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Saturday, January 24, 2015

My View on BR1M

BR1M by and large is being maligned on both sides of the political divide; pro-BN side (or rather pro-Mahathir side) holds onto Tun M's argument that BR1M is a waste of valuable govt resources and should be used in subsidizing the petrol price, while pro-PR sides had claimed that BR1M is a form of bribery, a means to buy vote.
However, for those who come from economics background will understand that BR1M is what we called as negative taxation.
Govt has 2 tools in managing an economy;
1. Fiscal policy,
2. Monetary policy.
Monetary policy, ie increase/decrease of interest rates may not help to stimulate the economy. In fact, in Malaysian economic context, monetary policy is no longer flexible enough to be stimulate the economy. A decrease in interest rate will help to push people to spend, but it will result in increased loans in the property market, which has already pushed housing price far away from the reach of most working class Malaysians.
Increasing interest rate on the other hand will stifle market liquidity as cost of loans increased, and individuals may choose to save the money instead of investing them into ventures.
Another component of monetary policy, the exchange rate, can and is still be manipulated by Bank Negara. While ringgit isn't tagged to any currency anymore, revaluation of currency to stimulate the economy may have an even more adverse effect on the long term economy.
A strengthened ringgit will help to lower cost of living in Malaysia, but conversely, it will result in higher outflow of liquidity as more money is spent on imported products. Local manufacturing will also suffer hits as dropping demands for their products due to drop in foreign exports due to pricier goods and increased demand of imported goods will be a double whammy. These will affect the liquidity of these producers and they may have to close their businesses. This in turn will result in job losses which in turn force the economy to contract.
That leaves fiscal policy. Usually, in most economies, especially western economics, the step that is taken is by affecting changes in the tax.
Lowering tax is a sure way to free more money into the market.
But lowering tax rate will result in benefits that would be enjoyed mostly by higher income group. As those in this group usually have high disposable income, this may in turn result in the tax savings being saved instead of being spent.
Since the poor don't pay tax, a negative tax is introduced, ie BR1M. The effect of BR1M by large is similar to reduced tax rate, but since the recipients have less disposable income, this benefit will definitely be spent and thus, turn the economic wheel.
The problem however is at our rather inefficient distribution of BR1M.
Ideally, BR1M distribution via banking account is the most perfect method. However, due to large number of population in East Malaysia do not have and do not need banking accounts, distribution of BR1M to both states have to be via direct disbursement.
Direct disbursement in cash is dangerous. You might have instances where the money is embezzled by individuals or even by the distribution team.
Thus, printed vouchers with (security features) that need to be acknowledged had to be used (note increase in cost).
Due to lack of banking accounts, the vouchers will need to be distributed by banks. Cost to transport the cash to these locations will then again cost money.
And not to forget the allowance paid by the respective services to their staffs in helping to distribute the aid.

First published on 15th Jan 2015 at 12.37pm at

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