January inflation clocked at only 1.0% from a year ago while in December it was 2.7%. That was a pretty drastic slowdown that I bet someone will cry deflation wolf somewhere soon.

The cause of the slackening is easy to explain. It is unambiguously due to the drop in retail petrol and diesel prices. RON95 fuel price, the most popular fuel in Malaysia by far, in January dropped from MYR2.26 per liter to MYR1.91 in December. Diesel went down 30 sen to MYR1.93 per liter in the same period. In January 2014, RON95 was MYR2.10 per liter.

At this rate, Malaysia might be seeing actual deflation this month. In February, both RON95 and diesel went down further to MYR1.70 per liter. The drop in yearly terms in February 2015 is greater than that seen in January because in February 2014, RON95 was MYR2.10 still. In January 2015, it fell 9% YoY. In February 2015, it decreased 19% YoY.

In fact, on monthly terms, we are already in deflation. This is not your monthly, seasonal price fluctuation that people usually ignore and say, ah, it is nothing. This is a clear deflation.

Is this deflation something to worry about?

No. I do not think so.

Deflation these days connotes bad news. Japan and Europe are trying hard to avoid deflation. In Singapore, deflation played a role in convincing the monetary authority there to loosen up its forex policy, which is their monetary policy. And the last time Malaysia had a deflation, it was during the 2009 recession.

But not all deflation are the same.

In Japan and Europe and Singapore today, and Malaysia in 2009, deflation came about from reduced economic activities. There was less demand and so, price pressure was weak and that pulled prices down. It was demand-driven. In fact, we really are worrying about demand rather than price itself. Price changes – inflation or deflation – are usually a symptom of something else.

Unlike in 2009, the (possible) February deflation would be supply-driven. The weakening in prices has been supply-driven in the sense that technological improvement – all the talk about shale mining that is turning the US into the world’s largest oil producer – has created oil glut in the market.

I do not worry because this is the same pressure that forced computer prices down over the decades. It is a kind of pressure that makes a typical person feels richer because he or she could now buy something else with the same amount of money and still afford the same quantity of fuel or more. Or save them. I do not see a price-wage spiraling down out of control here. The price deflation does not make them feel poorer because the deflation does not come about from them losing them job or suffering a pay cut. There are news of some retrenchment in the oil and gas sector but the size is small so far, as far as I know and besides, the sector is not the biggest contributor to the Malaysian economy. Indeed, the biggest sector, electronics, is having swell of a time and being ignored by the press.

I also do not worry about deflation because fuel is not something a typical consumer can live without for too long. Deflation can be disastrous to the economy in the sense that people would stop buying or postpone their purchases until prices fall further to stabilize at some low prices. But with fuel, I do not think you can do that to the point it would adversely affect growth. Fuel is an essential good and you just have to use them, especially in a society that is so dependent on combustion-type vehicles. If you do wait out, then you might not be able to drive or get to somewhere at all. You just need them and you will keep buying it even when you know prices are falling.

More importantly, the postponement of purchase is dangerous to growth especially when consumers do not know when prices would bottom out. So, they keep holding back and then not making purchases at all. This can be particularly devastating for fixed assets like homes and durable goods. In the case fuel prices, it does appear prices have bottomed out, especially since the prices used for the determination of petrol prices in Malaysia is lagged by a month, as I have explained previously. If global crude prices hold at the current level at about $60 per barrel compared to $45 in mid-January, it is very likely that retail petrol prices will be higher in March next month. So, a February deflation will be temporary. This also means people would line up at the gas stations at the end of this month preempting the loophole that comes with Malaysia’s imperfect dirty float system. So, instead of being encouraged to postpone purchases, they will hoard them instead.

Before I end, I am not saying there is no problem with demand. I still worry that consumption growth is slowing despite the surprisingly strong expansion last quarter. But the possible deflation in February is very much driven by the supply-side, and not demand.

So, do not worry about the deflation.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — I am tempted to say yet another reason why I was not worried about deflation, but decided the argument is problematic. That argument goes: core inflation is still more than 50 basis points above headline inflation. Since core inflation is more reflective of demand, and since it strips fuel away and therefore free from supply-driven inflation/deflation seen in January, it suggests demand is going well. But I checked the data from 2008-2009 and core inflation was somewhat healthy despite the fact there was a recession. This probably shows core inflation is an imperfect measurement of demand change.

I am putting it at the postscript to catalog my own thoughts on the matter and revisit it later.

The number 50 is psychologically special to almost everybody. Notwithstanding the debate about the age of Malaysia, whether it was 50 years old or 44 in 2007, we too had a huge celebration for our golden anniversary. Down south this year, Singapore is approaching its 50th anniversary as an independent state.

The Singaporean anniversary is less ambiguous than Malaysia’s. There are fewer ominous existential questions being thrown around unlike in Malaysia when from time to time, we hear secessionist sentiments coming out from Sabah.

There is a myth in Malaysia that Singapore seceded from our federation. In truth, it was Tunku Abdul Rahman who pushed the island-city out with a vote in Parliament in Kuala Lumpur sealing the decision.

Unilateral secession is impossible legally. Furthermore, Singapore itself did not want to leave and this was very clear through Lee Kuan Yew’s writings. Jeffrey Kitingan, unfortunately, recently repeated the secessionist myth as he pandered to Sabahan nationalists for his own political fortune by saying secession is a state right, showing again and again that history can be forgotten and worse, twisted to fit the preferred narrative.

That is not the only myth: some Malaysians still think there are 14 states in the federation somehow forgetting that Singapore is no more a member state. It is as if the vestiges of the Malaysian Singapore still linger and that these Malaysians have yet to come to terms with the 1965 separation.

The fourteenth stripe and the fourteenth point in the Federal Star of the Jalur Gemilang now have been redefined to represent the federal government and the three territories, instead of Singapore as was previously. Our coat of arms no longer has the Singaporean red and white crescent and star underneath the four colors of the old Federated Malay States. In its place is the red hibiscus, what seems to be the forgotten Malaysian national flower.

Regardless of the myths, Singapore and Malaysia did go separate ways and that has been the source of contention between the two. The issues range from water supply and train land in the heart of Singapore to ownership of rocky outcrops in the middle of the sea. Some have been resolved amicably but the general rivalry persists even as the Causeway ties have improved since the almost irrationally nationalistic days of Mahathir Mohamad and Lee Kuan Yew.

One can speculate what would have happened if Singapore had remained within the federation. This question has been raised as Singaporeans reflect on their 50 years of independence but I think the more interesting one is whether there would be a time when Singapore would rejoin Malaysia.

As much as I believe international borders with its passport and visa requirements are suffocating in this modern world, I think that is a very distant possibility. Malaysia is unprepared for Singapore just as we were not prepared for a Malaysian Malaysia in 1963. I do not believe the pro-Bumiputra policy will go away even if power does change from Barisan Nasional to Pakatan Rakyat in Putrajaya. The Bumiputras are the majority in Malaysia and there will always be pressure to appease them. It is the uncomfortable truth of electoral politics that makes idealists sigh.

Just look at the squabbling in Pakatan between PAS and DAP that has degenerated to race and religion. You can also read Datuk Seri Anwar Ibrahim’s speeches and wonder what exactly he is saying about hudud, for instance, out of fears angering either the liberals or the more conservative Muslim majority.

Meanwhile in Barisan, the slightest hint of liberalization is being fiercely opposed by the conservative sides in Umno. When discussing the Transpacific Partnership agreement, one of the top objections to the negotiation is how it would affect the Bumiputra, and really, the Malay, business community. Prime Minister Najib Razak is already facing a civil war within his party for the liberalization he did and other less admirable factors that include the mismanagement of the country.

Ultimately, there is a common theme across Barisan and Pakatan and that means it is more of a systemic Malaysian issue. Adding Singapore into the equation would not help and could even make it worse.

Singaporean diplomat Bilahari Kausikan recently said in a speech, it is “impossible for us to ever be part of Malaysia again unless Malaysia abandons its basic organizing principle.” That principle will not go away any time soon.

But we have Asean and in many ways both Malaysia and Singapore are already integrating. Both citizens can travel across the border without much hassle, if you discount the congestion at the Causeway. Some Singaporeans are already living in Malaysia as the government is promoting Nusajaya and Johor Baru, to put it bluntly, as the suburbs of the world-city Singapore.

And the Asean Economic Community due for implementation this year would deepen integration between the two, which is already one of the most ― I would think it is the most ― integrated national economies in the region.

Realistically the AEC would take time but the trajectory is clear. That I think is a reasonable future for both Malaysia and Singapore: a closer confederation of South-east Asian states.

So, we do not need Singapore in Malaysia. We just need to have both countries to be active in Asean.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on February 14 2015.

The Malaysian GDP figures released yesterday suggest there was indeed a pre-GST spending spree.

Private consumption growth was phenomenal especially if you consider the fact that previous quarterly growth figures have been slowly dropping gradually over the past year from 8% year-on-year to all the way down to mid-6% in the third quarter of 2014. The latest consumption figure grew 7.8% year-on-year, which is crazy. It is so red hot that if the overall situation had not been so gloomy, Bank Negara would surely have panicked and raised its rates by another 25 basis points. This is quite a surprise even if you had believed the pre-GST spending spree hypothesis.

As a result, 2014 growth was at 6%, which is higher than most (well, all) economists watching Malaysia had projected.

But the central bank would not hike rate because the feeling is that the jump is temporary. I think it would last into this quarter before growth takes on a drowsy mode. The GST should depress consumption growth from April onwards. This is the danger. If consumption could jump so high pre-GST, how low would it get post-GST?

That is a scary thought.

This also gives more proof that consumers do expect prices to increase post-GST. I should add ceteris paribus, I guess, because the low retail fuel prices could make the net effect somewhat a wash. As for the recent electricity tariff cut, do not bother. I did a simulation and it hardly changed my headline projection.

Regardless of expectations, I am unsure there would be an actual net price hike. Last year, somebody told me the authorities expected (ranging from the Department of Statistics to the Treasury) inflation would hit 6% with GST, after months of official drive by the mainstream press that inflation would rise. Then it fell to about 4%. (You could understand why most banks are projecting about 4% inflation previously. They took the government’s guidance to heart) Now? I was informed the government expected it to be about 2%, mostly because of fuel prices. My own projection is about 3.3% YoY monthly average where I assume the GST will hit the economy in full force without any exception-zero rated stuff, but I keep several projections in the spirit of scenario analysis with the lowest at about 1.5% YoY where I pretend GST is the spoon in The Matrix.

My confidence in my models is  at an all time low and I have resigned to the fact that we will only know it in June or July when the Department of Statistics will release the April-May inflation figures. The crazy demand fluctuation, the retail fuel flotation and the GST make projections go everywhere.

I think the general consensus is that there will be a spending spree before the GST, which will be implemented on April 1. The idea is that a lot of consumers would expect price hikes of various degrees on or after April Fools’ Day. So, people would rush on to capitalize on current cheaper prices. This is much like how each time the government slashed petrol subsidies and hiked petrol prices previously, private vehicles would line up at the gas stations as consumers try to save the tiniest bits that they could.

I used to agree with that idea despite holding that the effects of GST would not be the same across all goods. A hike sounds likely for new homes but for some others, it does sound like a price reduction. In fact, I am unsure about a lot of stuff.

But in the end, it is expectations that affect current behavior and not actual future prices. The expectations might be wrong, but it will be wrong on the day consumers see the actual price, not before. So until then, expectations would still drive the spending spree. But of course, I am forming an expectation about people’s expectations, which can be problematic.

I am unsure about that spending spree now because I saw a piece of data from a survey at my workplace. I cannot reveal it because it is proprietary data. I would probably get into trouble for this (haha) but the result is quite different from my earlier expectation. I think all I can say is that more respondents expected to spend less instead of more before the GST!

The implications can be big. If you believe the consensus story, growth would be relatively strong in the first quarter and weak for the rest of the year. They spend first and spend less later.

Now, the survey result sounds like a straight up Ricardian equivalence, or at least close to it where consumers save to fund their near future spending (Ricardian is actually more than this but the saving story is similar). So, if the survey is right, there will be no spike in spending this quarter. Maybe even a slump.

People are asking me if the Malaysian government’s new 3.2% deficit ratio target is achievable.  I have read in the news that several politicians are skeptical about the target. I do not remember who said that but I feel the sentiment is shared by many.

But the only way to really answer this objectively is to run a sensitivity analysis.

It is relatively easy to do a sensitivity analysis and I have done one last week under the assumption of no expenditure cut. That one shows how the deficit ratio would react if the government had not changed its budget under a range of NGDP and revenue assumptions. I think it somewhat presents the realistic worst-case scenario. The government said its fiscal deficit would have gone up to 3.9% of GDP in 2015 without any expenditure cut. I think that would come close to my expectation (4.0%-4.1%), which is based on no revenue growth (not unreasonable) and at about 4%-5% NGDP growth. I am not reproducing the table here because I do not want to confuse the readers. If you are interested in that sensitivity analysis, you should revisit the post.

But that sensitivity analysis does not indicate whether the new 3.2% target is realistic. To answer that, it requires a bit more moving parts added into it. One additional dimension is required to be exact.

I am doing that here by showing 3 cases of revenue change under a range of NGDP and expenditure assumptions (note the not-so-small difference from the above model). To cut through the graphics, I think the 3.2% fiscal deficit ratio target is achievable if revenue grows by about 2% (I said about because I am too lazy to run a differential equation).

Before that, some legends for the three charts at the bottom. The yellow-highlighted cells describe the would-be situations if the expenditure was not cut (yes, it is a funny coincidence that the government had planned to increase its expenditure by 3.2% from 2014 in the original budget). The red-highlighted cells show the deficit ratio under the January 20 revised budget expenditure figures (Under revised budget, expenditure would still grow 1.2%. So, please do not call this austerity).

Here is the deficit ratio if 2015 revenue does not change from last year. Achieving 3.2% target seems impossible under this scenario (I wrote impossible because it would require a very strong NGDP growth at a time the GDP deflator appearing weak. If government revenue is flat this year, then my projection for the deficit would be about 3.6%):

No revenue change

Things would look a bit better if the government revenue would grow by 1% this year, but it would miss the deficit target still as 9% NGDP growth is beyond our reach, given current constraints:

Revenue growth 1%

Under 2% revenue growth case, the 3.2% deficit ratio looks achievable:

Revenue increases 2%

So, after reading through this, do you think the 3.2% deficit is achievable?

Ultimately, your answer must rely on revenue and NGDP growth. I think the reasonable NGDP growth assumption is about 4%-5%. As for revenue, I am unsure at the moment. There are just too many moving parts that require further investigation but the original budget had it grown at 4.5%. It will definitely be lower than that this year.

Hearing voices announcing something over the loudspeakers in public spaces makes me uncomfortable. It gives me the feeling that somebody is watching me and worse, the unknown person is giving me an order. The automatic reaction by the libertarian in me is to question and resist, even if the announcement makes sense.

Most announcements in KL Sentral, Kuala Lumpur’s Grand Union Station with its wide atrium, are harmless. Please let the passengers on-board get off the train first. Please watch your belongings. Please watch your step.

Judging by how some people refuse to wait for others to get out of the train before getting in, it feels like I am not the only trying to resist the announcement…

But from time to time it gets a little suspicious. Come join us for the F1 racing this weekend in Sepang! Drink this coffee.

No, I do not want to watch the F1 under the tropical sun. No, I do not like your coffee.

Yes, they are advertorials telling you to buy something that you do not need.

One time in a train car, a “refresher” would spray a scent of a particular brand of quick canned coffee into the enclosed air. There was no way for me to run, except getting out of the train. The advertisement campaign assaulted not only my eardrums but my olfactory organ too.

I learned to identify which train cars were installed with the horrible refresher and refused to ride on it, preferring to wait for better smelling train sets. It was not hard to know which was which. Oh, that is the car with the horrible smell of coffee. Oh, that is the coffee Wonda train car! I will let the train go for a better smelling one.

The PA system does have it uses. Sometimes, when the trains break down, the announcement helps. But at other times, all the gentle reminders – in London, I think it is “Mind the gap”; in New York, “Stand clear of the closing door, please” or was it in California with its BART? I do not remember; in Paris, well, the Parisian Metro is unique with its chime “na-na-na-na” – are definitely a hint of paternalism. It is a kind of soft paternalism that almost everybody ignores but at its heart is that suffocating authoritarian worldview.

The cavernous badly lit KL Sentral exacerbates, as with any cavernous building would, the sensation with that slight echo that follows the initial sound wave.

Growing up Malaysia, I quickly associate loudspeakers and echoes with Islam. The calls to prayer, the azan, are familiar and with so many mosques around, it can be maddeningly incomprehensible and downright annoying. In this country, expressing dissatisfaction against the competition between mosques for the loudest azan prize can bring trouble as the overly sensitive conservatives ignore comprehension of the azan recital in favor of noise. The louder the azans, the sermons, speeches and readings, the louder will the echoes be.

The echoes give the idea that god the supreme being is speaking to you. This is not just me feeling it and writing crap theory. Switch on the TV or the radio when an Islamic program is up in the air and you can hear how the editors use the echo effect whenever a verse from the Koran is read. In a more adventurous unorthodox Islamic program – I think it was Imam Muda where judges look for the best “Islamic idol” (just like the American Idol!) – an echo would accompany the contestants when he or she read a Koranic verse. So, there is something holy about the echoes.

My travels across Southeast Asia have made me realized the role of echoes in depicting something as holy is not limited just to Islam. I stayed for a week in an alley in Mandalay, Myanmar. At the top of the short alley is the Ein Daw Yar Pagoda. The Buddhist chanting I heard every morning and in the evening through its PA system was, forgive me for the neologism, echorized. It sounded like a prerecorded mantra chanting. I could hear the word amitaba through the artificial echo and among the unrecognizable words. And there was also echo in traditional Christian chanting from the mediaeval times as they sang in their tall cathedrals.

Religion, either god himself (herself for the feminist?) or the institution is an authority, I suppose sociologically, rightly or wrongly. The echo is a signifier of holy authority.

Holy and authority. Those are two of my favorite things.

And so I come back to KL Sentral with its banal announcements along with its echoes.

The libertarian is clenching a fist, but with only four fingers closed.

The Prime Minister announced the government’s plan to slacken its 2015 deficit target from 3.0% of GDP to 3.2%. While it is an easier target, it is still a cut from the expected 3.5% last year. I think we can relax it further but the revision is in line with my sentiment although not fully. There are several measures which I disagree, especially after the PM mentioned the phrase “import substitution” but I will not go into that.

The budget revision involves a number of expenditure cuts and other, I guess, less orthodox measures.

But what if there was no cut to expenditure?

I have made a simple calculation showing how the deficit ratio would react based on changes in the NGDP and government revenue. The original 2015 budget had the NGDP growing at 9% while revenue increasing at 4.5% from 2014, as I have highlighted in yellow below.


I suppose I could add a range of expenditure cuts too, but a 3-dimensional table or chart makes my head spins without the proper software at hand.

Also, I think it is good to use those figures and compare it with historical ones, just for the context:


I have been supportive of the government’s attempt at closing the deficit. I do celebrate the significant fiscal progress made over the past five or six years.

In retrospect, it was easy to back the cuts because the times were generally good. After a recession in 2009, the Malaysian economy grew quite well almost every quarter and that made tough policies easier to swallow.

But times are changing and what was swallowed easily yesterday will be tough today. Those tough policies will be hard on almost everybody now if executed too religiously.

The situation has changed so fast that I feel almost nobody ― at least as far as I can see in the financial market ― still believes the original deficit target of 3.0 per cent to GDP for 2015 is credible anymore. It will be challenging to meet the target and if the government insists on meeting it anyway, something has to give and that something will be overall economic growth.

Growth here is not merely an economic figure appearing in someone’s spreadsheet. It is people’s livelihood which is at stake.

Partly in my effort to be pragmatic and partly from observing from afar the horrible European experience arising from the wrong timing of its austerity program, I have come to believe in having a counter-cyclical policy. We commit to tough reforms making the economy more efficient during the good times and then we give it a slack when things are not so sunny and cheery.

What I am saying here is that the government here in Malaysia should be flexible with its deficit target for the time being.

I sincerely believe we can afford to do so because we have done serious fiscal reforms recently. Petrol and diesel subsidies are no more after years of gradual cuts and we are finally implementing the goods and services tax after years of contemplating it. I think the long term trajectory from the initiatives has already set the right direction.

My only disappointment is that these reforms were not done sooner due to political concerns. Everybody was so concerned about their political prospect that they forgot or even ignored the country’s future. For months, the government went on autopilot and the subsidy cuts themselves were put on hold for quite some time as the government prepared for the 2013 general election. We lost valuable policy time and now the window is closing.

But what is done is done and perhaps, that is just the cost of maintaining a democracy, however flawed ours is. If we believe in countercyclical policy, we should now switch our focus from fiscal tightening to some kind of relaxation.

In fact, with this framework in mind we should target the deficit within an economic cycle instead of the Gregorian calendar and I think, again, with the reforms done, we should be able to close the gap in the long run.

And we ― when I use the pronoun we here particularly, I mean the government; after all, we elected the government regardless whether we like those sitting in Putrajaya spending our money ― do honestly have a legitimate requirement to spend this time around, which runs contrary to keeping the what seems to be an impossible deficit target to meet.

No, it is not about saving 1Malaysia Development Berhad ― a beast which we will have to address ― or paying thousands of ringgit for a set of screwdrivers, or even giving more free money to suspicious grantpreneurs and selecting winners in the economy. It is about helping fellow Malaysians.

Pictures of devastation from the recent floods are heartbreaking. As fellow citizens, it is our duty to lighten their burden and the government is our primary agent to do so. Not some political parties, not some NGOs, not some volunteers. It is good to see people helping out but our agent is the government. We pay taxes and we expect the government to provide the basic infrastructure that the country needs to go forward. It is the basic role of a government.

These infrastructures from water to bridges to schools in the east coast need repairs. We need to spend for the repairs and in many cases, for reconstruction altogether.

That spending would probably hit the deficit figures but it is for a good cause. The deficit can wait for another day.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on January 17 2015.

The government is getting a lot of flak for its decision to adopt the dirty float mechanism in determining petrol and diesel prices. Pakatan Rakyat, Rafizi Ramli especially, is attacking the government by highlighting the fact that the government is not passing the full saving from the falling crude oil prices to the consumers and pointing out that consumers are effectively being taxed for consuming petrol and diesel.

Politically, I am enjoying the show because Barisan Nasional politicians and their supporters are so fond of asking others to be thankful to the BN-led government for providing subsidies. Now that the government is actually taxing fuel consumption, the politicians and their supporters are trapped by their own rhetoric and suffocating logic. There are people like Tan Keng Liang who is trying to defend the government but his messages are incoherent and uninformed. So, he is not doing the government much favor and I dare say he is hurting the government instead.

But beyond the politics, I prefer that we tax both petrol and diesel and then completely float it. That would leave retailers to set the prices, and hopefully compete with one another rather than having the government sets the prices from above. So, in some ways, I do approve of Rafizi’s action because I see his campaign ending up pressuring the government towards a better floating system, regardless whether that is his intention.

But I think it must be said that the current dirty float system is better than the old one. It is still inefficient, but it is more efficient than before. There has been significant policy progress in the past year or two and I think we have to be fair to the government for having the political will to do so.

On to the dirty float system itself, while the current mechanism has its weaknesses, it also has its strengths. In fact, its weaknesses are its strengths depending on the direction of the price change, from consumer perspective. Its lagged nature does provides some kind of stability to consumers.

I will not describe the current system in full, but in summary, it uses the average market prices from the last period as the reference retail price for the current month. The information that the system uses is lagged by a month.

I have drawn a chart to illustrate this:

Dirty float

From the consumer perspective, in time of falling crude oil prices (I label as actual market prices), the dirty float is not ideal. This is because saving from the current difference between market and retail prices goes to the government. The government would pass some saving to the consumers eventually but as you can see, the saving passed is only a fraction of total saving the consumers would have gained under a pure floating mechanism. The area colored red is actually the taxes paid by consumers.

But in time of rising prices, consumers would prefer to have this lagged pricing exactly because the situation is reversed. Consumers will also pay less, essentially enjoying a subsidy, as represented by the blue area. Of course, right now, this scenario is a hypothetical. When prices rise, you can bet the rhetoric will be different and wanting this kind of system instead.

But this also highlights that the dirty float mechanism does not really do away with the subsidy regime despite all the hoo-ha that Malaysia has finally abolished petrol and diesel subsidies. The truth is that the government has changed its system from that which always subsidizes consumption to that which would subsidize it only when prices are rising (and taxing it when prices are falling).

I would like to see the abolition of subsidy. That means a complete floating system where retail prices correlate almost completely with market prices, with a slight tax on it. That imposition of tax should be considered alongside the cash transfer policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — I have additional thoughts on the matter.

Apart from free-floating the prices to keep retail prices closely following the market prices with the view of passing the saving to the consumers, another way of improving the dirty float mechanism is to shorten the lag period.

Right now, the retail prices are dependent on the average prices of the previous month. What we could do is that make it dependent on average prices of the last two weeks, or the last week. The shorter lag would ensure the effective tax and subsidy be smaller than what it is right now. Here is another chart to show what I mean:


Here, I have added a new dirty float retail price with a shorter lag, superimposed on the first chart. You can see the amount taxed or subsidized is smaller compared to the original case. For clarity, area A+B is the total tax enjoyed by the government with the original month-long lag. With shorter lag, the total tax is just the area B.

It is also worth noting that if market prices are completely random, the total tax and subsidy would cancel out each other.

I also want to take this chance to clarify my ideal policy, i.e. free float with a slight tax on it. I figure the next chart will deliver my message crystal clear:

Free float taxed

I am showing a fixed tax version. There are other ways to do this, like through ad valorem, which is how the GST would do.

I think Malaysia needs Jokowi. When I write so, I do not mean Malaysia needs Joko Widodo the man per se as our prime minister. Instead, I am thinking about the idea of him the outsider. It is about having a Malaysian prime minister who comes from outside of the feudal circle.

Most of our national leaders over the years have come from mostly the same pool of elites with close ties to the old Malay feudal structure. Malaysia’s first prime minister Tunku Abdul Rahman was a prince from Kedah. His successor Tun Razak came from a noble Pahang family. The third prime minister, Tun Hussein Onn, came from a family of Mentri Besars from Johore at the time when democracy was unheard of in matters of state administration.

Mahathir Mohamad and Abdullah Ahmad Badawi are the only prime ministers that we have had who come from more modest backgrounds. But with Abdullah’s grandfather formerly the state mufti for Penang and with the father being a prominent ulama himself, I would think it is arguable that the fifth prime minister belongs to the same feudalist system.

Penang does not have a sultan but religion and the Malay monarchy are so intertwined: both play a large role in creating the old Malay feudal society and sustaining its vestiges in this modern Malaysia. Today, while the Malays of Malacca and Penang as well as those in the Federal Territories and Borneo have no sultan, they have their Agong, who incidentally is the head of Islam for the whole of Malaysia. So, it is hard to think the mufti office as separate and independent from the feudalist circle. It is part of it.

As for the current prime minister Najib Razak, he is son of the second prime minister and he inherits his father’s nobility.

To strengthen the idea that our prime ministers have come mostly from the feudalist pool, one of the next prime ministerial candidates is the current office bearer’s cousin, Hishammuddin Hussein, who is also the son of the third PM. So not only does our leadership mostly come from the same feudalist pool, we risk turning a democratically-elected office ― the highest in the land no less ― effectively into a dynasty.

As far as I can remember and I am happy to be corrected, only Mahathir has the courage to challenge the past by confronting the men at the top of the feudalist pyramid. In 1993, his government removed legal immunity formerly granted to all of the royal Malay houses. The move eroded the feudalist power in our society and more importantly, it set the tone that the monarchy needed to change. It set the way for a more equal society. Mahathir of course damaged other Malaysian institutions like the judiciary and the press while trying to preserve his power. I am under no illusion that he is an angel but as far as bringing modernity to Malaysia by beating feudalism into the background, he deserves credit.

The rest of the office bearers did little to keep the old feudalists in check. I think that was so because they were and are part of the old feudalist elites. They have little interest to fight it because they benefit from it. After all, notwithstanding the Mahathir era, Umno itself clings to a feudalist heritage to give the grand old party its purpose: Malays must have their sultan (and his religion) and without it, it would be the end of the Malays, or so they argue. Already in the current political climate, any criticism against the sultan is taken as seditious by the state and that sets the stage for the further rise of feudalist forces. Whatever progress Mahathir made, I feel it is being undone.

I fear that if we continue to have the same pool of elites running our country, our democracy would be weakened ― and it is already imperfect ― to enhance the feudalist aspect of our society.

My ideal Malaysia is one where we strive towards equality for all. The feudalist structure does exactly the opposite by elevating certain groups.

Jokowi, to me, represents a break from Indonesia’s past. The break is not as clean as it should be with former President Megawati Sukarnoputri standing behind the curtains ― I am sure other vestiges of the old regime would challenge him soon enough ― but Indonesia has made significant progress in the last 10-15 years, rising up from a dictatorship to becoming a beacon of democracy in the region. Each step Indonesia takes is yet another break from the chain of history, leaving it freer to move ahead without too much baggage.

I am envious of Indonesia because of that.

It is in that sense that I think Malaysia needs a Jokowi. The Indonesian Jokowi breaks our southern neighbor from its ugly military past. We need a Malaysian Jokowi to break our excessive link to our feudal past.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on November 21 2014.

277 pages