Category: Economics

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.

Categories
Economics History & heritage Photography Society Travels

[2576] Life and commerce in Siem Reap, Cambodia

I have always known about the atrocity of the Pol Pot and Khmer Rouge regime in Cambodia but before I traveled to Cambodia, that knowledge was superficial. I only began to learn more about the conflict when I found myself in Cambodia for two weeks recently. Being there almost made the knowledge into an emotional experience for me.

To fully understand the history, I think one has to read up Cambodian history since its late French colonial days. That is so because each event led to another and finally in 1975, the Khmer Rouge came to power. It was a reaction to yet another reaction but that fact does not justify what the Khmer Rouge did.

Apart from its political desire that also contributed to the massacre of the Cambodian people and those in the Khmer Rouge themselves later, its communist, understanding, forcefully changed the economy and the demography of Cambodia for the worse. It was disastrous, as it was disastrous with the Soviet Union and the People’s Republic of China.

The regime was not ashamed to centrally planned the economy, forcing all to work in the countryside as slaves and victims of communism. Without exaggeration in the case of Cambodia, communism kills. The cities were deserted so that the communists could realize a stupid ideal of “peasant economy”. Doctors, engineers and professionals were all forced to till the land in the countryside. The cities were left to those in power, and those whom were being tortured to satisfy the paranoia of the Khmer Rouge and ultimately, the circle of Pol Pot. The cities became ghost towns.

The Khmer Rouge regime fell in 1979. By that time I visited the country in 2012, what was a rich country has only begun to make its way in this world again.

Cambodia was a rich country. Its temple ruins are evident enough. Phnom Penh the capital has traces of its pre-Khmer Rouge glory.

Some of the Cambodians I talked to rued how Cambodia was richer than Vietnam before the Khmer Rouge period. Now, Vietman is ahead in so many ways. My traveling partner whom has been in Vietnam several times for an extended period, confirmed this. There are more buildings and vehicles in Vietnam than there are in Cambodia.

While that is so, traces of communism are being overwhelmed by its better nemesis.

In Siem Reap up north where most the temples of Angkor are, commerce, the voluntary exchange of goods and services by individuals, is everywhere.

Some rights reserved. Creative Commons 3.0. By Attribution. By Hafiz Noor Shams

Under communism of the Khmer Rouge, that was illegal. Under communism, there was no life.

Categories
Economics Society

[2573] A pretty sizable legal migration into Malaysia between 2000 and 2010

I was reading, or rather re-reading, the Economic Transformation Program and I was a bit obsessed with its projection of 3.3 million total new jobs between whenever the program was supposed to begin up to year 2020. The figure sounds a bit too optimistic that I do not think there will enough workers to take up the jobs, especially  the geometric average growth between 2000 and 2010 was just below 2.0% per year and when population growth for 2010 was at the measly 1.5% per year. The population growth rate is slowing down.

So, I did a bit of investigation and was planning to do some back-of-the-envelope modeling until a different but related matter attracted my attention. It is the population profile for Malaysia.

The chart was pulled directly from the Department of Statistics because I was too lazy to pull out the numbers from a database available to me at work. It was already 5PM at the time I started writing this and I did not want to stay in the office for too long today, especially when I had to pack my belongings to catch a plane early the day after tomorrow.

Anyway, what interested me here was the population increase. Specifically, population increase according to cohorts.

The chart shows how important (legal) immigration is to Malaysian population growth.

How do you spot immigration from the graph?

Well, under an autarkic case where there is no immigration, it is impossible for a cohort in a particular year to increase in size in later years.

Yet, if you look at the chart, all cohorts between 0 and 34 actually increased in size in the 10 years that passed between the two population surveys (2000 and 2010). To be clear, the 0-34 cohorts in 2000 should be compared with those aged from 10 to 44 in 2010.

There are two explanations that I can think of. One, which is less likely or probably insignificant, error in one of the surveys, or both. Two, which is likelier, is immigration.

That was a pretty sizable legal immigration between 2000 and 2010. Easily more than 1 million legal immigrants in 10 years.

Most of the immigrants were in their prime years. In other words, they were young, productive and probably contributed to economic growth.

But there is one peculiarity. Look at the 65-69 cohort in 2000. In 2010, the above 75-year-old cohort increased. Odd is it not? Or maybe Malaysian longevity is getting really good.

Other cohorts exhibited a decreasing trend.