THE American economist Thomas Sowell is used to repeat that, in policy making, there are no solutions but only trade-offs.

In the newly published policy paper Inflation, Unemployment and Covid-19 Policies: Where Is The Malaysian Economy Heading? authored by Carmelo Ferlito, Fariq Sazuki and Abel Benjamin Lim, the Center for Market Education critically analysed the financial and monetary policies implemented to help Malaysia navigating through the pandemic, focusing on their unintended consequences and the pace they set for the future of the national economy.

The first part of the paper presents a summary of the different fiscal and monetary policies implemented during the COVID-19 era, focusing on the current trends for GDP, unemployment and inflation.

The second part, instead, places measures under the lens of a theoretical economic analysis, to stress the unintended consequences they produced and the perilous path they created for the future of the Malaysian economy.

We know that the Malaysian GDP declined by 5.6% in 2020 amid the harsh economic restrictions imposed in the attempt to curb the spread of Covid-19.

Stay-at-home orders increased unemployment by up to 5.3% and forced the government to intervene with different stimulus packages, supported by expansive policies by Bank Negara Malaysia.

The main critically findings from the theoretical analysis can be summarised as it follows:

• The expansive monetary policy path followed by Bank Negara Malaysia, by creating abundant availability of financial means despite the recession, is creating a dichotomy between the financial world and the real economy, planting the seeds for an economic crisis (monetary cycle à-la Mises).
• Expansive financial policies implemented to address the damages created by stay-at-home orders may result in temporary effects, but will 1) shift the debt burden to future generations and 2) create more unemployment when the stimuli are over.
• Most of the same financial policies can generate a slower future growth path by decelerating the pace of private investments.

Ferlito, CEO of the Center for Market Education, said: “The policies implemented so far may become the very root of an economic crisis once the Covid-19 emergency is over and the economy is on the path to recovery.

Their effects on inflation and unemployment will become more evident when the deflationary pressures currently in play will be no longer in place”.

CME foresees unemployment to be between 5% and 5.5% at the end of 2021, depending on when lockdowns will be lifted and a serious discussion on domestic and international borders will be opened.

The figure could stabilise between 4% and 4.5% if the current trend in business openings won’t be stopped by further closures.

In accordance with Fitch’s predictions, CME foresees a flat growth for 2021, with the possibility of an annual rebound between 1% and 2% only in case of a rapid and radical change in policies.

The paper suggests that at this point it is very difficult to propose solutions to problems that were created by policies (lockdowns) judged harmful in light of a sound trade-off analysis.

We can now attempt to moderate those negative consequences. A commitment to a no-lockdown policy would help the system naturally free up resources to be invested consistently with the real structure of preferences, while the government should focus on targeted healthcare investments.

Targeted financial interventions, directed to strengthen the healthcare system, are the only financial tool that in this moment may not produce bad unintended consequences in the future in terms of slower growth, inflation and additional unemployment.

Similarly, monetary policy will need to change in order to allow deflationary tendencies to run their course.

Finally, a tax reform, which is based on simplification on one hand and on the introduction of a multi-layered GST (consumption tax) on the other, would favour rebuilding the savings, which are necessary not only for the long-term financial stability of households, but also as the sound resources for private investments. – August 30, 2021.

* Press statement from the Center for Market Education.

* 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.