Category: Economics

Categories
Economics

[1546] Of 40% better sir?

Punching bag of the day:

PENANG: Malaysians from all walks of life are better off now than four years ago.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said the country’s per capita income had risen by 40% between 2004 and 2007, from RM15,819 (US$4,163) to RM22,345 (US$6,452).

“If we compare in terms of US dollar, the per capita income has risen by 55% during the period due to the depreciation of the dollar against the ringgit. [Malaysians better off than four years ago. The Star. February 10 2008]

I am not so sure how the Finance Minister gets the 40% increase. I approximate that there was a 13% real increase in GDP per capita instead.

I did my own calculation and using approximated figures, I estimated that Malaysian GDP in real terms has increased approximately 20% since 2004. Remember, these are based on approximated figures and this reminder is especially important when the official GDP for Q4 2007 has yet to be release. It is expected to be release no later than February 29 2008 but the Finance Minister probably has access to such information regardless. The population sizes are approximated figures as well. Still, a 40% increase sounds awfully high.

One could get to a higher figure if the MYR is converted into USD (without considering purchasing power parity). In USD terms, there was an increase to approximately 31% in GDP per capita. If one reconverts the USD figures into MYR using 2007 nominal exchange rate instead of using the rate corresponding to the respective years, one will get 31%. This may correspond to the Minister’s 55% figure.

It is worth noting that the 31% and 55% figures are meaningless as a measure of well-being because most Malaysians do not earn in USD and spend in MYR. Instead, they earn in MYR. This makes the 13% and the 40% figures more relevant than the same figures read in USD.

I constructed the table below to summarize what I am trying to highlight.

Some rights reserved. By Mohd Hafiz Noor Shams.

For the full version of the workings, you may download it here.

Tony Pua is right about we would need to grow about 12% per year to get the 40% figure.

To achieve 40% growth, Malaysia must be growing in excess of 12% per annum. Hence, to grow by 40% over 3 years, with a population growing at just under 2% per annum, that will actually make Malaysia the fastest growing economy in Asia, outstripping even China and India. [Malaysian Income Rose by 40% over 3 years? Philosophy Politics Economics. February 10 2008]

I have included his 12% scenario into the calculation in the file if you are interested in it.

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

p/s — Could it be possible that the Minister included inflation in his calculation? If so, we need a GDP deflator. Or nominal GDP as data instead of real GDP. Or inflation rate.

Categories
Economics Politics & government

[1540] Of Nash equilibrium for DAP-PAS-PKR

Politics 101 wonders who should be the next opposition leader. Specifically (since his post is short, I might as well reproduce it wholly here):

Hypothetical question: If DAP and PAS win 18 federal seats each in the elections and PKR wins one, which party would the PKR MP back for Leader of the Opposition?

Is the DAP doing enough to ensure, come what may, it will continue to hold the Opposition Leadership Office?

Is winning 18 seats and letting Mullah Hadi Awang take over the islamist agenda as Opposition Leader a victory for secularism? [Hypothetical question. Politics 101 Malaysia. February 6 2008]

This of course asked with an assumption that these parties would fail to form the next government.

If the political scenario does reach that stage, it is presumptuous for anyone of us to conclude that candidates for the next opposition leader would be either DAP or PAS. It could be from PKR. In a situation where a small party holds the tie-breaker vote, it may actually have disproportionate influence over its larger partners.

In fact, the Nash equilibrium in that situation is to have a MP from PKR to be the next opposition leader as proven in the following diagram:

Some rights reserved. By Mohd Hafiz Noor Shams.

For those unfamiliar with game theory, this is how you read the diagram.

In the payoff boxes (the ones with a pair of numbers in it), the first figure is the payoff for Player 1 (DAP) while the second figure corresponds to Player 2’s (PAS) payoff. The numbers are ordinal and not cardinal.

The first box — named P1’s optimality — shows Player 1’s (DAP) best responses given Player 2’s (PAS) action. Those responses have been highlighted in yellow.

The third box — P2’s optimality — shows Player 2’s (PAS) best responses given Player 1’s (DAP) action. Those responses have been highlighted in yellow too.

The third box highlights only overlapped responses and these responses are known as Nash equilibrium. As you can see, there is only an equilibrium.

The underlying rationale behind matrices and payoff is simple: there are 3 rules.

One is that PKR refrains from voting DAP and PAS; it only votes for itself. An either-or voting for DAP or PAS by the smaller party is bound to hurt its relationship with the two large parties. In chess, it is called zugzwang; any movement is unfavorable and the best move is not to move at all but of course, skipping a turn is not an option in chess. Unlike chess however, PKR does not need to move in this political maneuver. If PKR totally refrains from voting at all, boxes with {6,5} and {5,6} will be {0,0}. Why?

That leads us to rationale number 2: the worst outcome for all players is the lack of a leader. In the matrices, payoff {0,0} illustrates a situation of no opposition leader and that happens when both parties vote for themselves with PKR abstaining for voting.

Three, PAS and DAP hate each other gut. This is observable in payoffs {10,1} and {1,10}.

If a person plays out the coordination game, actions by both DAP and PAS that overlap with each other is to choose PKR as the opposition leader.

In case PKR totally refrains from voting, there will be three Nash equilibria. Do you know which ones?

Categories
Economics Politics & government

[1526] Of trade off, not affordability

The current direction of public debate on fuel subsidy has slightly cheesed me off. This is one of few areas that are refreshingly different from legacy issues that tread along the path of ethnicity and religion. While I am happy that an increasing number of individuals would like to see a more liberalized market, I am dissatisfied at how political leaders on both sides of the aisle — PKR and to a lesser extent UMNO — are harping at the affordability of an increased level of fuel subsidy. Really, the question surrounding the subsidy is more about trade off rather than affordability.

The ideas of trade off and affordability are interrelated but at the direction the discussion is heading, it is as if unless the resources are not utilized to support a subsidy program, the resources would sit idle. A number of people in defense of greater subsidy or in response to Deputy Prime Minister’s bankruptcy statement, have pointed out that Petronas’ bumper net profit can more than support an increased subsidy size. The truth is, the more meaningful question sounds like this: what would we be able to do with that resources apart from subsidizing fuel consumption of the poor and the wealthy alike?

In answering that question, an old adage makes absolute sense. Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a life time. Advocates of fuel subsidy program, especially those that support greater subsidy level may do well to keep the idiom in mind and to heart.

Subsidy only supports current consumption. Yes, it does have multiplier effects on the economy but one has to remember, those effects are artificial and superficial. Prices act as signals for individuals to shape their behavior accordingly. In a highly priced commodities scenario, a rational individual would seek cheaper alternatives, conserve resources or develop new ways to deal with old problems. With subsidy, prices are distorted and that steals the incentives for rational individuals to follow a more sustainable path into the future. The individuals in a distorted prices scenario would act as if there is no problem at all despite the fact that path that they are on leads to disaster.

Even if the multiplier effects are much sought after, how do the positive effects of fuel subsidy fare against the positive effect of investing the same resources into our education system, infrastructures or development of new technology that increases fuel efficiency, among others? How do the positive effects of fuel subsidy fare against policies with eyes on the future? How does a policy of giving a man a fish fare against a policy of teaching a man to fish?

The former position is irresponsible and that is especially so when there are other superior policies available to aid the poor, if that is the goal of the fuel subsidy program. Tax reduction, tradable coupons and targeted subsidy are few ideas that free up resources for developmental purposes from the mentality of here and down, of instant gratification, of myopia.

I do understand that this maneuver is a strategic political move. The call for higher subsidy level is done to garner support that the current opposition needs. In other words, it is a populist policy. It is a bad policy — how bad the policy is telling when affordability is cited as a defense; it clearly demonstrates poor understanding of a major but basic concept in economics — but popular regardless. But surely, one can be responsible and popular.

Categories
Economics Society

[1523] Of market pressure in Gaza

Witness the power of the market:

RAFAH, Egypt — Thousands of Palestinians streamed over the Rafah border crossing from the Gaza Strip into Egypt on Wednesday, after a border fence was toppled, and went on a spree of buying fuel and other supplies that have been cut off from their territory by Israel.

They used donkeys, carts and motorcycles to cross the border, and streamed back over the fallen fence laden with goods they had been unable to buy in Gaza. The scene at the border was one of a great bazaar. The streets were packed, and people were bringing into Gaza everything from soap and cigarettes to goats, chickens, medicine, mattresses and car paint.

Israel ordered the closing of its border crossings into Gaza last week, halting all shipments except for emergency supplies, after a sustained and intense barrage of rocket fire into Israel by militant groups in the Gaza Strip, which is run by Hamas. Israel allowed in some fuel, medical supplies and food on Tuesday, as temporary relief, but has said that its closure policy remains in place. [Palestinians Topple Gaza Wall and Cross to Egypt. NYT. January 23 2008]

As supplies dwindled in Gaza, prices shot up. It went so high that the prices difference between Gaza and Egypt makes cost of transportation — which includes the cost of bringing down a wall to cross an international border — irrelevant.

Egypt so far has done nothing to stop Palestinians from crossing the border.

President Mubarak said he had allowed the Palestinians to come in.

He said he had told Egyptian troops to “let them come to eat and buy food and go back, as long as they are not carrying weapons”. [Gazans flood through Egypt border. BBC News. January 23 2008]

If the Egyptian government does nothing, Israel’s policy of border closure, or at least the side effect of the policy, will be as irrelevant as the cost of transportation.

Categories
Economics Politics & government

[1522] Of PAS wants a welfare state but we already are one

PAS earlier said that it wanted to turn Malaysia into a welfare state:

On Saturday, PAS said that it turn the country into a welfare state should it win the coming general election. [PAS Should Explain Welfare State – Muhyiddin. Bernama. January 23 2008]

But our favorite minister said that Malaysia is already a welfare state.

SUNGAI PETANI, Jan 23 (Bernama) — The Barisan Nasional (BN) government has already made Malaysia a welfare state, Information Minister Datuk Seri Zainuddin Maidin said Wednesday. [Malaysia Already A Welfare State, Says Zam. Bernama. January 23 2008]

Sadly, I agree.

PAS or BN, either way, we are already screwed. In fact, it is hard to find a local political party that would move away from the idea of welfare state, which usually comes together in a package with central planning policies. But if PAS does not think that Malaysia is already a welfare state, I could only shudder at its definition of the concept, which would probably sit far farther to the left.