As reported in The Star (29/12/2009), the Malaysian Institute of Economic Research (MIER) executive director Datuk Dr Mohamed Ariff Abdul Kareem was quoted as saying that the Malaysian economy is expected to face a tougher and more challenging times ahead in 2010 as the US economy may be heading for a deeper recession.
Being the global economic powerhouse, it is no doubt that the economic conditions in the US economy have significant bearing on other economies throughout the globe. This is particularly true for a very open economy such as Malaysia. As such, the Malaysian economy is very fragile since the ups and downs of the economy are mainly dependent upon the economic situation in the US. While it is true that a significant proportion of our exports are shipped to the US, there is an urgent need to somewhat reduce our dependency on the US to market. I wonder what happened to the long on-going efforts to diversify our exports to the non-traditional markets? Haven’t these efforts bear fruits yet? Conventional wisdom has it as “diversification reduces risk”, and that is exactly what we need in this context.
On a more positive note, according to Dr Ariff, evidence clearly showed that Malaysia was out of recession as the economy is expected to register positive growth in the 4th quarter of 2009, and this would probably continue into 2010. For the whole year of 2009, Malaysia is expected to turn in a better-than-expected performance at -2 to -3%. For 2010, growth is expected to be closed to 4%.
Despite the expected modest growth in 2010, the economy is set to face several challenges amid the backdrop a still-weak global economy. First, the modest economic acceleration needs to be further strengthened by more fiscal stimulus, which many countries could not afford. Second, there is a concern of a fallout effect from the asset bubbles in China and many East Asian countries. Third, some countries have been printing money to finance their deficits and this could later results in inflationary pressure.
Continuous fiscal pump-priming in times when domestic and external demand are weak is a reasonable policy precsription, in my view. It is indeed timely for Malaysia to further improve its basic infrastucture such as buiding roads, up-grading the ports, more schools and hospitals. One area that needs special attention is improving the rail infrastructure. In this context, Malaysia should again turn to Japan to further develop and expand the rail services. These public projects could be financed by domestic sources since currently, we do have ample liquidity in our system. There is an urgent need to expand our basic infrastructure so as to increase our capacity for greater economic activity in the future, thus gradually reducing the over-reliance on the US economy. Of course there are issues such as efficient implementation of the public projects, but theoretically, fiscal pump-priming would go a long way to support the economy during weak economic condition.
On the monetary front, interest rate is expected to remain low due to the need to support the still-fragile economy.
