Category: Economics

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Economics Liberty Politics & government

[1077] Of Malaysia-US FTA is under threat

With respect to the current negotiation on Malaysia-US FTA, chairman of the House Committee on Foreign Affairs, the Democrat Tom Lantos made the most unhelpful comment:

The recently-announced oil and gas deal between Iran and Malaysia is equally abhorrent. That is why today I am sending a letter to our trade representative, Susan Schwab, requesting that all negotiations between the United States and Malaysia on a free trade agreement be suspended until Malaysia renounces this proposed deal.

According to Bernama, “abhorrent” deal refers to this:

Abdullah was reacting to a statement made by US House of Representatives Foreign Affairs Committee chairman Tom Lantos who demanded that US President George W. Bush suspend all FTA negotiations with Malaysia, in protest over the US$16 billion (RM57.6 billion) deal signed last month between Malaysia’s SKS Group and the state-owned National Iranian Oil Company.

All this is on top the fact that negotiation is tough:

A proposed Malaysia-U.S. free trade pact may falter if negotiators fail to make firm progress in bridging differences at a fifth round of talks next week, a U.S. official warned on Wednesday.

Negotiators will meet again for a week starting Monday in Malaysia’s Sabah state on Borneo island, where they will seek a compromise over opening up of Malaysia’s services and government contracts – two key hurdles to a deal – said Deputy U.S. Trade Representative Karan Bhatia.

Labor and environmental issues are also holding up talks, he said.

Further at Forbes by Associated Press :

Malaysia has warned it will drop free trade talks with the United States if it is asked to scrap a multi-billion-dollar gas deal with Iran, a news report said Friday.

[…]

In an angry reaction, Trade Minister Rafidah Aziz told Washington to stay out of Malaysia’s affairs and warned the government will not bow to any threats, the Malay-language Utusan Malaysia reported

While I am very keen of the Malaysia-US FTA, I have to agree with Rafidah Aziz. No one shall dictate Malaysian relationship with Iran. Besides, that oil and gas cooperation is not a government-to-government dealing.

Malaysia must have the liberty to forge relationship with anybody. It is our liberty and in my priority list, liberty sits higher than an FTA.

Despite that, I urge both the Malaysian and the American negotiators to ignore Lantos and realize a closer relationship between the two countries. It is only through trade could we guarantee our prosperity. In Kant’s words, “the spirit of trade cannot coexist with war.”

Further, what better way for Malaysia to get back at Lantos other than having a successful fair FTA?

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Economics

[1068] Of blanket subsidy is inferior to targeted subsidy

Subsidy leads to inefficiency. Notwithstanding the reasoning, sometimes subsidy could be justified; sometimes, efficiency is not the only consideration of a society. The word subsidy is commonly heard when a society tries to address the problem of inequity; subsidy is a tool of wealth redistribution.

I maintain a high dose of skepticism against any subsidy policy. Yet, I am prepared to lower my opposition if such subsidy is well-tailored. A well-tailored subsidy however does not include blanket subsidy; blanket subsidy is the worst form of subsidy one could ever think off. An example of blanket subsidy is the current Malaysian fuel subsidy.

A blanket subsidy is a lazy policy — at best, clumsy — formulated to solve a perceived problem. It generalizes society, assuming that everybody in the society is in need of the subsidy; that people are fully homogeneous. On the contrary, people are heterogeneous to a very large extent. If people were completely homogeneous, I do not doubt that communism would have ruled supreme.

That generalization is costly. The generalization, believing that the lower, the middle and the upper economic class are equally needing of or benefiting from a blanket subsidy is an expensive proposition. It is expensive because it gives benefit to those that value such subsidy the least; the rich values subsidy less than the poor. A blanket subsidy does not make that discretion. Therefore, a blanket subsidy regime pays too much to increase societal welfare whereas in fact, a better policy would have done the same job with lesser resources. One of those better subsidy regimes is a targeted subsidy.

A targeted subsidy policy specifically identifies a segment of a society that is in need of aid and then aids only those that in need of aid.

With a targeted subsidy, resources that would have been used under blanket subsidy could be used to make investment in education or other areas that could permanently and structurally increase societal welfare.

Not only that blanket subsidy as a policy is expensive, somebody has to fund it in order to maintain such policy. Resources ultimately has to be sourced from the society; the taxpayers. The society has to be taxed in order sustain any subsidy. Therefore, to defend a blanket subsidy as a mean to increase societal welfare is almost oxymoronic. The society is being taxed to support a subsidy — you pay me to pay you, all else being equal.

In my opinion, rather than support a subsidized regime as far as the current Malaysian fuel subsidy is concerned, it is better to promote tax reduction instead. Or a hybrid tax reduction-targeted subsidy policy if we are so hooked up on the crack that is subsidy. Rather than you pay me to pay you, why don’t you just keep your money for yourself?

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Economics Humor

[1063] Of who says economics is a dry and boring subject?

Have you ever wondered how Malaysian economic growth correlates with Malaysian carbon emission? Or economic performance against income per capita? Or internet proliferation against telephone proliferation?

Head over to The Gapminder World; another great tool by Google. Kudos to Prof. Mankiw for the discovery!

Just a friendly reminder — be mindful of the golden rule that is correlation is not causation.

Categories
Economics Politics & government

[1061] Of global warming in the 2007 State of the Union

After years of denial and under pressure from growing green presence in the Congress, the Bush administration is expected to finally give global warming the attention it deserves:

George Bush is preparing to make a historic shift in his position on global warming when he makes his State of the Union speech later this month, say senior Downing Street officials.

Somehow however, I feel Bush is only happy to touch on global warming instead of discussing further on Iraq. Iraq has been such a failure that it has become a good policy to divert public attention away from Iraq.

Nevertheless, finally, perhaps this is the way forward. This u-turn by the Bush administration might set the momentum we all need to formulate an globally inclusive post-Kyoto plan to combat global warming. Bush’s proposal might be insufficient but a change is still a change.

Earlier this week, ExxonMobil of whom had developed a reputation as the staunch denier of global warming, abandoned its denial stance and joins the fight against global warming. Also, this week, major companies called for a carbon trading system, putting President Bush under pressure just hours before his address:

NEW YORK (CNNMoney.com) — Chief executives from such major corporations as General Electric and DuPont teamed up with environmental organizations Monday, urging U.S. lawmakers Monday to pass sweeping legislation that would ultimately cut greenhouse gas emissions.

This will be an exciting address for us, the greens. The snowball is now an avalanche.

Categories
Economics

[1060] Of tax reduction, not subsidy increase please!

Crude oil prices have been falling lately and certain quarters are calling for the reduction of fuel prices in Malaysia. That call includes implicit demand for increase in subsidy. Anwar Ibrahim is one of them.

I oppose any subsidy increase that distorts the market. In fact, to combat externalities caused by fossil fuel consumption, I advocate the imposition of tax to internalize the externalities. Unfortunately, taxation is politically unpalatable. As an alternative to subsidy increase or taxation, I propose a policy better than subsidy increase as well as pragmatic at the same time; a third way — a proportionate decrease in taxes.

That means any saving made by the government through the reduction of subsidy as well as the fall in crude oil prices should be fully used to fund tax cut across the board.

The term saving here needs to be defined. Saving means the amount would need to be paid by the government for subsidy if crude oil prices had not fallen from the price level when the latest subsidy regime was announced.

Why is this policy better than the call to increase subsidy?

This policy is less distortionary. Not only it does not increase distortion caused by subsidy, it also reduces distortion caused by taxation through tax reduction. Apart from economic consideration, tax reduction might have favorable impact comparable to the political effect of subsidy increase effect — it would please the mob, for better or for worse.