ASEAN Economics Politics & government

[2742] Good luck Mr. Jokowi

I have not been following the Indonesian presidential election closely in the sense that I am unfamiliar with detailed policy proposals from both candidates, Jokowi and Prabowo. I remember from some time back that Jokowi specifically offered little detail, leading to the criticism that he has no idea what he is doing and betting on his clean, humble image to win. But I think I have heard or read some proposals along the way. But what I do know is that there is a difference between the two candidates and Prabowo comes out as nationalistic, protectionist candidate, which I think is bad for Malaysia and for Asean integration.

Malaysia and Indonesia are having it relatively good in the past year or so. There have not been too many ugly and petty spats around the accusation of cultural theft. Others are more serious, like the abuse of Indonesian workers in Malaysia and the haze. I should not mention the haze because looking outside right now in Kuala Lumpur, it is pretty bad. Normally I can spot the Petronas Twin Towers from here but right now, it is all white. Walking outside is unpleasant. It is hot, humid and acrid. It is impossible to tolerate the condition. In the past,  Malaysians (and Singaporeans) had been quick to blame their largest neighbor but I think both have to come suspect and possibly realize that the perpetrators of the opening burning in Sumatra and elsewhere (including in some parts of Malaysia) are Malaysian and Singaporean-held plantation companies. And besides, we consume the very products produced by the plantations there. I do not mean that Indonesia is blameless, but solving it requires regional cooperation to address it.

Still, apart from the unpleasant smell, we are not at each other’s throat and I think that is partly because of the reconciliatory tone, or rather, non-aggressive approach taken by the political leadership of both countries, Malaysia and Singapore. I suppose, it is also because the current President Susilo Bambang Yudhoyono has no incentive to appease the more populist crowd who love a chance to slam Malaysia. He is approaching his term limit after all. But even earlier in his term, I think he preferred discussion rather than Sukarno-style rhetoric when dealing with Malaysia.

I do not believe the relatively good period of Malaysia-Indonesia relations will last very long if Prabowo becomes the new Indonesian President. Prabowo appears very nationalistic and I think he would be easy for him to ride on those anti-Malaysian sentiments, especially if things do not go according to his plan in Indonesia. It will always easy to shift the blame to foreigners than focus on the actual problems at hand.

Prabowo also appears to be a protectionist. Having a nationalistic and protectionist President is probably bad news for Malaysia and for Asean integration. It is bad news for Malaysia because there is a lot of Malaysian investment in Indonesia, from plantation to banking. Indonesia is already trying to limit exports of raw material, hoping to develop its own industries. Prabowo looks like the person who would go further for a more comprehensive protectionism across industries. Indonesia is also behind in Asean Open Skies initiative, while most others have agreed and even done opening up.

Also, having Prabowo campaigning with fascist theme is not all too hot for a libertarian like me. Having a fascist Indonesia will take pressure off Malaysia to liberal further. As in right now, I think Indonesia has some democratic and liberal credential to nudge Malaysia in the right way, in a small way. I suppose it is like the one of those Newton’s laws: bodies of mass attract each other and Indonesia is a very large body compared to Malaysia. Having a big, bad fascist right next door is like having a big, bad, black hole across the narrow sea.

Asean wants to integrate closer by 2015. It does not appear that all the goals set will be achieved within target but having its largest members dragging its feet or even regressing will make integration harder than it already is.

This is not to say Jokowi is all free-trade liberal. But I think Jokowi is more even-minded when it comes to Indonesia’s role in making the AEC a success.

I am a regionalist and I am so because I see global effect at closer integration is going nowhere. So, I would like to see the Asean initiative moves forward. Also, as a Malaysia, it is really tiring arguing about petty stuff. I think only Jokowi can do good on both fronts.

So, good luck Mr. Jokowi. I hope you will win the Indonesian election.


[2571] Cars, duties, congestion, pollution, revenue and income effect

Several new points were raised with regards to my post on duties and cars yesterday. One was pollution, two was government revenue and three, in one way or another, income effect. It is not exactly income effect but close enough.

Concern number one is easy. But let us state the pollution concern. The concern is that there is already too many cars on the streets and there is a need to reduce pollution, which I take as carbon and other greenhouse gases emissions. I also take that as actually reducing the number of cars. But here is the thing, substitution to foreign cars may actual reduce emissions without having to reduce the number of car on the roads. The reason is that comparable foreign cars-European, Japanese and possibly Korean-have higher emission standard than locally-produced cars. With more competition, consumers have a chance to choose emission-efficient cars over relative gas-guzzlers without too much price variation. End result: less emission given the quantity of cars.

Concern number two deserves a very libertarian answer. Cut government spending instead. The duties on foreign cars were always meant as protectionist measure, not primarily for revenue-generating purpose. The revenue derived from the duties should really be considered as a bonus. Except that the government is so used to it, that it forgets. With the fiscal discipline, they need the bonus. One way to cut spending is to cut fuel subsidy. In fact, tax it. Yes, tax fuel purchase.

Concern number three is harder to address and I actually thought about it but ultimately decided to not touch it. As try to explain it below, you will understand why I decided against touching it.

Income effect (not exactly but close) or specifically, the new competitive environment may push prices down across the board. This may be true and I have alluded to this in an article I wrote for The Malaysian Insider earlier. In turn, this may increase vehicles on the road as more are able to purchase cars. Or it may not. There is a sound theoretical case for an increase, but there is also a sound theoretical case for the opposite.

Initially, I wanted to address this in terms of stickiness and temporally. In English, prices will adjust only slowly to a new reality. More technically, all-in prices of domestic cars are sticky and that of foreign cars are not.

Why do I apply stickiness on domestic cars but not foreign cars? It is because the abolition or the reduction of duties is easy to calculate. It is on top of the car price in the sense that pre-duties prices are associated with the way companies run their business. It is this pre-tax, pre-duties prices that are sticky.

Most of domestic car prices are made up of sticky components. For foreign-manufactured cars, a significant portion of its end prices are made up of non-sticky components, i.e. the tax and the duties. This is why I apparently apply stickiness only on domestic cars. In truth, I am applying stickiness on both domestic and foreign cars while taking into account domestic cars have significantly less portion of non-sticky components than foreign cars, within the context of import duties abolition.

Also, consider this. The net earnings of Proton in 2011 was not even 2% of its revenue. How much room Proton has for a serious price war? Not much in the near future. This, I think, is an indication that there is a price floor: there is not much incentive to push price of sedans down too much beyond whatever Proton is charging. Proton cannot charge less anyway.

So, in the short term, the specific income effect will not be present. And no traffic congestion issue.

The long term issue is hard to say. It depends on non-cooperation (it is quite possible for firms to achieve implicit understanding in price settings without getting into trouble with anti-trust law).

Ultimately, it depends on how efficient those under pressure can be. What is certain is that that takes time.

It also depends on how low prices would get. I have not done the calculation but I have a feeling, both Proton’s small margin and game theory will provide a floor how low prices can get. And foreign manufacturers definitely would not want to price their cars so low as to earn a loss. Furthermore, that would be dumping and they will get into trouble with that.

So, in the long run, it may, or it may not have effect on congestion.

Besides, if there would be worse congestion, it would be very naive to think there is no other accompanying policy to address it. I have one immediately in my mind: congestion fee within the cities.


[2570] Abolition of import duties on foreign cars will not increase congestion because there is substitution effect

I advocate the abolition, or at least a significant reduction of import duties (and other excessive taxes) on cars as well as the abolition of the approved permits system that blow up the prices of foreign-manufactured cars to an outrageous level. This should come at no surprise because I am a libertarian. I do generally support freer trade. Make no mistake, the policy on cars is a protectionist policy.

There is a concern that if duties on imported cars are slashed down significantly or abolished entirely, this will exacerbate traffic congestion in Malaysian cities. At first, this sounds like a very big and legitimate concern. It is not.

If one understands that the duties are imposed on foreign marques and that there is such a thing as  substitution effect, one will understand that the concern on worsening traffic congestion is misplaced. I suspect it is almost always raised by those without enough formal education in microeconomics.

Do understand that imposition of high duties are on foreign cars. This is the nuance. Too many talk as if it is applied across the board, including on Proton and Perodua marques. The peril of generalization is that you lose the nuance.

The duties make domestically-produced cars cheaper than foreign cars and this should be a no-brainer.

It is no coincident that a majority of cars on Malaysian roads are Protons and Peroduas. Malaysians buy Protons and Peroduas because those cars are cheap. There are not too many of those who can buy more expensive cars. If I recall correctly, the number of Protons and Peroduas and other locally-produced cars dwarf the number of foreign-manufactured cars in this country. I do not have the statistics at home but I do have it at the office. I will share it tomorrow and correct my assertion if it is proven to be incorrect.

If foreign cars are suddenly competitively priced after the abolition of various pre-exisiting duties imposed, new buyers will be tempted to purchase those foreign cars, which are many ways of higher quality than Proton at least. Perodua probably can stand up within its market niche.

Now, if the duties persist, these new purchasers would probably buy Protons and Peroduas.

Notice that there will be purchases of car anyway.

To put it in clearer terms, if the status quo remains, people will buy local cars. If it does not much to the benefits of Malaysian consumers, they will buy higher quality foreign cars. For those whom would have bought foreign cars anyway, it does not matter as far as traffic congestion is concerned. They would still buy their cars. It is not about discriminated duties that Malaysia has that I along with others like-minded persons want abolished.

So, the concern for traffic will exist as long as Malaysians purchase cars and it really does not matter whether the duties are abolished. The trend for greater quantity of cars on the road is really a secular one. It has to do with affluence growth and population growth more than anything, and the availability of a reliable public transport system within this context.

Those who argue that the traffic condition will worsen if those duties are removed just do not understand that those cars are substitute goods.

This does not mean the abolition of import duties do not matter. It matters in terms of welfare. It matters in terms of competition. It matters in a lot of other more important ways. But not in terms of congestion.


[2564] Anti-dumping duty on wire rods has little to do with predatory pricing, more to do with protectionism

It appears that protectionist sentiment within the steel industry just will not just die down. Earlier last year, Megasteel unsuccessfully lobbied for a levy on steel imports. That was shot down because users of steel protested. Megasteel, being the sole domestic producer of flat steel (used mainly for vehicles and major appliances), in its eagerness to protect itself from competition, wanted not only protectionism for domestic flat steel, but lobbied for across the board protectionism. That stepped on a lot of toes and it was good that the protest stopped the protectionist petition dead in its tracks.

In the news today however, the government is considering anti-dumping duty on foreign-produced steel wire rods. Wire rod is considered long steel product and most Malaysian steel manufacturers produce long steel. Contrast the fact about long steel with flat steel, which is only produced by Megasteel: one can immediately understand why the anti-dumping proposal may be more popular than Megasteel’s earlier protectionist proposal. The anti-dumping duty will benefit a lot more manufacturers (if not most in the industry) than Megasteel’s earlier proposal.

According to The Star, the government is mulling anti-dumping duty after an unnamed domestic manufacturer filed a complaint about how foreign steel manufacturers are dumping wire rods in Malaysia.

First, for laypersons’ benefits, what is dumping?

The typical definition of dumping is when a foreign manufacturer priced its products aboard at a price cheaper than the price its sell at its home country. The logic behind this is that foreign firm is flooding the market on purpose to kill off domestic competitor so that it will be a monopoly later. It is predatory pricing. The real concern is predatory pricing and the prices differential is just a proxy to that concern.

The problem is that not all of such pricing is predatory but regulators rely solely on the proxy to decide while disregarding the main concern, which is again, predatory pricing. This is flawed way of looking at the case.

It is all too possible for foreign firms to price their goods at home more expensive than aboard without engaging in predatory pricing.

One reason can be that a foreign firm has monopoly power over its home market while its export market is exposed to fierce competition.

Now, add another factor, which is likely the case for Malaysia since Malaysia steel manufacturers do not have the scale required to make it efficient: foreign steel manufacturers from large economies like China has the economies of scale to be efficient. In a world of pure free market with initial position as it is in the real world, Malaysian manufacturers would not be able to compete with the foreign manufacturers’ price.

Given both factors, efficient but monopolistic foreign firm can engage in such price discrimination across economies. So, a firm pricing its good in its export market lower than its home market is not embarking on predatory pricing at all. Rather, it is only responding to market reality. Under this scenario, anti-dumping measure by any government is highly inappropriate and in fact, protectionist.

The reality is the anti-dumping measure is aimed at protecting inefficient Malaysian steel industry.

This is not just an economic and ideological concern.

Long steel products are used for construction. An anti-dumping duty on long steel, for instance, will eliminate downward pressure on prices of raw material used for construction of houses and offices, even the MRT.

When prices of properties go up unreasonably, you know which policy to blame.


[2526] Improve real wages by liberalizing the auto industry

The articulation of concern for stagnating wages is well-rehearsed among Malaysians who are just entering the labor force as well as those earning low wages. For most fresh graduates especially, life in the city would be far more painful than it is without the support of their parents.

Regardless of justification, many have complained about rising prices and their disappointing wage levels and growth. While from a strict economic perspective it is arguable that the complaints about inflation are largely exaggerated, based on cherry-picking reasoning and frequently are based on conceptual misunderstanding of inflation, real wages is still an issue. The issue is that it has not been growing as fast as many would like it to, nor do they match their qualifications and capability. The brain-drain phenomenon is partly caused by the concern for wages as well.

PEMANDU targets to double the per capita income of Malaysians in a certain timeframe. Notwithstanding the argument that the target will be achieved even without PEMANDU and that the doubling of income per capita is really more inflationary than real, the target and the relevant plans highlight how wage growth is a pillar of the Najib administration’s policy.

What truly matters is real income. The series of criticism and counter-criticism between REFSA and PEMANDU at least suggests that beyond technicalities that will get policy wonks excited, hostile political maneuvering and a superficial public relations exercise, both organizations are concerned with real income. That is good. That means the mainstream debate is on the right track and the competitive public political sphere to some extent is working.

But even taking the target by PEMANDU in good faith, the plan is overly intricate. For a grand plan that is supposed to be driven by the private sector, it should not be too complicated. If it were privately driven, then the planning should be left to the market’s thousands of private planners working in the go-go economic center that is Kuala Lumpur, not left to central planners working in government complexes in the desolated, isolated and pretentious Putrajaya.

Granted, the PEMANDU plans are a set of national economic policies. Some complexity is inevitable but the truth is that this is a government-driven plan. And it overlooks simple and quick market-based solutions.

One of those policies is the liberalization of the automotive industry.

Prices of cars are amazingly high in Malaysia. This reality is amazing given that fact that cars are easily tradable and Malaysia has one of the most open and trade-dependent economies in the world. The characteristic of tradability and open market should make motor vehicles reasonably affordable. Yet, most cars in Malaysia are overly expensive in general. It takes so much out of a person’s income to own what is a considered a necessity.

The reason for this is protectionism. The industry suffers from punitive taxes and duties all aimed at giving domestic car producers a leg up. Competitive pressure is prevented from pushing prices of both local and foreign cars down to more reasonable and affordable levels. The same competitive pressure has the potential of pushing the prices of even the cheapest cars in Malaysia down.

While this particular liberalization policy does not increase wages, it does improve real wages significantly because the servicing of a car loan can be a major household expenditure. With less restrictive taxes and duties, this particular chunk of household expenditure will decrease, hence improving the household’s real income. More importantly, instead of dedicating a large fraction of income to servicing car loans, newly freed income can be used to purchase other goods, services or simply saved. To put it simply, they can do more with less.

The attractiveness of the liberalization is not just about improved real income. It is also about improving real income almost immediately. Contrast this to the intricate plan to double the headline wages of Malaysians by year 2020 by propping up small inefficient sundry shops when large retailers can do the job much better due to their economies of scale. This begs the question, why should Malaysia do this the hard, expensive, incentive-twisting way when there are quicker, simpler and more organic solutions?

There are other considerations of course, like the fate of those employed in that particular inefficient local industry.

It is true that there will always be winners and losers but the comeback point is that there will be more winners than losers: the losers are concentrated in a particular industry which is small relative to the whole economy to start with, and the winners are widely dispersed throughout the economy on a much larger scale. On top of that, the newly unused income will create new permanent demand that will likely be able to absorb the temporary disruption in the labor market and redirect resources, both labor and capital, to better use, all without too much overbearing government intervention.

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 March 23 2012.