Category: Economics

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Economics

[2849] The next step: from cash transfer to negative income tax

One of the better things Malaysia experienced on the policy front is the abolition of fuel subsidy and the introduction of targeted/conditional cash transfer as a replacement.

While the mean-tested nature of the transfer has been less the ideal (due to loose conditions) and appears uncorrelated to what the subsidy would have been (its discretionary nature means the transfer policy is increasingly digressing from its original purpose), the policy is still better than the very costly and inefficient subsidy regime Malaysia had. I have advocated the shift from subsidy to cash transfer for a very long time now, and I still support it.

But cash transfer should not be the end of progress. Perhaps the next step is to push the conditional cash transfer towards a more rule-based approach. In that spirit, I think the next step is the introduction of negative income tax system to replace the cash transfer system that we have now.

A negative income tax system works like this: it pays a registered taxpayer money if the person earns below a certain income level determined by the government. One easy benchmark would be the minimum wage level (in doing so, it could make minimum wage policy obsolete). The size of the payment could be a portion of the difference between the determined level and the person’s income.

In short, if you earn below that benchmark, the government pays you some money. If you earn above it, you pay tax. A brief introduction to the policy is available at the Library of Economics and Liberty.[1]

The current cash transfer program Malaysia has, BR1M, has some resemblance to the negative income tax. Those earning below a certain income threshold get the cash transfer. Negative income tax does the same thing, but more.

It goes further by institutionalizing the cash transfer arrangement and eliminates the latter’s discretionary nature, which is susceptible to corruption in its widest sense. It guarantees the payment will be paid out every year based on transparent formula. There will be no grand announcement about the payments by ministers, party members, leeches and definitely no more mock-checks and unnecessary conflict of interest/suspicious handover ceremonies.

The institutionalization also brings about one thing: a real basic income for all Malaysians. It is also an automatic stabilizer for the economy, which means in case of economic troubles, the urge for discretionary fiscal stimulus can be reduced. That also means less corruption on the procurement side.

Payments itself can be done just like how tax returns are done every year. If cashflow is of concerned, the payments can be broken up in stages just like how BR1M is being paid this year.

I do not think the jump will be that big, unlike the previous shift from fuel subsidy to cash transfer. But I do think in terms of benefits, it might be bigger the cash transfer as it could make redundant other welfare policies while streamlining administration cost of supplying or enforcing these other policies.

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[1] — The NIT would thus be a mirror image of the regular tax system. Instead of tax liabilities varying positively with income according to a tax rate schedule, benefits would vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. If, for example, the threshold for positive tax liability for a family of four was, say, $10,000, a family with only $8,000 of annual income would, given a negative tax rate of 25 percent, receive a check from the Treasury worth $500 (25 percent of the $2,000 difference between its $8,000 income and the $10,000 threshold). A family with zero income would receive $2,500. [Jodie T. Allen. Negative Income Tax. Library of Economics and Liberty. Accessed February 15 2017]

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Economics WDYT

[2848] Guess the 4Q16 Malaysian GDP growth

The final quarterly GDP figures will out next week on February 16. The GDP grew 4.3% YoY in the third quarter, up from 4.0% YoY in 2Q16. In the first quarter of 2016, it was 4.2% YoY. So, as the game goes…

How fast do you think did the Malaysian economy expand in 4Q16 from a year ago?

  • 3.0% or slower (13%, 3 Votes)
  • 3.1%-3.5% (0%, 0 Votes)
  • 3.6%-4.0% (9%, 2 Votes)
  • 4.1%-4.5% (35%, 8 Votes)
  • 4.6%-5.0% (39%, 9 Votes)
  • 5.1%-5.5% (0%, 0 Votes)
  • Faster than 5.5% (4%, 1 Votes)

Total Voters: 23

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Judging from industrial and import figures, I would think the domestic demand part of the economy grew reasonably okay in the fourth quarter although other statistics like car sales remain depressed, suggesting not all is well.

The labor market says as much. Unemployment rate is relatively high at 3.6%. That suggests the recent economic growth recovery has not brightened up the labor market. It is not that there is no job creation, but the pace of job creation is not happening as fast as the growth of the labor force.

(Interestingly, the core inflation has been stable at about 2.0%-2.2% in annual terms. Nerdy stuff to note: core inflation fell as unemployment rate rose. This is cool, assuming the GST had minimal impact on the core inflation. Cool because unemployment rate and demand-pull inflation that the core is supposed to measure tell something about the output gap: it may suggest the gap has not changed by much despite 2015-2016 economic weakness. One would start to worry if unemployment rate goes up but core inflation remains unchanged, which suggests the output gap might be widening. A worse worry is when unemployment rate goes up together with core inflation: gap is shrinking but potential is decreasing)

The other good news is that exports did great. But with strong import growth, trade balance for the quarter will not help the GDP. Indeed, from the merchandize goods trade stats, 4Q16 net exports actually fell in the quarter by nearly 10% YoY.

So, in the end, I am thinking the 4Q16 GDP growth will be somewhere in the mid-4.0%, leaving the full year 2016 GDP growth at 4.2%-4.3%.

Categories
Economics

[2846] Unfairly casting aspersion on the Gini coefficient

There is a very good article published in the Malay Mail over the weekend.[1] It is about the brisk sales of high-end cars like BMW and Mercedes in Malaysia while entry-level, compact cars like Perodua are doing badly, and the consumption pattern in the economy by income levels.

[The divergence car sales by prices are part of the weird macroeconomic statistics that have been coming out of Malaysia since the GST was introduced back in April 2015, along with the collapse of oil prices. Weirdness like the consumption growth is rising nicely while big ticket items like cars and homes are not doing so well in terms of growth. In fact for cars as a whole, it has been declining. It may be some non-business cycle explanation behind this, like the widening of train network in Malaysia but for now (a person driving BMW rarely if ever take the train, for instance), let’s put that aside and maybe discuss that on another day.]

But I have one, tiny issue with the article, way, way down. The author questions the accuracy of the 2014 Gini coefficient, which suggests inequality, decreased compared to 2012, while pointing to the latest car statistics (2015-2016), which may say otherwise:

While BMW Malaysia posted its highest ever sales growth last year, its rival Mercedes posted record sales for the second straight year in 2016. A total of 9,047 Mercedes vehicles reported to have left its showrooms in the first nine months of 2016, marking a 10 per cent growth compared to the same period last year, according to Malaysia’s leading automotive online magazine Paultan.org.

In 2015, when the local economy appeared to be slowing, Mercedes sold a total of 10,845 vehicles, a record increase of 56 per cent from 6,932 units in 2014.

[…]

Based on the sales data, slower economic growth was not affecting all segments of the country equally. While those in the lower income brackets are complaining of rising costs, their more well-off counterparts have been splurging.

”What it indicates is that while the low and middle income earners are experiencing fiscal constraints, it is business as usual for the higher income group,” Muhammed told Malay Mail Online in a phone interview.

Global trend

Putrajaya has so far shrugged off the idea. According to official statistics, the country’s Gini coefficient series shows a downward trend in household income inequality from 2004 to 2012, after which it falls off drastically — the Gini coefficient was 0.46 in 2004 and only dropped by 0.3 percentage point after eight years. But in 2014, it dropped to 0.40.

I find the final paragraph (especially the final sentence) in this excerpt as slightly confusing. After laying out the situation in 2015 and 2016, the article goes on talk about the 2014 Gini data, which might not describe 2015 and 2016 very well.

Confusing, because the Gini coefficient is a low-frequency data done, at the moment, every 2-3 years together with the household income survey. Not only that, it lags severely, published only after the survey was done months earlier: the 2014 data was released in June 2015 while the 2012 data was released in July 2013. You can see its low frequency in the chart below:[2]

In contrast, car sales statistics are high-frequency data available monthly.[3] 

High-frequency data do have a lot to say about the present time. But I feel it is unfair to cast aspersion on low-frequency data from all the way back by using more recent information (2015-2016 car sales) the way the article does. It is unfair because the two datasets describe two different points of time. They are not contemporaneous data and not comparable, at least in the way it is being done.

I am aware of the paper by Lee Hwok Aun and Muhammed Abdul Khalid which the Malay Mail article cites. But the paper utilizes car sales data that is contemporary to the Gini coefficients it uses (before that, I would like to say it is a shame that Lee had to leave University of Malaya because of the short-sighted government spending cuts). You can read the working paper here.

In contrast, the Malay Mail article is taking post-2014 car sales data to question a 2014 Gini coefficient.

So, I think the attack on the 2014 Gini coefficient from the Malay Mail angel might be overdone, and different from the Lee-Muhammad criticism. The 2014 coefficient is just unable to describe the 2015 and the 2016 situation, especially since the GST was introduced in April 2015. There was a significant structural break since the 2014 coefficient was released.

[Also, I feel it is important to note that the Gini we have here measures income inequality, not consumption inequality. We have the Household Expenditure Survey though. Just saying]

In any case, the next Gini coefficient may come out this year or the next. The Household Income Survey is supposed to be done twice in five years (last done in 2014). The latest coefficient may yet go up.

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[1] — Syed Jaymal Zahiid. What BMW and Perodua sales data says about the economy. Malay Mail. January 21 2017.

[2] — 2014 Household Income Survey. Department of Statistics. Accessed Jan 23 2017.

[3] — Malaysian Automotive Association. Accessed Jan 23 2017.

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p/s — I am not defending the Gini coefficient per se. I am saying the criticism mounted in that particular way is off the mark.

Categories
Economics Politics & government

[2844] Evolution of corporate ownership in Malaysia

Terence Gomez is embarking on a massive project investigating quantitatively the influence of government-linked companies in the Malaysian economy. The dominance of government in business and in the economy is no mystery. What is special here is that he is analyzing the numbers more comprehensively than many had done before. He is currently focusing his research at the federal level but if I remember correctly, he plans to delve into state level bodies, looking into bodies like Kumpulan Perangsang Selangor, which are much less known than those like Khazanah Nasional.

Together with Jomo Kwame Sundaram, Gomez in 1997 wrote the go-to book — Malaysia’s Political Economy: Politics, Patronage and Profits — exploring the ownership of corporate Malaysia in the 1990s and its links to politics, namely Umno. To understand political financing during the Mahathir era, this is the book to read.

The scale of Gomez’s latest project on ownership is larger than anything available before. There have been work done on corporate ownership in Malaysia after his 1997 book but they provided only partial view of the whole story while nibbling at the edge.

Gomez in his lecture, which I attended at the University of Malaya earlier this year (and later at an event organized by the Institute for Democracy and Economic Affairs; Ideas is funding of the project) made the connection between previous ownership literature and showed how the majority ownership changed from the 1950s to the 2010s, the present time.

He is continuing the work pioneered by James Puthucheary, who back in the 1950s went through official colonial and Malayan documents to understand who owned what in the economy. Through that, he corrected the idea that the Chinese had controlled the economy when in fact it were the Europeans. Gomez mentioned Lim Mui Hui’s work as the other important literature in the 1970s tracing capital ownership in the Malayan-Malaysian economy in the early days of the New Economic Policy period.

Gomez in his lecture showed just as Puthucheary demonstrated decades ago that the British and other European bodies controlled the majority of the top Malayan companies in the 1950s. This changed in the 1960s and the 1970s when Chinese tycoons rose up in the list. By the 1980s and the 1990s, due to the implementation of the New Economic Policy and Mahathir’s industrialization drive, the list was dominated by Malay industrialists. The ownership list was also more diverse than it ever was, with Genting, Berjaya and YTL were among the biggest then.

But in the aftermath of the Asian Financial Crisis, something fundamental happened. Most of top Malaysian companies were owned by the government and no longer belonged to private individuals or groups. There were bailed out or acquired by the government through the Government-Linked Investment Companies. Gomez listed the usual seven: the Employees Provident Fund, Kumpulan Wang Persaraan, Permodalan Nasional, Lembaga Tabung Haji, the Armed Forces Fund, Khanazah Nasional and the Ministry of Finance Incorporated. Many of the Malay industrialist companies like UEM were now owned by the government.

Not all of those seven government-linked investment companies are the same. The EPF, for instance, is not strictly a government company, in the same Khazanah is. But nevertheless, the EPF does have an extremely strong presence in the Malaysian economy, in both the equity and the debt markets.

In a different talk of a more casual style, historian Khoo Kay Kim claimed the Germans controlled the Malayan economy before the First World War. Their influence diminished after their lost the war and was replaced by the Japanese during the interwar period. I have not read a proper document to ascertain the claim but I have read from various sources that Japanese companies were active in Malaya prior to the Second World War.

Gomez’s work has implications beyond economics. Control over of these government-linked corporations and entities enables political control and enhances political power, just has the Umno’s ties to various the 1980s-1990s Malay industrialists had kept the party’s machinery going. But unlike then, when those funds were private money from private companies (public companies privatized), the government today does enforce spending or procurement requirement to benefit certain parties. While Gomez did not cover 1MDB, the 1MDB corruption scandal, provides the starkest example of public resources being used directly and illegally to finance Umno’s (and even its president’s personal) requirement. The connection is starker and more corrupt now than ever before.

The evolution of corporate ownership in Malaysia simply does not inspire confidence, and the completion of Gomez’s work will truly show how big the beast has become.

Categories
Economics WDYT

[2837] Guess Malaysia’s 3Q16 GDP growth

The Department of Statistics will release the third quarter GDP numbers this Friday.

Growth, I think, unlikely to be pretty and will likely be the worst so far yet this year. This slowdown has lasted longer than I expected but the good news is, I think we might be close to the trough. There is not much light at the end of the tunnel, but it does feel like it will get slightly better next year. Projections all around point towards a high-4% for 2017, versus this year’s low-4%.

Still, there is risk things would hardly move on the ground. I remember as we entered the last election cycle (possibly began as early as 2011 and definitely by 2012. It felt like forever) the government crept on its four legs. Everybody was being cautious. Friends in the government shared their frustration how the bureaucracy moved extra slow and reluctantly as the civil service felt the need to wait out for the election, lest work invested would go to naught. Najib Razak post-2013 did change the agenda rather spectacularly that Pemandu men and women hardly have work in Malaysia now, and working in India at this very moment.

So, forgive me when I am a bit skeptical upon hearing the government’s claim that the construction for the east coast rail line (ECRL) and the high-speed rail (HSR) will start next year. Maybe having a no-bureaucracy, no-tender MYR2 company doing the ECRL would hasten the timeline a bit.

But that is the prospect for 2017. What about 3Q16?

How fast do you think did the Malaysian economy expand in 3Q16 from a year ago?

  • 3.0% or slower (0%, 0 Votes)
  • 3.1%-3.5% (8%, 1 Votes)
  • 3.6%-4.0% (42%, 5 Votes)
  • 4.1%-4.5% (50%, 6 Votes)
  • 4.6%-5.0% (0%, 0 Votes)
  • 5.1% or faster (0%, 0 Votes)

Total Voters: 12

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I think growth would decelerate to below 4.0% YoY, about high-3%. That is the lowest expectation I have ever had since I left grad school and first started working. The unemployment rate is relatively high at 3.5% and export figures have not been pretty.

Still, the industrial production statistics have shown some encouraging numbers. Furthermore, consumption and imports are no doubt on the rise.

We will see how all this adds up this Friday.

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p/s — Do not fuck this up Americans.