Category: Economics

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Economics Politics & government

[2957] Pakatan Harapan should avoid kitchen sink manifesto

Election is nearing and among policy-minded voters, it is not difficult to spot manifesto discussions. As someone with some implementation experience in government, let me say the last Pakatan Harapan manifesto was difficult. I knew this before I was pulled into the whole business: I reviewed the manifesto and summarized it as the following: the economic plank was “difficult to stomach wholly” but the other parts, particularly the institutional agenda, were what we needed. Given my concerns were institutional in nature, I was willing to give a blind eye to the economic plank, and support the institutional aspect wholly.

Looking back, the economic manifesto rode on popular anger quite effectively. That explained the kitchen sink approach taken by its authors. GST, monopoly, living costs, corporate corruption and other concerns were all meshed into one big document, which did not jive together. The authors knew what they wanted.

Unfortunately, riding the wave, and actually executing the policies were two very different things. Mahathir famously said ‘we’ did not expect to win, and so did not expect to implement those promises. Manifesto bukan kitab suci; manifesto isn’t a holy book. That highlighted the difficulties associated with the economic aspects of the manifesto, especially after GST was abolished just weeks after the 2018 election, and more importantly, before the Finance Minister was sworn in to bring SST back.

The next election, Pakatan Harapan can do better. They need to do better because the same mid-2010s anger is no longer there. There is little to match that economic anger, save the stubborn but relaxing global food prices and rising recession risks.

If I were to write the manifesto all by myself, I would reiterate the institutional aspects and reuse a good chunk for the 2022/2023 general election, and come up with a new one for the economic side. On the economics, I would reject the 2018 kitchen sink approach. I would instead set up overarching national goals. What do I mean by that?

In the kitchen sink approach, almost everything economic-related concerns were siloed off with little concerns to bigger concerns. One way to put it simply is that the proposed solutions were necessarily single-minded and siloed that the same proposed solutions ignored their effects on other things, like government finances and economic growth. At the implementation stage, at times this left those solutions contradicting each other, leaving individuals implementing those siloed solutions fighting each other and accusing the other side as blocking manifesto fulfillment. For instance, when Pakatan Harapan abolished GST without regards to policy sequencing, notwithstanding the previous problem with refunds (truly, the additional government revenue was lowered than BN admitted), how exactly the government would finance other parts of its economic promises? PTPTN? Highways? Petrol subsidies?

As you can see, the kitchen sink approach works from funding supply first, and then effectively takes the funding demand as an afterthought. This caused the troubles Mahathir identified so early. You ended up with insufficient funding supply to meet rising funding demand.

In the overarching national goals, it should work the other way round: start from funding demand-side first, and then work the funding supply-side afterwards.

To do this, we have to ask ourselves, what do we want for Malaysia?

Do we want to maintain our largely free, government revenue-financed healthcare system?

Do we want a welfare system given the damage Covid-19 has done to the financial security of many Malaysians?

Do we want a good education system? What kind?

Do we want better cities? Transport policy?

Do we want stronger defense?

Do we want to climate change infrastructure? Energy policy?

What?

This requires deep discussions among many parties, from lay users to experts. It has to be multidisciplinary, exactly so to avoid the silo problem that the 2018 Pakatan Harapan manifesto suffered (and contemporaneously, the Ministry of Health’s ongoing white paper).

And this way, we can be honest when it comes to taxation: taxes have to rise.

The truth few willing to say loudly because it is unpopular is that the Malaysia government lacks funding to do a whole lot of things due to low taxation. We can raise the deficit ratio, but even so it would not be enough to meet various legitimate demand associated with basic functions of government like health and defense (let us not talk about unorthodox fairy tales about ‘printing money’). For a country aspiring to be a “first-world” with worsening demography (but still young), our tax (and the bigger government) revenue to GDP ratio is low. That fact has caused unnecessary outsourcing of basic functions to the private sector. The same fact is the reason behind a whole lot of off-budget borrowings and spendings, which are nontransparent and significantly raises corruption risk in an environment where underfunded institutions cannot play their check-and-balance role properly.

To tell this truth, you have to tell the funding demand-side story: what do you want?

Of course, not all wants can be entertained lest the same problems besetting the 2018 manifesto would come back. You cannot want a well-run public transport system while wanting blanket petrol subsidies and eye-roll-worthy car duties cut. You cannot want a working revenue-funded health system while supporting tax cut for private insurance and spending at private hospitals. You cannot want a fully-funded education system while supporting tax cut for private education institutions. You cannot want a healthy Malaysian population but keep sugar cheap. You cannot want a good road while wanting a low road tax and cheap petrol.

Manifesto authors have to choose instead of putting everything into the kitchen sink. Here is where leadership is needed: decide on the policy direction instead of a Hail Mary rush.

And also, of course, manifesto has to be popular. It has to have its hooks. But those populist promises can be brought in line with the overarching themes. For example, have public transport cheap, with discount and vouchers and everything, and admit the system will always be in the red, to which the government will have to fully fund it directly (leaving financial performance for public transport system second in priority to physical performance).

Be direct about the funding demand, and through that, we can be honest about funding supply, and taxation.

I should add that the institutional aspect of the 2018 manifesto worked because it had an overarching goal: improving the overall check-and-balance mechanism and all of them are linked to one another in one way or another. It was not a kitchen sink.

To summarize it all: the next manifesto should be driven by overarching goals, instead of a laundry list of grouses. In other words, do not throw everything into the kitchen sink.

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Books & printed materials Economics Politics & government

[2955] Reviewing The Republic of Beliefs

Do laws matter? How do they matter? When do laws work? Why should a law work just because it is written on a piece of paper?

Kaushik Basu explores these questions in his 2018 book The Republic of Beliefs: A New Approach to Law and Economics. He utilizes game theory to answer the questions. Basu is an economist with wide experience in public policy.

By Hafiz Noor Shams

From the very start, he is skeptical of the power of the law as understood through Hobbesian lens. He largely rejects the idea that laws function primarily through the threat of force. In place of coercion, he places beliefs firmly at the center of the answers, with possibility of coercion working only to modify beliefs. We are governed more by beliefs, and less by coercion.

To convince his readers, he lays out the basics of game theory. Luckily for most of us, he does not write down too many formulae. In doing so, he avoids turning a good chunk of the book into a dense game theory textbook. Charts are aplenty to deliver the same messages mathematical formulae would. All I am saying here is that the book is quite readable.

The point of the crash course (or review for those familiar game theory) is to ease readers into the idea of focal points, a concept imported from psychology (was it? I am unclear here). Within the context of game theory, focal points are a subset of equilibria as understood in economics. It’s a signpost to coordinate responses. Once all prerequisites in place, Basu delivers his central thesis: laws work to push society towards a preferred equilibrium, out of many equilibria.

Laws alone do not create equilibrium. A law that forces society towards a non-equilibrium outcome will suffer from serious ineffectiveness. That ineffectiveness translates into frequent violations as rules are ignored, or circumvented via corrupt ways.

This is an important point to be learned by policymakers. I write so because I see lawmakers more often than not prefer non-equilibrium outcomes and propose complicated policy to address problems arising from such non-equilibrium. So complicated, that their proposals end up creating bigger problems (wink wink: chicken prices and palm oil subsidies in Malaysia).

Perhaps, this idea can be better explain through the problem of smuggling. Political commentators and even ministers (BN, PH, PN or whatever) have blamed the smuggling of something (cigarette, rice, gasoline, anything) on imperfect enforcement. And so, their solution is to put more money into greater enforcement. But the primary problem is not enforcement—though weak enforcement itself creates beliefs regarding (in)credibility of laws (but I will skip that part and encourage you to read the book for deeper treatment). It is about the law itself, which attempts to move society to a non-equilibrium outcome. And that non-equilibrium leads to corruption.

The prime problem, typically, lies in demand itself. Here, I believe Basu would claim, to fight smuggling, preference or behavior itself has to change. And behavior depends on beliefs.

More specific to Malaysian context, I think this is where attempt at ‘generational end-game’ for smoking will likely do more at curbing future tobacco smuggling than any ‘greater enforcement’ initiative would. There will be no cigarette to smuggle if people do not like smoking in the first place.

I think that (focal points) is the greatest insight from the book. But there are other points of interest.

One is the history of law and economics. The author goes back to Hobbes and Hume, but I am more interested in his treatment of modern history when Basu writes about neoclassical understanding of laws as provided by Gary Becker. Basu criticizes the modern economics approach towards law by stating a typical neoclassical model ignores the interest of law enforcers and other agents of the state (that include functionaries like judges and prime ministers). He zeroes in on the inconsistency of neoclassical understanding of law: citizens are assumed to be rational agents, but agents of the state taken as robots obeying everything they are told to do. In that way, neoclassical economists working on the intersection of economics and laws regularly sidestep the problem of corruption. Basu suggests, agents of the state should be considered as rational too, and their obedience should not be taken for granted. In that way, economists can tackle corruption problem more directly.

Despite his criticism of the neoclassical approach, Basu does not call for a complete culling of the school. Rather, he wants to improve those models by expanding it in a meaningful way. Indeed, the way he writes the book, it feels like a pioneering work built up on neoclassical approach.

Categories
Books & printed materials Economics Politics & government

[2954] The frustrating read that is Notes to the Prime Minister

The ringgit has been on a depreciating trend versus the US dollar since early April 2022. While it is natural for Malaysians to focus on the ringgit, the depreciation is best explained by the strengthening of the US dollar against a slew of other currencies. Global events are triggering capital to head to the US, leaving other economies having to deal with the repercussions of such capital flight. But this fact does not stop Malaysians from calling domestic authorities to do something about the depreciation. Former Prime Minister Mahathir Mohamed recommends Malaysia pegs the ringgit as the country once did.

This is where Wong Sulong’s Notes to the Prime Minister: The Untold Story of How Malaysia Beat the Currency Speculators might be useful in providing greater details how pegging and capital control of the 1990s came about.

Unfortunately, the book does not do the job very well by digressing too much.

The book is firstly a reproduction of notes Nor Mohamed Yakcop wrote for the Mahathir at the heights of the crisis. Nor Mohamed is the architect behind the pegging and possibly the brain behind the rebuilding of Malaysia post-Asia Financial Crisis.

Secondly, it is an unexpected festschrift-like tangent in honor of the man, written by men and women (themselves had, and have, big roles in corporate Malaysia post-1998) Nor Mohamed recruited to head various government bodies and companies.

While the notes are useful and enlightening, the book is deficient in a way the notes are ill-supported by context-making commentaries. Because of the structure, the book makes a disorienting read, which leaves me dissatisfied.

When I bought the book some time back, I had expected it would discuss how Malaysia came to the decisions it made, and how the debates among those in power went. Furthermore, given the book was published more than 10 years after the crisis, possibly a critical review of the pegging and capital control.

There is no critical review. When I write critical, I do not mean criticizing the actions. Rather, I expect an examination why the policy worked for Malaysia. What we have instead is assertion that it worked and everybody else in the world was wrong.

Debates had around the various policies advocated by Nor Mohamed through notes are totally absent. A reader would need prior and outside knowledge of the economic and political environment of the 1990s to truly comprehend the reasons and tensions behind the notes. For instance, Nor Mohamed in his letters to Mahathir here and there criticized decisions taken by the Finance Ministry and the central bank, both of which were responsible to the then Finance Minister, Anwar Ibrahim. But Wong Sulong left the tensions largely out. I did not expect a full political analysis of tensions between Mahathir and Anwar, but I think it would be reasonable to expect an exploration of policy difference between the two men in response to the Asian Financial Crisis.

This makes me feel reading the book a little like reading Malaysian newspapers in the 1990s and the 2000s. Journalists during those decades (sometimes, even now) liked to write about the government’s reply to an issue, but not the issue itself. Imagine the government saying “everybody is alright” in response to a major vehicular accident, but that accident is not mentioned at all. The public of that era would have to guess what the government was referring to. Reading Notes to the Prime Minister is a little bit like that: frustrating. Annoying even.

Nor Mohamed proposed multiple policies in his notes, but readers are left to guess whether the policies were adopted. This is yet another example how the Wong leaves the notes uncontextualized.

My frustration grows further when in the chapters following the ‘notes,’ the book goes off tangent to celebrate Nor Mohamad. The man deserves to be celebrated, but the book overly does it by having various then-contemporary corporate captains (several of them are still active) recounting how they met the man and describing the man’s best traits in a festschrift style.

Nevertheless, some of the stories told help readers understand some aspects of government policy in the 2000s. I also become more appreciative how many GLC men and women were Nor Mohamed Yakcop’s men and women. When Najib was at war with Mahathir, and reopened the forex scandal of the 1980s and inevitably found Nor Mohamed as the number one scapegoat, I wonder how these men and women felt. But again, these insights come only frustratingly indirectly.

Finally, the notes themselves are fascinating. I learned one or two things that I took for granted before. I think more importantly, I am just impressed how detail-oriented Nor Mohamed Yakcop was, how knowledgeable he was, and how he was able to explain complex financial transactions in simple terms to the Prime Minister. Very clear-minded.

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Economics Society

[2952] When did dates become popular among Muslim Malaysians?

Dates now feel ubiquitous on Ramadan dinner tables among the Malay (and the wider Muslim Malaysian) community. Not only that, more often than not, they break fast with the fruits first.

Just the other day, somebody spotted me breaking my fast with something else (a glass of water), and the person commented how unusual my behavior was.

I found that comment very peculiar. Contrary the person’s assertion, I feel date-eating had never been normal in Malaysia. I remember a time when dates were not even at all popular. It was not even available in the Malaysian mass market easily unlike now. The Yusuf Taiyoob trend, in particular, is really a recent phenomenon appearing in the early 2010s.

I myself first tasted dates not in Malaysia, but at a mosque in the United States in the early 2000s. There was a large Arab community—Iraqis, likely due to the Gulf Wars—and they loved their dates.

That comment made me wonder, how and when did dates start to become popular?

I know how it became popular: many would tell you it is religiously preferable to break fast with fresh dates. It is sunnah, which means extra pahala, or merit for those practicing it. And during Ramadan, Mulims believe everything good has a big multiplier assigned to it, unlike normal times when one good deed is considered one. Do not ask me about how the scorecard works.

So when?

I figured, the best way to know when dates became popular in Malaysia, and to prove whether I was right (that is mass date consumption being a relatively recent phenomenon in Malaysia), is to look at trade data over the years.

Here, two public databases are helpful. First, the International Trade Center, a body under both the World Trade Organization and the United Nations. Second, the UN Comtrade Database. Unfortunately, the best I could get was data all the way back from 1989.

So, when did dates first becoming popular in Malaysia (within the confines of Ramadan)?

I will let the graph talk.

The chart suggests date consumption grew in popularity (within its own context) over time. More supply means more could consume it: at the very least, date import volume grew at a faster rate than population growth.

Specifically, 1989 date imports were approximately 440 g/person. It rose to 480 g/person in 2000. An increase, but not too much. But it surge to 640 g/person in 2010 and then 700 g/person in 2020. There was a big jump between 2000 and 2010. I think that says something.

Things changed some time in the 2000s or the 2010s, which coincided with the rise of Tunisia as an exporter to Malaysia. Prior to that event, China, Iran and Egypt were the biggest suppliers. Both China and Egypt have fallen off the rung since the last decade.

With that, I think I can say in the 1990s, it was not that popular. That justifies my experience. It is not me that is unusual. It is the community that has changed.

I also suspect date consumption was popular among rich Malays first, way way before. The culture became popular with masses later partly due to religious exhortation/advisory (sunnah) and a version of conspicuous consumption at work: a Veblenian way of saying rich religious people eat it, and if I eat it, I would be seen as a rich religious person too. This is probably harder to prove.

Finally, it is good to put the rising popularity of dates into context. These date imports are small compared to other (foreign) fruits. For instance, nearly 170,000MT oranges (citruses really), 150,000MT apples and 50,000MT grapes and the likes were imported in 2020. Compare that to the 2020 dates imports of 22,500MT.

Still, 2020 date imports were bigger than bananas. But Malaysians do grow bananas locally. So, it is not a proper comparison.

Categories
Economics Politics & government

[2951] Politics of prices is counter-productive

There has been a global supply constraint of various kinds for at least a year now. The supply chain disruption was expected by many—I quickly noted the post-war Malayan supply-side crisis as a parallel. Nevertheless, few people expected the constraints would be this tight for so long. I certainly did not.

The tightness has slipped over into the Malaysian consumer market. Chicken, beef, vegetables are the usual suspects.

The waitlists for cars are long due to a persistent global chip shortage: I test drove a Peugeot several weeks back and that experience to me underscores how modern ground vehicles these days are more and more an electronic device than a mechanical one. I knew vehicles had an ever increasing electronics (and electrical) components to them. Several months earlier, I read a report showing how the share of electronic cost relative to total car manufacturing cost has gone up drastically in the past 20 years, from less than 1% to maybe 40%-60%. But there is a difference between reading it, and riding the thing. The dashboard is a computer screen popping more information any older car could show. When I say dashboard, I mean a dashboard full of dynamic data, with customizable menu. The air-conditioning controls are only accessible through a separate central LCD screen, which also controls other aspects of the car. Even the brakes can be controlled by the computer, along with so many other things.

It is not just chip and electronic components are in short supply. Somebody on Twitter jokingly said “oh, this is the chip shortages they were talking about” in reference to shortages of fries at McDonald’s in Malaysia and Japan.

Consumer prices are rising, and it would have risen higher if it was not for price control mechanism and subsidies in place in Malaysia. This is readily observed from the following chart, where consumer prices are not rising as fast as producer prices. The latter is a proxy to global prices.

PPI vs CPI

Nevertheless, despite enjoying the shield, consumers have been complaining about rising living costs. They demand actions. More than a few activists and politicians have demanded the same.

All governments are sensitive to such criticisms and this government, especially as weak, incompetent and clueless as it is, is doubly so. The opposition has been relentless in their criticism. Some Pakatan Harapan supporters have highlighted how their government played a better and proactive role in addressing prices, and go on to claim a Pakatan Harapan government would have been far more effective in managing cost of living problem. And when Pakatan Harapan was in power, Barisan Nasional and Pas, on top of their usual racist rhetoric, also attacked the government for rising living costs regardless of whether prices was actually rising (prices then were actually very stable due to the imposition of an overly generous blanket fuel subsidy).

I dislike politics of prices. While it has its uses in cases when there are monopoly abuses and regulatory hurdles (the drop in broadband prices are a great exception), in the current climate prices are largely out of the government hands. The truth is, if Pakatan Harapan was in power, they too would not be able to do much about it either.

But that does not matter. Such is the politics of prices.

The problem is with the supply itself and the players of politics of prices simply ignore the cause of the problem. Some even go has far as misdiagnosing it as unhelpfully as greed.

A supply-driven crisis like this requires investment to loosen up the supply chain: expansion of ports, new technology to hasten production and delivery, new plants, more workers, etc. Yet, the aversion for price hikes have led to large government subsidies (think fuel), which takes fund away from productive investment purposes that are needed to address the supply chain disruption.

Politics of prices not only ignore the source of price pressures Malaysian consumers are experiencing. They ignore wages. Prices and wages are part of the same coin: wages are prices of labor. Notwithstanding issues relating to income distribution between employees and employers, and technology-driven price cuts among others, the politics of prices suppresses price growth, and through it, risk of suppressing wage growth.

More than once, the politics of prices have led to calls for wage cuts. The targets have been high-paying professionals and ministers (and their unqualified advisors), but too often, it has gone a little bit too far. Mahathir as the 7th Prime Minister for instance, is a fan of pay cuts and that unfortunately set the tone for the whole economy when he was in power. Coupled with his obsession with government debt (government debt and transparency were a problem), and his history with the gold dinar movement, it felt like he wanted a deflationary environment.

All that set the tone for austerity. There was really no austerity in place—government spending went up and the economy expanded—but the narrative set by the PM made it difficult to convince many out there that that was no austerity. And the economy, even as it expanded, took heed of the deflationary sentiment.