Category: Economics

Categories
Economics

[1707] Of build-sell or sell-build?

Tony Pua (okay, okay, MP Tony Pua) raised an interesting issue in his blog. There, he expressed his approval for the build first and then sell later arrangement (build-sell) proposed by the Selangor state government in replacing sell while building arrangement (sell-build?).[1]

While the build-sell model does have its benefits, namely having the potential of reducing the number of cases of buyers being cheated by developers, the currently popular sell-build structure does have its benefits too.

First of all, it allows individuals to purchase home at a cheap price. Developers, assuming there is no fraud involved, will be willing to sell yet to be built or completed homes at a discount to accommodate any risk undertaken by the purchasers. Furthermore, time value for money faced by the developers encourages them to accept smaller amount from purchasers here and now compared to any time in the future.

Secondly, it encourages developers to be bold and thus, encourages growth in the construction industry. This is due to convenient cash flow. If the developers had to wait for months before they could see the first cent of revenue coming in, I think a lot less developers would be willing to participate in building homes. Or at least, smaller developers would have less opportunity to do business. Small developers most likely could not withstand the large net outflow of cash they would have to suffer between the start of construction and completion date. In the end, not only the construction industry could see less growth, a build-sell world could create a world close to a monopoly in which only large developers which could withstand sustained net cash outflow until the date of completion survive. I am well aware that financial institutions are there as underwriters but then again, through what limited experience I have, banks are very risk-averse and that increases cost of doing business.

Anyway, I am ambivalent in the debate between build-sell and sell-build, if there is a debate at all. But I am certainly would be unhappy if the state decided to coerce developers into adopting a particular structure.

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

[1] So when I read that the Selangor state government intends to implement the “build then sell” concept of housing, I’ll all hands in support. [Build The Sell. Philosophy Politics Economics. July 2 2008]

Categories
Economics

[1706] Of when to extract oil?

I tend to get excited when I see familiar things.

At the WSJ, the famed Feldstein explained why prices of crude oil are up. Among the explanation written how the decision to extract oil from the ground comes about and how it affects prices:

Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise.

There are of course considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner’s decision — and therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a role. But the fundamental insight is that owners of oil will adjust their production and inventories until the price of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to rise faster, they’ll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds. [We Can Lower Oil Prices Now. Martin Feldstein. Wall Street Journal. July 1 2008]

This is real economics, not a hunt for scapegoats, i.e. blame the speculators.

And oh, it is familiar because that is exactly what my environmental economics professor taught me back in Ann Arbor.

Categories
Economics

[1703] Of comparative advantage versus food sovereignty

Just one of those articles which try to point out that the idea of food sovereignty is flawed.

One relates directly to trade: Is it best to specialize in whatever food grows best in a country’s soil, and trade it for all other food needs — or even, perhaps, specialize in services or manufacturing, and trade those for food?

Or is it best to seek self-sufficiency in every type of food that will, weather permitting, grow within a country’s borders? [Hoarding Nations Drive Food Costs Ever Higher. Keith Bradsher. Andrew Martin. New York Times. June 30 2008]

I have been skeptical to the idea of food sovereignty from the beginning. Food sovereignty in its essence is protectionism, hurts trade and subsequently makes us all poorer (on average, of course).

Categories
Economics

[1697] Of oh, enlighten me about purchasing power parity please

I was reading the Mid-Term Review of the Ninth Malaysia Plan:

During the 2006-2007 period, real GDP expanded by 6.1 per cent per annum, exceeding the target of 6.0 per cent. Per capita income increased by 10.6 per cent per annum to RM23,066. Per capita income adjusted for purchasing power parity increased at a higher rate of 14.2 per cent to RM46,478 in 2007. This growth was achieved in an environment of stable prices. Unemployment stood at 3.3 per cent in 2007, reflecting the full utilisation of labour resources. [Full speech in Parliament by Prime Minister Datuk Seri Abdullah Ahmad Badawi when tabling the Mid-term Review of the Ninth Malaysia Plan. The Malaysian Insider. June 26 2008]

Someone, please enlighten me: why does the income per capita figure need to be adjusted to purchasing power parity?

So far, I see no reason why it should be adjusted. PPP is usually used to make comparison between countries. When there is only one country in question and we are dealing in terms of just a currency, why on earth would we need to adjust it for PPP?

Is the statement “higher rate of 14.2 per cent to RM46,478” meaningful at all?

Also of interest to me is this:

11. The nation’s robust economic growth has been spearheaded by the private sector, with private sector investment growing at a rate of 8.6 per cent per annum. Foreign direct investment also increased by 39.3 per cent to RM29.1 billion in 2007. At the same time, public sector investment grew by 8.9 per cent per annum following vigorous implementation of development projects under the Ninth Malaysia Plan. [Full speech in Parliament by Prime Minister Datuk Seri Abdullah Ahmad Badawi when tabling the Mid-term Review of the Ninth Malaysia Plan. The Malaysian Insider. June 26 2008]

Increased government spending typically crowds out private investment. I wonder how much the public sector grew at the expense of investment growth in the private sector.

Another question: how much of export has been sacrificed so far due to increased government spending?

Categories
Economics Environment Liberty

[1696] Of why I oppose the logging move by Kedah government

With budget constraints clearly visible, the Kedah state government announces move to harvest timber from several water catchment areas in the state to increase its revenue.[0] I find the action disagreeable and my opposition is two folds.

First revolves around the question of sustainability. While the state government will utilize helicopters to allow selective harvesting,[1] having the activity done within water catchment areas is really hard to support. I am not convinced on logging done within water catchment areas has sustainability in its equation. On top of that, when referring to sustainable forestry, I always have dedicated tree farms in mind. Furthermore, such tree farms are available in Europe and more importantly, as well as in Malaysia. This proves that the availability of a more sustainable harvesting method. So, I am through and through with the Malaysian Nature Society in disagreeing with the state government.

Secondly, it concerns the function of a government. I, as with many libertarians of minarcist tendency, prefer to have a small government focusing on governance, maybe on some developmental projects with positive externality which the private sectors have absolutely no interest in and little else. So, when the state government says it requires greater revenue to finance its operating expenditure, I could only raise a red flag. In my humble opinion, it is the expenditure which requires reduction.

If the state government plans to do some investment, then borrowing may be a better idea instead. If the investment is really good, I am sure the returns from the investment to cover at least the cost of borrowing some years later. If it is not, well, one has to wonder why should the investment be made in the first place.

Also, the current Menteri Besar himself, when he was in the opposition, opposed the helicopter harvesting when it was first proposed by the previous state administration back in 2003.[2] Now, he holds a different position. Thus, forgive me if I am beginning to think he was objecting then for the sake of objecting instead of seeing the issue on its merit. As it turns out, it does not matter if it is PAS or UMNO; all of them are the same!

The two reasons notwithstanding, I also take exception with the federal government for reneging in its promise to pay Kedah RM100 million yearly for encouraging a logging moratorium 5 years ago.[3] Though I personally think such transfer is inferior to a solution which I shall share next week at The Malaysian Insider, a promise is a promise nonetheless. Inability to fulfill a commitment reflects badly on the federal government and it has its repercussion, not just to the Barisan Nasional, but more importantly, to the country. If the Abdullah administration is incapable of staying true to its words, they should simply stop making more promises.

As in right now, the Barisan Nasional has little credibility. The Menteri Besar’s inconsistent position on the matter does little to differentiate him from the Abdullah administration.

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

[0] ALOR STAR: The Kedah Government has approved logging activities at the Pedu, Muda and Ahning dam catchment areas, a move that is expected to generate about RM16bil in revenue for the state.

Mentri Besar Azizan Abdul Razak said the move was necessary to cover the high expenditure incurred by the state following the petrol price increase. [Kedah approves logging activities. Embun Majid. The Star. June 19 2008]

[1] ALOR STAR: The Kedah Government is going ahead with its plan to allow selective logging in the Ulu Muda catchment areas using the heli-harvesting technique. [Kedah to use heli-harvesting. Sira Habibu. The Star. June 22 2008]

[2] … Azizan, when reminded that he had strongly opposed a logging plan for the forest reserve when the former Barisan Nasional state government had proposed using helicopters to fell timber trees in 1992, said the circumstances were different then.

He said when he was the state opposition leader, he was not well informed on the matter. [Kedah MB stands firm on logging in the Ulu Muda forest reserve. New Straits Time. June 25 2008]

[3] ALOR STAR, June 18 (Bernama) — Kedah plans to open up the Hulu Muda Forest Reserve to logging activities to increase its revenue as the federal government has not paid the compensation for banning logging in the area five years ago.

Menteri Besar Azizan Abdul Razak said the federal government had not paid the RM100 million compensation to Kedah for banning logging in the area under the National Forestry Policy. [Kedah To Log Forest Reserve To Increase Revenue. Bernama. June 18 2008]