Category: Economics

Categories
Economics Sports

[1751] Of they counted it wrongly

Notwithstanding Tibet, the conflict in Xinjiang, suppression of Falun Dafa, the alleged connection to the alleged genocide in Darfur, broken promises of a free press, the pollution and eviction of citizens from Beijing, or the less than flattering revelation of how the “live” opening of the Olympics was not quite as “live” as it should have been — not to mention the use of a substitute child lip-syncing the song at the opening ceremony because the actual singer was not pretty enough — another phenomenon which this Olympics will forever be associated with is the competition between the United States and the People’s Republic of China. The methods used to measure the competition at the moment are flawed however.

The Olympics, in a way, can be seen as a proxy battle between the world powers. Prior to the Second World War, the United States was up competing against Germany. The battle was conclusively settled outside of the stadium in 1945 in Berlin.

During the Cold War, it was the US against the Soviet Union. As the Soviet Union crumbled under its own weight, so did the competition between the US and the USSR. Today, it is the PRC versus the US.

The competition between the US and the PRC is not just in the courts of sport. It can also be seen in how the points are tallied and, subsequently, how ranks are determined.

Go to the official website of the Beijing Olympics, head over to the medal count table and immediately a visitor can observe how the count is carried out. At the site, a gold medal is the ultimate yardstick. Regardless of quantity of bronze and silver medals, if a country has more gold medals than the other, the country gets to be on the top.

Head over to any Olympic standings published by the US press and there is a good chance that a person will find that countries are ranked by total medal count, regardless of the value of gold, bronze and silver. That is how the New York Times, FoxNews and MSNBC do it, anyway.

I am unsure how far the different ways of assigning ranks relate to competition between the US and the PRC but it is tempting to attribute the difference to the rivalry between the two countries. Another possibility is that this could be an innocent systematic difference.

A quick check of the official standings of previous editions of the Olympics reveals that it is gold medals that count, not total medals. In the 2000 Sydney Olympics, for instance, Ethiopia ranked 20th with four gold and eight total medals while Ukraine held the 21st place with three gold and 23 medals in total. The US ranked first, having the most gold and total medals.

The same arrangement is true for the 1996 Atlanta Olympics. Italy ranked 6th with 13 gold and 35 total medals while Australia ranked 7th with nine gold but 41 total medals. Just as with the 2000 edition, the US reigned supreme by garnering the most gold as well as total medals.

I am unsure how the US media did their rankings for the 1996 and the 2000 Games. Therefore, I cannot comment on the consistency of the US media but it is safe to say that the official convention at the Beijing Olympics is in line with past practice.

One way to see if bias has played a role in the determination of ranks would be to see if changes of circumstances of standings under a particular convention would lead to changes of convention.

Regardless, each convention suffers from a serious flaw respectively. Are 50 bronze medals worth less than a single gold medal? Is a gold medal worth as much as a bronze or a silver medal?

Surely the answer is no to both questions.

Yet, under the gold convention as officially adopted at the 2008 Olympic Games, the answer is yes to the first question and no to the second question. Under the total medal convention as adopted by the US media, the answer is reversed.

Truly, all participants actually care about winning a medal and what kind of medal. Gold is obviously the most favoured medal. Silver is not bad too if gold is out of reach. And better bronze than nothing, do you not think so?

The fact that participants compete for these medals and obviously hold transitive preferences for each type of medal insists that both types of ranking adopted by the Beijing Olympics and the US media are flawed. If the rankings are not flawed, then the principle of microeconomics would have to see a complete overhaul!

It would be the end of economics as we know it.

Seriously!

For those who truly wish to right the wrongs of the world, we can begin by restructuring the way countries are ranked in the Olympics. Weight to medal should be assigned to reflect the transitive nature of preference for different types of medals.

We could assign three points for gold, two for silver and one for bronze. The sum of points would then determine the final standings.

I think this is a worthy cause to fight for. I shall take up my dissatisfaction against the IOC by protesting in front of their headquarters soon. So, who is with me?

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

A version of this article was first published in The Malaysian Insider.

Categories
Economics Education

[1747] Of PTPTN now is an inter-temporal subsidy

Borrowers obviously will celebrate if they see a reduction in their repayment obligation. When the National Higher Education Fund Corporation (PTPTN) reduces its service charge or really, interest rate, from 3% to 1%, already I read borrowers singing high praises to the body. The reduction of rate also turns the financing facility into a subsidy, small as it may be.

Even with the traditional inflation rate between 3% and 4% that Malaysia had enjoyed earlier, 1% interest rate has the PTPTN suffering negative returns. The borrowers meanwhile get to pay less in real terms. Accommodating inter-temporal consideration which is typical in calculation present values, clearly the borrowers are being subsidized.

Now, while I am vehemently anti-subsidy as I have consistently demonstrated in past postings, my opposition towards subsidy is based desire to eliminate certain kind of negative externality as well as a desire for freer market. When it comes to positive externality however, I can be quite supportive. The public benefit derived from well-educated citizens are far higher than any private benefit enjoyed by individual borrowers, assuming all else is constant.

Indeed, subsidization of education creates positive externality. As a result, I am willing to have a subsidy supporting students. This willingness of course has it own qualifications but I shall leave that topic for another day.

One potential issue with the lowering of the interest rate is the disincentive to pay the installments on time. Compared to previously, the penalty of not paying any installment is smaller now. This may encourage borrowers to delay their payments, preferring to incur minor penalty to manage their own cash flow. As a result, PTPTN may have trouble managing its cash flow.

Finally, the across the board cut seems too blunt. I prefer to turn the PTPTN into a convertible loan, rewarding the best students with subsidy, or if you like, scholarship. For those whom are less successful, let them take the full brunt. Under this scenario, I think we would introduce a strong incentive for students to succeed.

Categories
Economics

[1744] Of crude oil prices may not continue to fall for long

Before we get the party going in celebration of falling crude oil prices, beware. This decrease could well be just a pause before prices march to yet another record.

I am suspecting so not because I subscribe to Malthusian logic. Malthusians all over fail to notice that humanity has an amazing capability to adapt. As prices of typical energy rise to a sufficient level, the search and utilization of substitute sources will take place. As a result, the demand for expensive source of energy will fall, bringing along its prices down.

The prices will stay down, given all else being equal, if technological, or rather increase in efficiency in consumption of the energy occurred. Improved efficiency produces a situation where fewer fuel is required for the same amount of production.

I suspect that it is possible that we may be seeing merely a dip in prices of crude oil because I am unconvinced at how the recent fall in prices is caused by structural changes.

On the surface, three factors seem to be causing crude oil prices to fall. They are contracting demand curve probably due to high crude oil prices, appreciating greenback and the slowing down of several world’s major economies. All factors are possibly cyclical and none is structural. When I refer to cyclical changes, I refer to changes in volume and when I refer to structural changes, I refer to changes in efficiency.

The relationship between crude oil price and the health of the global economy is easy to pinpoint.  A slowdown causes demand for crude oil to decrease. While the relationship may well be the reverse, the point is that it is a matter of typical business cycle and has nothing to do with improvement of technology.

The strengthening of the US dollar also has little to do with improvement in technology. To understand how stronger dollar leads to cheaper crude oil, it is important to understand the mechanics that works between trade and exchange rate. Weaker dollar causes cheap export and cheap export causes foreigners purchasing more US product. With weak dollar, the strength of the USD has to return as improvement in net export accumulates capital. If theory does not convince you, then let the number must do the job: the US trade deficit already dropped for the month of June.[1] With stronger dollar and with crude oil priced in riyal or some other currencies, fewer dollars is required to buy the same volume of oil.

Now, the third factor — contracting demand curve — may come closest to encouraging structural changes. The problem is however, I am not convinced that there is a actual improvement in technology. What I see is people using smaller instead of larger vehicles, public transportation, etc. But that is merely temporary lower consumption because once prices become sufficiently low, consumers would abandon small cars and public transportation and anything that only reduce volume of crude oil consumed rather than substituting it.

While there is indeed greater usage of electricity, natural gas and biofuel to replace crude oil, I am unsure how widespread it has been. Besides, the fall in crude oil prices have been too drastic in such a short time that I have trouble accepting the fall is caused by technology.

Why after all the adoption, the decreases in crude oil prices come only now and in such a dramatic pattern? Effects from structural changes should come gradually due to various lags that exist in the real world, not abruptly.

This has led me to speculate that the trend we are seeing is caused by merely and mostly reduction of consumption with little substitution energy consumed as replacement. It is likely that what we are seeing is merely reduction in volume rather than increase in efficiency. If my take is correct, then once prices reached a level somewhere down below, consumption would return to assume its record breaking rise performance which we saw weeks earlier as volume would go up while efficiency level would stay constant. This might be so due to little structural change in the global economy.

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

[1] WASHINGTON (AP) — The U.S. trade deficit unexpectedly fell in June as exports advanced to an all-time high, offsetting another big surge in oil imports.

The Commerce Department reported Tuesday the trade imbalance dropped to $56.8 billion in June, down by 4.1 percent from a revised May deficit of $59.2 billion. It was the smallest deficit in three months and much better than the $61.5 billion deficit Wall Street had been expecting.[June trade deficit shrinks as exports climb. Martin Crutsinger. Associated Press. August 12 2008]

Categories
Conflict & disaster Economics

[1740] Of financing Iraqi reconstruction effort is an obligation for the US

US politicians have begun questioning the virtue of the US spending over USD20 billion on Iraq whereas the Iraqi government has merely spent less than USD4 billion on the construction exercise despite having USD70 billion of budget surplus.[1] By comparison, the planned expenditure for the 2008 Malaysian budget was approximately USD55 billion and we are running on deficit.

As reported by the New York Times, security problem in Iraq is discouraging the Iraqi government from spending. Turbulent environment is not conducive for developmental effort, forcing Iraqi institutions to hesitate before even beginning to spend money for new projects. As a result, large Iraqi surplus sits safely idle in banks, earning enormous interest amounting to half a billion to date.[2]

Despite the large surplus and low expenditure, I do not think that would rationalize the call for the US politicians to cut back the US reconstruction expenditure in Iraq, especially when the reason for reconstruction originates from destruction brought upon during the US-led invasion back in 2003.

I am in the opinion that the US has every obligation to finance the reconstruction exercise with its own resources, regardless of the resources available to the Iraqi government. To put it simply, if a person breaks it, the person should pay for it.

This however does not mean that the Iraqi government should not spend anything. It is far more helpful if both governments could simultaneously spend to improve Iraqi public infrastructures like roads and communication lines for example. Restoring old infrastructures and building new ones should take place simultaneously to hasten development of Iraq. In other words, both reconstruction exercise, which is the responsibility of the US, and further developmental exercise, which is the task of the Iraqi side, should happen concurrently.

It would be far more acceptable for US politicians to call for the Iraqi government to match the US developmental expenditure instead. Nevertheless, the inability of the Iraqi government to spend has to be addressed first before the call could be earnestly made and that means securing peace in the war torn country. After all, the low figure for expenditure is about inability to spend rather than refusal to spend.

With greater security, those projects could bring economic returns to the Iraqi society. With insufficient security in place, those projects would just be another targets for the insurgents.

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

[1] “The Iraqi government now has tens of billions of dollars at its disposal to fund large-scale reconstruction projects,” Mr. Levin, who is chairman of the Senate Armed Services Committee, said in a joint statement with Mr. Warner. “It is inexcusable for U.S. taxpayers to continue to foot the bill for projects the Iraqis are fully capable of funding themselves. We should not be paying for Iraqi projects, while Iraqi oil revenues continue to pile up in the bank.” [As Iraq Surplus Rises, Little Goes Into Rebuilding. James Glanz, Campbell Robertson. New York Times. August 5 2008]

[2] The deposit at the Federal Reserve Bank is so large that the United States has been obliged to make $435.6 million in interest payments to Iraq through the end of last year, according to the new report. [As Iraq Surplus Rises, Little Goes Into Rebuilding . James Glanz, Campbell Robertson. New York Times. August 5 2008].

Categories
Economics

[1736] Of temporary inflation could be a reason for unchanged rate

Malaysian central bankers have become victims of a running joke lately: if you are divided between maintaining a low unemployment rate and containing inflation, pray and do nothing.

On Friday last week, Bank Negara made known its decision to maintain the Overnight Policy Rate at 3.5% even as the local real interest rate is negative.

The recently published monetary policy statement is too hilarious for me to read quietly. It reminds me of what US President Harry Truman once famously said: “Give me a one-handed economist… All my economists say, ‘On the one hand… on the other’.” For sure, Truman would not find a one-handed economist on Jalan Dato’ Onn either.

The statement opens with a pessimistic tone by making references to the wage-price spiral and persistent inflation. It is all doom and gloom but then Bank Negara vows to take the “appropriate monetary policy response” to “maintain medium-term price stability and ensure that the high inflation does not undermine the longer growth prospects of the Malaysian economy.”

After comforting the public that the bank is prepared to do whatever is necessary to fight inflation, the bank says “while both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment”.

The statement ends with “based on this assessment, the Monetary Policy Committee has decided to keep the Overnight Policy Rate unchanged at 3.50%.”

Smooth.

To be fair, however, the bank did indicate that projected slower economic growth is expected to keep inflation in check. The statement also seems to suggest, or at least I interpret it as such, that the inflation rate we are experiencing is likely only a one-time spike.

The fact that there are lags between wages and prices would discourage a wage-price spiral, further providing the case that this high rate of inflation is unsustainable. All those control mechanisms over prices, though lamentable, do a good job at delaying the catch-up game between wages and prices. In other words, it helps keep inflation tamer than what it could have been.

I think the possibility that this is a one-time hike in inflation is important in understanding why the bank did not increase the OPR last week.

Ben Benarke in a speech last year said: “”¦With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices.”

This is probably what is happening at the moment, fuelling the rationale for Bank Negara to maintain the OPR.

But how confident are we that this is merely a one-off hike?

Well, the 7.7% inflation rate is mainly due to the June 5 hike in local retail fuel prices. It is fair to assume, especially with all the control regimes the state has put in place, that if there is another hike in inflation rate, it would probably be caused by another hike in retail fuel prices.

Within that context, world crude oil prices at the moment have taken a dive and the fall is nothing less dramatic. From close to US$150 per barrel, a record even in real price, it now hovers below US$125 per barrel.

Now, the jury may still be out but the demand curve has to contract sooner or later as market participants adapt to a new reality which calls for less reliance on fossil fuel. Just as how the 1970s taught us about our amazing versatility in solving crises, there is little reason for us to embrace the Malthusian logic now and throw in the towel.

If indeed the demand curve has shifted, then Bank Negara has all the more reason to expect that the current high rate of inflation is temporary in nature despite the expressed concern about persistent inflation. And the bank did indicate how temporary is temporary in the statement: by mid-2009, we should be able to party on and laugh all this off.

Perhaps more importantly, the government has little reason to increase prices at the pump if prices stabilize at the current level. With current global crude oil prices being so favorable to the state’s coffers, there has been talk within the Barisan Nasional government about reducing local retail fuel prices.

Apart from politically undercutting the Pakatan Rakyat, reduction of prices has the potential to bring down the inflation rate without the need to raise interest rate, thus providing the bank some room to do something about the unemployment rate.

But damn, negative real interest rate!

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

A version of this article was first published in The Malaysian Insider.