Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics Environment

[2137] Of 40% cut in carbon intensity may not be something to shout about

Bernama wrongfully reported that the Prime Minister of Malaysia, Najib Razak, put up a conditional offer to cut 40% of Malaysia’s 2005 carbon emissions by 2020.[1] The same goes with the New Straits Times, except it did it more badly by not directly quoting the Prime Minister.[2] This is sloppy reporting. The truth is that it is a conditional cut of 40% to Malaysia’s carbon emissions intensity in terms of GDP within the base and time frame mentioned. Regardless of the inaccuracy, is the cut impressive?

The size of the cut seems big but cutting carbon emissions intensity is a lot easier than cutting outright carbon emissions; a cut in emissions is more expensive than a cut in carbon intensity. Achieving 5% cut as demanded by Kyoto is a lot harder than 5% cut in carbon intensity. The difference is clearer when one takes note that emissions itself can increase even under a situation of decreasing carbon intensity.

A demostration is in order. The most convenient way of showing this is by using intensity per capita as a unit rather than per GDP. In order words, this refers to emissions per person.

Assume that the emissions per person is 2 and there are a total of 10 persons in a neighborhood. The total emissions is therefore 20.

Assume further than emissions per person improves to 1.5 and total population increase to 15. Total emissions gets worse: it is now 22.5.

A cut in emissions will address total emissions. A cut in carbon intensity does not guarantee that.

A concrete example is the United Kingdom. According to the National Environmental Technology Centre of the UK, total emissions fell slightly between 1990 and 2005. Carbon intensity? It fell more or less by 40%. [3]

Hence, the act of stressing the difference is not a matter of splitting hair.

Carbon intensity has the tendency to decrease over time due to application of technology. The typical criticism directed at any commitment at reducing carbon intensity is that even without such commitment, carbon intensity will decrease anyway. This is especially true for developing countries where there is a lot of space for technological improvement through by merely copying.

Given this, the Prime Minister’s conditional offer is not something to shout about. China also made an offer to cut carbon intensity and it has been rightly criticized for trumpeting an unremarkable target and then demanding moral authority at the negotiation table in Copenhagen during the 15th Conference of the Parties that ended recently.

(Despite this tendency, Malaysia’s carbon intensity between 1990 and 2004 increased. I suspect a Kuznets curve.[4] The ratio may increase up to a certain level before decreasing. Malaysia after all was industrializing during the 1990s and now, Malaysia is largely done with industrialization.)

It should only be seen as a brilliant diplomatic maneuver and not a big effort at cutting emissions. It is brilliant not just because that the commitment is very likely to be achieved anyway and thus, making the offerers look good, it is brilliant because it makes demand for aid — and making the exercise cheaper than it would — even when the cut in carbon intensity is very likely to be achieved without any binding commitment.

This is not to dismiss the importance of cut in carbon intensity. I myself believe that technology is the answer to climate change but it is important to get the right message across while the Malaysian mass media failed the public miserably.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — COPENHAGEN, Dec 17 (Bernama) — Malaysia has agreed to reduce its carbon dioxide emission to 40 per cent by the year 2020 compared to the 2005 levels subject to assistance from developed countries.

Prime Minister Datuk Seri Najib Tun Razak said the cut was conditional on receiving the transfer of technology and adequate financing from the developed world.

“I would like to announce here in Copenhagen that Malaysia is adopting an indicator of a voluntary reduction of up to 40 per cent in terms of emissions intensity of GDP (gross domestic product) by the year 2020 compared to 2005 levels,” he said in his speech at the United Nations Climate Change Conference 2009 here, on Thursday,

United Nations data shows Malaysia’s carbon emissions in 2006 stood at 187 million tonnes or 7.2 tonnes from each Malaysian. [Malaysia Announces Conditional 40 Per Cent Cut In Emissions. Bernama. December 17 2009]

[2] — PM Najib says Malaysia is committed to do its best in combatting climate change.

MALAYSIA will voluntarily slash by up to 40 per cent her carbon emission by 2020 compared with 2005 levels.

Prime Minister Datuk Seri Najib Razak, who made this commitment yesterday, said the cut was part of Malaysia’s contribution to global efforts to combat climate change. [40 per cent reduction of carbon emission by 2020. Mimi Syed Yusof. New Straits Times. December 18 2009]

[2] — COPENHAGEN: A roadmap towards realising the 40% reduction of carbon emission per capita from the 2005 level by 2020 will be presented to the Cabinet soon. [40 per cent reduction of carbon emission by 2020. Mimi Syed Yusof. New Straits Times. December 18 2009]

[3] — [Page 18 and 19. Carbon dioxide emissions and energy consumption in the UK. The National Environmental Technology Centre]

[4] — See Kuznets Curve at Wikipedia. Accessed on December 25 2009.

Categories
Economics

[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.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

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

Categories
Economics

[2135] Of GLCs are not quite part of the private sector

Second Finance Minister Ahmad Husni Hanadzlah recently made a speech that received a lot of attention. Early in it, he shared that the government is looking to increase the private sector’s contribution to the domestic economy. This particular point would have been exciting if it was not for three reasons. One, he is not the first person to say this. Two, the last time somebody important in the government expounded the idea, the size of government expanded considerably instead. Three, as the minister said, the government means to see this through via government-linked companies. The third point is noteworthy because government-linked companies hardly qualify as part of the private sector.

It is instructive how the definition of a word or a phrase changes over time. Invasion is termed as liberation. Loss of innocent human lives resulting from military action sanctioned by the state is called collateral damage. George Orwell probably drives home the point best with the statement ”war is peace, freedom is slavery and ignorance is strength.”

The term private sector is supposed to describe the sector within the economy that is not owned by the state, where private individuals make private choices with private resources for private gains or losses. Any enterprise owned by the government, and therefore largely utilizes public resources, is part of the public sector. While the break may not be clean because the link between the two sectors in some cases is inevitable, their difference in Malaysia now is far too blurry for it to be meaningful within the context of the speech. The cause of that is years of government intervention in the market.

These interventions come in many ways. Bailouts of failed enterprises by the government are one way where excessive presence of the state in the market can be introduced. Another is through the government’s expressed intention of participating in business that is mostly due to political and not business considerations.

During the Abdullah administration, multiple fully-owned government-linked companies were established as part of the government’s focus on the agricultural sector, as well as its love affair with centrally planned economic corridors. During the Mahathir administration, the focus on manufacturing brought upon the birth of — for example — the state-owned Proton. How the protection of Proton has prevented Malaysia from becoming a regional automotive hub driven by foreign but essentially private sector is well known and needs no further elaboration.

Even when import substitution policy was all the rage in the early history of Malaysia, the government helped create what eventually became favored oligopolies in multiple sectors. These oligopolies continue to exist until today. The creation of a monopoly is not exactly a healthy way to enhance the private sector’s contribution to the economy because most monopolies have the incentive to maintain the status quo. They do this by discouraging adoption of new technology that is crucial to improving productivity and ultimately challenging their dominance to the benefit of society at large. Without improved productivity, it is hard to see how the private sector could increase its contribution to the economy.

Due to those interventions, the understanding of the term private sector has gradually but surely shifted to assume its opposing definition. Observe how strongly linked the domestic economy, specifically the supposedly private sector, is to Khazanah Nasional Berhad, Perbadanan Nasional Berhad and even the Employees Provident Fund, among others. Entities linked to them are countless: UEM, CIMB, Maybank and Sime Darby. Many of supposedly privatized companies are not quite part of the private sector as well.

To label entities strongly linked to these organizations as part of the private sector is tenuous because, like it or not, the government has a strong say in the management of those entities. With that, the government essentially controls the direction of these companies. Given the vast resources available to the government despite its massive fiscal deficit, the government unfairly competes with the true private sector. This unfair competition itself discourages the creation of new entrepreneurs for the inculcation of competitive market, to limit space for the true private sector.

Considering all that, how exactly does the government plan to increase the true private sector’s contribution to the domestic economy through government-linked companies will be interesting.

Does the government intend to instruct its government-linked companies to increase activities in the market and then label such contributions to the economy as privately-driven?

Or does the government plan to increase activities of government-linked companies to increase opportunities for entities from the true private sector? This creates only a culture of dependency. In times when the government seems intent to reduce dependency on the state, this contradicts the effort.

The best way to increase the true private sector’s contribution is to embrace the original meaning of the term. To do that, the government or really, the state, needs to reduce its participation in the market. Bad regulations protecting monopolies and state-owned entities meanwhile require dismantling in order to give true private sector space to expand in a largely distortion-free environment.

The first step to take is for the government of the day to stop overestimating its capability in managing the economy. Humbleness is the key in getting the private sector to improve its contribution to the local economy, especially in a sustainable manner. Rather than trying to expand the role of government-linked companies, the government should focus on building credible institutions capable of accommodating expansion of private sector.

In other words, the government must refocus on its original purpose. That original purpose of a government, without being ideological about it, is governing, not doing business.

Let the true private sector do its work properly without excessive government interference either directly from the government itself, or via government-linked companies.

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 17 2009.

Categories
Economics

[2134] Of worst, pro-GST, rationale, yet

Pakatan Rakyat has put forth some bad rationale in arguing against the implementation of GST in Malaysia. Populist argument tend to have bad rationale anyway. But the award for the worst rationale yet, for either pro-GST or anti-GST, has to go to our Minister, Ahmad Husni Hanadzlah of Barisan Nasional:

The implementation of the goods and services tax (GST)is a means of placing the country’s economy at a level that is at par with those of developed nations and in keeping with changing times, said Second Finance Minister, Datuk Seri Ahmad Husni Hanadzlah.

He said the GST implementation gave the government an advantage,particularly in enhancing income flow, which can then be used to implement projects for the benefit of the people.

”Only three countries in the South-East Asian region do not practice this taxation system, that is Malaysia, Brunei and Myanmar. Brunei does not have a taxation system and we will join 143 other countries in implementing the GST.

”We need to change to ensure we stay in the best grouping,” he told reporters after a gathering at the Tambun parliamentary constituency mobile service centre here today. [Husni: GST will put us among developed nations. Bernama via The Malaysian Insider. December 19 2009]

We implement GST “to ensure we stay in the best grouping”, eh?

Unfortunately, these countries are in “the best grouping” because of factors such as presence of strong institutions, respect for rule of law, free market economy, etc. It is not because of GST that they are part of “the best grouping”. These countries may be the same countries that implement GST, but GST is not the reason why these countries are part of “the best grouping”.

Correlation is not causation, my dear Minister. It is not.

Categories
Politics & government

[2133] Of rotation for Pakatan’s top post? Why not just vote?

The biggest event this week in Malaysia has to be the first Pakatan Rakyat Convention. It is good that Pakatan Rakyat is taking steps to institutionalize its cooperation. Despite that, there are a few issues that may appear to be a betrayal to democratic values that it claims to uphold. One is its commitment to local election, which seems to be wavering at the moment.[1] Second, which I want to touch briefly here, is the demand of DAP to rotate the top post of Pakatan Rakyat among the three parties in the coalition.[2]

When some members of PKR allegedly suggested that the position of Chief Minister for the state of Penang be rotated back in September this year, that suggestion was rightly criticized though the venom is uncalled for. One of the accusations thrown at those who allegedly made that proposal was that the proposers were “power crazy”.[3][4] Never mind the reality that all political parties are interested in power in one way or another, again, the suggestion, if it is true that it was made, should be shot down.

The principle of rotation goes against the spirit of democracy. Granted, given the system used in Malaysia for public office like the Chief Ministership, is not directly elected but surely it is only fair for the majority to hold the top post. This admittedly discounts what happened in Perak where there are real and unfair obstacles in letting the majority hold the top post.

DAP was visibly most vocal voicing out against that suggestion for the reason. This is understandably because it is the incumbent as well as the majority power within Pakatan Rakyat in Penang.

This demand by DAP, suggestion or whatever one wants to call it, should not be seen in different light to the call for rotation in Penang. It is the same principle.

Given this, to have DAP to repeat the argument for Pakatan Rakyat’s top post is hypocritical, whatever way one sees it. Would this mean DAP is “power crazy” too?

The better way to decide this is to have internal election for that post. Would this not be truer to democratic values? Of DAP really cannot win in an election and afraid of democracy?

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR, Dec 16 — Pakatan Rakyat’s (PR) democratic ideals will be tested at this Saturday’s convention which is being held to produce a common platform as all three component parties remain divided over local council elections. [Pakatan divided ahead of convention. Syed Jaymal Zahiid. The Malaysian Insider. December 16 2009]

[2] — KUALA LUMPUR, Dis 18 — Pakatan Rakyat (PR) kemungkinan menggunakan sistem giliran jawatan ketua menerajui ikatan itu sebaik sahaja pendaftarannya diluluskan pihak berkuasa.

Timbalan Pengerusi DAP Kebangsaan Dr Tan Seng Giaw berkata kemungkinan itu boleh ditimbangkan oleh PR bagi menampakkan yang ia berbeza dari Barisan Nasional (BN). [DAP mahukan sistem giliran ketua Pakatan. G. Manimaran. The Malaysian Insider. December 18 2009]

[3] — PENANG, Sept 29 — The proposal by Penang Parti Keadilan Rakyat (PKR) Youth that the Chief Minister’s post be rotated between parties in Pakatan Rakyat has been criticised by Penang DAP Socialist Youth (DAPSY). [DAPSY raps Penang PKR Youth over call to rotate CM’s post. Bernama via The Malaysian Insider. September 29 2009]

[4] — GEORGE TOWN: Penang Parti Keadilan Rakyat (PKR) Youth chief and Balik Pulau MP Mohd Yusmadi Mohd Yusoff has denied a newspaper report on Sept 29 which quoted him as saying that the Penang chief minister’s post should be rotated. [Yusmadi denies making Penang CM rotation statement. The Edge. September 30 2009]