[2441] No target, no central planning

Milton Friedman once visited Hong Kong in 1963. He met John Cowperthwaite, the financial secretary of Hong Kong, whom was credited for enabling Hong Kong to become Asia’s foremost financial center through his free market policy. Friedman asked him “about the paucity of statistics” in Hong Kong. Cowperthwaite replied, “If I let them compute those statistics, they’ll want to use them for planning.[1]

Statistics has its uses and it does help us understand our society better. It describes phenomena objectively instead of forcing us to rely on conflicting anecdotes that are dependent on point of views. First and foremost, statistics has descriptive power.

But not all individuals believe in only the descriptive power of statistics. Some believe too much in the prescriptive aspect. Statists tend to belong in the latter group. PEMANDU is afflicted with it too, arrogantly trying to manage the economy when the economy itself is organic.

I reject targets placed on something as organic as the economy. While the government does have a role to play, to set a target on the economy mistakes the economy as a business entity or a firm, pretending as if the planner is the CEO, where there is none really.

The dangers of having a set of targets like having specific real GDP growth rate are plenty. One of them is the incentive for the government to spend too much just to meet its target. There is a conflict of interest when the target is set by the very entity that is meant to achieve it (this is also partly the reason why I am skeptical with a lot of KPIs set by the government: incentive to set them low to make themselves good).

This adverse incentive is bad for public finance and ultimately, for taxpayers.

More generally, having those targets encourages central planning.

But this entry is not meant to bash PEMANDU. I think I have criticized PEMANDU so much that I am bored of it already. This entry is meant to criticize Anwar Ibrahim.

Anwar Ibrahim is smart. When he realizes that the Najib administration is targeting possibly an unrealistically high real GDP growth rate given the global economic circumstances, he challenges it and demands accountability from the federal government. He wants a special parliamentary sitting to meet if the federal government fails to meet their target later in the year.[2]

I disagree to the demand for accountability. It is not so much I would like to give the Najib administration a free ride. It is only because I disagree with having a target in the first place. To demand accountability only strengthens the path to the target. That means central planning.

This is a case where accountability is not so hot.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved
[1] — The difference in the economic policies followed by Hong Kong and Britain was a pure accident. The colonial office in Britain happened to send John Cowper-thwaite to Hong Kong to serve as its financial secretary. Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At the time, while Britain was moving to a socialist and welfare state, Cowperthwaite insisted that Hong Kong practice laissez-faire. He refused to impose any tariffs. He insisted on keeping taxes down.

I first visited Hong Kong in 1955, shortly after the initial inflow of refugees. It was a miserable place for most of its inhabitants. The temporary dwellings that the government had thrown up to house the refugees were one-room cells in a multistory building that was open in the front: one family, one room. The fact that people would accept such miserable living quarters testified to the intensity of their desire to leave Red China.

I met Cowperthwaite in 1963 on my next visit to Hong Kong. I remember asking him about the paucity of statistics. He answered, ”If I let them compute those statistics, they’ll want to use them for planning.’’ How wise! [Milton Friedman. The Hong Kong Experiment. Hoover Digest. July 30 1998]

[2] — KUALA LUMPUR, Oct 10 — Datuk Seri Anwar Ibrahim today demanded Parliament reconvene for a ”special sitting” if Putrajaya fails to meet its ”unreasonable” gross domestic product (GDP) growth forecast.

The opposition leader today poured cold water over Datuk Seri Najib Razak’s Budget 2012 tabled on Friday, claiming the prime minister’s predictions and his administration’s alleged penchant for unbridled spending would likely worsen the country’s deficit.

Anwar also predicted the Najib administration would table a supplementary supply bill by mid-2012, seeking for additional funds just as it did in June this year. [Clara Chooi. Anwar wants special Parliament meet if GDP aim unmet. The Malaysian Insider. October 10 2011]

Politics & government

[2299] Of a cab driver’s opinion of communism

On my way to Sydney Airport, I found myself sitting right beside a cab driver — who was probably close to 50 years of age — eager to convince me that he was an honest driver. “Pick any way you want, I go”, he said in outrageously fast but broken English. “I have map. You check. I go.” I almost smiled as he seemed to fit the old Western stereotype of Chinese people.

And as with most Cantonese speakers whom I have met, he seemed to shout when he spoke. I told him that I did not mind any route as long as I would get to the airport on time. Regardless of my indifference, he continued to convince me of his honesty up to the point that I wished I had taken the train instead.

It was unnecessary for him to convince me of his honesty. I know my way around enough and that makes his assertion irrelevant. I depended on his action, not his words.

I typically have a short fuse when it comes to loud and insistence individuals. I find them obnoxious and I will try to get away from them as soon as I can. But I was about to get late and I did not want to pay extra for another cab to the airport.

So, I remained polite to the obnoxious driver throughout the journey.

I am glad that I was polite because the second half of the ride was interesting.

I asked him where he was originally from, hoping that he would stop trying to convince me of his honesty. Given his mangled English, I hazarded ”Mainland China?”

He blew his top off. He insisted that he was from Hong Kong.

He has been in Sydney for 23 years. I asked why he migrated. He said he did not want to live under communism. Ah, at least he was redeeming himself; he appeared less obnoxious to me now. Just as I hid my initial discomfort of him from him, I hid my approval of him from him. I did not offer my view regarding communism and capitalism.

Hong Kong of course was a British colony before it was handed to the People’s Republic of China in 1997. More than that, it was a symbol of free market capitalism under liberal environment. Many were apprehensive of the future of Hong Kong beyond 1997. While the apprehension was justified, Hong Kong today continues to be the beckon of free market capitalism in the world.

He did not use the relevant terms as precise as he should. He was associating corruption with communism and a clean government with capitalism. The truth is that corruption is a problem in a capitalist society as well. Really, he was comparing the Australian government with the PRC government.

I played the devil advocate. I said the PRC government these days is only communist in name only but in truth, capitalism is making its round there. It is not free market capitalism but it is state capitalism. It is capitalism nonetheless and increasingly so.

To which he replied, “In communism, government officials are rich but the people are poor; in capitalism, government officials are poor but the people are rich.”

Looking at history, that is definitely true. That is the result of application of communist policy. There is more opportunity for government corruption in a centralized economy compared to a market-based economy, with all else the same.

We were approaching the international terminal. I got off and said to myself, I want to blog about this.

And yes, he was honest.


[2294] Of favoring the fat over the fit

The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

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 Malaysian Insider on December 28 2010.


[2136] Of import quota policy is irrelevant to the objective of low stable prices

On December 7 in the Parliament, based on the Hansard, Deputy Minister for International Trade and Industry Jacob Dungau Sagan was asked whether the government intends to abolish a policy that grants exclusive permits for imports to limited entities and effectively, the granting of monopoly power to several companies over certain commodities such as sugar and rice. He effectively said no and went on to defend the policy.[1] I find the defense problematic.

He began his defense of the policy by stating it is the responsibility of the government to ensure that prices of such commodities, and specifically sugar, remain at affordable levels while promoting the sugar industry in Malaysia. According to him further, due to the fact that prices in Malaysia are lower than prices in neighboring countries, there is possibility that producers will not import sugar when prices in the international market are higher than local ones.

Approved permit policy however is an very suboptimal solution to the problem. His answer is similarly so.

Firstly, prices are lower because of price control. Remove the control and prices will go higher. If the local prices without price control mechanism is higher than international prices, then there will be no problem of flow. In fact, the approved permit restricts flow into the local market. If it is the other case, then while there might be problem with flow, the policy of approved permits does not address the problem. This brings us to the second issue I want to raise.

Second, import quota is useless when international prices are higher than local prices sans free trade. It is a redundant policy. Why is it redundant? The rationale is the same as having a minimum wage that is lower than all other wages paid by the market. Higher international prices compared to local price however does introduce the issue of flow. There is a way to address that concern and this is why I make the third point.

Third, the existing subsidy system alone is more than capable of ensuring that there is no large major outflow of sugar under the price control mechanism. How? Just pay (really, subsidize) the importers to bring in the sugar.

I wish to veer off course for a moment or two here. Do note that this does not mean that I support a subsidy system. Rather, it is only a demonstration of positive economics. It is not an exercise at proposing the best policy but merely an effort at proposing a better policy. The best policy remains one that returns to the principle of free market.

Returning to the issue at hand, another unsatisfying point the Deputy Minister made in defending approved permits policy for sugar involves price fluctuation. Again, the subsidy system already in place is able to confront that. There is an existing system in place: the previously used fuel subsidy regime.

Really, the import quota policy is redundant in addressing fluctuating prices. Quota itself does not lessen fluctuation of prices. Any considerable fluctuation in the international price of sugar will translate into fluctuation of local prices regardless of permits, unless a country is a complete natural autarky, which Malaysia is not. What it does is merely to increase average local unsubsidized prices. It does not decrease variance around the local average. In other words, quota just makes prices fluctuating at the same magnitude at higher levels.

The relevant policy should be only price control and subsidy to producers and importers. Two tools alone are sufficient to achieve both objectives of affordable and low prices.

I want to harp on this point again, just in case if it had not driven the point home. While it is important to understand that these two policies suffer grave weaknesses — two examples are smuggling and shortage; also opportunity cost — when juxtaposed alongside free market environment, import quota in no way addresses those weaknesses. Therefore, import quota is really an irrelevant policy, if the objective is low stable prices.

The real reason for import quota is to protect domestic producers. The Deputy Minister did mention this as a reason and he should mention only this as the reason without stating that the policy is there to ensure that prices are affordable and to ensure the availability of sugar. The import quota raises price of sugar, with or without subsidy, much to the benefit of importers and producers of sugar.

It is worth highlighting that there are only four sugar factories in Malaysia owned only two entities. These entities also monopolize the quota. Never mind that these two entities are closely linked.

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[1] — See page 18 the Hansard dated December 7 2009.


[2095] Of in praise of trivial choices

It is easy to dismiss the triviality, for instance, of choosing a pair of high heels out of hundreds as excesses of modern life defined by free market. How does one sympathize with a dilemma of a purchaser who faces a petty option between consuming Coke and Pepsi?

Such inconsequential puzzles seem so shallow for it to be objects of attention at times when there are larger and more pressing issues that the society, or even the world, faces. So shallow and so trivial it seems that to defend it seems only so wrong. Yet, these trivialities continue to receive attention of great many people.

These have been derided as one of the excesses of a free world. There are simply too many choices that those choices divert precious attention from important issues.

Beware, however, of those calling upon such condemnation because it betrays an authoritarian tendency. If the condemnation sees execution, it opens an illiberal path for at the heart of the condemnation is a desire to apply strings to individuals. At its heart, there is distaste for liberty.

Choices, however trivial they might be, are crucial in the maintenance and enhancement of liberty in society. One perhaps may criticize this as overstretching an argument beyond its allowable elasticity. The band would snap before one could secure the point, as one may argue.

Yet, every little thing in life affects the psyche of individuals in society. Through this, the band can go farther than one would think.

In a society of illiberal culture, a majority of individuals born into it and raised by it would suffer from status quo bias, especially so for an isolationist society. Without effort or accident, they will acclimatize to unfree culture, unaware of the shackles that bind them down. They will be unaware of or suffer great difficulties in imagining choices that could exist, because it does not exist. For them, the limited choices they observe are the full imaginable choices.

In a society of liberal culture with full free choices restrained only by physical reality, just as a majority of individuals born into illiberal society, individuals will suffer from status quo bias. Unlike the illiberal society, the bias in a free society is a side with liberty as individuals have access or at least have knowledge of full choices available in their world.

It is here where choices are crucial in the creation and the maintenance of a free society, founded on non-aggression with respect to individual liberty.

Individuals familiar with full — mundane or exceptional, trivial or life-changing — choices due to status quo bias unconsciously impressed upon them by a free society will notice any disappearance of choices from their menu. From the awareness comes questions and from the questions, demands for the return of the disappeared options, if evolution within a free market is not the cause of that disappearance. If the free market is the cause of extinction of a particular option, then it must be that the individuals are willingly causing the extinction. That is a nature of the free market.

If the extinction comes from a diktat of unfree origin, the demands for the return of that particular choice will gather momentum, like an echo to an avalanche. It is so because acclimatization to full choices in itself creates sensitivity to elimination of choices. Free individuals will rise up to banish the diktat into a gutter, where all of things that resent liberty for whatever reason belong and restore the choices into the menu.

Familiarization to these little choices builds up awareness of larger choices. These larger choices are grand choices so well linked and easier related to the idea of freedom: freedom of conscience; freedom of expression; freedom of speech.

Willingness to defend these little choices translates into the willingness to defend these grand choices for executions of these little choices really are expressions of individuals’ personality. Without these freedoms, such little choices cannot exist. Yet, grand choices are so far removed from immediate life that it is hard for individuals on the streets to relate to it. Instead, freedom sees daily exercises through these little choices.

Each exercise of these little choices is another step towards grand choices. These little choices train individuals in making choices and there on, taking responsibility for their own life. The act of assuming that responsibility removes the need for a third party and reduces the possibility of tyranny by claiming their freedom. This collectively creates an environment conducive for the creation and maintenance of a free society. It follows that little trivial shallow choices deserve defense from ridicule.

Ignore those that condemn small little choices as excesses. Chances are, if in their heart is disgust for these small things, then they cannot stomach the exercise of grand choices. They condemn these little choices as excesses because their respect for individual liberty is limited. As soon as they have won the battle, the march from liberalism to tyranny begins.

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 Malaysian Insider on October 5 2009.