Category: Economics

Categories
Economics

[1517] Of a basket of currencies please

When opining on the strength of the Malaysian ringgit, many implicitly use the US dollar as a benchmark. That has caused some people to overstate the relevance of trends generated by the two currencies to the Malaysian economy while missing out the bigger picture altogether.

The United States is an important export destination for Malaysian goods and this is why the MYR-USD exchange rate receives the special attention in the public sphere. However important it might be, trend associated with movement of the rate blurs out the actual meaning of changes of the rate.

There are a number of factors that affect a currency’s strength but essentially, it comes down to capital flow. An inflow strengthens the currency and an outflow does otherwise. The MYR has been strengthening against the USD ever since the pegging of the former currency to the latter was removed back in July 2005. Meanwhile, the USD has been slacking against various currencies, including against the MYR. If the MYR and the USD were the only currencies in the world, one would assume that capital is flowing from the US to Malaysia. The issue is that there are more than two countries in this world.

One will reach the same assumption, albeit wrongfully, if one concentrates on the MYR-USD exchange rate alone. Through that, it is easy to get a feeling that the MYR is appreciating in general. Coupled with the perception that a strong currency is a good currency — a strong currency is not necessarily a good thing; it depends on the composition of the economy; an export-oriented country would hate a strong currency — among lay observers of local economy and politics, it contributes to a kind of unfounded optimism.

It is unfounded because not all of the strengthening of the MYR against the USD is caused by attraction that the Malaysian economy creates. Part of it is contributed by uncertainties in the US economy which has nothing to do with the Malaysian economy. On top of that, not all of the capital that flows out of the US economy is flowing into Malaysia. There are other countries out there but yet, a lot of laypersons seem to overlook that fact.

The truth is that while the MYR has been strengthening against the USD, it has not really shown the same trend against our other major trading partners like Singapore and Japan. The USD on the other hand has been growing weaker against a majority of other currencies.

The USD can become weaker against the MYR if capital flows out of the US to a third country. In other words, the MYR can appreciate against the USD without the Malaysian economy doing anything positive. Indeed, with enough outflow from the US economy to a third country, the MYR could appreciate against the USD even when the Malaysian economy is bleeding to death!

So, I guess what I am trying to say is that please do not measure the strength of the MYR solely against just the USD and then make a conclusion about the Malaysian economy. Instead, take a basket of currencies or more precisely, currency of Malaysia’s main trading partners. The latter method will help anybody to arrive at a more accurate conclusion than the former method will ever allow.

Categories
Economics

[1516] Of stupidité

Hilarity of stupidity (via):

Did you hear the one about Amazon? It offered free shipping in France, got sued for it by the French Booksellers’ Union, and lost. Now it’s choosing to pay €1,000 a day rather than follow the court’s order. Ba-da-bing!

No, it’s not funny, but that’s because it’s not a joke. The Tribunal de Grande Instance (a French appeals court) in Versailles ruled back in December that Amazon was violating the country’s 1981 Lang law with its free shipping offer. That law forbids booksellers from offering discounts of more than 5 percent off the list price, and Amazon was found to be exceeding that discount when the free shipping was factored in. [Amazon’s free shipping costing €1,000 per day in France. Nate Anderson. ars technica. January 15 2008]

Protectionism is funny!

Categories
Economics

[1514] Of bread subsidy in Egypt

Something that Malaysian politicians as well as advocates of subsidy need to learn. Quoted below are the effects of subsidy at another place on another commodity:

It is hard to make ends meet in Egypt, where about 45 percent of the population survives on just $2 a day. That is one reason trying to buy subsidized bread can be a fierce affair, with fists and elbows flying, men shoving and little children dodging blows to get up to the counter.

Egypt is a state where corruption is widely viewed as systemic, which is also why the crowd gets aggressive trying to buy up the subsidized bread. Cheap state bread can be resold, often for double the original price.

[…]

Egypt started subsidizing staples like bread, sugar and tea around World War II, and has done so ever since. When it tried to stop subsidizing bread in 1977 there were riots. Egyptians are generally not known as explosive people, but tell them you are raising the price of bread — of life — and beware.

[…]

The inspector explained why the system was so open to abuse. The government sells bakeries 25-pound bags of flour for 8 Egyptian pounds, the equivalent of about $1.50. The bakeries are then supposed to sell the flatbread at the subsidized rate, which gives them a profit of about $10 from each sack. Or the baker can simply sell the flour on the black market for $15 a bag.

[…] So they fight for cheap bread. They begin gathering outside the bare one-room bakery at about 11 a.m. every day except Friday, the day of prayer.

Over the course of an hour one recent day, 14-year-old Mahmoud Ahmed managed four trips to the counter. His job, he said, was to ensure a steady stream of bread for a nearby food vendor, who then resold it in sandwiches. It appeared that the baker let him push his way to the front to get bread before others. Was there a deal going? Mahmoud would not say.

Down the road, five blocks away, a 12-year-old, Muhammad Abdul Nabi, was selling bread, the same kind of bread, from a makeshift table for more than double the price at the bakery. But there were no lines. [Egypt’s Problem and Its Challenge: Bread Corrupts. Michael Slackman, Nadim Audi. NYT. January 17 2008]

Subsidy, lines and pressure to sell the commodity at a higher price. Sounds familiar?

Categories
Economics

[1513] Of winners need not compensate losers

Steven Landsburg:

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney?

[…]

One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

[…]

Bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted. When a free trade agreement allows you to buy from the Mexican after all, rejoice in your liberation — even if Mr. McCain, Mr. Romney and the rest of the presidential candidates don’t want you to. [What to Expect When You’re Free Trading. Steven Landsburg. NYT. January 16 2008]

Categories
Economics Politics & government

[1509] Of a rational world with perfect information makes fuel prices hike irrelevant

There is strong expectation that fuel prices will increase after the expected upcoming general election and the impetus for such expectation is clear. The Malaysian government’s no-hike guarantee lapsed as 2007 regressed into history while crude oil prices have increased significantly since the last hike took place.[1] Meanwhile, prices hike is a very unpopular move[2] and it can be disastrous for any incumbent facing an election. While the reasoning does make sense, it somehow reminds me of the Ricardian equivalence. Indeed, I am inclined to say that given strong expectation of a hike, it does not matter when the hike will take place. In other words, assuming rational individuals with perfect information, fuel prices hike is irrelevant to the result of the expected Malaysian election.

First of all, while I mentioned Ricardian equivalence, the economic theory has only a hint of relevance to the issue at hand. I will not go into the theory in great detail but somewhere along its rationale, the concept suggests that it does not matter when the state raises funds through one-time taxation or debt.[3] The effect will be the same with only one exception: timing difference. This is because individuals accommodate their expectation and shape their behavior accordingly. In either case, between raising debt or rising tax, individuals changes their saving and spending levels to make their lives less painful especially given the eventuality of taxation in the scenario. This is where the concept influences my thought on how fuel prices hike affects Malaysian election.

Honestly, if people greatly suspect that fuel prices hike will follow the election in the tradition of fatalism, assuming the incumbent stays in power, does it matter when the hike will occur?

There is a speeding train running on an unfinished track leading to a horrifying large canyon with no chance of halting the train. You know that the train will be at the bottom of the canyon within the next few minutes. Assuming you actually care for self-preservation, does it matter when you should jump off the train as long as you do not end up at the bottom of the gorge with your face rearranged?

The nature of fatalism is that it is unavoidable and one might as well accept it. Through interaction with a lot of people, I have the perception that they embrace fatalism as far as the fuel prices hike is concerned. There is a clear resignation that nothing could be done about it among them. I have to admit though that I am one of those fatalists and actually support a hike. In fact, I advocate taxation along with floating prices arrangement but that is another issue altogether.

Alas, not all of us are privy to complete information regarding the hike. On top of that, not all of us are a fatalist, either by ignorance or special knowledge. In an imperfect world unfortunately, fuel prices hike will affect the election to a certain degree.

While the conclusion may look like mere mental masturbation and irrelevant to the real world, it does inform policymakers, or rather, the incumbents on how to manage the general public expectation to the incumbents’ benefit, given belief in fatalism and imperfect information. I will share some thought on the matter later.

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

[1] — KUALA LUMPUR, Nov 5 (Bernama) — The government has reiterated several times that there would be no increase in the price of oil or gas products for the year 2007.

But the reprieve is expected not to last long as we enter the new year and as global fuel prices continued to surge.

Oil prices added nearly US$12 a barrel since the start of October and reached US$93.80 (about RM313) a barrel last Monday (Oct 30) and US$96.24 (about RM321) on Nov 1. Some reports have also mentioned that oil prices could break the US$100 mark if risk factors influencing the sharp rise are to continue. [Bracing For Another Price Hike For Fuel Products. Bernama. Extracted November 5 2007]

[2] — As expected, Malaysians reacted with shock, frustration and anger to having to pay 30 sen more for every litre of petrol and diesel.

Unexpected was the ferocity of sentiment on the ground a day after the biggest single petrol price hike. The common man, already feeling the pinch of the rising cost of living, spewed a litany of complaints and grouses. Consumer groups and trade unions warned the fuel price hike would set off a chain reaction across the board. [Price hike pain for RM4.4b gain. New Straits Times. March 1 2006]

[3] — See Wikipedia for more on Ricardian equivalence.