GLOBAL Keynesianism has always been the mainstay of the World Bank and International Monetary Fund growth template. The World Bank would like to see Malaysia continue with debt-financed growth spending and not be preoccupied with the RM1 trillion debt, if EPF economist Nurhisham Hussein’s suggestion, made on the sidelines of a World Bank event, is an indication.

The central tenet of Keynesian economics is that government intervention through fiscal spending can stabilise the economy. Theoretically, this may be correct, as money spent wisely on projects that increase the productive capacity of the economy will create employment, and generate economic returns and multiplier effects.

It is true that there have been successful cases of Keynesian economic application, like the case of Brazil in 2003, when deficit fiscal spending lifted the country out of poverty, and South Korea in 2008, when infrastructure spending on green technology helped the nation in the years succeeding skyrocketing oil prices. But, it was during an era of robust global economic growth.

There are also several failures in the World Bank and IMF’s economic prescriptions for developing countries over the last 60 years. According to Jason Hickel, as published by Al Jazeera on September 27, 2012, the reasons for the World Bank’s dismal record on development projects were:

“When the Bank gives out loans to poor countries, they come with strict conditions attached that require debtors to restructure their economies in line with neoliberal policy by cutting subsidies and price controls; privatising public utilities; curbing regulations on labour and pollution; removing trade tariffs; and, allowing foreign corporations to buy public assets, bid on government contracts and repatriate profits at will. The Bank claims that this free-market ‘shock therapy’ stimulates growth and, therefore, enables debt repayment. But, this doesn’t actually work. Instead of helping poor countries develop, structural adjustment has basically destroyed them.”

Providing foreign aid has always been a hallmark of US foreign policy, portraying kindness and humanitarianism. The World Bank, under the auspices of the US, though operating as a bank for loans to countries, is also a vehicle to funnel a form of aid with conditions attached. Often with insidious intent to bankrupt nations or bring them to their knees, and economic hitmen deployed, doubling as advisers to troubled nations.

The provision of foreign aid and loans is more an economic necessity as long as the US dollar remains the world reserve currency. The much-touted goodwill and humanitarian cause is only secondary.

Having the reserve currency, the US has the advantage of printing or creating money at infinity. Production and the subsequent trading of commodities in dollars worldwide technically allow the US to also own the commodities. This global reserve currency phenomenon carries with it the risk of inflationary pressure if too much of the created dollars return to the US homeland. Foreign aid and loans help to deflect the inflationary pressure. Unless, of course, the Donald Trump administration prefers to cut down on aid to help raise the much-desired inflation to lift it from the deflationary doldrums plaguing it since 2008, but puts on a poker face to issue threats instead.

Returning to the arguments made by the EPF economist to focus on economic growth rather than debt settlement – currently, the world economy is on a downtrend. The decade-long quantitative easing led by the US from 2008 only delayed the world economic reckoning due to the zero interest rate policy and often indiscriminate Keynesian economic fiscal spending. The world is now at the beginning of a long trend of economic tightening and the necessary rising of the interest rate as a correction. The banking system will be squeezed with non-performing loans.

Gone are the days when China saw double-digit growth and rode along on the economic bandwagon by other Asian countries, including Malaysia.

The rising interest rate and credit squeeze will not spur the private sector to invest. It is left to the public sector and reliance on fiscal spending, and obviously, debt spending. Malaysia’s gross saving rate has been on the decline from 2011, down from 37.7% to 28.4% as of December 17. It was reported last year that almost half of all Malaysians have zero savings. Therefore, as a barometer for growth, this does not look good for our country. It will be fortunate if we can maintain a 5% growth for this and next year. Arguing to maintain a 3% budget deficit to encourage economic growth by 7% or 8% at the current trend is flimsy.

Keynesian economists often argue against austerity and cutting cost. Deficit spending gives an illusion of temporary success, but the reckoning will soon follow when the interest rate starts to rise, or when an economic spark starts a contagion flame from elsewhere.

We need to rein in government spending. Getting the umbrella ready through frugality, efficiency and reducing debt has always been on the side of time-tested formula, even against potential economic hitmen. – July 12, 2018.

* Captain Dr Wong Ang Peng is a researcher with an interest in economics, politics, and health issues. He has a burning desire to do anything within his means to promote national harmony. Captain Wong is also a member of the National Patriots Association.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.