And screw the smart ass broker too. You and your stupid and worthless advice as well as those useless technical graphs.
Categories
Category: Economics
UPDATED: I am surprised by the performance of the Information Minister in the debate tonight. I had expected the Minister to fail to present his case against subsidy, losing to Anwar Ibrahim’s oratorical skill. Delightfully however, I found myself underestimating the Minister, at least, in the earlier parts of the debate. Unfortunately, despite my initial excitement at the Minister’s performance, as time progressed, his performance began to regress downward, veering to irrelevant issues.
The personal attacks done by the Minister are deplorable. He should concentrate on policy, not on personality.
While digressing, he made one sketchy economic point. He said something to the effect that subsidy encourages inflation, citing Iran and Venezuela as examples. I think inflation in those countries is caused by other factors, not subsidy. In fact, subsidy plays a role in moderating inflation, not flaming it, regardless the inefficiency involved.
But an indirect relationship between inflation and subsidy is possible however, though not quite sanctioned by mainstream economics. For one, subsidy increases expenditure which may increase fiscal deficit. In the case of Malaysia, a subsidy as massive as the fuel subsidy is definitely related to our government’s fiscal deficit by the virtue that we already have approximately 3% deficit out of GDP. That deficit encourages capital outflow and depreciate local currency because the expenditure does not encourage confidence as it is practically a type of spending with no returns. Nobody would want to invest if the government spends money but receives no returns. Through the weakening of the currency, goods of foreign origins would become more expensive. How that would affect the local inflation rate depends on the consumption composition.
While I have seen an example of budget deficit leading to capital outflow — Indonesia in 2006 if I recall correctly — I admit that there is a problematic explanation for this. In theory, fiscal deficit means higher interest rate since higher expenditure due to the deficit reduces saving. Higher interest rate leads to capital inflow.
Still, I think inflation in the two countries mentioned has little to do with this. It has more to do with the confidence for those economies in general which subsidy is only a tiny factor.
While the Minister continued attacking his opponent, Anwar Ibrahim started well especially with matter revolving around IPP. His suggestion is acceptable and it may be good to implement it. Yet, as I have pointed out earlier, savings from the suggestion should be directed to developmental purposes, not something that merely temporarily encourages expenditure.
The former Deputy Prime Minister’s economic reasoning on other matters is twisted. One concerns the definition of subsidy. He said investment in infrastructures to benefit corporations as well as incentives given are forms of subsidy, no different from the current fuel structure. Wow. Just wow. He just redefined the meaning of subsidy. According to him, investment is subsidy!
I just cannot accept that and I reject such redefinition.
That notwithstanding, Anwar Ibrahim compared bailouts costing billions of ringgit with the cost of subsidy. This is an attractive argument but I am in the position that we need to refrain from both bailouts as well as subsidy. The wrong of one policy does not make another policy necessarily good, especially where there are better options out there compared to both.
On the reduction of retail fuel price itself, Anwar Ibrahim proposed a RM0.50 reduction off the current RM2.70. Yet, fuel prices went up from RM1.92 to RM2.70 or by RM0.78 and the former Deputy Prime Minister promised to reduce the price prior to the price hike. Given that fact, I am not sure how Anwar Ibrahim would make good of his promise by just RM0.50 reduction. He would need to reduce the price by at least RM0.79. Shabery Cheek rightfully pointed this gap in Anwar’s reasoning.
By merely reducing fuel by RM0.50 from current price, Anwar Ibrahim would effectively raise retail price by RM0.28 from the pre-June 5 price.
Anwar Ibrahim did say that RM0.50 is only an initial step however. Fine but what would happen next? He presented figures to justify the RM0.50 but he did not rationalize for any further reduction. So, the main question was not answered.
In the debate further, he said he would not touch Petronas in order to reduce price. Yet, listen to this video:
[youtube]nzK5BAt8ets[/youtube]
Pay attention to around 2:25 when he mentioned about reducing the profit of Petronas. So, I am highly skeptical of what Anwar said about not touching Petronas.
As for the Information Minister, I thought his reference to how Norway managed their oil money is good. Anwar however dismissed it by merely saying that Norway is a country far richer than Malaysia. I am content to say that the difference between having a trust fund and fuel subsidy has nothing to do with living standard.
While Anwar Ibrahim refrained from replying to Ahmad Shabery Cheek’s personal attacks, the former Deputy Prime Minister did shoot his sparring partner down on a couple of occasions. One was about oil running out in 2015. The Minister said oil would run out by 2015 but Anwar Ibrahim corrected him by stating the assumption for that: if there is no new exploration.
But that digressed from a very legitimate question directed to Anwar: if Malaysia ran out of oil, would Anwar advocate for subsidy still since his argument for fuel subsidy is based on the fact that we are net exporter of oil, however small is that net?
Anwar did not answer the question.
Finally, Anwar Ibrahim’s patience is admirable. If the debate was purely about ethics, the Minister would lose out through and through but it is not. This is an economic debate and Anwar Ibrahim failed to convince me.
This is not to say that the Information Minister did better than Anwar Ibrahim though. I side with the policy endorsed by the Minister because of its economic rationale, not because of the Minister. I have decided my mind long before the debate. If I had been neutral without the luxury of any economic training, I think Anwar would have convinced me of his points.
But let us look at the bright side: at least, Shabery Cheek carried himself better than what Zainuddin Maidin possibly could.
p/s — this entry at first praised the Information Minister. After watching the debate twice, I think I over-praised the Minister. I have to admit that I focused on Anwar Ibrahim more than the Minister because I support total elimination of subsidy. So, I do not need to be convinced by the Minister and am more interested in listening to what Anwar had to say. So, forgive me for being overly critical of Anwar but I could not help it.
After some thinking, I have rewritten the entry to reevaluate my position with respect to the minister and to get what Anwar said right before criticizing it.
After all, the entry was written on the go. There is always a trade-off between speed and accuracy of what was said and what I really think beyond the surface. I am only glad to be able to revisit this entry and revise it.
MP Jeff Ooi said:
Yesterday, all four petrol companies in Singapore – Shell, Exxon-Mobil, Caltex and Singapore Petroleum Company – reduced their pump prices by 4 cents a liter for petrol. Diesel price remained unchanged at S$2.033/litre.
[…]
Currently, Malaysia retails petrol at RM2.70/litre and diesel at RM2.50/litre.
[…]
Incidentally, oil prices have fallen by about 7% since hitting a record high last Thursday. Oil prices fell to US$136 per barrel on Tuesday. (See Crude Oil price chart on the top right hand corner of this blog)
Will Malaysia defy the law of gravity, that what goes up must come down, and reduce the fuel burden on Joe Public? [Petrol price down… in Singapore. Screenshots. July 10 2008]
He seems to suggest that Malaysia should lower local fuel retail prices after global crude oil prices suffered a dip. Just like Singapore. He of course failed to identify or mention that prices in Singapore are free whereas Malaysian prices are inflexible due to our fuel subsidy regime.
As Friday has proven, the dip is merely temporary and more about fluctuation and not a general trend.[1] I am wondering if he would agree to increasing the retail prices whenever the global prices are up…
Whatever the MP feel, it would definitely be interesting if we have subsidy in an ad valorem manner. Under this arrangement, local prices will fluctuate according to global prices while the subsidy is set as a percentage of the fuel prices.
Regardless the cost and benefit of maintaining a subsidy, subsidy ad valorem-styled will certainly be a more robust policy compared to the current structure. More importantly, ad valorem subsidy will allow prices to act as a signal better compared to the current Malaysian policy.
The graph below illustrates the current subsidy program with local prices fixed regardless of global prices. The blue color represents the size of subsidy while yellow represent the amount paid for fuel by consumers. It makes our model far simpler if we assume that the consumer purchase only an unit of fuel per day. This assumption is made for simplicity’s sake and nothing else.
As you can see, the subsidy merely acts as a buffer to fix local prices. If global prices actually go below the fixed level, tax is automatically introduced. Given expensive crude oil prices and the size of current subsidy at the moment, I doubt a tax would be introduced.
This policy probably be good if there is a tendency for global prices to revert to a mean. The fixed local prices can be the mean and this will mean in the long run, the cost of running the policy is zero, at least nominally.
The graph below illustrates ad valorem subsidy with the subsidy itself assumed to be at 40%:
As you can see, the local price is capable of going low as global price drops, unlike as shown in the fixed local price structure. Depending on the subsidy, the size of subsidy can be made lower than what it will be under the other model.
The only weakness of ad valorem subsidy is that the subsidy lives on forever as long as the rate is above 0%. Compare this with the introduction of tax in the first scenario.
Due to reasons stated earlier — concerning signaling and robustness, as long as global prices do not fall below local fixed prices — regardless of my support for total elimination of fuel subsidy, ad valorem subsidy is better than the current fuel subsidy policy practiced by Malaysia.
And there you go: a simple analysis comparing two different subsidy policies.
I have a feeling that what Jeff wants is this…
…which is totally an unreasonable and irresponsible policy.
[1] NEW YORK, July 11 (UPI) — Crude oil prices eased back after setting a record above $147 per barrel on the New York Mercantile Exchange Friday. [Oil prices ease after record Friday. United Press International. July 11 2008]
Education empowers individuals by enabling them to utilize their faculties, freeing themselves from tyranny. With reasonably educated individuals dominating the society, the creation of a liberal society becomes more possible than ever. Self-empowerment is the seed to the creation of a liberal society and education is the key to such empowerment. Without the empowerment, individuals would forever stand timid in the face of tyranny, unable to rationalize the reason for liberty.
Education is the sculpture of a society and its importance cannot be overemphasized. Yet, the issue of education has always bogged me down. I struggle to answer the question whether the state is required in providing individuals with education, especially in poor societies.
I am predisposed to answer no.
The path is chosen due to my minarchist tendency which seeks to limit the roles of government to simply the protection of individual liberty and private property only. This is the only social contract which a libertarian seeks. Anything more increases the opportunity for tyranny.
All other areas should be left to means of individuals in the society. The reason for that is the market in many cases has proven to be more than capable to play roles played by statist state as effective if not better. It is part of the spontaneous order doctrine so close to the heart of libertarianism.
The issue of education and the state arises when I come to consider the effect of endowment on eventual outcome. In a poor society, attainment of education requires a quantum leap. Resources well beyond the means of the poor are required to invest in education.
It is not uncommon for children of poor families to face strong pressure to forgo basic education in order to answer immediate question surrounding matter of survival. Without coercion by the state in form of compulsory basic education as well as other aids, it would be highly probable for these children to stay away from any kind of formal education. As they grow up, they would become susceptible to manipulation of the elites whom might have insidious plan to promote themselves in a society. Through this manipulation which usually comes in form of populism, a mob could easily overrun individuals, transgressing individual liberty with impunity.
Only a strong liberal culture could fight such tendency fearsomely. It is worth repeating that the birth of a liberal society is only possible through self-empowerment usually brought upon by education. By education, I do not mean simply the ability to read and write. I am referring to the development of the critical minds which take more than merely learning about humanities and sciences. I speak of liberal education which students are able to explore their potential freely.
Leaving education to the workings of market of a poor society may not encourage the creation of a liberal society. There is always competing demand between immediate demand and the future prospect. Not too many people have the luxury of looking beyond a hill when no food is guaranteed on a table everyday, assuming there is a table in the first place.
The misalignment of temporal requirement for education could perhaps be tweaked to impress on individuals the importance of education through market means without the use of force. For instance, a philanthropist or foundation could fund schools or offer need-based scholarships, making the cost of education of a child more bearable to poor families. To bring the idea farther down the road, a corporation in need of talents could adopt a child by financing the child’s education. Graduated individuals under such program could repay their sponsors when they start their professional career.
Then again, this only repeats the problem of citizenship for liberals and mismatched timelines: the ones most likely to make such bond for the children would be the parents while the children really had no say in the matter. As they matured, they found themselves in bond they did not choose to be in.
How well private institutions tailored for basic education fares against the idea of universal basic education has yet to be explored however. Even on the surfaces, private institutions may disfranchise the poor for reason made clear earlier. And I am uncertain how a system dominated by private institution for basic level encourages a society’s progress towards liberal ideals.
All that considered, it seems that the institution of universal education on the basic level supported by the state looks promising in creating a liberal society, especially for poor societies. As for affluent societies, the problem of endowment is less of an issue. It is probable that members of an affluent society are well-educated and liberal enough in their outlook to fight tyranny.
The progression towards an affluent society however requires education and this creates a conflict in my thinking. Ignorance is a barrier to self-empowerment and liberty.
Perhaps, universal basic and general education with involvement of the state for poor society is the spark plug for liberalism. Perhaps, I am trying to be too rigid, ignoring a virtue of pragmatism.
p/s — Milton Friedman’s The Role of Government in Education is an essential read. Friedman’s Free to Choose is for further reading. For wider scope, the Friedman Foundation has more.
Categories
[1710] Of solution or shut up
The Kedah state government has come under criticism for its decision to log timber in its water catchment areas. While I disagree with the decision, I feel too many sides are criticizing the state government without providing any solution — with the exception of Sahabat Alam Malaysia (SAM).
Here, I want to offer two solutions to the issue that will leave those trees in peace:
SAM rightly pointed out that Penang needs to compensate Kedah for refraining from logging timber within the water catchment areas from which Penang draws its water supply. In everything that we do, there is always an opportunity cost and Kedah is no different in this respect: one of those costs involves the decision to log or not to log.
A similar idea of compensation was proposed at the United Nations Climate Change Conference held in Bali, Indonesia last year with the objective of halting the destruction of rainforests. The origin of such an idea itself goes back to 1937 when economist Ronald Coase first proposed it. I will not bore you with the economics but what I am trying to do is demonstrate that this idea is not as novel as it sounds.
While SAM gets the idea of Coase, the state-to-state compensation is not as on target as I would like it to be. It does not link the issue with the market and any state-to-state compensation may amount to a water subsidy in the end.
A better compensation method will see consumers themselves compensating the owner of the catchment area and, in this case, the owner is the Kedah state government. This is also the reason why I do not prefer the idea of having the federal government compensating Kedah. This allows the opportunity cost to be included into the water bill of Penang folk. With that, the opportunity cost faced by Kedah will be flipped and eventually provide the state with a chance to reassess its priority. Needless to say, that translates into higher charges for water consumption for Penang folk.
The beauty of this suggestion is that it also encourages water conservation. It reveals the true cost of water to consumers and allows the consumers to appreciate the problem faced by Kedah even more. It is a model for advocating more sustainable water consumption.
The second solution involves property rights. Those who wish for a guaranteed continuous clean water supply from Kedah can purchase rights over the trees or a tract of land within the catchment areas. At the right price, the Kedah state government will sell the rights to the trees and be relieved of the temptation to cut them down. This, of course, only works if the new owners do not succumb to the temptation of cutting down the trees for money.
But the two solutions somewhat digress from my original thought. What I am trying to say is this: please offer solutions. Criticism, however justified, is simply not enough.
p/s — a version of this article was first published by The Malaysian Insider.