Category: Economics

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Economics Politics & government Society

[2989] Eroding our commons will erode our togetherness

The Malaysian government faces tight fiscal space and the runway to keep going on as we do now is not too long or wide.

The population is still young but it will not be so much longer. This suggests growing needs for healthcare services. In the meantime, education is somewhat underfunded judging by less-than-favorable learning outcomes, compounded or caused by pandemic disruption. Defense is underfunded at a time when the world is becoming a more dangerous place; previous wasteful spending on this front does not help. Climate change requires new kinds of public infrastructure investment. Petroleum revenue is highly like to go down permanently due to rising provincialism, while an aging society means income and consumption tax revenue will struggle to rise in the next 10-20 year period. This has yet to take into account pension liability that the government faces in the same period, which is also underfunded. And, a lot of Malaysians do not have enough savings and in their old age, they will depend on public services more.

The list goes on and on to tell us that under business-as-usual, public spending requirement is rising while there is every reason to suspect that the pace of government revenue growth will not match the former.

The current government understands this and there are efforts to move away from the current business-as-usual scenario. Diesel subsidies has been partly removed (but not in Sabah and Sarawak). There are plans to abolish or at least lower petrol subsidies but that has not happened yet. Recently, the Health Ministry announced it would expand its full-paying patient scheme.[1] This is largely in line with a high-level suggestion made last year that public healthcare should be more targeted to relief fiscal pressures caused by the public health services.

And even more recently, the Prime Minister said education subsidies enjoyed by the rich is to be cut.[2] It is unclear what the actual policy is but that is for us to find out soon when the government tables its 2025 Budget later this month.

But as the government seeks to improve its fiscal conditions, it is crucial to remind Putrajaya that not all fiscal consolidation actions are of equal measures. While fiscal pressures are important and must be addressed urgently, it is not the only things that matter to this country. When it comes to cut or rationalization of public service, it is good to take a step back and reassess what we would lose in return for what we would gain not just in the short Parliament terms, but also in the long-term. After all, most of us save the unfortunate ones, live beyond the 5-year parliament term.

What we would lose from reduced access to public education and health services (and other similar services provided by the government) is the commons. It is the space where we Malaysians theoretically—really, actually for many people—come together regardless of our origins in terms of geography, class, gender, ethnicity, etc. That togetherness allows for the creation of shared lived experience or even shared identity. In an age where technology and quirks of history are leading us to live in our little bubbles, it is our public service that attempts to connect these bubbles into a larger common.

Without these commons, we Malaysians will lose connection to each other, losing whatever left of our shared values and shared identity. Erosion of these commons necessarily lead to the erosion of our togetherness.

I do not think these commons should be eroded by concerns over fiscal pressures, especially when these pressures could be alleviated through other more effective means. Instead of applying the knives to public education and public healthcare systems, other policies could be jettisoned first, like outdated incentives and reliefs provided to private healthcare service providers or private insurance, or outdated subsidies for electric vehicles. And of course, cutting petrol subsidies would go a long way too (although with crude oil prices are low these days, one wonders how long it would go).

And really, Malaysians are able to pay much more taxes. But we refuse to do so.

Our refusal points to another problem: our reluctance to make short-term sacrifices to ensure larger long-term gains and sustainability. It seems that we rather avoid the short-term pain and instead lose something valuable in the future.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Health Minister Dzulkefly Ahmad is standing by the government’s proposal to expand private wings at public hospitals as part of a hybrid model termed “Rakan KKM” (Health Ministry Friends). [Health minister defends private wings at public hospitals plan. Malaysiakini. September 24 2024]

[2] — Menjelang pembentangan Belanjawan 2025 tidak lama lagi, Anwar Ibrahim menghantar ‘isyarat’ yang menunjukkan kerajaan sedang meneliti pengagihan subsidi pendidikan kepada rakyat negara ini. Berucap di Putrajaya hari ini, perdana menteri berkata, kerajaan mahu memastikan subsidi sebegitu disalurkan kepada golongan yang benar-benar layak saja.[Golongan kaya mungkin tak lagi dapat subsidi pendidikan. Malaysiakini. Accessed March 31 2024]

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Economics

[2988] Malaysia’s 2024 sweet spot for growth

After years of economic disruptions and wild growth swings, the Malaysian economy is now in a sweet spot. Strong GDP expansion rates in the past two quarters show us as much: 4.2% year-over-year in the first quarter and then 5.9% yoy in next. Lest somebody points to base effect playing a role (indeed the large variability is still a problem), adjusted quarter-over-quarter numbers are robust as well: 1.5% qoq during first and then 2.9% qoq in the second quarter. These qoq figures are respectable because the post-Covid-19 2021-2024 median qoq rate so far is 1.4%-1.5%.

The government is quick to claim credit. To some extent, it is deserving. The Malaysian government of all colors (2018-2020 PH, 2020-2021 PN-BN, 2021-2022 BN-PN and the current PH-BN-GPS) has been trying to capitalize on fraying global supply chain. Malaysia understood of the need to move quickly as early as 2019 (or possibly earlier). But political crisis (coupled with a health and economic crises) led to policy paralysis and that crisis only ended in 2022 with PH returning to power with unlikely partners. The stability plays an important role in sharpening the minds beyond domestic partisan survival, which allows us to pursue new tech investment opportunities and boost Malaysia’s role in the global manufacturing and technological services (it is not without concerns, especially with the influx of data centers which create little jobs and consume tremendous amount of water and electricity which could push out other manufacturing industries that are not necessarily low-tech).

But in some other ways, it is also about the stars aligning involving sectoral syncing and growth normalization. To understand this, we need to go back to 2020 when many parts of the world hunkered and locked down in response to the pandemic. Yes, the pandemic remains relevant four years after it spread.

The year 2020 was the ground zero, which everything in free fall. By 2021, the pandemic was still a concern but things were improving. Yet many could not move around freely. Services—a labor-intensive sector—had a weak growth and an incomplete recovery. In contrast, the goods sector experienced a surge and production surpassed pre-pandemic levels: XBox, IPhone and a whole lot of electronics were bought and sold to keep everybody sane at home. Afterwards when the economy opened up in 2022 with all the tangible stuff that could be bought were bought (notwithstanding orders unfulfilled due to the then supply chain disruption which kept the goods sector going), goods demand growth took a break in return for heightened services: tourism, restaurants and other related sectors boomed. That is more or less the story for Malaysia, as can be seen from the goods-services growth chart below:

Some rights reserved. Hafiz Noor Shams

The Malaysian cycle for goods and services almost synchronized at the top in 2022, which in return led to the synchronized whiplash a year later. From 8.9% growth in 2022 thanks to complete reopening of the economy, 2023 GDP rose by only 3.6%. The 2023 goods market was so bad and that was reflected in Malaysian industrial production and export figures. Only the almost complete tourism recovery helped the overall 2023 economy from doing worse.

What makes 2024 a sweet spot is that it is likely a proper normalization amid further synchronization. Normalization because the gyration of growth since 2020 is finally stabilizing for both sectors. Additionally, that normalization and stabilization are bringing balanced growth since both goods and services are expanding faster at the same time (so far).

Normalization, synchronization and balanced expansion. The government under Anwar Ibrahim has done well in adapting to changing global environment and lucky at the same time. Not only has growth been firm. Global prices have been kind to Malaysia as well, leaving inflation benign. Job creations are going well. In short, economic conditions are good. I would argue this leaves the government with a lot of leeway to commit to reforms.

The question now is if the great conditions brought by the cycles would persist. There is some hope (and bad news too) for that but we cannot run on hope that much this time around. With cyclical normalization from here on and definitely in 2025, the government would have to depend less on luck and more on its own initiatives.

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Economics

[2985] Malaysia’s EV policy risks running obsolete

The government has been incentivizing electric vehicle purchases and use as a way to boost domestic electrification trend. Those incentives come in the form of zero import duty, zero excise duty, zero road tax and non-tax on EV and/or related equipment, among others.

Whatever the early rationale behind these incentives,[1] changing global conditions are making these policies dated. Rising trade barriers across the world are affecting EVs adversely, especially those made in China. Regardless of the appropriateness of US and more relevantly European policy in response to China’s dominance in the space, these barriers would redirect Chinese EV volume from places with high tariffs to other economies without similar restrictions. These other economies—many of them are small-to-medium sized (like Malaysia)—might be the ones having to absorb oversupply. In other words, there is an EV oversupply coming our way.

Under a scenario where there are downward pressures on EV prices, would Malaysia’s set of incentives still make sense? I would argue no, especially for the retail side of the equation.

There are several reasons for the negative answer.

First, the downward pressures on prices caused by manufacturers’ need to reduce their inventories would likely be good enough to encourage domestic electrification on the road.

Second, the prospects of higher petrol prices caused subsidy rationalization exercise should already be a big incentive enough for road users to migrate from internal combustion engine to EV. This is of course depending on the government going through with the rationalization exercise.

Third, the coming oversupply would be an opportunity for the Malaysian government to shift the burden of encouraging EV from the public towards private manufacturers. After all, these are private EVs we are talking about, not public transport. And even better, the burden would be shifted towards foreign manufacturers, which many of these manufacturers originating from China.

Fourth, the government faces fiscal pressures and the migration towards EV would be a chance for Putrajaya to reap the migration dividend in the form of more duty and levy revenue. This does not mean raising those duties and levies to punitive level. It could mean just normalizing it (i.e. undo the incentives). That additional revenue could be used to either finance electrification facilities, or other pressing needs in education, health or even defense… or finance public transport projects instead of boost private vehicle ownership.

If it were up to me, I would quickly cut short these incentives. Immediate reversal of policy is likely too disruptive to be good and that suggests undoing it by end of 2024 sounds reasonable.

Otherwise, these EV incentives do have sunset clauses. I would recommend letting them lapse. But waiting until 2025 might be too long for Malaysia to benefit for changing global landscape.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Given early (still?) focus on luxury electric vehicles and the government being overly focused on retail side of EV supply chain, the policy might have been captured by what I would call hobbyist lobbyists, i.e. rich men who take electric vehicle as a symbol of prestige.

It definitely didn’t help with the perception when early major lobbyist was an association named Malaysian Electric Vehicle Owners Club.

If the policy had not been captured, it would have focused early on the mass market, allowed leeway for cheap but reliable Chinese brands instead of the likes of Tesla, and also would provide better stress on industrial rather than retail.

Categories
Economics Politics & government Society

[2982] Insufficient law enforcement as a symptom of fiscal pressures

Rules and regulations would become non-credible if it is unenforced enough. Smoking ban at eateries. Running the red light. Private vehicles on bus lanes. Illegal parking by the roads. We all have seen these cases frequently that violations are expected to be the norm.

In frustration, a person recently publicly tweeted Health Minister Dzulkefly Ahmad to complain about zero enforcement of the smoking ban. The Minister replied that the Ministry indeed enforced the bans and shared some statistics of people caught violating the rules. He shared that more than 96,000 citations were given, and 42,000 alone were linked to violations at eateries. So, technically, the Minister is right. There has been a non-zero enforcement. Yet, a non-zero is not sufficient.[1]

After all, what is the percentage of 42,000 caught violators to total violations?

The actual answer might be difficult to get to without a proper survey. But we can run a guesstimate. One 2018 paper suggests there were 5 million smokers in Malaysia.[2] Let us assume several things:

  • The 2024 figure is the same as suggested by the paper.
  • 1% of the 5 million are regular violators.
  • These 1% visit a restaurant (mamak) at least once a month (12 times a year).
  • They violate the smoking ban during every visit.
  • There is no corruption.

If we agree these are reasonable assumptions (these assumptions all in all are very conservative, except maybe the no-corruption part), then the 42,000 citations (caught violations) would represent only 7% of total assumed violations (caught and uncaught). The 7% figure suggests a low rate of enforcement. The revealed preference suggests that if the 7% figure is right, then it is below the rate necessary to make the law credible.

But even if we reject these assumptions and reject that 7% guesstimate, there is also revealed preference at work here: the fact that violations keep happening suggests the actual ratio must be very low that many continue to ignore the regulation brazenly.

These smokers ignore the ban because they do not believe they would get caught. And if they do get caught at all, the cost they would suffer is low. This is true not for just the smoking violations, but other things as well.

The laws themselves are meaningless if people do not believe in it. It is the act of enforcing enough that make people believe certain laws are credible.

But enforcement is expensive. Enforcement has been funded and here is where there is a link between insufficient enforcement and the fiscal pressures the government faces. To put it differently, resources are scarce enough that funding has to be prioritized and not enough has been channeled to boost the ratio of citations/total violations.

I take this as yet another symptom of the government being underfunded, and a case of needing to raise taxation level in Malaysia from its current low levels.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Hi & Thanks Paul @paultantk Lest you missed these..lm attaching it here for you et al to peruse..for your ‘zero enforcement’ n ‘completely toothless’ law. [Dzulkefly Ahmad. X. Accessed March 31 2024]

[2] — Approximately 5 million Malaysian adults (22.8%), aged 15 years and over, were current smokers. The prevalence of current smokers was significantly higher in males (43.0, 95%CI: 42.0-44.6) compared to females (1.4%, 95%CI: 1.0-1.8), as a whole and across all socio-demographic groups. The Chinese (14.2%, 95%CI: 12.7-15.9) and Indians (16.5%, 95%CI: 13.9-19.4) had a significantly lower prevalence of smoking compared to other ethnic groups. Adults aged 25- 44 years (28.3%, 95%CI: 26.9-29.8) reported the highest prevalence of smoking, but those with tertiary educational attainment (14.9%, 95%CI: 13.5-16.3) and those with an income level at the lowest (16.5%, 95%CI: 14.6-18.6) or highest (19.3%, 95%CI: 17.7- 21.1) quintile had significantly lower prevalence of smokers. On the other hand, the smoking prevalence was significantly higher among the self-employed workers (35.4%, 95%CI: 33.2-37.6) and those who worked in the private sector (31.7%, 95%CI: 29.8-33.6), compared to government servants, retirees and homemakers [Prevalence and factors associated with smoking among adults in Malaysia: Findings from the National Health and Morbidity Survey (NHMS) 2015. National Center for Biotechnology Information. National Library of Medicine. Accessed March 31 2024]

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Economics WDYT

[2976] Guess the 2Q23 Malaysian GDP growth

The second quarter GDP for Malaysia will be published tomorrow, at noon Malaysian time.

As a reminder, the first quarter economy grew by 5.6% year-on-year. That was a surprisingly resilient quarter, despite deceleration in growth.

How fast do you think did the Malaysian economy expand in 2Q23 from a year ago?

  • 2% or slower (8%, 1 Votes)
  • 2.1%-3.0% (38%, 5 Votes)
  • 3.1%-4.0% (23%, 3 Votes)
  • 4.1%-5.0% (23%, 3 Votes)
  • 5.1%-6.0% (8%, 1 Votes)
  • Faster than 6.0% (0%, 0 Votes)

Total Voters: 13

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All available statistics point towards a second quarter slowdown. Export numbers during the quarter have been horrible, and the country’s industrial output, given how Malaysia is an small, open economy, has not been doing well either.

Part of the reason why the decline in exports and industrial output is due to the extraordinary post-lockdown growth, amid severe supply chain complications: that created an extremely high base effect and that effect will likely persist until the third quarter.

But that should distract us from the ongoing global growth slowdown. Europe is in recession and China is in trouble. The only real bright spot is the US, which is surprising because much, much earlier, many had expected the country to go into a recession.

But the US strength itself is causing troubles elsewhere in the form of capital outflows and foreign exchange volatility, since it gives more room for the Fed to raise rates. The end of the hike cycle keeps getting delayed.

The good news is that the domestic labor market remains solid, and there has been a little bit more medium-term direction given out by this government. The political heat has come down a bit after the recent state elections, which hopefully, will convince the government to shift more attention towards the economy, and other nation-building exercise.

And challenges in the next several quarters will not be small. Next in the list is a strong El Nino phenomenon, resulting, very likely, the hottest season we will go through yet. That will require a little bit of preparation: water supply, electricity transmission, manufacturing inputs, health services, firefighting services, etc.

And I pray there will be no forest fire and haze this time around.