Categories
Economics

[1147] Of preparing for rate cuts?

On Thursday, the Federal Open Market Committee kept the federal fund rate unchanged at 5.25%.

Phrase of the week: neutral bias.

NEW YORK (Reuters) – The Fed’s shift toward a more neutral bias on interest rates is likely to deal a blow to the dollar in the longer term, but bears expecting a sharp fall in the currency may have to wait a little longer yet.

The dollar slumped to a two-year low against the euro on Wednesday after the Federal Reserve left interest rates on hold at 5.25 percent but dropped a phrase in its statement pointing to future monetary policy tightening. [Shift in Fed tone signals dollar down but not out. Reuters. March 22 2007.]

The Fed is expected to cut rate later this year; a rate cut signals an economic slowdown.

Given Malaysian dependence on the US market, I am convinced that Malaysia would be affected.

The ancients said, all roads led to Rome. With slowing US economy as well as stronger ringgit which hurt local export, this particular road might lead to Rome indeed. So, I am confident of winning this bet.

Our own Bank Negara left our interest rate as unchanged at 3.50% at the last monetary policy meeting on February 26. If the Bank Negara is worried about slowdown, it should cut down rate. In the news however, the Malaysian central bank seems to be very bullish given current circumstances:

KUALA LUMPUR: Bank Negara is confident Malaysia’s economy will remain resilient and grow at a healthy 6% despite moderate global growth predicted for the first half of the year. [Bank Negara says economy still resilient. The Star. March 21 2007.]

If Bank Negara is as bullish as it says, conventional wisdom would either advice the central bank to either increase the rate up or leave it be, depending on the situation, if inflation is the bank’s main concern.

Categories
Economics History & heritage

[1146] Of globalization is not new

Globalization is loved and loathed by so many people for so many reasons. Too many people however seem to talk as if globalization is a modern phenomenon. This is understandable given that it is only around the 1990s that many started to recognize the forces of globalization. The Battle of Seattle in 1999 especially brought aspects of globalization into public consciousness. On the contrary, globalization is not a recent invention; only the word is. The phenomenon itself could be observed from dawn of time right here in Southeast Asia, and everywhere else around the world.

The late 20th century has been characterized as a century of trade. So many Asian countries had, and still are, directly benefiting from trade. The Asian tigers built their economies around trade and that later became a template for economic growth. From this perspective, globalization is increased economic connectivity, perhaps, synonymous to free trade. While we as a species have never been closer to each other, globalization has been true even before we, the current generation, came into being.

The previous era of intense globalization was during the Pax Britannica in the 19th century and to a certain extent, the early 20th century. Trade within and without the British empire was so impressive in volume. Goods flowed so freely between nations that it is possible that those decades were the closest point in history we had ever come close to true free trade. Goods crisscrossed nations with great ease; the only restriction then was technology. The speed at which trade was conducted nevertheless amazed those of that era, with goods as far as Malaya could reach London through the Suez Canal in just a few months when previously, it had taken almost eternity. Despite that, no, the 19th century is not the origin of globalization.

The 17th and the 18th century were another, earlier, bout of globalization. The formation of the Dutch and the British East India Company connected Europe with the world in a greater way. More remarkable is that this century marked the rise of free trade as an ideology, pushing mercantilism out of the deck and to the bottom of the sea. After tearing down the wall of protectionism in Europe, free trade continued its march to the east in search of prosperity, albeit violently, initially.

Back in Southeast Asia in the 15th and the early 16th, the Sultanate of Malacca acted as a broker between the east and the west. So famous was it that Barbarosa said “Whoever is Lord in Malacca has his hand on the throat of Venice“. The wealth Malacca gained from trade, specifically, spice trade, attracted the Portuguese to this part of the world. The fall of Malacca to the Portuguese somewhat halted trade for a moment but it did not take long for trade to reorganize itself to take Malacca out of the equation; others like Aceh took over Malacca’s role as Christianity and Islam brought over their rivalry in the west to the east.

Just as Malacca and Aceh, many kingdoms of Southeast Asia rose and fell with elements of globalization. During its golden age, not only Srivijaya controlled the important Malacca and Sunda Straits as well as land bridge up in the Malay Peninsula — Langkasuka-Kedah and Pan Pan — to monopolize trade while the Silk Road faded into ancient history, it was also the center of Buddhism. In other words, it was an agent of cultural globalization. The great Srivijaya — with Sailendra, the builders of the wonderful Borobudur — only started to experience decline and eventually extinction not because of internal strive but instead, by external forces. The restriction of trade in China and harsh raids conducted by Chola from southern India, Srivijaya had its fate sealed by those that lived thousands of miles away from the Malay Archipelago.

Even before Srivijaya — it existence was only noticed by modern historians more than five centuries after its fall — even before Brutus stabbed Caesar in Rome in 44 BCE, the globalization was apparent. How else would one explain the presence of Chinese silk and Persian rug in Rome and Roman vases in the far east? Or the Moluccas spices on the steps of Genoa? And surely, the introduction of paper-making technology from China to Europe by the Muslims is another proof of globalization.

When the safe passage across the Silk Road was threatened, first by the advancing Persian armies, later the Greeks, then the Mongols and finally, the Chinese struggle during the period of the Romance of the Three Kingdoms, globalization refused to die. Trade diverted itself from land to sea. Mushrooming across the Malay Archipelago, along the coast of eastern Indochina and the banks of Mekong were small kingdoms that suddenly saw the influx of traders and the wealth that come with it. That sudden increase in trade created an economic boom in the region. Each one of them took advantage of the change. That prosperity only ended when China under the Sui dynasty practiced isolationist policy in the 6th and the 7th century. It was a good run for the kingdoms of Southeast Asia regardless, lasting long enough to enrich our history.

We are currently riding another wave of globalization. Our ancestors rode theirs and carved their names in history. If we carefully embrace our wave and not succumb to the fear-mongering protectionists, just as we recall Malacca, Srivijaya, etc as great trading nations, our children would remember, that we lived during an era of unprecedented prosperity.

Categories
Economics

[1144] Of overly concerned with Gini coefficient

I am willing to admit that extreme wealth inequality might be undesirable in building a stable society. Extreme inequality could create unnecessary tension in a society that could in turn bring about disregard for property rights. In spite of that, I am unconcerned with the current state of wealth inequality in Malaysia. Regardless of my take, whenever the Gini coefficient for Malaysia changes by an infinitesimal amount, some would make mountains out of molehills. These people are being overly concerned about inequality. Some wealth inequality is still okay.

Many factors could cause such inequality. From the way I see it, the most common cause is the incentives to be better; the strive to be better. A system that rewards success and punishes failure causes inequality. There is no doubt that some deterministic factors — like being lucky enough to be born into a well off family — play a role but I would like to concentrate on a factor; abilities.

A person’s abilities, controlling for luck, determine how successful the person would be in his life. By successful, I mean wealth accumulation. Inclusion of individual preferences would further excite inequality. On top of that, there are uneven returns across different fields; different occupation offers different returns. For instance, an average teacher would probably earn less than an average engineer despite both are equally able in their respective field, given everything else is the same.

If a person wants a totally egalitarian society in term of wealth, the simplest way to achieve such end is to ensure that everybody has the same abilities, preferences, etc. With exactly similar attributes, the path that everybody follows would be the same; everybody would share successes and failure and hence, being rewarded and punished together. Consequently, everybody’s returns would be exactly the same. Voila! Wealth equality.

If such method is unpalatable because it leads to authoritarianism, the other way is the Robin Hood method: forced wealth redistribution that is ever so popular under welfare state arrangement.

Robin Hood or not, to me, instead of wealth inequality, a more pressing matter is poverty. Instead of forcing those at the top and those down below to converge at an average to achieve better Gini coefficient, I would rather lift the median up; fight poverty through economic growth.

You may ask why poverty is of greater concern than inequality to me?

Well, what is the point of having a Gini coefficient of zero — perfect wealth equality — when all of us earn below a dollar a day?

Equality in poverty is not in my list.

Categories
Economics

[1141] Of eeriely familiar rhetoric in Venezuela

In Venezuela, Hugo Chávez the socialist, while going on a fool’s errand:

Mr. Chávez champions these ideas, which will take effect in January, as ways to combat inflation, which in recent weeks crept up to 20 percent, the highest in Latin America. Officials blame ”hoarders” for shortages of basic goods and price increases for food on the black market. Mr. Chávez says the renaming and redenominating the currency will instill confidence in it. [Venezuela to Give Currency New Name and Numbers, NYT, March 18 2007]

Isn’t that familiar?

Categories
Economics Politics & government

[1134] Of Malaysian political parties on the economic spectrum

Within Malaysian politics, I do think economic philosophies have taken a back seat to the point that typical left-right classification of political parties is meaningless. Nevertheless, I would like to classify Barisan Nasional, DAP, Keadilan and PAS accordingly. I will leave the others alone since I do not think the rest are worth talking about at this point.

First stop is the Barisan Nasional, the coalition that has ruled this part of the world for more than 50 years; BN itself is older than Malaysia. Labeling BN is no easy task because, in my opinion, the parties of the coalition band together for power more than anything else. Classification is not made any easier when, the most important party, UMNO for instance, has pursued liberal economic policies as much as it has advocated some left leaning ones. More often than not, UMNO economic policies are ethnocentric which perhaps could fit into typical protectionist policies. UMNO and in my opinion, even MCA and MIC for that matter, are too pragmatic to simply fit into a class. Another component party, Gerakan, on the other hand is pretty liberal. Regardless of Gerakan, given how much central planning is observable in this country and the fact that Malaysia is a mixed economy, I would say BN sits somewhere in the center with slight variation from time to time.

If the act of classifying BN is tough, trying to do the same thing with Keadilan is harder. While BN is a coalition of parties with diverging economic ideals where pragmatism has taken over, at least, if one goes through of the component parties, one might be able to recognize each party’s leaning. The same method unfortunately will not work with Keadilan because Keadilan is a party by itself. Instead of a coalition of parties with different backgrounds, Keadilan is a party of individuals with different backgrounds. They have liberals in classical sense, they have communists, socialists, Islamists; you name it, they have got it. I do not know how Keadilan manages to get liberal and socialists along with Islamist under one roof. A greater mystery is how Keadilan manages to keep them from ripping each other apart. Therefore, I am unsure which direction Keadilan would be taking and I bet Keadilan as a party itself is unsure which path it would want to embark on. The best word I could uses to describe Keadilan is populist. Some people that I know in Keadilan themselves are contented to be mere populists.

Contrary to the two, DAP is easy to label. Without doubt, it is a socialist party. Or, if you like it, a social democrat party.

Finally, PAS. I am happy to say it out loud that PAS has no economic policy; they are too busy policing morality that they have no time for the economy. Nevertheless, Islamic economics does support welfare state arrangement to some extent. Yet, I am hesitant to take that into account as far as PAS is concerned because PAS is pretty clueless about the economy.