Category: Economics

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Economics

[2777] Rebasing, revision and GDP-ratio targets

From time to time, economic statistics get revised. Usually statisticians require a lot of time to compile data and in that mad rush, certain data could left out first and included only later when everybody gets a chance to reflect. There is nothing structural about the revision. It is just about errors, corrections and business as usual.

Other times, the revisions are more structural. Some are structural only because of definition change like what happened with the concept “external debt” last year. Others include very deep changes. An example of that is the GDP rebasing exercise and it affects policy targets.

The Malaysian GDP gets rebased once every five years and the exercise consists of two parts: rebasing and revision.

The rebasing itself is simply a manipulation of index but the more significant part of the exercise is the revision that include/exclude of new/old sectors. Strictly speaking, the change in the composition of the GDP is not rebasing but instead, it is a structural revision. It is really the revision that makes rebasing such a big deal.

The revision is a problem for any policy with GDP-ratio targets as it can make such targets quickly irrelevant. Since Malaysia structurally revises its GDP once every five years (for instance, from 2010 to 2014, the GDP base year was 2005. For 2015 till 2019, the base is 2010), any GDP-related target formulated in 2013 for instance could become problematic in 2015 when a new GDP series is used.

Here are two examples.

First is the 55%-to-GDP debt limit that the Malaysian government maintains. Notwithstanding the off-the-budget spending criticism as well as the fact that the limit itself is a paper tiger and assigned arbitrarily, the government promises to keep its debt below 55% of GDP. Previously, a lot of people were worried that the government would breach the limit. Not so much now and this is largely because of the revision.

As you can see, the old GDP series (with the 2005 base) has the government cutting it close but under the 2010 GDP series, there is a lot of space still for fiddling around:

Effect of GDP revision on Malaysian debt limit

The implication? It gives the government more room to borrow just because the GDP statistics have been revised upward while allowing the government to keep to its words.

Another example is the fiscal balance of the federal government. You can see, the Malaysian fiscal deficit ratio is slightly lower under 2010 GDP series compared to the 2005 series.

Effect of GDP revision on fiscal balance

The ratio changes are not trivial from policy perspective.

In the case of deficit, previously thought to be a severe policy under one GDP series might not be so severe under the other after all. For instance, the federal government recently revised its deficit target from 3.0% to 3.2%. But 3.2% deficit under the 2005 GDP series is harder to achieve than it is under the 2010 GDP series. If the government sticks with the 3.2% target after the rebasing/revision, then the government could have higher absolute deficit and actually borrow more than it would have if there was no rebasing/revision exercise.

To put it simply, the goal post moves and it becomes larger.

This is part of the reason why I prefer to target deficit on government revenue instead of  on GDP.

I suppose the other way to correct for this is to tighten those targets every time there is a rebasing exercise.

And there are other policies beside fiscal that look at GDP-ratio too.

I think the revision would become less of an issue if it is done every year. The problem with doing it once every five years is the sudden jump, which can throw a lot of targets into questions. Policymakers make targets simply on incomplete and dated data. In fact, any target made based on the status quo would be softer than it looks like.

A yearly revision would solve that and make any GDP-ratio target more robust.

Categories
Economics

[2775] Before you kick the low-tech sectors…

The idea that Malaysia needs to graduate from low-tech, low-skill sector to high-tech, high-skill sector is well-rehearsed. If you have been reading my blog long enough, you will know that I am not a fan of such narrative.

I consider it as a feel good rhetoric as if there is a switch somewhere that turns everything low-tech to high-tech where most if not everybody is a high-tech workers. I also think the narrative appeals to our xenophobia, peppering ugly racism with some kind of economic rationale as if it would make it less racist.

Recently, I came to think of yet another reason why I am opposed to the low-tech, high-tech story.

When you think of it, many low-tech sectors are the base of high-tech sectors. Without the unsexy low-base supply chain, the high-tech sector just cannot exist because these high-tech sectors depend on input of these low-tech firms.

Consider Penang with all of its Intel, National Instrument, Dell, Honeywell and many other so-called high-tech anchor companies. What support them are the smaller guys producing relatively unsophisticated components. Without these smaller guys, which are low-tech (admittedly, not as low tech as spinning cloth or harvesting the paddy field or palm oil, but low-tech nonetheless), these famous names would not be here in the first place.

If you forcefully kick these so-called low-tech out, the question is, where would the high-tech guys source their inputs? If they have to source it from abroad, would that increase their logistics cost? Would the high-tech guys move to where the inputs are?

Sure, we have a global supply chain but in many cases, like the auto sector near Bangkok and the electronics sector in Penang, it is the hubs that draw on local resources before joining the global supply chain. The existence of the hub depends on whether the economy can support it. It does not exist in vacuum. And it is the unsexy low-tech sector that provides the support the hub needs.

A lot of people who favor the narrative of low-tech to high-tech also forget in many ways, the low-tech sector is the incubator for high-tech firms. Many high-tech firms were originally producing ”stupid electronics”, the basic components that require only high school knowledge of physics, chemistry or general science. But they experimented later, turning themselves from dumb manufacturers through ”trial and error” to high-tech ones with actual ”research and development” arms.

Globetronics for instance used to produce just LEDs and ICs for Intel in the old days. I do not think anybody would dare call LED high-tech but it went on to support higher-value products for Intel. Now, Globetronics produces multiple components more complicated that ICs and LEDs, feeding other higher-value electronics manufacturers all around the world.

This is not only applicable to the electronics industry. I cited electronics because it is a large component of the Malaysian economy.

Other I can probably cite safely is the rubber industry, specifically glove manufacturers. I have never visited these manufacturing plants and you would think making rubber gloves are so low-tech, but I know equity analysts covering several Malaysian glove manufacturers and the name Hartalega pops up as a high-tech glove manufacturer, focusing on automation and productivity.

Also, there is a reason why these glove manufacturers are in Malaysia. Southeast Asia — Indonesia, Malaysia and Thailand — are the largest producers of rubber in the world. That is such a low tech.

In Sarawak where I was several months back, without passing judging on the politics there, many big local contractors were merely cheap builders meeting Cahya Mata Sarawak’s needs. Now, firms like Shin Yang, Naim and KKB are more than just that contractor some big guys would call for petty civil work. They are not exactly high-tech but the point is that they have graduated to do more complicated structures.

Like I said, low-tech is the incubator for high-tech sectors.

Besides, it requires a big investment and experience to run big high-tech. These people, a lot of people want to run before they learn to walk. We do not have to crawl and take a hundred years to get things right but these low-tech sectors are where we can do our trials and errors, before doing our “research and development”.

Categories
Economics

[2774] TPP is not just about the US

Among those who oppose the TPP in Malaysia, the US is on their crosshair, always. The opposition is so US-centric that I wonder whether they are anti-TPP, or anti-US. Malaysia has signed several other FTAs in the past years and negotiating more but you do not hear any complaint against those. Among the pro-TPP too, whether it is about trade or involving some kind of geopolitical babble, more often than not, it is about the US and sometimes about Malaysia too.

Yet, Malaysia is negotiating the TPP with 10 other countries and there is hardly any question asked about what these countries want out of Malaysia and what Malaysia would get out in return. Judging from various reports, it is quite clear that what Japan wants is very different form what the US wants, never mind the exemptions requested by all countries to accommodate their domestic political reality. But there are not many questions asked on this front.

Granted, Malaysia has active FTAs with six other TPP countries — Australia, Brunei, Japan, New Zealand, Singapore and Vietnam — through the Asean trade system. There is even one between Malaysia and Chile. The TPP could very well replicate those existing FTAs. But the question I would love seeing asked and answered is how TPP would change the existing ties. Is there any new special request between these countries?

And we know, the TPP has more depth than any of the previous FTAs Malaysia has signed.

What about others that we do not have a treaty with, like, besides the US, Canada, Mexico and Peru? We would have to discuss with them from the ground up. No, there is no question asked here too.

During the Malaysia-Singapore Retreat earlier this week, Singaporean PM Lee Hsien Loong mentioned the TPP. In this video, he mentioned it at 1:11:

That was a chance to ask specific Malaysia-Singapore issues within the TPP. But nobody asked them there. I do not even see any analysis about the TPP coming from the annual retreat.

So, I think this is the area where the debate in Malaysia at least should spread out to.

Categories
Economics

[2773] Convergence versus middle income trap

There are always chatters in the background how Malaysia is growing slower now compared to years ago, mostly with the 1990s in mind. The general sentiment and popular line parroted is that country is stuck in the middle income trap as growth is too slow for Malaysia to break from the middle pack and become part of the developed world . For good measures, some would cite Indonesia and the Philippines as growing faster now, though that is not strictly true all the time.

So, the idea is that we are in for a bad time in some quasi-permanent way. Growth is slacking behind some preferred rates. Some have courageously applied the term secular stagnation, as if the troubles faced by the US, Europe and Japan are the same as Malaysia’s. I dislike using the term within domestic context.

But I have wondered for a long time now. Is Malaysia really in a trap or is it merely the plain old convergence brought by the forces of diminishing returns as explained by the orthodox growth theory.

I am leaning towards the latter answer.

An economy can never grow at a high rate forever. At the heart of the mainstream growth theory taught at most respectable universities is the idea of diminishing returns (even with the AK model and its variants, which are a step up from the famed Solow one, you can see diminishing returns given some parameters). Beyond the savings, (human) capital, technological progress and population growth that complicate the models, at the center is the idea that growth will slow down eventually as an economy becomes bigger and richer: this is diminishing returns.

Why poorer countries tend to grow faster than richer countries? Why richer ones find it harder to grow in contrast? Poorer economies have an easier time at growing because of weaker diminishing returns factor. Build a bridge and you would grow the economy by a lot. For more advanced economy, you might need to build a lot more bridges to see some growth: the bigger you are, the harder is it to grow. In the same vein, you do expect a country to grow slower the richer it becomes.

Granted, there are challenges to the mainstream theory. The convergence predicted always needs to be qualified but it is still one reason why we should be careful with the idea of middle income trap. There are alternative, in fact I think stronger explanation, to the so-called middle income trap.

Through experience, most casual proponents of middle income trap narrative in Malaysia are ignorant about the mainstream idea of growth and its links to diminishing returns. With the belief that there is no alternative explanation given ignorance about mainstream growth theory, it makes it easier for them to take the slower growth rate automatically as the proof that Malaysia is in such a trap and so we need to do something to push growth higher and faster. A politically convenient story as well, if you know what I mean.

I do not think the rate is a proof in itself. There has to be something deeper to justify the allegation that we are in such trap (with secular stagnation) instead of just because the average growth rate now happens to be lower than those registered in the booming 1990s. Before believing in the middle income trap hypothesis, we have to ask ourselves, are there something causing economic growth to slow and stuck at a low rate, or is it a natural growth process — the diminishing returns — described by the orthodox growth theory?

Because of this, I have come to think the middle income trap is at best a heterodox side note to the orthodox growth theory and at worst, an irrelevant lemma: it is a ”just so” statement that is true within the larger model to trivially prove the idea of diminishing returns, rather than being a special problem by itself.

Categories
Economics

[2769] Cab riders would not like frequent, regular fare hikes

Beginning April 1, cab fares as regulated by the government will increase from RM0.10 per 115 m to RM0.25 per 200 m. That’s about 43.8% fare increase. The flagfall cost remains at MYR3.00 for the first kilometer. There are other hikes but I want to focus on this particular case.

Nobody likes a fare hike. Whatever sense it makes, paying for something extra for the same thing is not something I enjoy. But cab fares have not been hiked for six years and I think, it is only fair to the drivers to hike it, especially when their real wages have definitely come down.

I do take cabs from time to time and I do talk to them, asking them about when do they wake up, when do they finish, how much do they make, how much rent do they pay for the car, do they own the car, etc. It is not an easy job. So, I will not complain too much about it and I do not think I have the right to say anything bad because as a consumer, I have benefited from the six years of no hike.

But Institut Rakyat thinks otherwise and they failed to notice the effect of compounded rate. From The Malaysian Insider:

“Having failed to conduct a fare review for the last six years, SPAD has now opted for a sharp and sudden increase,” Yin said in a statement.

He said this steep increase represented a regulatory failure on SPAD’s part, as the agency was supposed to conduct fare reviews every two years with focus on small and manageable increments of 10%.

Yin said SPAD should have considered a gradual increase in fares to balance both consumer and business interests, which would help promote the use of public transport in the country.

He said a gradual phase-in of the overdue fare increase, at 10% at regular intervals over a period of one to two years, would be fairer than making up for six years in one fell swoop.

He reckons it would be fairer for the consumers if the authority does a small hike at regular intervals instead of what will be done now. [The Malaysian Insider. Fare hike too sudden, steep, says think tank]

He thinks it is better for the consumers if the authority “does a small hike at regular intervals instead of what will be done now.”

I think his analysis is wrong. Here is why.

If you look at the mathematics, for passengers, it is quite clear a frequent rate increase of 10% every one or two years is actually a worse hike-mechanism versus a 44% increase after six years. Worse in the sense that total fare paid in the former case is larger than the those paid in the latter one. There is a compounded effect here that makes the seemingly small 10% increase more expensive than the 43% hike.

Here is a graph where I demonstrate just that:

Compounded rate

The light blue line indicates how much total cab fare you would have paid if the rate had increased by 10% every second year.

The red line is the current scenario, explaining the total cab fare you have paid.

The assumption here is that you travel 5,000 km per year. The flagfall cost is ignored for ease of calculation. Having flagfall cost included does not change the analysis by much; remember, the flagfall cost does not change and only the rate changes. Also, just one person passenger with no other charge like baggage, toll, whatever.

As you can see, the blue line is consistently above the red line. That means you would have paid more if the rate was raised 10% every two years instead 44% once in the sixth year. In fact, the dark blue bars show exactly how much extra you would have paid in total.

For instance, in Y6 which is 2015, under the 10% increase every 2 year regime, you would have paid MYR3,976 fare in total over the six years. Under the 44%-hike-done-after-6-years regime, your total would be MYR3,715 in the same period, MYR261 lesser than the 10% case. You can see that in the chart.

So, the right conclusion here is that the 2-year-hike regime would be fairer to cab drivers but the riders would not like it by one bit. The 6-year-hike regime would be unfair to the cab drivers but it saves riders money.

The 44% figure is of course huge compared to a mere 10%, and superficially, it is easy to say we prefer 10% to 44% rise. But that is falling into a psychological trap prepared by the gods of compounded rate. Our job is to resist that psychological temptation.

Mohd Hafiz Noor Shams. Some rights reserved
p/s — if you are interested, I have posted the simple model here (updated. Please read the second postscript). There are at least one or two more dynamics I have left unexplained. You can figure that one yourself. I want to go home.

pp/s — And it is the day after. I ran further modelling (see tab Model 2 in the spreadsheet) and I have to say the conclusion is specifically true for the last six years. If we put the two 10%-2-year and the 44%-6-year series head to head and run it up long enough (unlikely to happen because the authority’s plan is to hike it once every two years), the compounded effect of 44% eventually catches up with the more frequent 10%: to be exact, 12 years later in 2027. But the 44% hike seems like a one-off event, and so, the failure to hike it once every two years is a boon for riders. Thus, as a passenger, on the balance over the past six years, I would not complain too much. And just to satisfy the cat, I also added a yearly increase in the model: a yearly increase at 10% makes the total fare paid zooms away, if I may exaggerate, exponentially, and never to look back. Clearly, a yearly hike is the worst option here and if it is to work to riders’ liking, the yearly increase has to be much, much lower for it to make sense.