ASK any Malaysian to rate the government’s Covid-19 response a year ago and one would most likely give a high score.

       Back then, the country’s Covid-19 metrics were low while the virus rampaged major economies such as China, the United States, and Europe. The same respondent would give a contrasting answer today. So, what gives?

       It is becoming more compelling for governments worldwide, including Malaysia, to intervene in the free market when confronted with an economic crisis. There is a legitimate economic rationale for this, but the one that takes the cake has always been political.

       Politics often come in the way and dictate how democratic governments respond to a crisis. The temptation to intervene gets higher when a government faces legitimacy issues considering changing demographics.

       MARC Firdaos Rosli

       Look at Malaysia’s past crisis response. In the past three decades, the government had dished out billion-ringgit bailouts and stimulus packages in each crisis. In fact, the amount appears to grow larger over time.

       Politically feasible

       This scenario denotes the economic crisis cost as well as the time and effort to bring the economy back to its long-run growth path. Tax revenues always take a hit while tax rates hardly move an inch. This carries no economic efficiency rationale whatsoever, but it is politically feasible in every sense of the word.

       The same goes for monetary policy. Bank Negara slashed interest rates by 150 basis points during the 2008 Global Financial Crisis, and 125 basis points due to the Covid-19 pandemic. While it may seem like a smaller cut during the present crisis, Malaysia’s overnight policy rate was 50 basis points higher back then. There is a tendency for interest rates to settle lower following an economic crisis.

       Now, this is where the government’s “covidnomics” gets entangled. Although past crises were primarily due to a shock in demand, the Covid-19 pandemic is supply-driven. This has a lot to do with the over-reliance on lockdowns as the sole means to “flatten the curve”. It is imperative to distinguish between the two shocks to know whether additional spending is required to stimulate the demand or supply side.

       The global economy has never suffered a shock that is related to both demand and supply. Even if it did a century ago, the world was nothing like what it is today.

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       Accumulating savings

       Since the movement control order (MCO) 1.0, the government has spent tens of billions of ringgit to stimulate the economy only to accumulate household and firms’ savings. These economic actors see no incentive to convert the extra cash into spending amid prolonged lockdowns.

       Besides, the raging virus spread of late has led to voluntary lockdown, which is undoubtedly worse than a mandated lockdown from an economic standpoint.

       These extra savings will eventually be spent on durable goods and holidays. Such spending is highly inflationary. So then, isn’t it folly to chase your own tail by stimulating demand amid prolonged lockdowns?

       Suppose the argument for higher federal debt is to protect jobs. Is it right for the government to “pay” the private sector’s salaries without improving labour productivity? Shouldn’t we find creative ways to protect jobs by, say, increasing firms’ productivity amid social distancing rules?

       Herein lies another problem: imagine squeezing a balloon so hard that “growth” could only come as you release the grip. In any case, the volume of air in the balloon stays the same.

       Even if the government gradually reopens the economy, there is no real economic expansion and productivity improvements, only a high unemployment rate and “high” growth rates. In reality, it is essentially the same inflated balloon.

       The unemployment rate remains stubbornly high despite fiscal and monetary policies working in sync to address supply problems. So long as the grip on the balloon remains, retrenched workers cannot freely move about during a lockdown.

       Even more so when workers, in general, are not agile enough to switch to a different industry as they wish.

       Supply shock

       Contrary to popular belief, addressing a supply shock is relatively straightforward. In addition to reopening the economy, all the government needs to do is lower prices and/or increase the labour supply. Economic liberalisation and technology adoption are the low-hanging fruits here.

       Considering recent political developments, releasing the lockdown grip will put many things in order if the latter is too onerous. That said, there will be a handful of industries that cannot escape the aftertaste of lockdown.

       Looking into the future, what would be the respondent’s answer be a year from now? Rightly or wrongly, it surely will not be the same as today.

       Covid-19 represents a test of our policymaking resilience in a time of crisis. Without growth-enhancing policies, the scarring effects of lockdowns will be too great to ignore. More so for a developing economy such as Malaysia. Thus, it will take much longer to restore past growth rates and rebuild the economy.

       Unprecedented times call for unprecedented measures. Yes, I get that. Notwithstanding our pandemic response so far, shouldn’t our future prosperity require unprecedented policy measures too?

       Firdaos Rosli is chief economist at Malaysian Rating Corp Bhd (MARC). The views expressed here are the writer’s own.