possible to clock impressively high GDP numbers for short-term political publicity and survival by running a country’s resources down and squeezing the labour force and leaving future generations to deal with the consequences. The narrow conception of ‘sustainable growth’ (or ‘potential output’) in conventional economics does not consider resource or ecological limits, social conditions and other factors in the economy. Are the large increases in debt seen in the last decade justified by the increase in the meaningful portion of GDP?

An international study suggests that a high level of domestic debt makes it is possible to default even on small external debt. It found that domestic debt defaults are numerous but hidden; citizens can be shortchanged by their governments. Debt-to-GDP ratios say nothing about these. Another study says that debt-to-GDP ratios are country-specific, meaning we cannot directly compare ratios between different countries, especially between developing and developed countries.

There are also questions of social justice: are the citizens agreeable with the government’s debt undertaking? Which projects and which companies are the beneficiaries of these borrowings, and are they bankable? How exactly will the citizens be compensated for the borrowings made from their savings? Are public resources being used to pay them back?

These issues were discussed in the third installment of the Centre for Policy Initiative series on Malaysian debt ( ‘Malaysia’s debt: the misleading debt-to-GDP ratio’ , 29 March 2013).

Household debt and the ‘shopping-mall economy’

The structure of the Malaysian economy is one that is geared towards consumption. When export earnings fall, citizens are requested to consume to enlarge the domestic economy.

Malaysia probably has one of the highest densities of shopping malls in the Asia-Pacific region. It is not surprising that consumer spending and debt is significant. Malaysia’s household debt currently stands at more than RM600 billion. This amount needs to be assessed substantively, not simply in terms of ratios.

Consumer expenditure can be wasteful and counterproductive. For example, a fair chunk of household consumption is driven by rivalry. When person X’s peer owns a highly desirable object, person X is prompted to make a similar purchase to maintain his or her social standing. With easy credit, the cycle can continue until a crisis erupts.

The causal chain driving this consumerist behaviour is admittedly complex. In addition to the ‘keeping up with the Joneses’ syndrome, there is also the element of addiction and compensation. To make up for the disutility of long working hours or stressful, unsatisfying jobs, instant satisfactions are sought via consumer spending. These quick thrills fade, only to be sought again with a subsequent round of spending (see Tibor Scitovsky, The Joyless Economy: The Psychology of Human Satisfaction, 1992).

There is then the production side of matters. To increase profits, producers of goods and services employ the strategy of ‘planned obsolescence’. Consumer goods are intentionally made non-durable or are designed so that they are quickly rendered obsolete or unfashionable by newer models with minor additional features, hence triggering a new wave of consumer spending.

Such aspects ought to be scrutinised and incorporated as part of responsible economic policymaking. A range of policy options could explore the viability of having shorter work-hours, more part-time work or work-sharing opportunities (see Tim Jackson, ‘New economic model needed not relentless consumer demand’ , The Guardian, 17 January 2013). Ways could be found to create a diversity of occupations and more satisfying jobs. There should not be a focus on creating only ‘high productivity’ jobs.

The freeing up of more personal time could go hand in hand with creating consumption opportunities that give deeper satisfaction at lower expenditure. This could involve creating more parks, preserving forest reserves and encouraging recreational and sporting activities, constructing well-stocked public libraries, enabling communities to work together for achieving local-scale goals, and so on. Less materialistic but more meaningful living could be made fashionable. Creative measures at local and higher scales could be taken involving public awareness and advocacy.

But advocating moderated consumer spending is anathema for many governments as well as pro-market economists; GDP numbers will not be so high. Pro-market economists (and libertarians) believe that individuals should be free to spend as they like. However they ignore the powerful impact of advertising on consumer behaviour which entices consumers to spend the way producers prefer.

‘Quality growth’

The pursuit of ‘economic growth at all cost’ or ‘high growth numbers’ as a prime economic goal is at odds with reducing household debt or making judicious public investment. Unlimited growth is also impossible given finite natural capital and social and technological constraints.

In our context as a middle-income country, we should aim for well-conceived development which may produce low but quality growth — growth that is equitably distributed, socially meaningful and environmentally and economically sustainable — not high growth. This is a goal that needs to be in the forefront of our national aspirations.