Public works innocent of Malaysian-crisis role
When the Malaysian Government starts talking of spending more money on public works, investors in Malaysia start worrying about losing money.
They have had cause to worry about it in the past. In 1982, the Malaysian Government ran a fiscal deficit equivalent to 20 per cent of gross domestic product in a big push for infrastructure and publicly supported industrial projects.
It all looked good until 1984-85, when this fragile edifice could no longer be held together and it collapsed into painful recession.
Now the government is talking public works again, this time as a means of stimulating the economy in difficult times.
There is to be a M$5 billion (about HK$9.32 billion) infrastructure development fund and $7 billion of spending on housing agriculture, education and alleviation of poverty. Deputy Prime Minister Anwar Ibrahim expects a $10 billion fiscal deficit as a result.
All of this follows on construction of an airport (you think Chek Lap Kok had troubles) and a large number of other big projects, some now pulled, some not, culminating in the Commonwealth Games this year.
Malaysia seems obsessed with pouring concrete. The signs warning of excess have been posted for years. But there is a difference with past experience worth noting.
The government has learned its lessons of the mid-80s, and, since 1994, has registered fiscal surpluses, even after taking in development spending. Since 1994, that surplus has averaged 1.4 per cent of GDP annually.
As a result of this fiscal prudence, the government's external debt has steadily declined over the past 10 years. From the equivalent of 40 per cent of GDP in 1987 it is now down to less than 4 per cent. Deficit financing might raise it a little this year, but the projected fiscal deficit will not rise much past 3 per cent of GDP and deficit financing in times of trouble is perfectly understandable.
Criticism of the government's economic management has focused on public-works spending since last summer, because this has traditionally been the cause of the economic troubles the country has encountered.
There are still good reasons to think many of the projects ill-conceived. There is no reason to build the world's tallest building in the twin spires of the Kuala Lumpur City Centre other than national pride, and just how much rice does this put on the table in a Sarawak village? But it won't do this time round to say that they don't have the money. They do have it. Malaysia's problems at the moment lie as much in the private sector, and some hint of it can be seen in the second chart, which shows that private-sector external debt has been rising rapidly.
The figures are probably even higher than the chart indicates, because it has taken only the average of the 12 months up to March this year and because an unquantifiable proportion of the private-sector debt is not reported.
Too much private-sector borrowing, often for the wrong purposes, and an unsustainable currency fix against the US dollar are to blame for Malaysia's problems.
Blame the government if you will, but not public works.