Category: Economics

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Economics Pop culture Society

[1108] Of the poor listen to local music

At the Marginal Revolution, based on a paper by Omar Lizardo:

…the data supplied by Professor Lizardo show that the poorer a country, the more likely it will buy and listen to its own domestic music. This makes sense given that music is a form of social networking and the relevant networks are primarily local.

There is an article discussing the same subject on the NYT written by the author of Marginal Revolution.

I skimmed through the paper for regression analysis and I found this on page 15:

Omar Lizardo. Fair use.

Malaysia is somewhere in the middle, above the regression line. You may take a closer look at the graph by clicking on it.

I wonder how the inclusion of population size would affect the analysis.

Categories
Economics History & heritage

[1106] Of fighting inflation by shooting down the zeros

What would one do to fight runaway inflation?

In Venezuela, chop the zeros off:

CARACAS (Reuters) – President Hugo Chavez said he will chop three zeros off new bolivar currency bills to bolster Venezuelans’ perception of a strong currency in a bid to curb inflation, which is now highest in Latin America. [Reuters, Feb 16 2007]

If I remember my history correctly, the German Empire took similar route to combat inflation right after the First World War. Though similar, there is one major difference.

In the aftermath of War to End All Wars that did not only fail to end all wars but instead made way for a larger war, the Allied was victorious and the Central Powers was devastated: the Ottoman Empire ceased to exist, Astro-Hungary disintegrated while the German Empire was humiliated through and through. As if such victory was not enough, the Allied at the Treaty of Versailles imposed heavy war reparation against the German state. Given heavy debt burden as well as the power to print money, the German government indulged in seigniorage.

The ability to print money might be cool but be careful, if you printed too much money, you might end up poorer, as the German learned in the 1920s. The German not only learned a lesson or two about inflation — they learned it the hard way.

In 1923, one US dollar was equivalent to 4.2 trillion mark. No. I am not kidding. That is 4,200,000,000,000 mark; 4.2 x 1012 mark. Imagine, if you lived in Berlin in 1923, you would have to use scientific notation to buy a sack of flour. And converse in German to boot!

And oh shit, imagine the (nominal) cost of roses on Valentine! Inflation on top of inflation cannot be good news.

Further, the nominal interest rate stood at around 900%. For comparison purpose, as of February 2007, the Malaysian nominal interest rate is 3.5%.

The funniest thing is, since prices across the board were raising so fast on daily basis if not on hourly basis, the central bank could not print out enough money to make life a little bit simpler for the Germans. In fact, there is one famous picture that depicts how bad inflation was back in 1923:

Public domain.

On Wikipedia: “A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.”

Suffice to say, I do not think a person could buy dirt with the mark in 1923.

Some time in the same year, the German government which got tired of probably raising the interest rate almost daily — while the people got tired of running from the banks to the stores just to make sure 4.2 x 1012 mark would still be 4.2 x 1012 mark an hour later — replaced the heavily inflated mark with a new mark. Those outrageous zeros were slashed. While the Venezuela is cutting three zeros, the German cut 12. The new regime brought sanity back to an insane monetary roller coaster ride.

Apart from that, the new mark was anchored to real assets, which, I do not think is true for the Venezuelan bolivar. Because of this — this is the only policy tailored to fight inflation — and the reputation of Venezuelan central banking, I believe that the problem Venezuela is facing would not end anything soon. Reputation is important in the fight against inflation. Given how populist the Venezuelan government is right now, I doubt the central bank — which I assume has no independence on monetary policies — would have the stomach to fight inflation.

Apart from that slashing of zeros, there are other efforts aimed to fight inflation. For instance, Venezuela is cutting down taxes to fight inflation:

Chavez said VAT will first be reduced on March 1 by 3 percentage points and then by a further 2 points on July 1. [Reuters, Feb 15 2007]

And to promise to introduce new taxes to replace the old taxes:

To compensate for the income loss, Chavez, a proud socialist, said the government will create new taxes, including one that could involve the private property of the rich. [Reuters, Feb 15 2007]

With the removal of VAT, prices could fall but it remains unclear what the net effect would be as, as stated in the first Reuters’ article, price could increase with the slashing of zeros. The price increase is similar to the effect of abolishing the pennies.

Moreover, the abolition of VAT encourages consumption, which could lead to demand-push inflation. I am unsure what the net tax shift would be though.

Right or wrong nevertheless, Venezuela will be an exciting economy to watch from far.

Categories
Economics

[1099] Of food sovereignty and comparative advantage

As a graduate of economics, I unreasonably assume that everybody knows basic economic ideas like supply and demand and comparative advantage. Perhaps, it is time for me to throw away that assumption and assume the opposite. Explanation on comparative advantage is crucial in effort to discredit the idea of food sovereignty; food sovereignty is merely another name for protectionism.

The idea of food sovereignty is well-stated in the Ninth Malaysia Plan. See Chapter 3 of the Plan if you prefer not to take my words for it. Given that the current administration is stressing on agriculture, perhaps it is not too astounding to see food sovereignty being part of the administration’s economic game plan.

The idea of food sovereignty basically states that a nation should be able to produce enough food for its population and not dependent on others. It should be self-sufficient in food production.

In order to do that, resources would need to be allocated in a way that prioritizes the food production sector. Such prioritization if done as rigidly as possible would deprive other sectors of resources. And indeed, the idea of food sovereignty might contradict the concept of comparative advantage and ignore the possibility of trade.

Comparative advantage is a basic economic principle first proposed by David Ricardo approximately two centuries ago. It states that an entity, be it a whole economy or a person, should concentrate on what it does best. In order word, the entity should specialize in what it could produce most efficiently. From there on, trade away in order to obtain other goods that the entity does not produce. Whenever trade is impossible, the idea does not apply for the obvious reason. There is more to gain from trade than autarky, nonetheless.

When it comes down to the issue of food sovereignty, the question that needs to be answered is this: does Malaysia have a comparative advantage in food production?

Even if Malaysia has comparative advantage in food production — which I think it does to some extent due to favorable climate — the concept of food sovereignty is not as helpful as comparative advantage in creating a more prosperous society.

Categories
Economics Politics & government

[1093] Of RM46 billion vote of confidence? I have questions instead…

In the NST today:

KUALA LUMPUR: Malaysia is back on the global investment map. A record RM46 billion was invested in 1,077 approved manufacturing projects last year by local and foreign investors, a 48 per cent jump from the RM31 billion invested in 2005.

The keyword is “approved“. A more important question is, how much was actually committed?

The article is comparing approved investment in 2006 against actual investment in 2005. Why the article does not compare approved investment in 2006 with approved in 2005? Or, why the article does not compare actual investment in 2006 with actual investment in 2005?

Further, it is more likely that the figures are nominal figures. An honest analysis would use real figures for comparison purpose.

Let us compare oranges to oranges, apples to apples.

More from the article:

Domestic investments amounted to RM25.8 billion, making up 56.1 per cent of the total approved investments, compared with RM13.1 billion or 42.2 per cent in 2005.

I wonder, how much of the RM25.8 approved domestic investment are actually approved investment related to the government?

The answer should be compared against the outcome of Mundell-Fleming model.

Another question is, how does Malaysia perform against our neighbors? Regionally?

Finally, from Reuters (via):

KUALA LUMPUR (Reuters) – Malaysia’s media has been trumpeting good news about the economy, and that is stoking speculation of an early election this year.

Hmm….

Categories
Conflict & disaster Economics History & heritage Politics & government

[1089] Of the Scramble for Africa II

During the era of imperialism, European powers as well as a few others scoured the face of the Earth for territories. In Central Asia in the 19th century, the scour was called The Great Game. On the continent which the Nile flows, where the wildebeests roam the Serengeti, the Game had another name: the Scramble for Africa. Two centuries later, history is repeating itself in Africa as well as in Central Asia. Though the race does not come in the form it once took or with players that once played the game, it is a race nonetheless. Africa in particular has been the center of attention by both the United States of America and the People’s Republic of China.

For China, its economic growth requires so much fuel that it is embarking on a massive global search for precious resources to quench its thirst. In quest to secure sustainable growth, realizing that Africa is rich in natural resources, China is buying influence there by promising no-interest loan worth billion of dollar to improvised but resources-rich African nations:

Before arriving, he announced soft loans worth another $3 billion and a doubling of aid to Africa over the next three years.

[…]

This, probably more than anything else, is what makes Mr Hu popular with African governments. His largesse comes with no strings attached, unlike pesky Westerners who insist on anti-corruption drives or improving human-rights records in exchange for money. China’s hand-outs come without the tang of neo-colonial interference so disliked by many Africans.

This is on top various investments made by the Chinese across the continent. It is suffice to say that to Africa at the moment, China is Santa Claus.

In a way, Africa is the perfect target for China. The competition for natural resources might not be as fierce at it is in the Middle East and Central Asia. In the Mideast, there are United States as well as other powerful corporations that in some ways monopolize the world’s supply of fuel. With Iraq in shamble and Iran rattling saber with the US, risk is high.

In Central Asia, there is the ever-jealous Russia trying to reassert its influence on the former states of the Soviet Union. And of course, the United States is everywhere, worthy of the label superpower it claims to. In these two regions, I would use the word crowded to describe the situation. Africa on the contrary has so many places remain unexplored. So far, it is a free for all and China is leading the pack.

The spotlight on Chinese interest on Africa has attracted the world to both. I trust the US is especially suspicious of the Chinese activities in Africa. Further, the US is not new in Africa. Earlier, there was rumor that the US was indirectly involved in the recent conflict in Somalia:

The officials said the C.I.A. effort, run from the agency’s station in Nairobi, Kenya, had channeled hundreds of thousands of dollars over the past year to secular warlords inside Somalia with the aim, among other things, of capturing or killing a handful of suspected members of Al Qaeda believed to be hiding there.

And then, who could forget of CNOOC’s failed bid for Unocal back in August 2005?

To be fair, the US interest in Africa is not mainly due to Chinese presence. The US fears Islamist influence and indirectly, anti-US groups. This is in line with the US alleged role in Somalia. The issue on security has led the United States to establishing a new command center in Africa:

WASHINGTON: The Pentagon will establish a new military command to oversee its operations in Africa, President George W. Bush and Defense Secretary Robert Gates announced.

Creation of the U.S. Africa Command, which had been expected, will “strengthen our security cooperation with Africa and create new opportunities to bolster the capabilities of our partners in Africa,” Bush said Tuesday.

And of course, China and the US are not the only players of the race. Other countries, including Malaysia have already created substantial presence in Africa:

American sanctions have kept many companies from Europe and the United States out of Sudan, but firms from China, Malaysia, India, Kuwait and the United Arab Emirates are racing in. Direct foreign investment has shot up to $2.3 billion this year, from $128 million in 2000, all while the American government has tried to tighten the screws.

Competition will be fierce. In fact, Malaysian national oil and gas company has been kicked out of Chad. Suspiciously, that episode has proven to be profitable for the Chinese.

Nevertheless, while the last scramble brought most of Africa to its knees, I have a feeling that this race will be different. With all the investment coming in and increasing trade, something good is bound to happen. I am optimistic that Africa is looking forward to a better future. I am optimistic that the second scramble is the precursor to the prosperity globalization promises. There will be obstacles of course but this scramble is too precious to squander that I do not think the obstacles would stop Africa from gaining respect from the rest of the world.