OUM BUSINESS SCHOOL
MAY / 2018
BBEK4203
PRINCIPLES OF MACROECONOMICS
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E-MEL : azlynemarlini@gmail.com
PUSAT PEMBELAJARAN : OUM ALOR SETAR
TABLE OF CONTENTS
NO ITEMS PAGE
1. INTRODUCTION
3
2. SUMMARY AND EXPLANATION 4
3. SUGGESTIONS
10
4. REFERENCES AND CITATIONS
11
Introduction
From the article entitled ‘Rising unemployment could ‘retard’ economic growth’ published on April 2017 by Billy Toh and also from other references, it can be summarise the monetary policy in Malaysia as a guidelines that provide the country with monetary authority in regulation of supplementing money and stabilizing the growth economy of Malaysia. The policy was conducted based on s22 of Central Bank Negara Malaysia Act 2009, where it’s influencing the borrowers or loaners have to pay on their loans and depositors earn on their deposits. There are conditions where the monetary policy will be tightened which are firstly, the when the economic is overheating and secondly is when the threat of inflation is high. The monetary policy will be stricter more on withdrawing fund from the banking system and raising interests’ rate.
By increasing and raising the interests’ rates, it will encourage people to save more money and spend less from the money that they borrowed. The rates also give the difficulties to people to borrow and loan more money. These will cause the investment as well as consumption to slow down to a level that is more sustainable and reduce the prospect for high inflation. Conversely, when Malaysian economic in weak condition, fund will be injected into banking system to reduce interest rates, spending rates and borrowing rates will be increased.
The first factor that can or influenced by changes in monetary policy is the production of money and economic growth. When Malaysia produced money more than its expenses, the Malaysian Ringgit value will reduce and it will lead to inflation. This condition will lead Malaysian government will tight up the monetary policy. The same thing will happen when Malaysian economy is at the bottom level; the monetary policy will be changed by suggestions from the monetary policy committee (MPC).
Monetary policy ability is to affect the real economy activity and growth when monetary is reasonably well-executed and can be quiet limited and is almost always short-lived. In few standard models used in policy analysis, monetary policy’s effects on the real economy generally derive from frictions that affect the overall average levels of prices such as the fact that it takes time for households and firms to adjust their behaviour in response to changes made by monetary policy.
The indicators of economy growth and real activity are; how many people is working or how much they are earnings? There are always consensuses among the economists that growth in average income depends on the rate of technological change. Economy growth in Malaysia occurs not only because we have more people working or more machines but also occurs because of the technological advances make existing workers more productive and efficient. The advance machines or technology here includes (for example) the cell phone and the steam engine or the techniques for making existing products. In addition to these facts, many researchers suggested that accumulated skills and expertise embodied in human capital are the main and important keys to making such advances. Country such Malaysia, with more human capital appear to have a greater to develop new technologies and to copy or adapt technologies developed by other countries such as Japan, United Stated of America and Germany.
Malaysia economic growth is not always a smooth process. Unwell anticipation can disrupt the activity and processes, necessitating the shift of capital and labour out of declining sector. Eventually the shift frees up those resources to be reallocated for expansion in another area in Malaysia. In a short run, however, if the shifts are larger enough, the total economy growth and activity might contract while capital and labour are temporarily idle during the process of ramping up the activity in other sectors.
As my understanding, monetary policy not really affects the economy growth in a long term. But poor monetary policy that leads to high inflation can obstruct the Malaysia economic growth in number of ways. Firstly, if inflation caused the prices of products and services to change simultaneously then it would not affect the prices and the pattern of demand and supply relatively. The researchers or the economists suggests that inflation affects prices differently and at different speeds and thus alters relative prices and deceive the productions of different products. For example, if inflation initially drives up the price of drywall more than other goods and services, it might be misinterpreted as a signal that society needs more drywall, resulting in overproduction. From this, high inflation draw away from growth by making the allocation of productive resources less efficient.
Second way in which poor monetary policy can limit the economy real performances is by encouraging people to spend more and less saving. Normally, inflation makes money a bad instrument for saving, since the longer you hold money in your pocket, the more value it loses. This makes people willing to go out of their way to keep their money holdings low, for instance, by making smaller and more frequent withdrawals from their interest-paying bank account. Resources devoted to economizing on money holdings are resources that could otherwise have spent on the production of goods and services.
Next, monetary policy in Malaysia can maintain the effect on economic growth by avoiding the negative consequences of poor and bad monetary policy which requires the stable inflation. As far as I know, this is not what most citizen and people know about and have in their mind when they actually think of the connection of monetary policy and economy growth. People tend to think that monetary policy boosting the economic growth by stimulating aggregate demand with low interest rates. Economists did say that the powers of monetary policy are quite limited when monetary policies are not in stable conditions. In addition, unanticipated changes of monetary policy also can boost economic growth and activity temporarily. Attempts to systematically stimulate growth in this way will lead to rising inflation and Bank Negara Malaysia will find itself needing to change course by raising interests’ rates and causing recession in order to rein in inflation.
There is another way where Bank Negara Malaysia can affect real economic activity and growth. BNM can use its balance sheet to alter the allocation of credit in the economy. By lending their securities of private sectors entities, BNM credit allocation can cause more resources to flow to those segments of the economy than would otherwise be the case. This deprives other sectors of resources and may deceive economy activity in unproductive way. Well, from own opinion, central bank or Bank Negara Malaysia is not a monetary policy but it’s a fiscal policy. As a result, it is appropriate for actions to be taken only by elected branches of government not by the central bank or Bank Negara Malaysia if its in Malaysia.
The second factor that can or influenced by changes in monetary policy is the unemployment, according to the International Labor Organization (ILO, 2001), unemployed is persons who are above a specified age are without work, and currently available for paid employment or self-employment, and actively seeking work. There are three categories of unemployment which are structural unemployment; this type of unemployment is related to the mismatch in skills or perhaps the person is at the wrong industries with his/her expertise. With the advancement of computer nowadays, many jobs such in hospitality industry where they were using book-keeping have been replaced by efficient software.
Secondly, frictional unemployment, this is the type of unemployment where resulting from temporary transitions made by workers and employers. This also happen when fresh graduates trying to enter the job market and industry to searching for their job. Last but not least, cyclical unemployment, this unemployment is attributed to the economic contraction. The economy may have the capacity for creating jobs which at the same time can increase the economic growth. When recession attacks any countries economy, the firm will reduce production and it may lead to the decline of labour demand, and from that it will resulting in raising the cyclical unemployment sharply.
The previous studies worldwide on monetary policy and unemployment such Berument et al (2006) has examined whether or not various macroeconomic policy shocks have different effects on unemployment by level of education in Turkey. Main findings of this study indicate that monetary policy does not affect the total unemployment as well as the components of unemployment by educational level and gender in Turkey and the main factor affecting unemployment in Turkey is the fiscal policies. However, unlike Weller (2000), Sachsida et al. (2011) investigated the relationship between inflation, unemployment and United States monetary policy co-integration and restricted vector ARMA model. The estimated results show evidence of co-integration between inflation and unemployment; besides the effect of consistency problem which explain the United States inflation during the monetary policy emphasis.
There are also some studies related with monetary policies and unemployment conducted for Malaysia, such as Sriram (2002), Tang (2006), Kuang (2008), Mohd Azlan Shah and Fisher (2010); and Raghavan et al. (2012). These studies have focused monetary policy has direct effect on Malaysia’s macroeconomics performance. However, among these contributions, the issue of whether or not monetary policy effects on unemployment has been neglected in Malaysia. None of specific studies cited have used co-integration techniques which are technically design to yield insights of structural break relationship between both variables; the monetary policies and the unemployment Therefore, we found that there is a lack of consensus in the literature, especially those studies related with Malaysia’s scenario.
In the year of 2016, Malaysia stood at 3.5% of unemployment rate compared to 3.1% rate in 2015 and 2.9% in 2014. Emeritus Professor Dr Zakariah Abdul Rashid is a Malaysian Institute of Economic Research (MIER) state that the case is really serious and also will retard the economic growth. At the same time Socio-Economic Research Centre Sdn Bhd executive director Lee Heng Guie said ‘if the local labour market continues to stall, it would hurt spending by domestic consumers in a high inflation environment’. Lee add more on the cases and issue regarding to economic growth by stating “This negative sentiment among consumers would eventually hit consumer spending as they are concerned about their job prospects and job security, as well as the rising cost of living,” Lee told The Edge Financial Daily.
Lee said, the unemployment risk might have a negative effect on consumer sentiment, since the report from Malaysia’s Consumer Price Index (CPI) stated that the measure of inflation hit the 5.1% in March 2017 where the highest number of inflation was happen in November 2008 where it hits 5.7% inflation. Julia Goh, the economist of the United Overseas Bank (M) Bhd, believes that ‘the concern about the unemployment cases and issue is slightly tremendously real as Bank Negara Malaysia (BNM) facing the unemployment rate to grow between 3.6% to 3.8% this year.
Julia Goh also said “While retrenchments have abated compared with 2015, the creation of new jobs is also not fast enough. Companies are still slow in hiring compared with the rate of new graduates entering the job market. It’ll be hard to see [the] unemployment rate coming off its high in the near term,” she said. “It will be tough because if unemployment becomes more serious, it could dampen consumer spending and eventually business”. In other positive respond from Julia Goh regarding unemployment, she stated that “Malaysia has been resilient as some of those who were retrenched in 2015 ended up being Uber or Grab drivers temporarily before finding a permanent job, and the economy is also at the beginning of an economic recovery, which could boost job creation on the back of improved corporate earnings’ growth”.
While at the same time the Affin Hwang Investment Bank Bhd economist Alan Tan concurred, it’s not about which sector are people into either government or corporate it’s about the mismatch between job opportunities with the skills of young graduates in Malaysia raising the number of unemployment. Tan also confirmed about the collaboration with private and public universities and colleges is really needed in order to provide exposure to the fresh graduates through internships. And with this effort it may results the opportunity to learn about the job scope and description as well as other soft skills.
This Affin Hwang Investment Bank Bhd economist also said that well-established infrastructure and stable political will help boost private investments which will lead to jobs being created. Tan also noted that “a further increase in unemployment and inflation, coupled with the existing high household debt level, will have a negative impact on private consumption”. “If Malaysia’s exports unexpectedly drop, then [the country’s economic] growth will be less optimistic as consumption will be impacted,” he add. Where from the annual report is state that the exports raising up to 26.5% in February 2017, which is the quickest pace in almost seven years.
An economist from a foreign investment bank, who declined to be named, noted “Malaysia’s high household debt levels can be a serious cause for concern if the unemployment rate were to continue to rise. If there are no jobs and yet you have a huge level of debt, that’s when things get ugly. Of course, we’re probably still a long way from it given the manageable level of non-performing loans,” she said. The economist also state that the “unemployment risk for Malaysians is very serious, especially among the young graduates. In the past, we have the government to absorb the unemployed, which explains the high number of civil servants in the country. But with the government embarking on a fiscal consolidation, this is unlikely to happen,” she added.
In order to overcome this case and issue investment plays an important role in order to reduce the unemployment rates in Malaysia. For example the Foreign Direct Investment (FDI) has brought in capital investment, technology and management knowledge are so much in need for economic growth. From that, there will be a lots of firms will be setting up and a lot of numbers of employee needed which can reduce the unemployment rates. The advance technology in production will train more skilful labours. At the end, it will result in enhancing the productivity of the firm in Malaysia. And in the future, Malaysians might be able to produce high quality goods, services and products as foreigners do.
According to researches and economists “the key success factor of the FDI contributes to the economic growth in Malaysia because of the good environment. Without a suitable environment, it will discourage foreign investors to invest in Malaysia. Some trivial matter problems can be avoided in a good favourable condition environment, so that the investors can run their business conveniently in order to make more profit with life safety. Few crucial clues for foreign direct investment include political stability, economic stability, lower wages, easy accessibility of plentiful raw material, special rights, and personal safety”.
For a conclusion, Malaysia government needs to maintain the political stability and the sustainability of the economy, and implement policy that can protect domestic producer and attract more foreign investors where the government need to focus more on the FDI and at the same time create more jobs opportunity so it will contribute to the decreasing percentage of unemployment rates and contribute to the Malaysia’s economic growth in the future.
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References
Berument, H., Dogan, N. & Tansel, A. (2006). Economic performance and unemployment: Evidence from an emerging economy. International Journal of Manpower, 27(7), 604- 62
Kuang, O.S. (2008). Monetary transmission mechanism in Malaysia: Current development and issues. In Transmission Mechanisms, Bank for Monetary Policy in Emerging Market Economies, Bank for International Settlement (BIS) Papers, No. 35, 345-361.
Mohd Azlan Shah Zaidi & Fisher, L.A. (2010). Monetary policy and foreign shocks: A SVAR analysis for Malaysia. Korea and World Economy, 11(3), 527-550.
Raghavan, M.A., Silvapulle, P.B. & Athanasopoulos, G.B. (2012). Structural VAR models for Malaysian monetary policy analysis during the pre-and-post 1997 Asian crisis period. Applied Economics, 44(29), 3841-3856
Sachsida, A., Divino, J.A. & Cajueiro, D.O. (2011). Inflation, unemployment and the time consistency of the US monetary policy. Structural Change & Economic Dynamics, 22, 173-179.
Sriram, S.S. (2002). Determinants and stability of demand for M2 in Malaysia. Journal of Asian Economics, 13, 337-356.
Tang, H.S. (2006). The relative importance of monetary policy transmission channels in Malaysia. Centre for Applied Macroeconomic Analysis, Australian National University, Working Paper, No. 23(2006)
Weller, C.E. (2002). Whose bank is it anyway? The importance of unemployment and the stock market for monetary policy. Review of Radical Political Economics, 34, 303-310.
Article
http://www.theedgemarkets.com/article/rising-unemployment-could-%E2%80%98retard%E2%80%99-economic-growth