Categories
Economics Society Travels

[2595] Good things happen to good people

If one looks at various socioeconomic statistics, it is easy to conclude how far behind Malaysia Cambodia is.

Yet superficially, if one landed in Siem Reap in north Cambodia, one would find it hard to differentiate rural Cambodia from rural Malaysia, apart from Khmer writing on the billboards and posters as well as the spoken language. The homes appeared Malay and the people themselves looked Malay. There were a number of times when a Cambodian spoke to me in Khmer, only to giggle finding out that I did not speak their tongue.

The substantive difference became clearer only once I was in the town of Siem Reap. Most parts of the town were dusty to present a Wild, Wild West impression. There was clear under investment in infrastructure. The statement on infrastructure was true elsewhere as well. There were not too many cars. Whatever seen on the road would be driven by westerners, or belonged to the government or some aid organizations. The locals would either ride a bicycle or a motorcycle generally instead.

The tuk-tuk and the likes formed the backbone of public transport. A Cambodian tuk-tuk is essentially a small cabin attached to a motorcycle.

In Siem Reap, Battambang and Phnom Penh, every single available tuk-tuk driver would hail me and ask if I needed a ride. Sometimes, it appeared almost everybody on the road honked at me to ask plainly, ”tuk-tuk?”

A college friend of mine whom I was traveling with me told me that her brother visited Cambodia a few years earlier. She joked that he was traumatized by the tuk-tuks. She went on to buy a tuk-tuk-themed T-shirt for him as a cruel souvenir.

The persistence was noteworthy and it did not end with the tuk-tuks.

As both of us explored the Angkor temple ruins littered throughout the land, children would approach us and beg us to buy something from them. It could be a bottle of cold water, a flute, a book, a piece of cloth, anything. They would beg in the softest of voices that would melt the heart of an untrained traveler. There was a hint of desperation in their voices. And they were persistent.

After a while I became desensitized to the incessant pleas, as many other travelers eventually did. My friend made the desensitization easier. She said we could not possibly help them all by purchasing everything from everybody.

What struck me the most, and informed me the most about the state of Cambodian society beyond the cold statistics, was our guide.

We employed a Cambodian guide, who led us into various ruins. He explained to us in detail the history, the story behind amazing Angkor’s bas-reliefs and shared tidbits about temples for a moment worth of amusement. We thoroughly enjoyed his company.

By the end of the day, we wanted to go to where we wanted to go and he had to go to where he had to go. We parted ways. We paid and thanked him for a splendid day.

He thanked us for the payment, as it is customary to do so. What was unusual was that he exhibited further unnecessary gratitude. He explicitly thanked us for providing him with employment.

It was quite clear that he not only wanted a job. He also needed it.

What I am about to do is an attempt at generalization. There are always perils at doing so but after observing the Cambodian society as a foreigner, I do think Cambodia has a bright future.

It is true that it is poor now, with children working on the streets when they are supposed to be in school.

Yet, I do not believe those rough edges are enough to negate my optimism. I am optimistic because Cambodians in general appeared to have that hunger to move forward and leave the past behind.

Life in the capital Phnom Penh is the symbol of that hunger. The city is not as modern as Kuala Lumpur and it will be many years before the two are at parity.

Nevertheless, Phnom Penh is developing even as it maintains its old colonial charm. One can immediately feel the go-go spirit in the capital as one skyscraper or two slowly inches toward the sky, as the tuk-tuks laze across the city. The newly found Cambodian openness will further aid progress.

For years, Cambodia was held back by inward-looking world views. Judging by what I saw in Cambodia, from the rural north to the urban south, that self-damaging age has come to pass almost fully.

A new Cambodian era introduces its own issues.

Cambodians complain of corruption and suspicious political maneuvering. But as the society matures as it is inevitable with continuous economic progress that was impossible 30 or 40 years ago, chances are these issues will be arrested along the way to a more tolerable level.

I do hope Cambodia progresses to emerge out of its ancient Khmer predecessor’s shadow.

As I was haggling with a merchant at a market in Phnom Penh for an item, an American saw me and smiled. He approached me and said: ”They’ll take every penny from you. But they are good people.”

Good things are supposed to happen to good people.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on September 7 2012.

Categories
Economics

[2593] OMT; yet another acronym in crisis monetary policy

Yet just another day in the year of crisis monetary policy. And of course, yet another acronym to add to the alphabet soup.

The acronym of the day is OMT. That stands for Outright Monetary Transaction. It is a unlimited but sterilized bond buying program aimed at keep yield of sovereign bonds down, with some conditions, without seniority privilege.

The market is responding relatively well to the OMT but I think the OMT is insufficient to address the woes Europe is facing. The European Central Bank cannot do everything but the monetary policy is a potent firepower nonetheless and I think the ECB has not been using it.

From money supply point of view, the word unlimited is misleading because it is a sterilized operation. That means the ECB can purchase an unlimited amount of bonds, injecting unlimited amount money into the system and then withdrawing the same “unlimited” amount of money from somewhere else. So, any purchase of sovereign bonds by the ECB necessarily means someone else will suffer.

The sterilization is done because Europe, or rather Germany, is so much against quantitative easing, apparently still hung up from inflationary pre-World War II experience.

The sterilization aspect is not different from the previous but defunct program called the Securities Markets Program (the SMP).

It appears to me that the only real difference is the no-seniority nature of the OMT. Then again, as Alphaville at the Financial Times quoted a Mr. Nowakowski, a fixed income strategist at Roubini:

The ECB can promise to be pari passu, until a default threatens and it can then pressure Euritania to let it swap into local or international bonds without CACs that receive special treatment, exactly as it did with Greece. They could still argue, though not in good faith, that those bonds are not senior to anyone, they just got lucky again to get such a great offer. The ECB has tremendous leverage on countries whose banking systems depend on it for funding, so it can call the shots. [Joseph Cotterill. Seniority, the SMP and the OMT. Alphaville. September 6 2012]

So, why again is the market rallying?

Categories
Economics

[2592] The stimulus was not the cause of the rebound

Economist Nor Zahidi Alias at Malaysian Rating Corporation wrote in The Edge Financial Daily today that there was too much concern for the fiscal deficit. I will accept that (while I am concerned about the deficit, concerns shown by the public  is overly excessive, especially about the debt limit) although I do still believe the government revenue should aspire to reduce its deficit in the long run.

But I am writing here not to discuss about the deficit per se, but rather an assertion by him that:

In Malaysia’s case, its budget shortfall widened to 6.7% of GDP in 2009 as the government implemented measures to avert deeper economic contraction. As a result, the economy rebounded strongly by 7.2%, whilst revenue growth accelerated by a double-digit pace by 2011. At the same time, the budget deficit as a percentage of GDP narrowed to 4.8% in 2011 from 5.4% in the preceding year. [Nor Zahidi Alias. Budget shortfall no cause for sleep deficit. The Edge Financial Daily. September 5 2012]

First, a small issue of clarification. The economy grew by 7.2% in 2010. Government grew by 16% in 2011. I think the langauge can be a bit confusing.

Now, to the beef. I am disagreeing with the causality cited here. The author wrote that as a result of government spending in 2009 or really, the stimulus, the economy rebounded strongly in the following year.

In 2010, real government spending in real terms slowed to 2.9% from 4.9% in 2009. The economy did rebound in 2010 but given the trend in government spending, it is really hard to attribute the 2010 rebound to the government. This is especially so when government spending typically formed only 11% of total real GDP.

How about gross fixed capital formation (i.e. investment) of the public sector? It grew by 2.9% in 2009 and 5.0% in 2010. The 5.0% is more or less the typical growth in the immediate years before the recession.

In fact, the first three quarters in 2010, GFCF by the public sector contracted. Only in the last quarter of the year did it grow by 34.7%, which was huge. If GFCF had not grown at all in that quarter, overall real GDP growth would have still grown by about 6% in 2010. If the GFCF had contracted at about the same average magnitude in the earlier three quarters, the economy would have still rebounded. So, clearly, the source of the rebound came from somewhere else, not the stimulus.

One might try the multiplier story but given how late the stimulus came, I doubt it, along with the stimulus, really was relevant.

Truly, private consumption and private GFCF growth recovered before the stimulus really came into force. Private consumption registered year-on-year shot up by the first quarter of 2010 and private GFCF registered its first growth in the last quarter of 2009. Both happened well before the stimulus had a chance to act. If one compares the numbers on quarter-on-quarter basis, one will realize that the recovery came even earlier.

So, I cannot agree with Nor Zahidi’s assertion that the 2010 economy rebounded strongly because of the stimulus. The numbers do not show that.

 

Categories
Economics Politics & government

[2587] You shall not crucify mankind upon a cross of gold

I do not take hard currency idea seriously. Hard currency is a wacky idea. I generally think supporters of hard currency, gold standard advocates being the worst, as non-serious discussants of monetary policy. Hard currency is inflexible and it will exert unnecessary pain in time of crisis. If we had a hard currency all over the world during the last financial crisis, we would have easily experienced the worst depression in modern times. Worse than the 1930s Great Depression.

It would be worse because the world’s economy was so much bigger in the 2000s than it was in the 1930s and given real prices of commodities associated with hard currency, gold and silver specifically, the supply of hard currency could not accommodate the demand for money. The world’s economy would be much smaller than it was at every single point of modern history even without any crisis.

I am a libertarian but unlike too many libertarians, I prefer fiat money to gold standard. I have rationalized my position before.

On top of that, I am a monetarist because I understand the basic operations of modern monetary policy and its implications. I accept the lesson taught by Milton Friedman and Anna Schwartz: in times of crisis, expand the money supply. Under hard currency, the expansion is almost impossible while deflation, which as damaging to general welfare as hyperinflation is, is always a real threat.

Although I am generally reluctant to admit it, I do ultimately support previous quantitative easing exercises in the United States and other similar money supply expansion in other parts of the world. The fear of expansion is always about high rate of inflation but it is quite clear for the past few years that there is a considerable unmet demand for money that money supply expansion does not create any kind of noticeable damaging inflation. Until inflation becomes a credible threat, I will not oppose money supply expansion by too much.

In other words, I think Federal Reserve chairman Ben Bernanke has done a great job. Bernanke given his scholarship is the right man for the job.

So, I take it as a demerit when Mitt Romney said he would not reappoint Bernanke to the job if he is elected as the next President of the United States. And I take it as a huge downer for the Republicans to bow to unreasonable crowd that is the Tea Party and then push for gold standard.

This may force me to reassess my bias with respect to US politics.

I have a Republican bias just because of Republicans’ economic policy has typically been closer to my preference (notwithstanding the Clinton’s years that blurred the line; I do consider Clinton as the best President in recent times). At least, the rhetoric is. And I do think the selection of Ryan Paul as exciting. This election has catapulted libertarian understanding to the national front farther than Ron Paul has ever done.

But the contemporary Republican view on monetary policy might be too much for me.

There are many great economists within the Republican camp at the moment. It is the responsibility of these economists to advise the Republicans of the folly of gold standard.

Categories
Economics

[2579] Far higher potential output for Malaysia?

Both the GDP and the CPI numbers for Malaysia were released yesterday.

Real GDP growth grew by 5.4% in the second quarter from a year ago. Although I suspected that growth would be strong due to strong showing in the industrial production index, I found 5.4% as surprising still. It was too strong for whatever the production index was showing.

The strong growth, along with low unemployment rate, provides a puzzle when it is considered together with inflation trend. Inflation in Malaysia, both headline (1.4% in July from a year ago) and core (1.3%) inflations, has been decreasing since the beginning of the year. Typically, strong growth creates demand-pull inflation. That demand-pull inflation has been absent in the second quarter despite strong GDP showing.

Furthermore, the unemployment rate has been low and I tend to consider the current rate to be quite close to the idea of full employment.  The latest employment rate, which is for the month of May, is 3.0%. Previously, the rate hovered between 3.3% and 3.1%. Labor participation rate is also quite high given historical standard. The assumption of full employment implies the economy has been working close to its full potential. Any growth stronger than the potential will put upward pressure on prices.

Yet, inflation, especially core inflation, has been decreasing throughout the year.

This may suggest that the potential output is higher than the growth the Malaysian economy has been experiencing so far. It also suggests that the already low unemployment rate can go down further and that we are not really that close to full potential.

So, Malaysia can grow faster still, which is an exciting realization. I heard of the go-go 1990s. Maybe, it is time for the go-go 2010s in spite of everything. Let us just hope things will not go down in flame like it eventually did in the 90s.

Whatever it is, if growth so far has been unsustainable, then inflation should accelerate in the near future. If it is sustainable (i.e. actual growth is lower than potential), we should see only limited demand-pull inflation.

Finally, I previously projected the Malaysian economy to grow by 4.0% for the whole of 2012. I am looking like a fool now and will be looking to upgrade the growth rate soon. Nevertheless, I am ultimately skiddish about that upgrade. Although domestic demand, which grew by 12.0% year-on-year, has proven to be capable of cushioning the adverse impacts from weak exports, the global risk is still there. Trade has not collapsed but it can and if it does, an upgrade will be a very foolish thing to do.