Will Economic Ghosts Block Post-Covid Recovery?

Prof. Jomo K. Sundaram writing in Business Focus on 10 June 2020 suggested that “governments all over the world (will) struggle to revive their economies.... (with) neoliberal naysayers already warning against needed deficit financing....”

Deficit financing options have changed little since first legitimised by Keynes in the 1930s. Prof. Jomo argues that government debt exceeding twice national income like Japan is not a problem if it is held by locals and issued in the local currency. Second, price controls on extracted natural resources may enable government to secure resource rents to augment revenue. Third, the use of QEs is giving a boost to modern monetary theory. Finally, an overvalued exchange rate favours the elite and may even be a cause for national pride. This is a temporary solution favouring consumers over producers and importers over exporters. East Asian economies have done the opposite to their betterment.

Deficit spending in some respects was to meet demands of interest groups for higher wages, cheap housing, public healthcare and free schooling. Macroeconomic populism was used to explain increase in government spending and budgetary deficits. However, neoliberal commentators are warning against deficit financing and insisting dogmatically minimal budget shortfalls and/or balanced budgets.

Following neoliberal policies have widened wealth and income disparities around the world. In the U.S. three decades of neoliberal economic policies has led to widest gap between the rich and the poor. The top 20% in the U.S. receive about 50% of the income and the lowest 20% receive a mere 3.4% of the income. The top 1% own 40% of the wealth.

The Covid-19 crisis presents an opportunity for reform and exorcising the ghosts of the past. But will the political masters have the moral courage to do the “right thing”?

What’s for Malaysia?

There are ample areas for reform including suspending affirmative policies for a period; minimising government intervention and bureaucratic procedures; developing new areas to focus – renewables and digitalisation; and creating R&D clusters for resource-based, medical and other key areas where Malaysia may have a strong competitive advantage. That requires courage, perseverance and fortitude.

References:

1. Jomo K. Sundaram, Economic ghosts block post-lockdown recovery, Focus Malaysia, 10 June 2020

2. Sharon Beder, Neoliberalism and global financial crisis, University of Wollongong, Australia