Category: Economics

Categories
Economics

[1679] Of Dr. Mahathir’s got his economics wrong

Spot the error:

In the first place the Government should not have floated the Ringgit. A floating rate creates uncertainties and we cannot gain anything from the strengthened Ringgit. Certainly the people have not experienced any increase in their purchasing power because of the appreciation in the exchange rate between the US Dollar and the Ringgit.

Actually the Ringgit has increased by about 80 sen (from RM3.80 to RM3.08 to 1 US Dollar) per US Dollar, i.e. by more than 20 per cent. Had the Government retained the fixed rate system and increased the value of the Ringgit, say 10 per cent at a time, the cost of imports, in Ringgit terms can be monitored and reduced by 10 per cent. At 20 per cent appreciation the cost of imports should decrease by 20 per cent. But we know the prices of imported goods or services have not decreased at all. This means we are paying 20 per cent higher for our imports including the raw material and components for our industries.

Since oil prices are fixed in US Dollar, the increase in US Dollar prices of oil should also be mitigated by 20 per cent in Malaysian Ringgit.

But the Government wants to please the International Monetary Fund and the World Bank and decided to float the Ringgit. As a result the strengthening of the Ringgit merely increased our cost of exports without giving our people the benefit of lower cost of imports. [Oil Price. Dr. Mahathir Mohamed. June 5 2008]

If you cannot find the mistake, I would like to point out that the former Prime Minister does not appreciate the concept of ceteris paribus.

Categories
ASEAN Economics

[1677] Of greater trade with monetary union

It was one morning during one of those ugly winters in Ann Arbor when I found myself sitting close to the front row of an economics class. The professor sounded odd but then again, I am sure I sounded odd to my friends here.

Regardless, with me still half awake, I heard the professor say something about the amount of trade between Vancouver and Seattle corresponding to the distance between the Earth and the moon. Was the professor nuts or maybe I was dreaming?

That statement was so out of this world that it halted my descent to slumberland. It turned out that the professor was discussing the relationship between trade and currency. Yawning widely, I straightened my back to have another shot at staying awake.

On the screen up front, there was a table listing trade volume between various US cities and with cities in other countries. There was a typical regression model projected on the screen too. I do not particularly remember the exact equation but the conclusion was clear: monetary union encourages trade.

Trade volume between New York and Seattle was much higher than that between Seattle and Vancouver. This was despite the fact that New York is located on the East Coast while Vancouver is situated on the West Coast just a few hundred miles up north where the people speak rather strangely. New York and Seattle, of course ,use the US dollar while Vancouver uses something else entirely.

The whole class then mentally swam across the Atlantic to trace the evolution of the Euro. The conclusion was reinforced: trade substantially increased after the Eurozone countries adopted a single currency.

The virtue of a single currency was hammered home further by another graph indicating how fluctuation of exchange rates between countries within the Eurozone virtually disappeared: uncertainty eliminated. The professor with his New Zealand accent announced that the Europeans got tired of the exchange rate fluctuation so they decided to get rid of it altogether.

I was stranded somewhere in Minneapolis when the Euro was officially introduced to the public on Jan 1, 2002. Reactions to the introduction ranged from celebratory to bitterness at the loss of local currencies. Anecdotes by individuals having trouble adjusting to the new reality were amusing but I was merely a curious observer across the Atlantic.

Close to three years later, I found myself in a class undergoing official economic training in Ann Arbor. That particular class made me an Aseanist: I became a monetary unionist. I want to see Asean repeating the same experiment the Eurozone is undergoing, hoping this will bring on yet another halcyon period of prosperity for Southeast Asia.

The years leading to the late 1990s were great but those days are gone. Sure, we have learned one or two things from the Asian financial crisis but nothing beats the feeling of being on top of the world. When Deng Xiaoping visited Southeast Asia back in those days, he was expecting to see backwaters cities but boy, he had the shock of his life. Not only were the cities modern then, they out-rivalled those of China’s. Nowadays, the feeling is almost reversed.

The rise of Southeast Asia is a story of trade and it goes all the way back to the era of Srivijaya in the first millennium. The prosperity of this region has always been linked with trade. The prosperity of this country as a small open economy has always been linked to trade.

Asean already has a regional free trade agreement in place and progress so far has been encouraging, especially when compared to the disappointing Doha Round. We could probably see the full effect of the FTA by 2015 when all tariffs imposed on almost all Asean-based goods must be lowered to 0%. That should fuel inter-Asean trade but as demonstrated by the experience of the Eurozone, trade could be enhanced further with the introduction of a monetary union.

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

p/s — the article was first published by The Malaysian Insider.

Categories
Economics

[1676] Of are you bitching about higher fuel prices?

I have a suggestion: quit smoking.

I suspect that if you stop smoking, your may be able to maintain your expenditure to pre-June 5 level.

As for me, while I have some reservation at how the prices were raised, I cannot wait for August 2008 when local fuel retail prices are expected to achieve parity with world prices. Please raise your glass to a good economic policy.

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

p/s — this entry is meant for Malaysian audience. As pointed out in the comment section, this idea does not apply in other places.

Categories
Economics

[1675] Of a sustainable economic policy requires political sustainability

With the liberalization of the retail fuel market is making headlines on almost daily basis, the volume of liberal-friendly announcement has been dizzying. I am happy of the trend seen within the local retail fuel market of course but I fear the rate of change may be too fast for it to last for long.

Subsidy, as always, suffers from deadweight loss and that is the crux of any objection to it from mainstream economics. Other factors include over-consumption and externality: rather than internalizing externality, certain subsidies only make the matter worse. Affordability has been cited as a reason too but trade-off is a far better reason to oppose subsidy. Nevertheless, both reasons call for at least a reduction of subsidy, if not elimination.

The most neutral argument against subsidy, at least within the current Malaysian context, is the distribution of subsidy. If subsidy is a must, then I think some liberals would be happy to see some improvement in the subsidy delivery system. Typical economic tools which are superior to blanket subsidy ranges from cash transfer to tradable coupons to tax cuts.

After countless criticism aimed at the badly designed subsidy policy, it is heartening to observe that the government has finally endeavored to undertake targeted mechanisms and has actually considered money transfer — the most efficient of all welfare policy as proven by the Second Fundamental Theorem of Welfare Economics[0] — rather than relying on blanket subsidy which is always a blunt tool to help the poor while ruining the economy. If appeal to liberalism fails, then appeal to economics should do fine.

The direction of policies regarding retail prices of fuel is a cause for all liberals — the original liberals, I must add — to jump up and down until the floor gives way and then hold an all night long party in the basement. The speed at the current administration pursuing the matter is something else altogether. The political sustainability of the policy is a matter of concern.

Yes, it is a great tragedy that politics is not necessarily aligned with economics. What good in politics is not necessarily good in economics and vice versa. A sudden elimination of subsidy has a high chance of creating a backlash which may be detrimental to liberal policies. It has been reported that retail fuel prices will be floated to market prices in one go[1]and it is definitely not hard to imagine the kind of opposition such abrupt policy could garner from the public.

What we need are sustainable policies, both economically and politically. A sustainable economic policy without political sustainability is perhaps as useless as an unsustainable economic policy. A policy has to survive considerable amount of time for it to offer noticeable change. A one-time policy which in many ways mimics unsustainable policy only provides a short-term euphoria and may as well suffer from something to the effect of Ricardian equivalent.

Shock therapy may cause revulsion and eventual rejection and we do not need that. The best way to promote liberal economic policy within a heavily welfare-based society is through incremental approach. Gradual liberalization offers liberal policies the political sustainable we need to achieve economic sustainability. I would personally prefer a scheduled gradual reduction of subsidy that will eventually achieve parity with the world market price. Such measured liberalization has a better chance of weathering destructive populism.

There may be something behind this sudden fad of liberalization within the current administration. The magnitude of change is too large to not to attract suspicion. Perhaps, this is an act of desperation. Perhaps, the economic sustainability of the flawed subsidy policy has become too great for the administration to shoulder that political sustainability of the policy is entirely ignored

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

[0] — In short, the Second Fundamental Theorem of Welfare Economics states that any efficient outcome could be achieved through lump sum transfer of wealth. See Fundamental theorems of welfare economics at Wikipedia for more explanation.

[1] — KUALA LUMPUR, June 3 (Reuters) – Malaysia will scrap fuel price controls in August and allow pump prices to rise in line with market rates under government plans to cut it’s burgeoning subsidy bill, the domestic trade minister said on Tuesday. [Malaysia to scrap fuel price curbs, use market rate. Reuters. June 3 2008]

Categories
ASEAN Conflict & disaster Economics

[1669] Of no cash aid for Myanmar

Money may not be the only thing in this world but it does make a lot of people happy, including the junta of Myanmar. But keeping the junta happy is not what I have in mind when I want to help the people of Myanmar.

We may have forgotten that Cyclone Nargis took tens of thousand of lives in the Irrawaddy Delta just weeks ago. With the season finale of American Idol, Akademi Fantasi and the loss of sovereignty over a rock or two to Singapore a few days ago, who can blame us? There are far more important things going on with our lives than anything that happens in the delta.

But if we actually cared a little about the victims of Nargis, we would remember that the junta placed restrictions on foreign aid. The junta even refused aid from relief groups, stating that they preferred government-to-government transactions.

The junta of Myanmar must be the luckiest government in the world because it can afford to become a chooser in a time when it really should be a beggar. Unbelievably, it took some coaxing by governments of other countries before the junta actually relented. Even then, aid workers were barred from entering the country. To think that other governments cared more about a person than the person’s government really reflects badly on a government.

Aid eventually crept in but as the blankets, medicine, food and cash got into Myanmar, there were reports that the junta repackaged the aid as if it were provided by the junta. But I suppose, if the aid gets to the victims, it does not matter. Black cat, white cat: whichever catches the mouse is a good cat.[1]

There were also reports that some of the aid was redirected away from the victims of the cyclone.[2] The French had foreseen this by initially offering a small amount of aid and said they did not believe the junta had the trustworthiness to manage the aid. I share the skepticism of the French government.

In many cases, money transfer is a superior method of giving aid when compared to transfer in kind. Money transfer has the potential of improving the receivers’ welfare much more than what material goods can ever do. This is especially so when the receivers know exactly what they need while donors are unfamiliar with the local environment.

Money, after all, is the most generally accepted medium of exchange. It is usually harder for a person to barter blanket for food because the double coincidence of wants has to occur first before that transaction can take place. This is true for many situations, including the one involving fuel subsidy in Malaysia. Money transferred to those the authority wishes to help is a better policy in enhancing welfare than material transfer.

Money or cash transfer, however, does suffer from a problem called moral hazard. In the case of Myanmar, the donors may want to help cyclone victims buy food, blanket and rebuild their livelihood. But with little ability to oversee how it is actually spent, the victims may use the money to buy cigarettes or something less useful in improving their welfare.

Money transfer may also not be as useful in Myanmar as in other places in peaceful times. Disasters, especially the major ones, tend to push prices up as distribution channels suffer damage, causing supply problems. Add to the increased demand, prices will rocket, hence reducing its purchasing power.

Prices shot up in Florida in the aftermath of Hurricane Katrina and it surely is happening in the Irrawaddy. Some people derisively called it scalping but I call it economics. Regardless, donation in kind overcomes the problem of weaker purchasing power that any money donation under that scenario suffers.

Thirdly, just as how the French had expressed their skepticism, the junta cannot be trusted with money.

Now, there are caring Malaysian organizations out there that seek to alleviate the suffering of those in Myanmar by sending money over directly. Noble but their actions could prove unhelpful.

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

[1] — YANGON, Burma — Burma’s military regime distributed international aid Saturday but plastered the boxes with the names of top generals in an apparent effort to turn the relief effort for last week’s devastating cyclone into a propaganda exercise. [Burma Junta Turns International Aid Into Form of Propaganda. Associated Press via FoxNews. May 11 2008]

[2] — The British ambassador to the United Nations, John Sawers, said Britain had also received unconfirmed reports that aid was being redirected away from disaster victims. [Myanmar Government Still Blocking Relief. New York Times. May 14 2008]

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

p/s — a version of this article was first published at The Malaysian Insider.