I was doing some research and needed to get some data from the Statistics Department. I was pleasantly surprised to find out that the website of the Department has seen an improvement. It is prettier than the old version and more navigable too.
Good work to whoever that worked on the website.
p/s — I wonder when will Bank Negara do something about their website. It is really a pain navigating around their site.
Any policy which pays too much attention to the symptoms of an issue while ignoring its root cause only deserves outright rejection. The Malaysian government’s typical response to shortage of goods is one such policy. The shortage is unambiguously caused by a price and supply control mechanism, which prevents prices from adjusting according to prevailing supply and demand, as well as incorporating other relevant information. Yet, time and again, the authorities blame smugglers for the problem. Not that smugglers deserve any defending, but they are but a mere symptom of a control regime. Addressing a symptom is an ineffective way of solving a problem. Another policy which conflates symptoms with root cause is the pegging of the Malaysian ringgit to some currencies.
The rationale of the proposed policy is simple: It is aimed to stop the ringgit from weakening further vis-Ã -vis other currencies.
The root cause of a weakening ringgit is the economy itself. Although I am unable to exactly pinpoint the causes, I do have a list of suspects and three of them are political uncertainty, fiscal deficit and windfall tax.
The political uncertainty which we are experiencing so far has a lot to do with it. After all, Credit Suisse did advise investors to stay clear of Malaysia due to the political turmoil. Apart from Pakatan Rakyat’s increasingly tiring poker face with respect to their claim of entering Putrajaya, the recent use of ISA continues to send unhelpful signals to local and foreign investors. As a result, money flows out.
The fiscal deficit of the Malaysian government is yet another factor which may encourage capital outflow. Several economists, among them Salant and Krugman, did suggest that persistent deficit may cause capital flight.
This happened to the Indonesian rupiah several years ago as the size of the fuel subsidy ballooned into the Indonesian fiscal deficit. The rupiah dropped to a frightening level and it only recovered after the Indonesian government decided to dramatically cut the size of the fuel subsidy. Unrest ensued, but in the eyes of advocates of the peg, the rupiah was saved.
Another reason for the lackluster performance of the ringgit might be the imposition of the windfall tax. Earlier, the government imposed significant windfall tax on independent power producers. The imposition is no laughing matter because approximately a fifth of the local bond market is made up of papers issued by the power producers.
Such a tax naturally spooked the bond market, shooing investors away together with their money. In the typical fashion of the current administration, however, the windfall tax was scrapped and replaced with something else. While the U-turn was celebrated, the damage had already been done.
Indeed, Malaysia is not the only destination for investment. Once the money is out, there is little reason for it to come back, especially when there are far better options out there. The financial fortresses of Singapore and Hong Kong are not too far away, if distance is an issue at all in this age of light speed communication.
All of the factors need to be addressed if the strength of the ringgit is an issue. A peg, however, does little to address these issues.
A peg basically acts like a wall. Unless the push factors are addressed, pressure against the wall would build up and it would depend on the strength of the wall to prevent a terrible flood. That wall is the reserve of the central bank.
In the case of the peg, the central bank would have to maintain a position with respect to the currencies which the ringgit is pegged against. In times of a weakening ringgit, the bank would need to shore the ringgit up to the predetermined level by reducing the quantity of money circulated in the market. In effect, this would raise interest rates.
During a period of economic crisis, it is typical for a central bank to lower the interest rates by providing liquidity to promote growth in general, or at least to cushion the effect of a downturn. A peg, however, does exactly the opposite.
Borrowing will become more expensive and create an environment not conducive for greater economic activities, with all else being equal. Whereas consumption is required to fuel a flattering economy, a signal for greater savings and delayed investment is sent instead.
Increased savings will, of course, bring the interest rates back down if it gets to the necessary level, but by the time that happens, the economy would probably find itself in better health, removing the urgency for greater consumption.
Besides, a peg assumes that a particular level or band of ringgit vis-Ã -vis some currencies is more favorable than any other for everybody on average. Though mainstream economics has been accused of simplifying the world through its models, this assumption goes frighteningly further by committing a hasty generalization.
An economy does not comprise of homogeneous members. A strong currency is not necessarily good for everybody just as a weak currency is not necessarily good at all. Exporters for instance would love a relatively weak currency while importers would love a strong currency. It really depends on which side one is on.
The best way to balance the competing demands of various players within the economy is to allow the market to consider all variables to churn out the right answer. Within this context, Governor Zeti Akhtar Aziz rightly dismissed the call to peg the ringgit to the dollar or any other currencies.
A version of this article was published in The Malaysian Insider.
Long ago as a boy so liberated from cares, I was on my way back home from school. Along the way, I saw a kitten looking so forlornly in a bush with a face so miserable as if she was in need of help. Without much thought, I took her home with the intention of nourishing her. Once home however, she refused to consume anything provided to her and went on to die only days later. Her death shattered my heart into pieces. In retrospect, she may not have required any saving. What she probably needed was her mother more than anything else. It was very likely that her mother was scouring for food somewhere, leaving the kitten temporarily behind. In most likelihood, despite my good intention, I separated the kitten from her mother and consequently, I killed her.
I am sure that my experience is not unique. How many of us had the good intention of giving up our seat in a train to someone whom seemed to be a pregnant lady only later to learn that she was not in the most embarrassing manner? How many of us began with good intention but ended up worse off?
Many of the policies aimed at enhancing welfare of the people began with good intention. As noble as it sounds, good intention is not always a good measure for a good policy.
If we are to derive only one lesson from economics, it has to be that individuals respond to incentives. Here is where the importance of price as a signal must not be understated. Any policy which does not take heed of this lesson is doomed to failure sooner or later and we have a long history of communism to prove that. The success of a policy depends on policymakers’ comprehension of that lesson.
Behind the Malaysian fuel subsidy policy stands a compassionate desire to alleviate the burden of the people. While many are swayed by this point, the policy distorts prices in the market and consequently affects behavior of producers and consumers for the worse.
In times of high prices under free market arrangement, conservation and investment in new technology as well as its widespread application should be the order of the day. In doing so, most actors would have adapted to the prevailing environment. In contrast, a subsidy policy — interventionist policy — isolates consumers and producers from the reality outside; it artificially lowers energy prices. State interference through the policy only garbles the signal that would otherwise call for a more measured consumption path. As a result, there is little need to adapt to a new reality.
For instance, a greater need for better public transportation is only immediately apparent when fuel prices are high. It makes no sense for anybody to utilize any kind of public transportation when driving a vehicle does not burn a hole in our pockets, with all else being equal. Likewise for carpooling; no amount of funky advertisements commissioned by the state could match the effectiveness of dearer fuel price in encouraging carpooling. So too goes with the need for greater fuel efficiency.
Furthermore, if one cares for the environment, the case for freer market is undeniably strong. Within the context of climate change, Malaysia has the honor of having the highest growth rate of carbon emissions in the world since the 1990 and without doubt, artificially low fuel prices made possible through state intervention has a lot to do with that. A refrain by the state from interfering in the workings of the market could go a long way in humbling our ugly but spectacular record.
Most of all, the downside this particular state intervention in the marketplace in the form of fuel subsidy policy is the weight well-intentioned electorates, bureaucrats and politicians placed on short-term gains at the expense of long term and structural improvement of our society. A freer market will recalibrate our carrot and stick model to be more forward looking instead of being one of instant gratification.
First published by Malaysia Think Tank’s WauBebas.
Intrade is gaining reputation for predicting the future. At its center is the idea that prices reflect all available information.
Wouldn’t it be good to have Intrade for Malaysia?
Now I know why Fortis sounds so familiar.