Category: Economics

Categories
Economics

[1484] Of it does not work like that, Fomca

This is a weird article, weird in a way that the economic rationale does not make sense at first glance:

THE Government will not increase the number of permits to import wheat flour, as there is enough supply of the commodity in the country, reported Mingguan Malaysia.

Deputy Domestic Trade and Consumer Affairs minister Datuk S.Veerasingam said the price was still fixed at RM1.35, but admitted that the price of wheat flour in the international market had shot up by 70%.

Veerasingam was commenting on a statement by the Federation of Malaysian Consumer Association (Fomca) president Datuk N. Marimuthu that the Government should increase the number of permits to curb price increases.

Veerasingam explained that it would not make a difference if the Government increased the number of permits, as the international market controlled the price of wheat flour. [No extra permits to import wheat flour. The Star. December 24 2007]

Let me summarize that. Fomca is suggesting the government to increase permits in order to reduce price. While that may be the case in typical economic model, given situation in the market, it simply does not work like that.

Even if countless permits are issued to the point that permits are made effectively useless policy-wise, price will not move unless the fixed price regime is done away with. Permits restrict the availability of goods in the market, if the number of permits is below that of equilibrium. The article does not make clear if international prices are higher than local counterparts but judging from the sentiment of the article and current trends, it is likely that that is the case.

What a permit quantity increase will do instead in the current Malaysian context is to widen the availability of wheat flour in the market assuming there is a shortage of wheat flour and by extension, permits, which again, seems the case here.

With higher international prices, there is a upward pressure on local prices. If the local price control mechanism is done away with, price will actually go up to equalize with international prices. Because of that and the fact that Malaysia is a small and relatively open market economy, I do not have a reason to believe the price could actually go down, unless it rains flour. There is no reason to believe that Malaysian prices will significantly affect international prices downward either, if Malaysian prices are forced to be artificially lower than international prices.

One of the few things that will go down is the frequency of wheat flour smuggling from the local to international market. Smaller prices differential between the local and the international markets erodes incentive for smuggling.

Despite that, if Malaysia was an autarky with no opportunity for smuggling activities at all, increase in permits would reduce equilibrium prices, in a market with flexible price regime. So, I think, Fomca might actually be thinking within this framework when the representative made the statement as reported in the article above. But the existence of fixed price regime and higher international price compared to local prices render Fomca’s rationale false.

Nevertheless, I am partial to Fomca calls to increase the permits. Their rationale maybe wrong but hey, when the goal is the same, I am bound not to care too much for the difference in methods in achieving that goal. Increase in permit quantity provides a more liberal atmosphere than the status quo. Of course, nothing beats a total liberalization where free market reigns supreme, providing allocative efficiency to the society.

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

p/s — After some more thought, I find the whole thing confusing. If international prices are higher than local prices, there will be an outflow of good from the local to international market. So, what is the point of import permits?

Categories
Economics Politics & government

[1481] Of clarification on statement regarding Tony Pua

I froze for a moment when I saw a short article on Tony Pua today:

KUALA LUMPUR: In February, 35-year-old self-made Internet millionaire Tony Pua made news when he sold his Singapore Stock Exchange listed company for a full-time career in opposition politics.

Pua is a well-known name in the e-commerce industry, where his string of credentials include his being the youngest founder-CEO to have listed a company in Singapore.

But a 2005 Ernst and Young audit report recently revealed that the company, Cyber Village Sdn Bhd, may be running into difficulties, and Pua’s reputation as a corporate whizz kid, which resulted in the DAP appointing him economic adviser to secretary-general Lim Guan Eng, has been called into question. [Doubts over DAP’s economic adviser. New Straits Times. December 22 2007]

There is a little storm going on and I had somewhat contributed to it by making a comment somewhere over the internet of which Jed has taken the liberty to reproduce to support her points. The comment is about how Tony Pua is not an economist. I stand by that statement but I need make myself clear: I wrote it in a matter of fact manner. It does not in whatsoever way indicate my opinion on his management or entrepreneurship skill. Or even his ability to advise on economic matters. Indeed, anybody with a good understanding of economics would be able to advise a layperson. On top of that, a good economist may not be a good businessman, vice versa. A businessman or entrepreneur need not be a economist either, vice versa. Economics after all, is larger than the realm of business.

Regardless, he is not an economist. He qualification does not merit such honor and I have not heard him claiming to be as such either. So, I do not understand why people are insisting that Mr. Pua is an economist, or why the fact that Mr. Pua is not an economist is an issue at all.

Now, who is an economist? What does one need to do to become an economist?

To answer that, I leave you with an entry at the Free Exchange, a blog at The Economist:

WHAT exactly qualifies someone to refer to himself or herself as an economist? Having suffered through many years of graduate school, I, like many others with my training, consider someone an economist only if they too have received a PhD in the subject. I can rationalise this by believing I received special and select training; privy to the secrets of the trade imparted to me by my advisor who, in turn, also learned from the great masters. My take on the economy reeks of the university I attended and the professors with whom I worked. But then, someone, like former colleague Megan McArdle, comes along with no graduate economics work, but a terrific understanding of the field.

To refer to oneself as a medical doctor or be a member of the American Medical Association there exists clear education requirements. This prevents people from taking medical advice from someone unqualified and inflicting harm upon them. No such conditions are required to be called an economist or join the American Economic Association. This results in people who enjoy thinking about the economy, but may lack even undergraduate understanding of the field, representing themselves as experts on issues pertaining to the labour market, trade, and development. Often you have to do some digging to find out they are actually … sociologists.

The years of graduate-school seminars and rigorous mathematical training empowers PhD economists to converse with each other in a language all our own. This allows us to continue to believe that our years of education were worthwhile because we can recognize each other and sneer at the impostors. In the mean time, the rest of the world takes thoughtful advice and opinions from people who sometimes, while not having our illustrious pedigree, also have some very good ideas—and sometimes better ones. [What makes an economist? Free Exchange. October 2 2007]

Personally, unless someone is a practicing economist, I would only recognize someone as an economist if he has at least a Master’s in the field. A mere undergraduate degree does not qualify one as an economist. But to call someone with an unfocused degree such as PPE as an economist, to me, is an insult to those that have actually worked their way through the field.

Categories
Books, essays and others Economics History & heritage

[1473] Of a farewell to alms, and 2007

This is the last book for the year 2007 for me.

Fair use. Princeton University Press.

This book created quite a buzz in the economic realm. I have actually cheated my way through and read its reviews. Still, that fails to satisfy my curiosity. Thus, the purchase.

The odd thing is, an almost the same point that is central to this book is touched by Beinhocker briefly in The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics. And I think, this book should be read together with Douglass North’s Understanding the Process of Economic Change. I have yet to read North myself but I have read enough reviews to suspect that the two authors may be offering competing intriguing explanations to economic development. Or, in fact, complementary since no one theory typically explains everything away at ease in economics. I will invest effort to make North’s work as my first book for 2008.

Anyway, apparently, the book is quite hard to come by in Malaysia; I had to wait for a month or so for this book. Once, I asked for the book at Kinokuniya, and they gave me A Farewell to Arms by Ernest Hemingway instead. That was a “WTF?” moment there then but no matter. All is well now for I am a proud owner of the hardcover edition!

And oh, boy. There are too many books unread and most of them fall under the economics section. Maybe, just maybe, I should stop buying books for awhile.

Categories
Economics

[1468] Of homeownership should not be encouraged?

A finding that might affect housing policies (via):

Andrew Oswald, an economist at the University of Warwick, found that homeownership makes workers less mobile, which brakes economic growth and worsens unemployment, especially in areas blighted by the decline of locally dominant industries. Strictly speaking, whether this is a social problem is debatable. The costs of unemployment are borne mostly by the unemployed, not by others. Workers in company towns might be wise to spread their risk rather than sink their savings into a house close to the plant—but, you might argue, that is for them to decide. Yet Oswald argues that homeownership helps to calcify whole economies, which weakens the case for subsidy (and introduces the case for new taxes to discourage homeownership). [Housebound. Clive Crook. The Atlantic. December 2007]

Categories
Economics Society

[1448] Of before you shut the door, wait

Kuala Lumpur is full of aliens, legal or otherwise. In the recent weeks, there has been a strong call from those in power to reduce dependency on foreign laborers. Xenophobes only happy to jump onto the bandwagon that appeals to protectionism and central planning. This is indeed not the first time xenophobes have spoken out their mind.

The Malaysian economy is highly dependent on foreign labor. The fact that 41% of construction sector workforce is made up of foreigner stresses the importance foreign workers to our economy. Estimate has it that there are 2.6 million foreign workers in the country, or approximately 10% of total population of Malaysia.[1]

There are a few reasons for that and one of them as well as the simplest explanation is cost. Under the same labor and environmental requirements, foreign labors are willing to work for less compared to the locals; of course, foreign labor here refers to mostly low-level talents who privy not to higher education. Given the cost, it makes absolute sense to hire foreigners instead of locals. If the locals are willing to match the wages of foreigners, I am sure the composition of workers in the industries such as construction that demand low-level talents will tip in favor of the locals.

It is true that influx of foreign labors Malaysia depresses wages, assuming demand for labor does not increase, under typical situation. Without these foreigners, wages would be higher and closer to the level that matches locals’ preference. Yet, I would argue, industries which experience such wages depression are those that the locals are uninterested to participate in. On top of that, if it had not been for the increased labor supply, cost of construction will be higher and thus, an obstacle to economic development. Besides, Malaysian workforce on average is more educated than most of these foreigners. Stretching the line of reasoning further, the availability of foreign labors free up local resources — local human capital — for other more productive, higher talent intensive industries.[2] Indeed, it is a high time for Malaysia to move from manufacturing to services, up the value chain. For this reason, Malaysia needs to pay special attention to its education system.

Another possible reason for such a high requirement for foreign labor is shortage of workers. Despite the discussion of high unemployment among college graduates, Malaysia has a low unemployment rate; for the second quarter, the rate stood at 3.4%.[3] Not all of the unemployed, especially college graduate with degree in IT, mass communication, engineering or any other sexy courses would even think of toiling under the merciless sun welding steel, smoothing out the cement surface in effort to build yet another skyscraper to fill the sky of Malaysia, or roofs for most of us to live under.

If the number of unemployed graduate is not enough to explain the 3.4% rate, do not forgot frictional unemployment, those leave their jobs voluntarily for another jobs, which may be better. How many of you have heard a friend said he was in between jobs? That is frictional unemployment. And then, there is cyclical unemployment, which rises and drops according to seasons. In other words, quantity-wise, the number of workers and the availability of jobs may match or more than demanded but talent-wise, there is likely a shortage in the market.

This economic preference for foreign labors over local ones have prompted allegation that these foreigners are stealing jobs from the locals. On the contrary, nobody is stealing anything from anybody. It is simply something called competition and there will be winners as well as losers in a competition. These laborers are sometimes just thankful to escape the kind of poverty that persists in certain countries like Bangladesh or Myanmar. Their determination to escape poverty drives them to work hard. In all fairness, they should at least be rewarded with employment opportunity. I am willing to go farther to say that the locals, me included, which are used to hand outs, have a thing or two to learn from these foreigners. They may reach our shore in rags, looked down upon, but they have the drive that many of us — whom unashamedly demand for subsidy year in year out, as if it is our god-given right — do not.

Objectors to the use, or some may contend as excessive use, of foreign labor, have alleged that the presence of foreign laborers increase the probability of crime. They insist that most crimes are committed by foreigners. This is far from the truth and in fact, it is the locals that contribute to the level of crime rate we Malaysians currently experience.

Others have proposed expanding the use of robotics to reduce dependency on foreign labor. Alas, without doubt, labor cost, at least for low level talents, is much lower than the capital cost associated with robotics. The use of such capital-intensive resources is only justified when the cost of labor is high; high labor cost is associated with high level of education.

One argument against the use of foreign labor however may stand up. It concerns clash of culture. For this reason, it is wise to not allow a sudden influx of immigrants into a community. The locals need time to accommodate their expectation and to build trust while the foreigners need time to learn local culture. Nevertheless, with the expected closer integration among ASEAN member states — relatively freer flow of capital and labor — a good foreign labor policy will be the one that encourages liberal local attitude towards foreigners, expounding the fact that these foreigners are as much as human as you and I, Malaysians.

The sooner we get use to ASEAN’s Schengen area, the easier we Malaysians could integrate with the rest of the people of Southeast Asia.

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

[1] — Malaysia is home to an estimated 2.6 million legal and illegal foreign workers. They are critical to the nation’s valuable manufacturing and agriculture sectors, and many householders rely on foreign domestic workers. [Malaysian law to curb foreign workers, illegal immigration. AFP via Google News. November 12 2007]

[2] — Kindly compare my rationale to that of the Prime Minister’s:

KUALA LUMPUR, Nov 9 (Bernama) — Prime Minister Datuk Seri Abdullah Ahmad Badawi today asked employers to stop the “craze” to hire foreign workers as the move will not contribute to human capital development but will instead have a negative impact on the nation.

He said hiring of foreign workers, be it legally or illegally, would not help to upgrade the technology in the country as the foreigners recruited are not highly skilled and have low productivity. [Stop The Craze To Hire Foreign Workers, Abdullah Tells Employers. Bernama. Retrieved November 9 2007]

[3] — Key statistics. Department of Statistics, Malaysia. Retrieved November 21 2007.