Categories
Activism Economics

[1261] Of distributive justice in free market

Institute for Policy Research, better known locally among restricted circles as IKD (Institut Kajian Dasar) organized a small forum on the New Economic Policy a couple of hours ago. As it turned out, the forum focused on the weaknesses of the New Economic Policy but throughout the forum, the most interesting point was raised by Dzulkefly Ahmad and later followed up by Khalid Jaafar.

Dzulkefly Ahmad, the director of PAS Research Centre, mentioned the phrase distributive justice. I quickly recognized this as another word for equitability. In my head, I was quick to point out that mainstream economics does not deal with equitability but rather, stresses on efficiency. Nevertheless, there is a mechanism to achieve a perceived efficient equitable point; the Second Fundamental Theorem of Welfare Economics provides for this. In layperson’s term, the theorem proves that any efficient outcome could be achieved through a lump-sum wealth redistribution. Through the new allocation of endowment, the new efficient outcome is attainable through market forces.

While I was thinking in technical term, Khalid Jaafar came up with a more meaningful question: who would be responsible for the redistribution of wealth?

My bias wants me to say the market. After deeper casual mental masturbation however, I am struggling to answer the question of how would or could the market reallocate individuals’ endowment?

The tougher questions are these: what is an economic efficient equitable outcome? Could the market recognize that efficient equitable outcome?

At 02:40, my eyes are heavy and my brain is shutting off.

Unlike me, all speakers — Rajah Rasiah of Universiti Malaya, Dzulkelfly Ahmad of PAS and Tony Pua of DAP — prefer the easier path which requires government intervention. That endowment reallocation is of course done through taxation.

Categories
Economics History & heritage

[1258] Of the fall of Suharto

Do you remember this?

Copyrights unknown. Fair use. http://academic.evergreen.edu/H/hahnj/

The Asian Financial Crisis is an embarrassing episode in our history; the mighty tigers turned into sick kittens. This photo is the epithet of that period. The mighty Camdessus looked on the broken Suharto, reminiscing the old days of colonialism.

Throughout the next week or so, if time permits, I wish to revisit the fall, or hiccup, of Southeast Asian economies, including Malaysia, in the late 1990s. Please stay on and we will learn together what went wrong and answer some what-if questions.

Categories
Economics Environment Politics & government

[1257] Of a sensible US proposal but a better German option

Anthropogenic climate change is a contentious issue in the international arena; it is a tragedy of the global commons. The latest high profile debate took place at the Germany-hosted G8 summit in the week of June 6 2007. The discussion stayed true to the current trend that no longer doubts the existence of human-induced climate change but rather, seeks to mitigate the effects of climate change. At the meeting, two road maps were presented: one by Germany and another by the United States with the former being supported by a clear majority. Within this context, I fall within the majority but that does not necessarily mean I reject the US version outright.

The German proposal calls for the halving of the 1990 global carbon dioxide level by 2050. Such suggestion would limit temperature increase to between 1.5 and 2.5 ºC. If it is adopted as the son of Kyoto, it would be binding just like Kyoto. As a note, the Kyoto Protocol demands a 5% cut of carbon dioxide as well as five other greenhouse gases from the 1990 level by 2012.

The US has refused to that proposal and has come up with an alternative of its own. Instead of reducing the level of carbon dioxide in the atmosphere, it seeks to concentrate on reducing carbon intensity. Carbon intensity is simply a fancy word describing the ratio of carbon emissions to gross domestic product (GDP): the lower the figure, the more efficient the economy operates in term of carbon emissions.

While politically angry at the US, I am sympathetic to the US suggestion after giving it a fair inspection.

It is typical to blame countries with the larger total annual emissions of contributing to climate change. Applying the total annual national emissions as a basis of comparison is dependent on the size of the country, population and geography-wise. The larger a country is, the higher the emissions would be with all else equal. For instance, Malaysia contributed 0.6% of global emissions in 2002. If ASEAN is to be taken as a state, it, inclusive of Malaysia, would produce approximately 3.7% of global carbon emissions in 2002. That would rival a smaller Germany which contributed 3.3% of global emissions in the same year; Germany according to Wikipedia, based on figures produced by the United Nations Statistics Division, was the sixth largest emitter of carbon dioxide in 2002. Such comparison does not control for population or economy size. Without such control, the data is noisy and produces misleading conception.

In other words, using annual national carbon emissions for comparison purpose is almost meaningless and unfairly put too much blame related to climate change on the shoulders of large countries. What would be better for comparison purpose is the carbon intensity measurement as proposed by the US. Or, perhaps, my favorite, emissions per capita.

Take a look at annual national emissions in 2002:

GFDL. Wikipedia. http://en.wikipedia.org/wiki/Image:Ratio_of_GDP_to_carbon_dioxide_emissions.PNG

Then, observe carbon intensity in 2005 (in this graph, the red is below world’s average and green is above; the dimension is GDP/emissions. The inversed dimension means higher figure equals to higher efficiency):

GFDL. Wikipedia. http://en.wikipedia.org/wiki/Image:Countries_by_carbon_dioxide_emissions_world_map_deobfuscated.png

For emission per capita in 2003:

GFDL. Wikipedia. http://en.wikipedia.org/wiki/Image:Countries_by_carbon_dioxide_emissions_world_map_deobfuscated.png

Despite me preferring carbon intensity used as comparison purpose to annual national emissions, why would I not lending my support to the US proposal?

The answer is this: we need to lower the level of carbon dioxide in the atmosphere. In fact, not just carbon dioxide but other sensible greenhouse gases. Lower carbon intensity alone does not do that job. Indeed, effort to lower carbon intensity does not mean lower global carbon level. During a period of economic boom and technological progress, efficiency as well as the carbon level could increase. Depending on the rate and volume, it would lead to increase in carbon level in the atmosphere.

How is that possible?

Efficiency is essentially a multiplier and it basically could reflect emissions reduction know-how. Greater technological level could permit greater efficient; lower rate. Then we have volume which could be interpreted as economic activities. Finally, of course, there is some rate of carbon absorption by nature. The diagram below illustrates the flow versus level model which is typical in economics:

By Mohd Hafiz Noor Shams. Some rights reserved.

The product of efficiency and volume, subtracted with the amount of absorption could be positive. To make it clearer, assuming increased efficiency leads to lower emissions, ceteris paribus, a sufficient increase in volume could erase any reduction made possible through higher emissions if volume is held constant.

The US proposal does not address that but the German proposal does. Hence, my support. Despite that, the German proposal should incorporate the other suggestion without losing sight of the level reduction goal.

Categories
Economics

[1255] Of a tip to improve the tourism industry

About six years ago, I found myself awfully famished and called for a pizza. What felt like a century later, a pizzaman called me back to let me know that he was standing at the door. What exciting news! I grabbed some cash, rushed down to the door, gave the guy some cash and expected some change. I never got that change and I was puzzled by the fact that he just took the cash and left nonchalantly. I almost protested, thinking it was theft but with just a couple of dimes, nickels and pennies and an empty stomach, I decided to enjoy my pizza instead. Later, I learned that it is a culture called tipping. More importantly, that culture might be the key to an excellent tourism-related service industry.

Tipping is not big in Malaysia. I myself am not a big fan of tipping. After all, why should I pay more on top of an overpriced meal, especially with the bad service that comes along with it?

I was very thrifty while I was in the US. I am still is now but once in New York, my friends and I were scolded for giving what I would guess was an insulting amount of tip. What a lecture we had! It was enough to heat us up in the frigid New York winter! But please do not blame me for that for I am but a product of Malaysian culture.

But back to the question, why should we tip?

The answer is simple and relates to one truth in economics: people respond to incentive. This is an universal truth. Well, almost but let us pretend that there is no irrational people in this world.

When I say tourism-related service industry, I really mean the sector such as hoteling and restaurant. If I might add, Malaysia has a relatively terrible service industry. A friend of mine from India once lamented on how terrible the service he received at what could be considered as a posh place in the middle of Kuala Lumpur. I was shocked to hear him complaining about that place.

The fortunately could be changed if the culture of tipping is introduced in a big way in Malaysia. With it, visitors would have the power to reward those whom exhibited good effort and, in some way, punish the sloppy ones. Alas, introducing a new culture is an Herculean task. A more sensible proposal is to start it with a more humble manner: develop a personal habit of tipping.

In order to get good service, one has to develop a reputation for tipping. In an environment where tipping is alien, one does not have tip too much to be well served. One has to repeatedly tip the same service provider over some time to gain that reputation. Just like in a repeated game model, players learn. The same fact is true in the real world.

So, if you hate the service you get in Malaysia, start tipping. Trust me. Once one has a tipping reputation, many in the tourism-related service industry would try to please you. If everybody tips, we would have a great tourism industry in no time.

If that is not enough a reason for you to start tipping, there is another reason why you should tip: tip big enough, you may get lucky.

Categories
Economics Environment Politics & government

[1254] Of G8 on climate change