Cancellation of household debt for post-pandemic Malaysia?
LETTER | Covid-19 has brought global economies to a crossroads. Even before the pandemic, we saw growing levels of disparity due to the limited recovery from the 2008 global financial crisis.
The procrastination to come up with ideas that would have solved the problems of the 2008 stimulus model, which saw money sent and concentrated in the hands of financial institutions without any evidence of a “trickle down”, collided with the pandemic .
Neoliberal austerity policies have failed. We must now look for new and viable solutions to clean up the economic fallout we face and prepare for the post-pandemic scenario.
In Malaysia, we are currently witnessing alarming levels of job losses and slowing economic activity. According to socoto date, nearly 90,000 people would have lost their jobs in 2020.
The series of movement control orders (MCOs) we are still experiencing, although necessary, has accelerated the pressure on the economy. A report by Unicef and UNFPA on the economic conditions of low-income families in Kuala Lumpur shows that although there was an improvement in July, the median household income is still 10% lower than last year and unemployment remains high.
Many people turned to job hunting in the gig economy and gray sectors, but with consumer spending slowing, excess supply quickly saturated demand.
The issue of household debt in Malaysia is of concern. among the highest in Asia. How will people service their debt and loans when they are unable to increase their income? How will banks and lenders stay afloat if people don’t pay their debts?
A number of policy solutions have been tried so far. Among other things, the Federal Government and Bank Negara Malaysia (BNM), alongside the implementation of the MCO, announced a six-month moratorium on lending and funding from March to September, to allow borrowers to delay their reimbursements from banks.
The Bantuan Prihatin Nasional (BPN) program has been rolled out to support qualified B40 and M40 households through government cash transfers.
Today, as we approach the tabling of the 2021 budget, we are hearing calls from across Malaysian society for the moratorium to be extended.
The question is, can this be a long-term solution? The moratorium delays the borrower’s obligation to repay and is based on the projection of a rapid recovery from the economic downturn caused by the pandemic.
It could also extend the term of the loan for the borrower, but the idea is that this is good, as it is believed that a recovery in the labor market will be seen as soon as Covid subsides.
We believe that the steps the government has taken have been helpful and should be continued. The moratorium has allowed people in debt to breathe as they negotiate their way through the storm.
BPN helped beneficiary households cover their needs for basic necessities. However, the future cannot be bet on a recovery based on the belief that the pre-pandemic economy will return. Therefore, we are proposing a policy idea that we believe would be more feasible in the long run.
The idea is household debt cancellation, or a household debt jubilee, an idea that has been around for millennia.
Economist Michael Hudson in his 2018 book …and forgive them their debts shows that debt cancellation proclamations were practiced in ancient Mesopotamian societies from Sumer to Babylonia to Assyria.
It also found its way to the Mosaic Law (from which the idea of the “Jubilee Year”, which marked the year in which debts were canceled, was derived). At that time, debt cancellation was a regular occurrence when new rulers were installed.
Politically, this “clean slate” offer to debtors worked in favor of the new ruler, as it increased his popularity.
However, more broadly, the practice also served a social purpose, in that it allowed the new ruler to control the powers of creditors and keep as many citizens as possible free from debt bondage, thereby restoring the balance of the economy.
We are not offering an ancient solution to a modern problem. Debt cancellation is a policy that has been increasingly explored lately in different contexts.
What history can teach us is that such an idea should not surprise us. At the time, as Hudson argued, “debt write-offs weren’t radical.” Why should it be considered as such now?
Perhaps the most notable mobilization toward such a solution in recent times was Bernie Sanders’ Democratic primary campaign in the United States, when he made student debt cancellation a cornerstone of his movement.
A previously famous example, as cited by Hudson, was Germany’s post-World War II monetary reform in 1948, which launched the Wirtschaftswunder (economic miracle) of the German economy.
As in any other context, Malaysia can be prone to social unrest caused by the inability of people to honor their debts.
A cancellation of household debt, even if it is partial, can help us avoid such a scenario. It could also open up the possibility for society to chart a different course for the economy.
For starters, non-mortgage debt such as PTPTN and other government agency loans, if forgiven, could address the anxiety that many are feeling due to the current situation.
In addition, similar to the BPN model, the government can put in place a mechanism through which debt relief assistance can be provided to Malaysian citizens to help them secure mortgages.
A potential objection to this modern idea of the debt jubilee would be on the issue of equity. Isn’t that rewarding people who don’t fulfill their responsibility to pay what they owe? Isn’t that unfair to those who work hard to pay off their debt?
On the one hand, as mentioned in the previous paragraph, we are faced with a collective moral dilemma. As many of us are unable to repay our debts, society faces the possibility of a disrupted peace.
The moral thing to do is look for ways to maintain stability. Bearing in mind the devastation the pandemic has brought upon us, the question is, is it safe to expect unpayable debts to be paid?
Nevertheless, the objection remains. What’s in it for those who don’t have debt? Perhaps debt relief aid can be based on the principle that it is available to everyone.
Steve Keen, a key proponent of the modern debt jubilee, argued that for people who don’t need help, the government can either provide the money or allow them to treat it as good. purchase of company shares.
And the banks? We believe debt cancellation can help stimulate the economy. A clean slate would mean more discretionary spending in the future, as it would free up money that would otherwise have to be used by people to pay off old debts.
Also, credit will always be a feature of the economy and banks will continue to play a role in helping people meet their needs and wants.
Of course, this cannot be done in a vacuum. The main question is how will the government finance these measures? One way to do this is to reimagine the role of government in the economy and the function of money.
For example, from the perspective of Modern Monetary Theory (MMT), the government is assumed to have full control over the country’s fiat currency. If we accept this point of view, it is also possible to think of the possibility that the government creates and spends money if necessary.
The government is not the mirror image of the household, where the ability to spend depends entirely on the income generated. If inflation is the concern, some MMT researchers have proposed that taxation can be used to control it and regulate the behavior of large corporations and financial institutions.
Either way, as we approach the 2021 budget, we are currently seeing calls for more government spending and less emphasis on the budget deficit. While it doesn’t have to be the only solution, debt cancellation may be the easiest way to ensure people’s long-term well-being.
KHAIRIL IZAMIN AHMAD is Assistant Professor in the School of Politics, History and International Relations at the University of Nottingham in Malaysia.
JENNY GRYZELIUS is the Dean of the Tun Abdul Razak School of Government, Universiti Tun Abdul Razak.
The opinions expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.