REAL economies are far more complex than the two-agent model described in textbooks.

The economy is developed over time, partly spontaneously, partly creatively and partly in response to a policy action. Individual economic agents responding to incentives create, expand and close enterprises in expectation of profits or to avoid losses.

The complex web of relationships that link a factory to its vendors, suppliers, workforce, customers, lenders, investors and shareholders does not evolve in a day, and never as a result of a central command.

In a real economy, while cash is always a lifeline, it is not everything. The lifeline is the web of transactions that create interdependencies. If you kill the transactions and offer cash to the factory, the factory cannot function just with the cash.

The stimulus package is the cash. The web of firms and customers constitutes the transactions.

The Malaysian government has offered a huge stimulus package to businesses, worth more than US$60 billion. This is cash, whether instant or deferred. A small part is offered in the form of wage subsidies, and a bigger portion in the form of loans and credit guarantees.

The stimulus package follows the movement-control order that bars businesses from operating except those listed as essential services. It is the government’s response to a natural disorder. It has also disrupted the spontaneous order that firms and customers have evolved over time.

I am told that a factory producing processed food is included on the “essential” list. Also, a factory producing rubber gloves. However, both have stopped work and are finding it very hard to operate.

These factories are dependent on vendors to provide raw materials and packaging, which the government included on the “non-essential” list. The glove manufacturer is dependent on rubber being supplied, which is deemed non-essential. Both factories are dependent on logistics services, which were considered non-essential, but this has since been relaxed. In each case, transactions were brought to a sudden halt.

It is very much possible that now, both essential and non-essential factories will appeal to the government for assistance. The world’s largest low-cost airline, included on the essential list, has already appealed for help. The distinction between essential and non-essential will soon become irrelevant.

If the government’s basic intention is to assist only firms that are failing due to the Covid-19 pandemic, it will never be realised through an action today. The government will never have a reliable mechanism to get information on them. The stimulus package will never reach most or all of the firms that truly need assistance. The cash will not be enough to revive transactions. The government cannot print its way out of this crisis without fuelling a worse one.

What should the government do?

My short answer is, the government should do nothing. Or, nothing until the dust has settled, and it is clear which firms really need assistance. My intuition is that most businesses will be able to survive this crisis.

The process of a business’ creation is not a switch-on, switch-off mechanism. And, a lot of unnecessary movement by the government can send the wrong signals. Access to the cash (read: stimulus package) will also be influenced by political and ethnic relationships.

Large firms, already well-established and operating on good reserves, may gain a disproportionately larger share of the package. They know very well the players in both the government and lending sector. Small firms will be hesitant, and may be crowded out by the bigger ones. Therefore, a stimulus package cannot be deemed enough, as it only creates the expectation of more.

In the meantime, the government needs to invest in the healthcare system on a war footing, which includes a robust testing ability, an inventory of ventilators, safe isolation and quarantine centres. This is till we can find a vaccine, so until then, we must be prepared to face this pandemic without closing transactions.

The pandemic should not be a reason to embrace recession, and fighting this as a war will enable more

businesses to survive. Cash cannot revive transactions. The lifting of restrictions can. – April 3, 2020.

* Ali Salman is CEO of Ideas.

* 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.