Category: Economics

Categories
Economics

[2629] Recent RGDP growth versus sort of long-run growth

The recent real GDP growth were considered strong given how expectations were low to start with. In fact, expectations have consistently been on the bearish side over the past quarters as actual growth, or rather the official government estimates, have beaten market expectations over and over again. In fact, real GDP growth for the first and the second quarter have been revised upward to 5.1% year-on-year and 5.6% year-on-year from 4.9% and 5.4% respectively, making the official growth numbers even farther away from market expectations. The first quarter number itself was originally reported as 4.7% in May 2012.

The bearish expectations have partly to do with pessimism in the global economy and how it may affect the Malaysian economy. The Eurozone was not doing enough and went into recession, the Chinese economy slowed down and recovery in the US just had not been fast enough. Malaysian trade and export figures, especially in the third quarter had not been convincing.

But the economy was estimated to have grown by 5.2% from a year ago in the third quarter despite problems abroad. The domestic economy powered through the dark clouds with what I think essentially was a de facto fiscal stimulus. From BRIM to bonuses for civil servants to Felda payment, it sounds like a fiscal stimulus to me, especially if one considers that consumption has been growing above and beyond its usual growth rate in the last two quarters.

But what if recent growth is compared a sort of long-run trend instead of expectations?

Recent growth becomes less impressive and more mundane.

The red line is the geometric mean of growth in all quarters (1Q2006 to 3Q2012) except those from the fourth quarter of 2008 to the second quarter of 2010. The reasons these quarters were excepted was that there were outliers and geometric mean does not work well with negative numbers. The blue bars are real GDP growth in the respective quarters.

Why choose 2006 as the starting year? Well, The Department of Statistics produces the 2005 base series only up to 2005. I can make it longer well into 1957 but that will necessarily introduce a systematic error into the rebased pre-2005 figures and I do not want to do that.

Anyway, the geometric mean is approximately 5.6%.

So it appears that Malaysia is growing at its natural rate (maybe? natural rate is hard to discover but the long run trend I think is a good proxy. Also, it appears that the Malaysian economy is working near its limit although I have a lingering suspicion that the limit is farther out still), despite the estimates-expectations divergence.

Categories
Economics Poetry Politics & government

[2628] 5.2% in the third quarter, 5.6% in the second and 5.1% in the first

It’s above consensus,
so says the missus,
so shall we pop the champagne,
and start with the campaign?

Categories
Economics

[2627] Does inflation hidden between the CPI and GDP deflator explain the CPI dissonance?

I have argued before that too many disbelieve the CPI inflation because they do not understand how inflation is measured. Some do not get the fact that CPI inflation is the change in price level and not the price level itself. Too many think that it is impossible that inflation is really that low in Malaysia when prices have jumped up so much over the years. They essentially compared prices to a different base than that used by the CPI and failed to take that difference into account. Others are just too stubborn that they express disbelief but they are unable to systematically justify their disbelief other than resorting to rhetoric. While this is a trivial macroeconomic issue, it does have real political implications in Malaysia unfortunately. This really highlights importance of communication between economists and the lay public in Malaysia.

Lars Christensen, an economist and a giant in the market monetarist circle, may have implicitly provided another explanation to describe the discrepancy between CPI inflation and the disbelieving sentiment on the ground.

He suggests that price controls are causing a wedge between CPI inflation and GDP deflator change.[1] If there were no controls, the CPI inflation and the GDP deflator change should have moved in tandem. So, price controls are suppressing the CPI inflation (because price controls target goods consumed locally and CPI measures good consumed domestically while GDP deflator is more descriptive of prices all of Malaysia because it measures prices of good produced locally regardless where it ends up). The claim on inflation suppression (by price controls and not the data itself) is completely uncontroversial.

So, as Christensen puts it, the difference between CPI inflation and GDP deflator change is hidden inflation. Would be it possible that despite the official CPI figures, the consumers feel the pain from the GDP deflator?

While this can be used to describe the dissonance between the official CPI inflation rate and disbelief on the ground, there is an obvious problem to the implicit explanation of the dissonance. Consumers do not face prices as measured by the GDP deflator. They face prices measured by the CPI instead.

Christensen does not explicit use the term hidden inflation in the same context that I am framing the issue. He uses it to describe the problem of shortage of controlled items, which does happen from time to time in Malaysia. I am just preempting any argument that may come out to explain the CPI dissonance that may originate from his points.

My view is that the CPI inflation is right and the reason for the disbelief has more to do with the fact that many do not understand the CPI. Furthermore, some components of the CPI are growing faster than the overall CPI and this might have contributed to the disbelief. In this sense, the pain index designed by Hisham of Economics Malaysia is helpful in addressing the disbelief.[2]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — The Christensen family arrived in Malaysia yesterday. It is vacation time! So since I am in Malaysia I was thinking I would write a small piece on Malaysian monetary policy, but frankly speaking I don’t know much about the Malaysian economy and I do not follow it on a daily basis. So my account of how the Malaysian economy is at best going to be a second hand account.

However, when I looked at the Malaysian data something nonetheless caught my eye. Looking at the monetary policy of a country I find it useful to compare the development in real GDP (RGDP) and nominal GDP (NGDP). I did the same thing for Malaysia. The RGDP numbers didn’t surprise me — I knew that from the research I from time to time would read on the Malaysian economy. However, most economists are still not writing much about the development in NGDP.

In my head trend RGDP growth is around 5% in Malaysia and from most of the research I have read on the Malaysian economy I have gotten the impression that inflation is pretty much under control and is around 2-3% — so I would have expected NGDP growth to have been around 7-8%. However, for most of the past decade NGDP growth in Malaysia has been much higher — 10-15%. The only exception is 2009 when NGDP growth contracted nearly 8%! [Lars Christensen. Malaysia should peg the renggit to the price of rubber and natural gas. The Market Monetarist. November 15 2012]

[2] — Inflation as measured by the CPI is up 1.6% in annual log terms, but my core inflation measure (CPI ex-food, ex-transport) decelerated to 1.1% from 1.2% from April’s reading. Price’s are up from the month before, but not by much — not so coincidentally, the Ringgit has been falling slightly against major currencies, so some pass through of inflation is to be expected. But the magnitude of price increases is still far below what people seem to feel is happening to their monthly household bills.

To get a feel for this, I’m going to invert the components of my core measure — instead of excluding the more volatile components to arrive at a stable long term inflation measure that’s useful for policy analysis, I’m going to exclude the non-volatile components instead i.e. measure inflation based exclusively on food and transport prices, which is more representative of what’s happening to people’s wallets.

You could call this the ”Pain” Index [Hishamh. May CPI: Measuring The Pain. Economics Malaysia. June 21 2010]

Categories
Economics

[2626] Income distribution of Malaysian households, 2009

Below is the income distribution of Malaysian household as published by the Department of Statistics in its 2009 Household Income Survey. Income is measured in ringgit Malaysia per month.

The red bar more or less describes the median Malaysian household in terms of income.

Categories
Economics Politics & government Society

[2625] AES, privacy and perverse incentive

The implementation of the Automatic Enforcement System (AES) is proving to be so controversial that even federal backbenchers are joining the federal opposition in criticizing the system.

For the uninitiated, the AES is a privately-financed and operated system of speed traps under the purview of the Road Transport Department (JPJ). It has two functions: catch those who drive above the speed limit and those who beat the red light. The overarching aim is to reduce road accidents.

There are strong opinions on the matter, and at times, it appears that there is no middle ground. As for me, I am of two minds about the matter.

I can be supportive of the AES because, frankly, there are assholes on the roads. They drive as if the roads are racetracks. Many of them disrespect the traffic lights. They, as some would say in Malay, think that their fathers owned the road.

These drivers endanger others’ life and there have been times when they caused me unnecessary distress. Though it is unbecoming of me, there were times when I wished they would meet with an accident. Pain is a great disincentive and these drivers need some serious disincentive. Maybe, like losing a limb. Or two.

But such pain can be barbaric and so, the next best thing is to hit them in their pockets. For those driving Ferraris, a Hummer financed by a tycoon and the likes, the AES is unlikely to be of any deterrent. If you think a maximum of RM300 fine can deter the elites from becoming a road menace, then I do have something to sell to you.

Philosophically, the libertarian in me is always skeptical of cameras in public space, either for crime fighting or as speed traps. It is a concern for privacy and in an environment when I distrust the government with my private data, especially with an illiberal government in power, having these cameras all over the public space allows the government, or even private entities, to track me. Whatever the guarantee of privacy, words are words and it is open to abuse. How do I know, for instance, that the AES cameras will be used purely for traffic purposes?

I just do not.

There is, of course, an argument that in this age of social media, the concern about privacy with respect to cameras in public spaces is really overblown. A large chunk of our lives is already available online. Nevertheless, there are things on social media, and there are things that are not. Cameras in public space have the capability of revealing things that are not on social media, among other things. There is such a thing called privacy, especially to a libertarian like me.

The other part that raises my opposition is economics. Specifically, the incentive structure of AES is flawed. There is a clear case of perverse incentive. It creates a conflict of interest among the companies.

The private companies operate the AES and they generate revenue from paid traffic tickets. There is a clear profit motive here. The profit motive itself is not the problem.

The problem comes when one considers the fact that the process of taking the pictures is managed by the companies.

With that, the AES operators face the incentive to tweak the violation benchmarks regardless of the speed limits sanctioned by the authorities. The operators can increase their revenue by dishonestly lowering the benchmark for fines. In other words, there is an incentive for the companies to cheat commuters. There is a risk that these companies will cheat us.

This basically negates a pro-AES argument out there that sounds like this: if you do not commit an offence, the companies get no money. As I have explained, there is a risk that the companies do make money even when there is no offence committed.

This can be addressed by having an independent, incorruptible body to oversee the system. This can be the government because the government (a clean one at that) can be a counterweight to the profit-motive. The independent overseer needs to ensure there is no cheating done by the operators of the AES.

This is already in place in a way. All cameras will be calibrated every eight months by SIRIM, which one assumes to be an independent party. Still, something can happen between two calibration sessions. After all, the two private companies do operate and maintain the cameras on behalf of JPJ. They have access to the cameras all the times.

The alternative which can make the AES more palatable incentive-wise is to change the incentive structure. In my humble opinion, the companies should not be paid according to the number of fines paid. The payoff should not be pegged to the number of motorists caught. Instead, these companies should be paid a fixed regular fee from the relevant authority. This will make the incentive to cheat go away.

The problem with this is that the government may have to go back on its word and break the contracts signed. But hey, what else is new?

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on November 8 2012.