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Reassessing recessions

Reassessing recessionsTHE Malaysian public has received two major economic shocks this year: the marked increase in the price of rice, and the hike (and subsequent reduction) in the price of petrol.

However, our economic troubles are not over. The world economy is tottering on the brink of a major recession that will undoubtedly plunge us all into deeper problems.

Economic crises in pre-capitalist society always arose from a failure in production of goods. Disease, drought, floods, or war could affect production to such an extent that entire societies faced starvation.

Under capitalism the situation is reversed. Economic crises occur primarily because of over-production. Individual capitalists produce not out of particular love for that product, but because they have the expectation that they can sell the product and achieve a profit. According to capitalist logic, if the product cannot sell, then one eases or even ceases its production.

The increase in the price of rice and of petrol has led to a marked decrease in the buying power of the ordinary rakyat. The petrol and diesel price hike also has the effect of raising the costs of many other items because of increased transportation and power costs.

When a family’s disposable income shrinks in real terms, the family will try to maintain essential consumption — food, housing, education and health — by cutting back, sometimes drastically, on consumption of durable and semi-durable items such as shoes, clothes, electrical goods, computers and vehicles. When many families do the same, the market for all these goods will contract.

A contraction of the market for a product will lead to a plunge in production, and to a drop in the overtime and wages of the workers in that sector, as well as the sectors supplying material (intermediate products) to it. When this occurs on a large enough scale — and this is going to take place in a number of sectors, throughout the world — the net result is recession.

Reassessing recessions


Government in denial

The world economy was wobbly even before the shock of the oil price hike. The massive US trade imbalance, the huge increase in speculative activity in future and other stocks, the sub-prime loan crisis, and the gigantic public sector debt in many of the advanced economies had already created an unstable situation in the international economy. The exponential oil price hike is more than sufficient to trigger off a recession.

And the Malaysian government is in denial. At the July 2008 parliamentary session, the government bravely said their forecast of 6% growth over the next two years is attainable: “We have diversified our markets. The US only accounts for 15% of our exports. We can export to China, India and other growth centres.”

This irresponsible attitude fails to take into account the fact that in addition to the 15% quoted, another significant portion of Malaysia’s exports goes to the US market through third countries such as Singapore.

The other fact is that recession in the world’s largest economy would have a dampening effect on the economies of many of our other trading partners.

And the mid-term review of the Ninth Malaysia Plan is a disappointment. The government planners haven’t included a contingency plan to deal with a recession that could unfold within the next year or two.

Those in the lower-income groups are always the worst affected by calamities — both natural as well as economic. At a time of recession, many workers lose their jobs. Some of them don’t even get the meagre benefits as specified in the Employment Act because their company has claimed bankruptcy.

Reassessing recessions At a time of recession, those retrenched may end up jobless for months. Many of the retrenched are unable to service their housing loans, and there are many whose houses are auctioned off by the banks. Owners of small businesses also face similar straits.

Pump priming

There needs to be a well-thought-out plan to handle the problems of the people if and when a recession sets in.
Malaysians have been exposed to the Keynesian concept of “pump priming” that the government used during the 1998 recession to stimulate the domestic economy. What we should be aware of is that there are different forms of pump priming.

Giving a local cooperative a project to build houses for lower-income people using labour-intensive technology, for example, would be much more socially just, and would create more jobs, than giving a large high-tech company the contract to develop a luxury resort. Both expenditures would stimulate the economy, but the former example would be more appropriate because a lower-technology building process would generate more jobs, and lower-income families would spend more of their income locally, thus creating a larger multiplier effect.

The following should be part of the contingency plan that should have been but was not included in the mid-term review:

  • As a temporary measure, a work week could be reduced to four days. It is better to have 100 workers getting 60% of their normal income rather than having 40% of them unemployed!
  • The government should be prepared to employ those laid off; for example, to build houses for the lower-income groups, to conduct repairs and to upgrade drains and roads, as well as to work on flood mitigation projects in towns and in kampungs.
  • There should also be a mechanism to deal with the issue of housing loans. The banks could be asked to renegotiate the loan repayments and extend the period of repayment.

These and other plans should be put to civil society, the unions, and consumer movements, so that they can be improved, and an effective action plan be put in place before the onset of the recession.

Our government must not pretend to be surprised if and when a recession hits us. Recessions keep recurring in a capitalist economy. It is the duty of the government we elect to make effective plans to alleviate the serious difficulties that the majority of our people will face, and not focus on projects that selectively help certain big companies. Effective planning should start now. End of Article

Dr Michael Jeyakumar Devaraj is a physician by training and a founding member of Parti Sosialis Malaysia. He is currently Member of Parliament for Sungai Siput.

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