Category: Economics

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Economics Politics & government Society

[2872] Lasting change needs more work, more time and wider support

We have the right to celebrate May 9. It is after all the first time in Malaysian history change at the very top happened. For years we were only chipping at the edge. Progress felt irrelevant. But now, here it is. Change.

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Yet, not all or even most of the changes Malaysia needs will be instituted quickly. It will take time and work for these changes to happen. There will be residual resistance to change and perhaps using the adjective residual understates the problem at hand. After more than six decades of Perikatan/Barisan Nasional in power – seven decades if you go all the way to the first Malayan general election in 1955 – there is a kind of deep state the new Pakatan Harapan government will need to win over and even fight.

There will be disappointments, and Pakatan supporters and sympathizers will accuse the new government of betrayal and hypocrisy.

But before any of us levels those accusations, we must understand that the government will have to pick their battles. Some will be won. Some will be lost. Pakatan and their supporters will need to be smart in which battles they want to win.

More importantly, before throwing those accusations in the future, we need to understand the long arc of history all of us have to deal with. Malaysia’s deep multifaceted history – with dimensions of race, religion, Peninsula-Borneo, federal-states, urban-rural, national origins, class, gender, etc – is the proper context to judge the new government in the next few years. No action could be judged in isolation.

And the future is just as important as the past in understanding this new Malaysia and the new government.

Our demography and culture are changing at glacial pace. It is slow but the inertia is massive: our society is set to become less diverse in a meaningful way. By 2050 the Bumiputras will form 70% of total population from about 60% in 2014. So would be the Muslims. The Malay population share will rise to 60% from 50% in the same period.

At the same time, we will be an aged society by 2050, from our low median age of 28-29 years old and low dependency ratio.

I fear the two demographic shifts could make our society less open and less progressive in our values. It is not the Malays and the Muslims per se that I fear. It is the increasingly monolithic nature of our society, and hence, the possible intolerance of differences. I fear that future where the Malaysian mind would narrow to a point that leaving is the only reasonable option for too many people.

This is the reason why the 2018 election was the last chance to change in time. The trends are pushing against us, especially against the liberals. It is not simply an election rhetoric. It is a real long-term concern about the fate of Malaysia. This is why I feel spoiling your votes or not voting is unwise: the advocates of the tactics (who wanted some kind of change) are ignorant of history and blind to demographic changes.

It was also the last chance to change because substantive changes that Malaysia needs could not be made by the same side that benefited from the closing of the Malaysian mind. Najib Razak tried it in 2009-2013 and he failed. All his attempts were in the end reduced to mere silo economic targets that stood alone outside of multifaceted Malaysian contexts, making them utterly dissatisfying as a vision. So dissatisfying that we had to go back to the 1990s to move forward.

And substantive change will need more support from Malaysians. While the Pakatan victory is the first step, we have to remember Pakatan won only plurality in popular votes, not majority. Lasting change would require Pakatan to get more Malaysians on board.

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Economics Photography Society

[2868] The last Banton boatmakers

I consider myself lucky. I have gotten enough education opportunities to ride on the benefits of globalization and technological changes. So big are the benefits I have reaped that I think I could travel around the world tomorrow if I wanted to without worrying too much about my financial obligations back home. If I lost my job somehow, I could afford to enjoy my unemployment as a short holiday and more importantly, I could get another good job in Malaysia or elsewhere with the skills, the connection and qualification I have. My social capital and wealth are great enough to tide me through such difficulties.

But the same modernization can be unkind to others. Not everybody benefits from such changes. Some are unequipped to ride the waves with the same education paths available to me. Worse, the wave could smash and sink whatever raft they are on. That fact sometimes makes me feel guilty of living the life I live now.

The last time that guilt hit me hard was when I found myself on the side of the Irrawaddy in Mandalay several years back. I remember walking by a shanty town where homes were haphazardly built along the river, with no access to clean water. There was no sanitation. The people lived in wooden homes on stilts with pigsty below. Trash of various kinds could be found everywhere and some children no older than ten would play happily among flies, fleas and maggots, contend with their small world simply for not knowing any better. I have seen how poverty looks like before but the kind in that Mandalay village is by far the worst kind I have ever witnessed.

I felt guilty just for being luckier than them, just for doing much, much better than them economically.

That feeling re-emerged recently as I travelled through southern Thailand for work. The Deep South as the Thais call it is a Malay heartland, just as how northern Malaysia is. The people on both sides of the border, more so on the east coast, have cultural ties restricted by the logic of modern states.

Somewhere by the beach in northern Narathiwat, the province that borders Kelantan to the south and Pattani to the north, is a village called Naim. There is a traditional Malay boatmaker aged in his 50s working hard to meet his orders. The only additional hands he gets are his son’s aged 20.

Ten or twenty years ago, he claims there were about 20 boatmakers on the same beach. Today, he and his son are the only ones left. So few are the traditional builders throughout southern Thailand that he is busy for the next four years meeting whatever demand that exists. It takes about four months to finish a boat, and by that account, he should have 12 boats to build.

The traditional boats he produces are magnificent. Made out of wood, they are 20-30 meters long. He uses modern tools to saw off wooden plank, before shaping and carving them. During my visit to his workshop, he and his son were working on the bottom most part of the boat, which had holes drilled into the sides and wooden studs jutting out of it.


The final stage of boatmaking involves painting the boat in bright contrasting colors, making the intricate pattern drawn on its body impossible to miss on land and in the sea. I would later visit Pattani located farther north and I found similar boats floating on the river that cuts through the city. An former MP for Narathiwat told me even the painters are a dying breed.

The modern economy has made traditional boat building an unlucrative business. It takes about BHT300,000 to make a boat, with the labor share of the cost being very small. Obtaining capital to finance the boat is also very difficult and the boatmaker complained nobody has helped him to keep the trade alive.

He also told me nobody wanted to become an apprentice anymore because of great sacrifices required. Apprentices are usually, or more accurately were, taken in young. Doing so today would mean missing out school days and missing out school would mean limiting one’s economic opportunity to escape poverty and rise up the social ladder. And the people in the village are largely poor living in their wooden homes and riding their motorcycles. Many live in wooden shacks in fact that could be mistaken as having been abandoned. One could get modern education and try to integrate with the modern changing economy, or risk one’s life making traditional boat for local fishermen, who themselves likely unable to compete with larger boats with deep sea capability, at a time when fishing stock is depleting regionally.

Boat building is a heritage of this part of the world. And he and his son are among the last of Narathiwat boatmakers. They are the last of traditional boatmakers on Banton beach.

And the same economic setup I am benefiting is killing that beautiful boatmaking culture. The importance of modern education is taking labor away from this trade, a trade that is a public good.

Categories
Economics Politics & government

[2866] Cut it to 4%, instead of abolishing GST altogether

Two of Pakatan Harapan’s ten big promises are the abolition of GST (returning to the SST regime) and the reintroduction of fuel subsidy.[1] While I can agree with most of its other proposals that include credible investigations into various financial scandals besetting the Barisan Nasional government, I oppose these two policies.

With respect to the GST, I think there is a better way to get what Pakatan Harapan seeks to achieve: cut the GST rate to as low as 4% from the current 6%. This policy is equivalent to abolishing the GST without actually abolishing it.

To make sense of why they — abolishing the GST versus cutting the GST rate — are effective equivalent, we have to understand two things.

First, consumers essentially face the end prices only. It is the end prices that matter to them, regardless of tax regimes. If the SST regime had been maintained and its rate hiked to 20% from its previous 6%-10% rates, consumers would have still felt the pain of rising prices. It does not take a GST for that statement on pain to be true.

Second, there is an equivalent GST rate to the old SST one. From my understanding, 4% GST rate is the same to the old 6%-10% SST rate. We know this because at 4% GST rate, government GST revenue would have been the same as its SST revenue (we call this revenue-neutral). In other words, the tax burden faced by residents in Malaysia collectively would remain unchanged if the GST rate had been introduced at 4% back in April 2015. To put it yet in another way, if the GST rate had been implemented at 4% instead of 6% in 2015, consumers would not have faced the price pressures they suffered in 2015-2016. Theoretically at 4%, there would have been no inflation attributable to the taxation system change.

Once we understand these two factors, we can immediately reframe the 2015 introduction of the GST as a tax hike, from 4% to 6%.

So, instead of abolishing the whole GST system altogether, Pakatan Harapan, if it comes to power, should cut the GST rate to 4% at minimum. That in effect will undo the 2015 tax hike and achieve the same effect as abolishing the GST from the perspective of the consumers, given that only the end prices matter.

I think this is the best way to acknowledge and to address the pain many felt during GST implementation, while keeping the benefits of having a transparent and efficient taxation system.

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

My fear of returning to the old SST way is that it could lead to an inflationary pressure worse than what we experienced in 2015 and 2016 (discounting the collapse of energy prices). The SST suffers from double taxation problem, unlike the GST. This has the potential of creating a cascading effect throughout the supply chain. Such a large rise in price level would be disastrous to a Pakatan government that campaigned not just against GST, but more importantly, a coalition that campaigned against rising living costs. To prevent such inflation from happening, a SST rate lower than 6%-10% might be needed, which would be a big hit to government revenue (essentially cutting the equivalent GST rate to below 4%).

This is another point to consider: government revenue. There is pressure to increase government revenue for social services, at a time when Malaysian society is ageing, unless you believe in a strict libertarian understanding of the state, which is not the norm in Malaysia. Under current situation, I think Malaysia can afford to loosen up its deficit ratio, but taxes could only be cut so low.

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

[1] — Pakatan Harapan (PH) says it will only take 100 days for it to put into place 10 major policy changes if it is voted into government in the 14th general election. [Pakatan pledges to fulfill 10 promises within 100 days of GE14 victory. Kamles Kumar. The Malaysian Insight. March 7 2018]

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Economics WDYT

[2865] Guess the 4Q17 Malaysian GDP growth

It is the final GDP release before the year goes to the dogs! The Department of Statistics will announce the fourth quarter figures tomorrow at noon. Before that, let us play a game:

How fast do you think did the Malaysian economy expand in 4Q17 from a year ago?

  • 4.5% or slower (13%, 3 Votes)
  • 4.6%-5.0% (13%, 3 Votes)
  • 5.1%-5.5% (22%, 5 Votes)
  • 5.6%-6.0% (43%, 10 Votes)
  • 6.1%-6.5% (0%, 0 Votes)
  • Faster than 6.5% (9%, 2 Votes)

Total Voters: 23

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For some context, the year 2017 was a pretty good year for GDP growth. It came after a pretty bad two-year period that in large part caused by the GST-shock to the economy.

But the fourth quarter growth is unlikely to be faster than the 6.2% yearly expansion we experienced in the July-September period. The third quarter was the peak and it was extraordinary. Even the 5.8% year-on-year growth in the second quarter now seems slightly on the high side.

You could see that industrial production has taken a break from the pace it grew for much of last year. Hot export and import growth are tapering off, with the volume index growing at a more modest pace now. There will be no more double-digit growth in the near future. Improving foreign exchange rates for the ringgit (with the exception against the Euro) will also keep export growth from flying off as it did from December 2016 to November 2017. Money supply growth is stabilizing after climbing for much of 2017 from a trough.

Change in government spending would be super-interesting this time around since the general election is just around the corner. Other GDP components like consumption and investment would likely expand at a rate not too different from the recent quarters.

Whatever the fourth quarter GDP growth would be, the first nine-month strong growth has translated well in the labor market. Seasonally-adjusted unemployment rate fell to 3.3% in December after staying at 3.5% for the longest time. So, consumption growth seems sustainable and okay in light of labor market improvement.

This happens at a time when core inflation has also fallen, suggesting potential output for the economy may have risen up, which is good news. As a result, unemployment rate could probably drop further with little impact on demand-pull inflation. I think this may also mean another rate hike by the central bank might be unnecessary this year, if things go as it is now.

Oh, happy lunar new year. Given how things are happening with the dogs here in Malaysia, I already cannot wait for the year of the pig. Too oinking exciting.

Categories
Economics

[2861] The society (and the GDP) is larger than a collection of individuals

It is fashionable in certain circles these days in Malaysia to question the reliability of GDP as a measure of welfare. They say they do not feel GDP growth and they prefer something like household income or wage statistics to a measure that is hard to understand. The more extreme criticism goes to claim GDP is worthless.

A journalist recently called me up for a crash course in GDP, just after the release of the third quarter statistics. “Why would the GDP matter to the man on the streets?” She asked me in a combative tone, as if I was lying about GDP, as if I was part of a conspiratorial system.

But GDP has functions that wages and household income cannot fulfill, just as wages and household income play roles GDP cannot properly fit in.

Wages and household income describe individualized statistics. Its appeal to personal welfare is also its weakness: it does not describe much beyond the individuals.

If the world were all about the individuals and the things happening within the four walls of our homes, then wages and household income would be sufficient. But there are entities that exist outside that do not contribute to our incomes and wages directly. And yet, those extra-household activities bring benefits to us (and sometimes, not so).

For instance, if a robot owned collectively by a community of humans provides a service to the neighborhood for a nominal fee (or perhaps even at market price), and that the robot income is used for community improvement instead of being paid as dividend to individuals, it is not clear to me wages and household income would increase as a result. But that income would definitely be counted under GDP.

Or if you are a Luddite and dislike the example, consider a more traditional case. If a government-run business — like operating the trains — makes profit and pays dividend to public coffers while the government itself is running a fiscal surplus, that income would not translate into wages or household income. But GDP would take care of that income, taking it as income for the whole economy.

Granted, GDP has its issues but we have to be careful about making false dichotomy when in truth GDP, wages and household income (along with other statistics) play complementary roles within multiple contexts. There are times GDP is more useful than wage stats and there are times the reverse is true. A widening productivity-wage gap, for instance, can be worrying within the current system and headline GDP figures might not be as illuminating as wage/household income statistics. And there are times all are useful. A complete picture of the world would use all measures available.

To kick GDP out as worthless in favor of a more restrictive statistics centered purely on the individuals is to develop a worldview of selfishness, that the world is all about me, me and me while discarding the fact we live in a society. The society can be larger than a collection of individuals. And I say that as a libertarian.