Category: Economics

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Economics Politics & government

[2755] Federal grants to Malaysian states in 2013

There are a lot of discussions about federal-state relations, especially with respect to Sabah and Sarawak. But I find those discussions and the points stressed are really hard to pin down in terms of numbers. So, I am putting the following chart up, mostly for my own purpose, and perhaps, also for the make benefit for glorious people of the benefit of others interested in the debate.

Here is a chart presenting all the federal grants paid by the federal government to all the 13 states in Malaysia:


20141017FederalGrantToStates

I obtained them from the federal government’s Anggaran Perbelanjaan Persekutuan 2015 document that was released on Budget Day last week. If you are interested in it, the figures can be found in Annex E of the document.

I apologize for the colors.

I have to highlight that this chart contains only grants. Things like petroleum royalties are not included because those are paid by Petronas, not the federal government.

And this of course presents only one side of the story. It would be interesting to collate all of government spending as well as income that went to/came from each state. Then we can calculate the balance. By doing so, we can know which state is the net recipient or contributor in this federation of ours. That perhaps could back any argument with some kind of data rather than merely strong beliefs. The exercise may sound simple, as if it involves just going through the government accounts. But federal spending can be so distributed among ministries and various bodies that essentially are linked back to the government that tracking them can be a real challenge.

That said, the relationship we maintain in this federation goes beyond fiscal matters. Just do not be too fixed on the economics. I think it is safe to say that economics is not nearly everything there is in life.

Categories
Economics

[2754] A history of fiscal deficit

I am sure you have seen this before but just in case…

20141013MalaysiaDeficitNGDP

And the surplus was not because of Anwar Ibrahim. It was something bigger than him. It was the Roaring 90s.

Just a short remark: the recession of the late 1990s was the worst Malaysia has ever experienced, but it is interesting that in terms of government finance, it was the recession of the early 1980s.

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Economics

[2752] Dude, where is my standard error?

When the economy grew 6.4% from a year ago, does it really mean it grew exactly at that rate?

Those kinds of statistics are supposed to give us the hard figures that we all can fall back as the one and only truth. Like the physical ones where a meter ruler is a meter long. But those with statistical learning would understand these macro numbers, from the GDP to industrial production to prices are not free from errors (even the ruler has an error but I would think that error here would be considerably smaller compared to that suffered by macro numbers, unless, it is an astonishingly bad ruler). The GDP for instance is not exactly an account of a small company that has in it all of the company’s expenditure. That macro figure is at best an estimation of what is happening in the economy. The fact that we keep restating (not rebasing) the GDP figures every now and then tells you that just as much.

Yet, after working in the financial sector, I am quite surprised to learn at how standard error/standard deviation plays a minuscule role in most analyses. I think this is a problem because without reference to errors, data providers in various government agencies as well as analysts and economists in the financial market give the illusion that their data and their analyses (strictly non-normative commentary of the data) come with absolute confidence (academic economists have better record at this). When the economy grew at 6.4% in a period, it is 6.4%.

But that confidence is overblown. It is not really 6.4% exactly. The truth is that it is possible the GDP had grown around that figure. What exactly, nobody knows. Maybe that is a technological question that would be solved some time in the future. In the meantime, there are some errors in the data.

Before we go on further, for the benefits of those without basic statistical training, I want to emphasize that these errors are not mistakes. They are simply uncertainty that comes along with the data. Uncertainties are there because we cannot know everything about the world. But we can know enough to know about the general situation. Hence the usefulness of these inexact macro figures. I call it inexact, because the true figures fall within a range and it is a stretch to suggest a point figure is the true figure with certainty.

I have no doubt that these economists, analysts and statisticians understand the meaning of errors and its importance. I am not overly worried about this group who work revolves around data. They know there are revisions and they know the numbers can change. They know there are errors. They know these macro numbers provide a useful guide to the happenings in the economy and these figures are not exact numbers. It is more of a sample — a good sample to generalize the population — rather than the actual universe. Whenever they refer to a number, they have the statistical caveat at the back of their mind.

I worry about the non-expert consumers of these data and analyses. These users do not understand this and they take the figures put down as the truth. Consider for example the discontent against the inflation rate in Malaysia, where there are critics who claim it is too low. I think the publication of standard errors of consumer prices would partly help address their concerns by telling them that there is uncertainty in the recorded prices. Still, this will not address the criticism against the CPI too much because the critics also appear fail to understand that the weight of the final CPI number is in such a way that it measures the middle Malaysians. But we have enough microdata that those weights can be reconstructed to fit more than the middle Malaysian. But I think this is a different issue which I have addressed in the past.

I am bringing up the non-reporting of standard error/standard deviation issue because I am bit peeved when I see news reports that goes something like ”Malaysian industrial production growth grew slower at 4.3% from 4.4% last month.” Or the GDP grew faster at 6.4% in 2Q versus 6.2% in 1Q. I mean really, is it truly a deceleration/acceleration? Are we not just sensationalizing it? I am particularly annoyed when economic-illiterate politicians start to sensationalize these figures, spreading uninformed views to the wider public.

(Another example is the idea that China is the largest economy in the world in PPP terms. But how about including the standard error inside too before making that pronouncement? I bet Chinese GDP has an outrageously big interval.)

Is it not enough just to say, ”hey, the economy is doing okay”?

When I see that kind of changes, I am more inclined to say it is stable. In fact, we can get more scientific about it. Calculate the index’s standard deviation and do hypothesis testing to see if the change is significant or not. It is very easy to do such testing these days.

I admit, it is less sexy and mouthful to say ”there is X% probability that the economy grew faster compared to the rate in previous period”, than to say ”the economy grew faster today versus yesterday.” But are we sacrificing truth for sexy, short, punchy, headlines?

I think yes.

I am guilty of not providing the standard deviation too, but I think we (can I use the pronoun we?) need to change our ways. Yes, I think we mainly write for each other, but we have to realize, these writings go out to the public as well. Our statistical caveat might not exist in others’ mind. We need to put those caveats explicitly in the open.

By sharing the standard deviation, I also think it shows others that we are being humble about our data. It says, “these are my best bets” instead of “this is it and there is no other way about it.”

Ideologically, from libertarian point of view, the humbleness is important. Libertarians believe in the superiority of the market over state actions. My belief (before I get banged up for being a blind market apostle, there are instances of market failure where the government needs to come in) in the superiority comes partly from the fact that we do not know everything about the world. I think the idea of standard error is part of that philosophy: the idea that we do not know everything. Again, there might be a time when technology will solve that and bring about a libertarian nightmare, but right now, there are enough cases out there to tell us to be humble.

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Economics Politics & government

[2751] When should we cut fuel subsidy?

Ten months into 2014, I have now resigned to the fact that my projection for the annual inflation rate in Malaysia is too high, with the actual rate being relatively benign. The reason I had put it so high — it was in the region of 3.5%-4.0% compared to what it would likely be, which is 3.0%-3.5% — was that I had expected a drastic subsidy cut early on. It did not happen until yesterday. Even yesterday’s cut is not enough to salvage my projection. I have of heard drastic, crazily complicated plans to revamp the subsidy system that would definitely help me be right, but that has either been postponed, or canceled. While I like to be right, I hope the convoluted system will be canceled. I hope the government would just stick with subsidy cut-cash transfer policy.

Politically, subsidy cuts are always a hot potato. It attracts criticisms from a whole lot of people.

Me? While I have criticized certain cuts from time to time, I am generally supportive of it for various reasons. I have been a long-time supporter of transforming subsidies into cash transfer. This time around, I do not have much reason to oppose the cut. Government influence, at least from the GDP perspective, is coming down, suggesting less government spending with the wider economy in mind.

So, I think I would like to engage on two criticisms directed at the recent cut. One questions the cut on the basis that crude oil prices are coming down. Another goes, subsidy cannot be cut until there is a viable public transportation system in place first.

On oil falling prices, I have said it in the past and one person has brought it up on Twitter (where I spend most of my time these days neglecting this blog, my column, my book project … and work… maybe by just a bit), that the best time to eliminate fuel subsidies is when prices are low, like right now. Acting when prices are low is acting from a position of strength and not out of desperation. If the argument that says we should not cut subsidy when prices are falling down is a good one, then when exactly should we cut it?

Is it never?

If the answer is not never, consider the counterfactual. If prices are higher, would that be the best time to cut subsidy then? Under the scenario of the rising prices, the effect of subsidy cuts on consumers and the economy at large would likely be greater than when cutting it when prices are low, because at that time, the situation would have been more desperate and would probably demand steeper cuts. There would likely result more shocks to the consumers that make the pain of higher cost more acute than it should be. As I have written on Twitter in a snappier way, “[you] criticize the cuts because oil prices are coming down. If prices were going up, would you be happy with bigger, more desperate cuts?”

From government finance perspective, I think cutting it earlier makes more sense. It means more saving for the government to finance other stuff earlier. If we are to wait for the government to cut subsidy only when prices are rising some time in the future, then the saving would probably be lower. The saving can finance the cash transfer program, among others.

Besides, a responsible policymaker wants a countercyclical policy. You do stuff that are painful but necessary during the good times, not during when times are bad. Look at the effect of austerity. The criticism of European austerity is exactly because of the poor timing of its austerity program.

On the point that we should wait until the public transportation system is good, I think this is a costly wait-and-see game. It is also partly a chicken-and-egg issue.

I label it as a wait-and-see game because the last MRT line is scheduled to only be completed by 2020. Keep in mind that construction on the two other lines has not started yet. Even then, I am unsure the public transport system would be reliable with comprehensive coverage. Do we want to keep the subsidy regime running until we are completely sure the transportation system is completely up and running in donkey-years’ time? That is a lot of money, never mind who knows what will happen with crude oil prices until then.

I also box this particular criticism against the cut as a chicken-and-egg problem. I would even argue it is a case of Catch-22. We need the money to invest in public transportation, but we do not have the money to do so if we keep up with the subsidy regime. We need to break the loop and not engage in such mind-numbing logic. At the very least, the cut in the subsidy bill and in the deficit ratio could help bring yields on government debt down, allowing the government or the relevant government-linked bodies to borrow at a cheaper rate to fund infrastructure project.

“But,” you say, “we are going to have the GST!” Yes, but I think every saving helps. “But,” you go on, “what about corruption-wastage-leakage in government spending? Sure, I share your concerns there but I think that requires some political changes but that requires some effort. In the meantime, until that happens, it should not prevent us from doing other stuff. It is not a mutually exclusive problem and it is not a sequencing problem either.

Ultimately, I see the argument on public transportation as one that prefers to do nothing.

Categories
Economics Politics & government

[2745] We need to ration our water

There seems yet another water crisis on the horizon, or here even. But walking around, it is hard to know that for sure. Out there in the streets well out of the dams and water plants, building management are instructing their workers to water the grass even after the rain, keeping it green and all. I spotted one worker watering a tree with a huge trunk for several minutes, while reading his phone. Car owners are washing their cars with generous amount of water. AirAsia plans the largest water balloon fight in Malaysia in November this year, right in the middle of Petaling Jaya, somehow trivializing the water assets negotiation in Selangor. AirAsia calls it Burst Asia and tickets are selling for RM48.

Yet, from the news we are learning water at various dams are below the critical levels previously seen earlier this year when rationing took place. The authority is pumping water from old mining ponds into our water supply as a solution. There are accusations that the ponds are contaminated with heavy metals. Whether it is true or not, it is clear this is a sign of desperation with the authority trying to augment the dam water in Selangor. If that does not signal desperation, then the sudden turn of events in the past months with respect to the Selangor water assets negotiation has to be one. After all, the basis for the Pahang-Selangor water tunnel and the controversial Langat 2 water plant revolves around future water shortage. There are those who claim the current shortage is a made-up crisis, especially among those in the current Selangor state government. They claim sabotage, saying somebody is trying to make the state government look bad. I do not know about those saboteurs but there is a water crisis, regardless of its sources.

Water prices meanwhile remain cheap. It has not changed for some time now. The Selangor state government refuses to raise it, supposedly for the benefit of the people, claiming the water companies are not doing enough to warrant a tariff hike. While these water companies are indeed slacking off, breaching their contracts and there is even a smell of corruption in the air, prices remain low and controlled too tightly to encourage judicious use of water. The free water policy by Selangor also does not seem to help. Sure, the free water policy says water is free of charge up to a certain level but the idea of free and saving do not go along well with each other. The policy encourages consumption, not saving.

So, there is a water crisis on the supply side but it does not seem to be so, looking at the consumption side.

Why?

It is because information does not flow from supply to the demand side. Prices do not correspond with water supply and so consumers, whether residential, commercial or industrial, act normal. Prices are prevented from functioning properly.

To correct the situation, we need to float the prices, or at least hike it up. Unfortunately, there is no political will for that. In fact, the current political establishment is hostile to any hike. Selangor Menteri Besar Khalid Ibrahim has guaranteed there will be no rationing. And lest people make him a scapegoat, that is a Pakatan Rakyat’s policy. Their credibility is dependent on a no hike outcome.

Given that political constraint, the next best thing is to resort to non-market solutions. That involves water rationing unfortunately.

There has to be a signal sent to the demand side, telling these consumers, “hey guys, there is a water crisis here. You might want to slow it down a notch.” Without that signal, consumers will act as if everything is alright. If it goes as things are going, there might be none to ration at all later. So, we need to send a stronger signal to the consumers. News reports alone are not working.

I know several people have written in support of rationing. Add me into that list.

I do believe water users in Selangor and Kuala Lumpur will tolerate rationing better than having no water at all.