Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics

[2502] A too convenient instance of government spending

The Malaysian GDP figures for the 4th quarter came out today, with the full year growth being slightly above 5%. Judging by the components of the GDP and their respective growth, I find the growth rate of 5% to be too convenient for the government, which projected the 2011 economy to grow between 5% and 6%. The reason is that government spending grew by close to 17%.

I shared this last month, and the 4th quarter growth for government spending was even higher than the previous quarter: 23.6% from a year ago.

I did a little calculation just now while I was finishing a GDP report for my bank. I found out that if government spending had not grown at all, that would have shaved almost a complete percentage point out of the 5% annual GDP growth. If the spending increase had been slightly more modest, the overall growth would have missed the government’s target easily. Really, it would not take much to miss the target.

I know there is a low base effect given that there was hardly any government spending growth in 2010. It is very likely that spending planned for 2010 was postponed to 2011.

But the government spending growth is still convenient, too convenient, nonetheless. This may appear to be a case of perverse incentive.

It is much like a case in Liar’s Poker:

One trader remembers that ”Lewie would say he thought the market was going up, and buy a hundred million [dollar-worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course the market would then go up. After he had driven the market up, Lewie would turn to me and say, ”˜See I told you it was going up’”¦”

Categories
Economics Humor

[2501] Happy Valentine’s day

Via Greg Mankiw, from Elisabeth Fosslien.

p/s — Oh, Dr. Goose rounds up the econosphere’s Twitterverse:

Who says there’s no romance in monetary stimulus? Those outside of the Twitter econosphere may not know that the network was recently swept by a wave of #FedValentines, as the trend was hashtagged. It began with Penn economist Justin Wolfers, who tweeted: “Like fiat money, our love is built on trust.” White House economic adviser Austan Goolsbee chimed in: “Roses are red, violets are pink, don’t listen to gold bugs — no one cares what they think.” My personal favorite belonged to the FT’s Alan Beattie: “I’d like to borrow you overnight and then hold you to maturity.” Not to be outdone, Dr. Goose contributed: “If you’re not ready for a liquidity injection, I’ll understand.”

Categories
Economics

[2500] Will there be any saving in the MRT setup?

Here is a microeconomic contract theory puzzle with the incentives do not quite line up perfectly.

According to the Financial Daily today, the MRT project delivery partner (a joint venture between MMC Corp and Gamuda) will be punished by the project owner if the cost of the project exceeds 15% of some base. Any cost overruns beyond that limit will be borne by the PDP instead of being passed to the project owner, which really is the government.

In StarBiz today, it is reported that any cost saving will go directly to the government.

This makes me wonder, will there be any saving? What incentive is there to discourage the PDP from running 14.99% above the agreed base. Is it not rational for the PDP to eat up any saving that might exist, leaving nothing for the government?

But I guess we can take comfort that a cost overrun is a likelier outcome than any saving. After all, the last time a similar project was carried out in Kuala Lumpur more or less 10 years ago, the cost ran out of order so much that the developers had to be bailed out by the government.

Some comfort, eh?

Categories
Economics

[2499] Foreign exchange reserves in terms of imports? Non! Non! Non!

Does anybody know why whenever there is a discussion on foreign exchange reserves, it is typically measured in terms of imports and external debt financing?

I took these metrics for granted in the past. They seem intuitive at first. It provides a humanizing reference to what can be meaningless large numbers. But they lose their relevance after one reminds oneself of the purpose of foreign exchange reserves.

When one measured in these terms, there is an implicit understanding that the foreign exchange reserves are used for imports and external debt financing, an understanding which is false. The foreign exchange reserves are held by the central bank and the central bank is neither responsible in any payment with respect to export and import activities nor responsible in the repayment of external debts per se.

If the foreign exchange reserve is stated within the context of the ability to sustain for example 10 months of imports, does it really do so? If the importers, which is not the central bank by the way, suddenly face a liquidity crunch and unable to pay for its current and future imports, will the large foreign exchange reserves help? No, unless the central bank suddenly becomes the economy-wide importer, which diverges so far away from the traditional central banking functions.

If the foreign exchange reserves are stated within the context of the ability to finance for example 10 months of external debt, does it really do so? If private debtors suddenly go bankrupt, will the central bank take over those debts on behalf of those private debtors? No. The central bank is not a financier of private individuals or businesses.

And if the government suddenly finds itself unable to finance its debts through traditional means, either through borrowing or taxation, will the central bank step in to pay the government’s debt (or specifically, Treasury’s debt in order to clarify the fact the when one speaks of government debt, it really refers to the government sans the central bank, and the Treasury essentially manages government-sans central bank-finance)? Not really. The government or more specifically, the Treasury does not and should not have access to the foreign exchange reserves controlled by the central bank.

The central bank can of course buy treasury to help finance government deficit. But it remains that the government borrows from the central bank. The government does not take the money and pretends that the foreign exchange reserves are some kind of treasury money saved in an account at the central bank. In fact, the central bank and the government collectively do not need the foreign exchange reserves to finance government deficit in time of crisis. The central bank can do so cheaply through debt monetizing process, i.e. through the printing presses or more accurately, money created electronically.

In short, foreign exchange reserves are not government savings.

Some governments take the foreign reserves and use it to fund a sovereign wealth fund. I suppose that is a somewhat more efficient use of the money, but that is essentially an institutional abuse.

The function of the foreign exchange reserves remain for the operation of — tada! — foreign exchange, especially for a country that runs on controlled foreign exchange regime. The reserves are huge exactly to defend the currency if need be. What has happened in Malaysia is that there is a hangover from the 1990s financial crisis. Malaysia continues to have one of the biggest foreign exchange reserves in the whole world, and that is not exactly efficient.

This is especially bad when laypersons catch up with the jargon. There have been several instances in the past when a drop in foreign exchange reserves are taken by some in the public as ominous outflow of funds from Malaysia. It makes discussion on the matter completely off track and irrelevant from the very beginning, just because everybody uses the jargon and nobody understands the function of the reserve properly.

So, somebody, please, share with me why foreign reserves are typically stated in context of imports or external debt.

I think if the metrics is used to convey what I think most individuals want to convey, there is another better concept that should be used. It is the balance of payment. The measurement in terms of imports still does not fit the bill exactly, but at least, it comes closer to being accurate than measuring the foreign exchange reserves in terms of imports will ever be. But the balance of trade is not money owned by any one person. It is money owned by the whole economy.

Categories
Conflict & disaster

[2498] The Syrian frustration

I know I said no to foreign military intervention in Libya when its civil war erupted. I reasoned that such intervention would rob legitimacy from any success out of the rebellion against the Gaddafi administration. In retrospect, I vastly underestimated the popularity of the rebellion. Foreign intervention did not matter much in determining the perceived legitimacy of the new government. Even if foreign ground troops were deployed in Libya to aid the rebellion which did not happen, I would think these foreign soldiers would be greeted enthusiastically by most Libyans. Once I realized this, I decided to support the intervention. Besides, the Gaddafi government itself received foreign military aid, and even had foreigners fighting for him. The NATO/UN action seemed justified in a tit-for-tat logic. In the end, I am glad the situation in Libya turned out as it has panned out, with or without foreign intervention. What is happening in Libya so far has been very liberal when compared to its history and its neighbors.

Libya has to rebuild their country and it has a long way to go. The relevant point here is that the military struggle has ended.

Not for Syria though. What happened in Libya is happening in Syria. Protests erupted. The government used force against the protestors. Some protestors picked up armed and fought back in an organized manner. The Syrian rebels have not been as successful as their Libyan counterparts had before NATO/UN intervened so far. Its evolution is almost the same, except this time, the UN Security Council is divided. That makes foreign military intervention impossible, if not hard.

I am tempted to repeat the same argument about legitimacy, popularity and foreign military intervention in Syria. At the back of my mind however is the success of the Libyan model and if the UNSC had passed the resolution, it would probably pave the way toward foreign military intervention and I would support the intervention in favor of the rebels.

But the UNSC did not pass the resolution to call among other, for the Syrian President Bashar al-Assad to step down. For me, that is a barrier towards support for the intervention.

The Syrian case added a new dimension to the issue of military intervention, or rather it accentuated it. It highlights the importance of not only the organic legitimacy of the rebellion at the expense of the incumbent dictatorial government but also international legitimacy. Libya had both. Syria has only one so far. As a sidetrack, Iraq had none (nevertheless, after all that has been said and done, I think the Iraq episode is a success story and I find it hard to deride the invasion of Iraq as I had in the past. That does not mean the invasion was legitimate though).

In the statist world that we live in, we definitely do not want countries to simply conduct hostile military action in foreign soil regardless of its justification, apart from explicit self-defense. That would mean an overly chaotic world. There has to be a check-and-balance mechanism and however flawed the UNSC is, it is one that prevents the strong from bullying the weak so blatantly. That is not to say the bullying does not happen (remember Russia and Georgia in 2008?) but the system does provide some needed discouragement.

The realist in us will realize that the UNSC is all about politics and not idealism. Russia has interest in maintaining the status quo in Syria. News reports cite that Syria is Russia’s only open ally in the region amid an either an increasingly independent Arab states, or pro-US states like Saudi Arabia and other smaller Gulf states. The fall of the Assad government may benefit the US, especially when the US is siding with the rebel forces.

Regardless of the benefits the US may gain, that does not negate the liberal impetus for the intervention and that is the protection of individual liberty which is clearly being trampled over.

The point of all this is that I want a military intervention.

But the consensual approach in the UNSC does appeal to libertarian non-interventionist foreign policy. It is a bit convoluted and can be contradictory but as I have written a long time ago, it is true that pure Ron Paul’s non-interventionism ignores violation of liberty outside of the border of a liberal state. That is a problem for me but it is also a practical approach to the fact that liberal states cannot fight tyranny everywhere out of economic reality. The UNSC with it consensual approach makes non-interventionism a default position.

But in the case of Syria, it frustrates me as a libertarian. The very libertarian foreign policy comes with a trade-off with another very libertarian principle.