Category: Economics

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Economics

[1300] Of the rate stays at 3.50%

In the US, a lot of people pay a lot of attention to what the Federal Open Market Committee (FOMC) has to say. In Malaysia, I do not feel that atmosphere whatever the Monetary Policy Committee (MPC) convenes. Partly because of that, the Malaysian economic scene is so boring compared to the US. The local economic discourse is limited to populism and hardly receives the academic attention economic news receive in the US. So, let us try to create that atmosphere here instead of complaining what a boring country we have. Be proactive baby!

First off, the MPC seems to have a template for the announcement regarding the overnight lending policy. If I may add, just like the FOMC. The first paragraph goes straight to the point.

In May:

At its meeting today, Bank Negara Malaysia’s Monetary Policy Committee (MPC) decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50 percent. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

At its meeting today, Bank Negara Malaysia’s Monetary Policy Committee (MPC) decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50 percent. [Monetary Policy Statement. Bank Negara. July 24 2007]

So it stays. What a boring comment. They need to put in some spice into it, put in some mystery, like what Greenspan did, you know?

The second paragraph talks about Malaysian economic growth in general.

In May:

Despite the less favourable external environment which has had a moderating effect on Malaysia’s export growth, strong domestic demand has sustained the growth of the Malaysian economy. The public sector has also had an important positive impact on domestic economic activity. The Malaysian economy is therefore expected to sustain steady growth over the medium term. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

The overall growth of the Malaysian economy in the first half of the year has remained favourable with the slower growth in the external sector being balanced by stronger growth in domestic demand. During the second half of 2007, the growth momentum of the economy is expected to strengthen. Recent trade data suggest that the sustained growth in Malaysia’s major trading partner economies is starting to provide support to export growth. This will complement the robust growth in both domestic consumption and investment that is expected to be sustained for the rest of the year. [Monetary Policy Statement. Bank Negara. July 24 2007]

The July statement seems to be more bullish in future prospect of the export component of the GDP. Concerning the export component, I wonder if it is caused by diversification. Also, I could not help but notice the word “public sector” in the May statement. That “public sector” probably refers to government spending. I also wonder if that “domestic demand” is caused by government spending.

Next paragraph clearly talks of the greatest enemy of most central bankers: inflation.

In May:

Inflation during the first four months of 2007 averaged 2.4% and has continued its downward trend. Going forward, the continued high prices of commodities and agricultural products, and the rise in global food prices could have implications for domestic food prices and overall inflation. Taking into account these developments and the low inflation prevailing currently, the expectations are that the average rate of inflation for 2007 would be within the projected range of 2-2.5 percent. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

Inflation moderated in the first half of 2007 to a level of 1.4% in June and averaged 2% for the period as a whole. During the second half of 2007, inflation may edge up due to both domestic and external factors, but the average rate of inflation for 2007 is expected to be at the lower end of the projected range of 2-2.5 percent. [Monetary Policy Statement. Bank Negara. July 24 2007]

Considering the second as well as third paragraph of the July statement, it sounds like the policymakers are confused. Good, bad, going up, going down… Maybe, the word guarded celebration is in order. Or maybe, neutral bias?

I feel like they are mirroring their counterparts at the Federal Reserve, with a hint of oxymoron.

The last paragraph tries to describe the future.

In May:

Given the medium term outlook for inflation and economic growth, the current level of the policy rate remains appropriate. In view of the uncertainty in the external environment, developments in the international economy would be monitored closely. The future stance of monetary policy would be determined by Bank Negara Malaysia’s assessment of new data and information and its implications on the prospects for price stability and economic growth. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

The future stance of monetary policy would be determined by Bank Negara Malaysia’s assessment of new data and information and their implications on the medium-term prospects for price stability and economic growth. [Monetary Policy Statement. Bank Negara. July 24 2007]

In May, the confusion is pronounced. In July, the explicit signal for uncertainty is gone. Odd. Does that mean Bank Negara feels the economy is growing at a good pace while inflation is comfortably low?

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Economics Liberty Society

[1299] Of don’t tread on me

Public domain.

Dedicated to Raja Petra Kamarudin, and liberty at large.

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

p/s — pardon the low frequency of post. Work now demands extra labor.

But do not forget, DAP is organizing a forum on Negara Islam on Thursday, July 26 2007 at the Chinese Assembly Hall in Kuala Lumpur at 1930 hours.

Later on July 30 2007, Prof K.S. Jomo will be speaking at a talk at the same place:

Malaysia Economic Development Since Merdeka: Lessons for the Present and Future

Date: 30 JULY 2007 (Monday)

Time: 8.00PM-10.00PM

Venue: Kuala Lumpur & Selangor Chinese Assembly Hall, No. 1, Jalan Maharajarela, 50150 Kuala Lumpur (Near Maharajarela Monorail Station)

Guest Speaker: Prof. KS Jomo

Jomo K. S. has been Assistant Secretary General for Economic Development in the United Nations’ Department of Economic and Social Affairs (DESA) since January 2005. He was Professor in the Applied Economics Department, Faculty of Economics and Administration, University of Malaya until November 2004, and was on the Board of the United Nations Research Institute on Social Development (UNRISD), Geneva (2002-4). He is Founder Chair of IDEAs, International Development Economics Associates ( www.ideaswebsite.org)

Born in Penang, Malaysia, in 1952, Jomo studied at the Penang Free School (PFS, 1964-6), Royal Military College (RMC, 1967-70), Yale (1970-3) and Harvard (1973-7). He has taught at Science University of Malaysia (USM, 1974), Harvard (1974-5), Yale (1977), National University of Malaysia (UKM, 1977-82), University of Malaya (since 1982), and Cornell (1993). He has also been a Visiting Fellow at Cambridge University (1987-8; 1991-2) and was Visiting Senior Research Fellow at the Asia Research Institute, National University of Singapore (2004).

He has authored over 35 monographs, edited over 50 books and translated 11 volumes besides writing many academic papers and articles for the media. He is on the editorial boards of several learned journals. Some of his most recent book publications include Malaysia’s Political Economy (with E. T. Gomez), Tigers in Trouble, Rents, Rent-Seeking and Economic Development: Theory and the Asian Evidence (with Mushtaq Khan)

Abstract: Malaysia as a nation turns into 50 this year. In commemoration of 50 years of nationhood, there has never a better time for Malaysians to reflect on the present, its origins in the past and what the future holds. The economic crisis that began in 1997 has reduced growth rates since.

Ten years after the crisis, how far has Malaysia recovered? What is the present situation of the Malaysian economic? Is FDI the solution for Malaysia’s economic stagnation? All these questions and many more will be addressed by Prof. Jomo. This discussion should open a debate on our shared future as a nation.

Language: English

ALL ARE WELCOME!

Categories
Economics

[1297] Of finally, a real world Giffen good!

This has created a major buzz in the econ-blogosphere for a number of days now: the empirical evidence of the existence of Giffen good!

This paper provides the first rigorous, empirical evidence of the existence of Giffen behavior, i.e., a situation in which consumers respond to an increase in the price of a good by demanding more of it. We begin by examining several theoretical approaches to the Giffen phenomenon and show that in each case Giffen behavior is closely associated with poor consumers’ need to maintain subsistence consumption in the face of an increase in the price of a staple commodity. We then present evidence on the existence of Giffen behavior among extremely poor households in two provinces of China. In order to obtain an unbiased estimate of the key price elasticity, we conducted a field experiment in which we randomly subsidized households’ primary dietary staple (rice in Hunan province and wheat flour in Gansu province). Using consumption data gathered before, during and after the intervention, we find strong evidence of Giffen behavior with respect to rice in Hunan province. We also find evidence for Giffen behavior in Gansu with respect to wheat; however, the evidence is less robust than for Hunan, due to the (unanticipated) failure of at least two of the theoretical conditions that appear necessary for Giffen behavior. Restricting the Gansu sample to households that meet these conditions provides stronger evidence of Giffen behavior. [Jensen, Robert. Miller, Nolan. Giffen Behavior: Theory and Evidence. NBER. July 2007]

Previously, many believed that while Giffen goods were theoretically possible, it did not occur in the realm of reality. As it turns out, economics is not science fiction after all.

Can anybody say Nobel Prize?

Categories
Economics

[1296] Of why Tesco and Carrefour are selling Hairy Potty at a discount?

The news:

KUALA LUMPUR: As avid fans of Harry Potter await the highly-anticipated finale scheduled to be released for sale at 7.01am today, a price war has brought about an unexpected twist — four major bookstore chains have decided to not sell the book.

MPH, Popular, Times and Harris bookstores have decided to withdraw the Harry Potter and the Deathly Hallows novel from their shelves in protest against Tesco and Carrefour’s move in selling the novel at a much cheaper price of RM69.90. The retail price of the book is RM109.90. [Harry Potter and the ugly price war. The Star. July 21 2007]

One word: traffic.

Both retailers may not make any profit out of those books in particular but the traffic the books attract would more than make up any loss.

This same tactic is utilized by all similar retailers on certain vegetables. They do not make profits on those vegetables but the traffic those greens bring get other goods moving.

Categories
Economics Society

[1282] Of questioning the morality of minimum wage

I had supper with two friends not too long ago. The gamut of our conversation topics ran wide but I have no doubt that the crux was on morality of free market and minimum wage policy in particular. A friend expressed how such philosophy fails to provide warmth to the struggling people whom work day and night to provide for themselves and perhaps, others. He pointed to the opposition to minimum wage and how free market supporters are insensitive to the hardship the needy face as proof. He presented his point so passionately that it pained me to disagree with him. Yet, I must disagree and went on to illustrate how such insensitivity within a larger picture is really a morally superior and caring position to take.

Scarcity is a real issue and minimum wage supporters unfortunately do not grasp the idea well. If scarcity is a tale belonging to the lands of the fairies, then we would be living in the land of the fairies. Sadly, this is the real world with harsh reality of constraints. Within the issue of minimum wage, the policy imposes more constraints than necessary on the economy, turning a harsh world even harsher from a big picture.

Perhaps I am stating the obvious but minimum wage policy increases wages of the already employed. Of course, the employed have to have wages below the floor if they are to benefit from the policy. Here, the key word is employed. The policy benefits limited fraction within the society and like many other things, it is fueled by self-interest when it is fought by those that tend to benefit from it. Or to put it more bluntly, plain old greed. Those that support such policy because they think it is a compassionate thing to do however simply fail to understand the economics behind the policy, or seems to limit their consideration to limited section of the society.

The story of minimum wage does not end where supporters of such policy would like it to be. When one is playing a game of domino, one really has to be careful on which pieces one would like to touch.

Once the employed, at least the ones that riped the fruits, received their pay hike, of course they would be happy. The same cannot be said for business owners and unemployed others. And trust me, most of business owners are not multimillionaires; a majority of them are simply trying to make a living too. Higher salaries increase cost for the affected employers. Money does not grow on trees and so, with greater wages to be paid, employers cannot afford to hire more people.

Please do not get me wrong. It is not always wrong to pay individuals with high wages. If a person is capable, the person deserves every one bit of it. It is productivity that determines wages. A policy that pays somebody extra for something trivial, something that too many people could do better or cheaper than him is a bad policy and this most of the times includes minimum wage policy.

And where does this lead?

One of the direct results is the less employment opportunities. The impoverished that require jobs are denied of opportunities because of a policy that benefits a certain section of the society at the expense of another group.[1]

For those those that believe opposition to minimum wage is governed by cold rationale, do kindly explain to me this: what about the unemployed? Are the unemployed expendable?

How does opposition to minimum is colder than a policy that robs many from employment opportunities while the beneficiaries of the policy enjoy higher wages that do not reflect productivity?

Where is the morality of minimum wages when it keeps the improvised from gaining employment? Where is the morality of such policy when it denies decent people from employment opportunities?

For those that fight for minimum wages and stand to benefit from it, this is where selfishness, instead of sharing the bench with supporters of free market, is the minimum wages proponents’ best friend.

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

[1] Note — minimum wage policy may increase employment under specific conditions but we usually face the typical model where minimum wage imposed above equilibrium leads to increased unemployment. Under a monopsony model, I would to a certain extent support minimum wage to correct imperfection in the market.