Economics Politics & government

[2559] Election now leads to less populism

We live in a time of widespread economic crisis.

Europe is in recession. For some European countries like Greece, it is effectively the Great Depression all over again. Economic recovery in the US is slow, with the labor market in May registering horrible statistics to suggest that the US recovery may be flagging.

On the other side of the Pacific Ocean, the Chinese economy is slowing down. Meanwhile, Asian production and trade are growing very slowly as well, if not contracting altogether like in Taiwan and South Korea.

The latest export statistics reveal that Malaysian April exports contracted for the second consecutive months as Europe and others demanded less goods and services. Europe will likely continue to demand less in the near future as its governments, firms and households rebalance their finance towards more saving and less spending on average. The rebalancing is needed and overdue. As always, there is cost to the exercise. The cost will be significant even to those halfway around the world.

These external developments are important to Malaysia because the country has one of the highest trade exposure in the world. The openness and generally liberal trade attitude has allowed Malaysia to enjoy significant secular economic progress so far. But the same factor also makes Malaysia sensitive to the global business cycle.

The awful trade data has not been translated fully into the domestic economy. The domestic labor market, for instance, is holding up pretty well and close to full employment. The resilience of the domestic economy is encouraging but if trade growth continues to be dismal, sooner or later things will change for the worse.

So, there is crisis abroad and Malaysia may very well feel the heat soon enough.

The country needs to be ready for the possible headwind. Politically, it is hard to see how Malaysia is ready given that the general election is just over the horizon, somewhere.

That means policymakers and politicians are politicking.

While this behavior is only to be expected, there is a fear that the government’s collective eyes are off the economic ball. Both sides of the divide — more importantly, the government of the day — are making populist promises and policies to outdo each other and win votes. That may hurt the country’s ability to address possible economic troubles when the time arrives.

While the election is a must to preserve and to enhance our democracy, there is a cost to it. That cost is populism. We have to bear the cost but we do not need to exacerbate it.

How does populism exacerbate cost?

The cost will be higher the longer the politicking opportunity persists. That is so because the longer the politicking period, the higher the likelihood of populist policy will emerge.

That in turn may cause us as a society to meet potential economic trouble with a rifle loaded insufficiently. The point is especially relevant because the federal Budget is expected to be tabled in September. A ”people’s budget” will not be ideal if Malaysia wants to weather the gloomy days successfully.

So, this is a case to hold the general election as soon as possible. A resolution is needed as soon as possible. It is only by having an election as soon as possible that there can be less opportunity for politicking to lessen the probability of economic populism winning the day and ruining the future.

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 June 11 2012.

Economics Politics & government

[2417] Being honest about crime

There are always victims in an economic recession. It can push individuals into desperation and force them potentially to do something that they would not otherwise do. It can turn the man on the streets into a criminal.

There is a relationship between economic recessions and unemployment rates and there is a relationship between unemployment and crime rates. An empty stomach has a way of convincing that the wrongness of stealing is only a secondary worry to the concern of the stomach. Rule of law can be meaningless in times of desperation.

The hungrier one gets because of external circumstances, the greater the erosion on one’s belief in the rule of law. The reward of specific types of crime becomes enticing.

Although there are risks involved in committing the crime, its relative immediate reward has the potential of immediately relieving hunger. A little chance of not going hungry is better than no chance at all.

Before these sentences are misconstrued as a justification or even an encouragement for criminal activities, let it be known the difference between describing and prescribing. One describes without making value judgment. One prescribes with value judgment. This is an effort at the former.

The relationship between economic recession (or perhaps the term economic downturn is a better phrase to escape the banality of technicalities) and unemployment rate is well-established. This requires no further exposition. The relationship between unemployment and crime rates is also well-explored.

What makes exposition important for the latter is that in Malaysia, there is an increasing tendency to ignore it. In its place, there is a belief that an alphabet soup causes the decline in reported crime rate.

That narrative needs to be assessed and then made blunt in the interest of sincerity. Partisan political discussions sometimes can push honesty aside for political convenience. It is all about brownie points. The utility of free speech is essential in putting less-than-honest assertion in perspective.

There are many documentations proving how unemployment contributes to crime rate. Karin Edmark in 2005 showed how ”unemployment had a positive and significant effect on some property crimes in Sweden.”

Property crimes can be associated with theft, which can be associated to what can be called as crime of the stomach. In 2002, Eric Gould, Bruce Weinberg and David Mustard found a similar result for general crime rate for young, unskilled labor in the United States, between 1979 and 1997.

Steven Raphael and Rudolf Winter-Ebmer in 2001 found the same relationship in the United States in the 1990s. They wrote ””¦a substantial portion of the decline in property crime rates during the 1990s is attributable to the decline in the unemployment rate.”

There is little reason why it should be different for other parts of the world, including Malaysia.

It is highly instructive to learn that if indeed actual crime rate had decreased in Malaysia, it happened only while the economy was recovering, thus creating the jobs needed to reduce unemployment.

It is equally instructive that crime rate was on the rise around the same time the Great Recession was at its peak, adversely affecting external demand for Malaysian goods and through that, jobs in Malaysia.

In February 2009, the unemployment rate was 4.1 per cent. In the same month in 2010, the rate was 3.6 per cent. Out of the 12 months, the 11 months of 2009 had higher unemployment rate than the same month a year later. If anybody requires any reminder, it was 2010 when the domestic economy was recovering at a worthwhile rate. The year 2009 was just horrible.

The severity of that number can be put in better context. The annual rate for 2006, 2007 and 2008 was around 3.3 per cent. In 2009, it is estimated to be 3.7 per cent. The estimate for 2010 is already lower than the year before, at 3.5 per cent.

As for the 2010 crime rate, the crime index fell by about 15 per cent compared to the previous year, according to a Bernama report. It also stated that the ”achievement was a result of the Royal Malaysia Police’s (PDRM) 12 initiatives to battle crime nationwide,” those initiatives being the Government Transformation Program. The arrogance and the dishonesty are truly remarkable.

The narrative of the results from the government’s effort at combating crime must compete with the mainstream uncontroversial economic one. This is not to say government effort is worthless, but for it and its supporters to claim too much credit, or in this case all the credit for the alleged drop in crime rate without even blinking amid the well-established and stronger case between unemployment and crime rate is too much to take. That is undue credit.

It must compete, just like how the government and its supporters claimed the undue credit for the Malaysian economic recovery when in fact, it was mostly the then rising tide of global economy that lifted the Malaysian boat.

Little things do matter. Actual effort at combating crime by the government and the wider public do matter and they are most appreciated. Nevertheless, do not be dishonest about it. Such dishonesty will discredit all the good real things done.

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 August 21 2011.


[2413] Looking for inverted yield curve

There have been talks of recession hitting the United States again. Extremely shocking manufacturing data from the US today is probably partly fueling the talks.

Although prediction is a risky game, there are various indicators one can use to gauge the likelihood of a recession. One of them is the US treasury yield curve.

An inverted yield curve may signal a recession, or at least some kind of pessimism in the market. The reason is that market participants will expect rates to go down during a recession. Future inflation rate meanwhile is expected to decrease as demand dies down. With those expectations, the bondholders will not require too high a returns.

Now, despite the talks, the current curve is sloping upward.

As you can see, the three yield curves in the last few weeks have been well behaving, unlike the one about 3 years ago just after the peak of the financial crisis. The September 2008 yield was inverted up to 2-year term.

So, there is no recession in the current yield curve. At least, not yet. Quite the contrary (unless we will be seeing stagflation), there is considerable inflationary expectation beyond the 5-year term relative to now; it is a pretty steep curve. That may suggest some kind of recovery.

Nevertheless, looking at the yield curve right now might be flawed, just because the Federal Funds Rate is already close to zero. Given that the US is possibly in a liquidity trap, the yield curve cannot be inverted.

Still, a relatively flat curve could be used as a signal of recession, especially if liquidity premium theory is taken into account. If the curve keeps sinking like it has for the past few weeks (so far, it seems to be due to flight to security phenomenon), we could be seeing a flat yield curve in a couple of months. Then, the case for recession will be stronger.

Of course, the curve should be viewed in context of other data for one to have a more educated guess about the future.

Another story is that the yield curve has been sinking lower and lower. The market is telling S&P something: S&P has got it wrong.