Category: Economics

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Economics

[2431] Two cheers to San Miguel

The sale of Esso Malaysia by ExxonMobil to San Miguel of the Philippines is a done deal. But it was not completed before economic nationalists sounded the alarm. They feared foreigners would seize control of strategic assets within the country while seemingly ignorant of the fact that ExxonMobil is a US-based multinational corporation in the first place.

The more discerning economic nationalists hoped, demanded and appealed to ExxonMobil to sell all of its shares to the locally-based Lembaga Tabung Angkatan Tentera (LTAT).

Luckily, the jockeying was to no avail. Why luckily? Here is a question for consideration: Were these economic nationalists interested in the welfare of Malaysians?

I would say no.

This is a pertinent question given that LTAT already owns Boustead, which in turn operates petrol retailer BHPetrol. To have LTAT controlling Esso Malaysia would likely reduce considerable competitive force within the industry, if there were any to start with. More importantly, it would turn back the clock on any effort at introducing competition in an industry already stifled by government regulation and effective monopoly.

The LTAT path advocated by economic nationalists in Barisan Nasional, Pakatan Rakyat and whoever else would reduce competitive pressure in the area, and it would also exacerbate the already adverse relationship that exists between the government and businesses.

With the government already involved in various industries, what ensures that the government has the interest of actual individual Malaysians in mind instead of the profits of various government-linked companies — or in the latest case of the economic nationalists’ wet dream, the profits of LTAT and its companies?

This is an organization that is already mired in a controversy revolving around opaque military procurement which is closely related to yet another case of conflict of interest. How is it not a conflict of interest when LTAT is the major beneficiary of various military contracts while at the same time being a retirement fund for armed forces of Malaysia? And let us pretend that unlike the experience of Indonesia and Egypt, a military with direct or indirect business interest is an ingredient for the creation of a healthy civilian government.

Real business concerns run mostly on a profit motive. It cannot afford to entertain nationalistic sentiment. If it does entertain nationalism, then it typically seeks to manipulate such sentiment to its own advantage. Proton is one such case: save Proton, buy Malaysia. Or Malaysian Airlines: save MAS, fly Malaysia.

It is not a phenomenon unique to Malaysia of course. In the United States, General Motors and Ford have from time to time brandished their American credentials to American consumers. Many businesses in the past have also employed economic nationalism to justify protectionism in these business favors.

Zooming back to Malaysia, economic nationalism takes the extra step of merging business interest with government interest, thus making the issue of conflict of interest two-fold: government protecting its profits rather the interest of its citizens, and businesses manipulating government powers to advance business interests at the expense of citizens. It is a symbiotic relationship between government and business that turns the very components of a free society into parasites, living on taxpayers’ sweat.

Such perverse incentives cannot be good for the welfare of Malaysians in general.

For these two reasons, the sale of Esso Malaysia to San Miguel should be celebrated.

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 September 18 2011.

Categories
Economics

[2427] Are telcos actually raising prepaid rates?

Consider a tax imposed on a producer in a transaction with its customer. In other words, the producer pays the tax. Does the tax burden fall on the producer exclusively? Or is it shared? Or really, is it a tax on the consumer?

This refers to the controversy regarding the passing of the 6% service tax from telecommunication companies to consumers of prepaid telecommunication services. Telcos have been absorbing the tax previously and now they have decided not to do that anymore. The service tax was supposed to be paid by the consumer anyway. It is a service tax, which is a consumption tax.

What does economics have to say about the passing? What is the welfare effect?

Laypersons might find the answer outrageously shocking: it does not matter who pays what. Whoever the taxpayer, the actual tax burden share between the producer and the consumer is unchanged.

There is a concept in microeconomics called tax incidence. According to it, regardless who pays it, the actual burden depends on elasticity. In layman terms, the most desperate between the producer and the consumer will suffer the larger burden of taxation.

Here is a clearer explanation. While the telcos officially pay for the tax and  if the consumer is insensitive to price change relative to the telcos, the truth is that telcos are passing the tax to the consumer in form of higher prepaid service price. If it is the telcos which are insensitive to price change, then the telcos will actually suffer the larger tax burden.

But there is a problem here, I think.

If the tax is passed to the consumer without change in elasticity, the new rate for prepaid service should be cheaper to account for tax incidence. This assumes that the rate prior to the passing already accounts for the absorption of the service tax, which it should in my opinion. So, RM10, for example, should be able to buy the same amount of minutes before and after the passing.

But if not, if customer will have to pay more for the same minutes after the passing (meaning, the rate for prepaid service remain unchanged after the tax is passed), then it is possible that the telecommunication companies are taking advantage of the situation by actually raising its price stealthily.

That has to be it. Think of it. The tax incidence theory has to hold. The government will receive the same amount of tax but the consumer will have to pay more overall. Somebody is gaining something.

That is right. I am suspecting that the telcos are not only passing the tax (which the passing itself is superficial according the tax incidence concept), they are raising the prepaid rates as well.

Categories
Economics

[2425] I don’t think the second half will be stellar

There is an expectation that the second half of the year will boost the annual GDP growth for Malaysia to make up for the relatively weak first half. That was a reasonable expectation to have in the first half of the year but with only less than four weeks to go before the final quarter of 2011 is here, it is becoming increasingly untenable.

The basis for the optimistic second half expectation has been the planned construction boom as a result from the Najib administration’s Economic Transformation Program. A friend told me that it is to rival the construction boom of the 1990s.

From casual observation, there is a slow start to the boom. If the casual observation proves correct, the boom may yet pick up full steam in the fourth quarter but I doubt the fourth quarter alone will be sufficient to bring respectability to the whole year growth number, at which I define respectability as at least meeting the minimum target of 5% set by the Najib administration.

When the boom actually begins, there will be a question of lag. The economic expansion arising from multiplier effect will be even slower to hasten growth, adding to the issue of lag. Even if the boom had actually begun, the length of the lag is unclear and it is possible that the lag is still ongoing. It is hard to know this conclusively before November, when the actual third quarter result of the Malaysian real GDP will be released.

There are question marks on both domestic and foreign demands. Foreign demand on domestic goods is substantial. It is so substantial that I have made the case that the Malaysian recession and the subsequent recovery has been primarily caused by the global economy before.

The global economy is not doing so well at the moment. If there was a global central planner, then that planner had yet to make up his mind whether to grow or contract the world’s economy. There have been renewed talks of a double dip but truly without projecting the future, I think current statistics are giving confusing signal at the moment. Some statistics are performing worse than before and expectation. Others are doing better.

I myself have done some rudimentary forecasts for the Malaysian real GDP. It ranges from 4.60% to 5.15%. Okay, those are the only two rough forecasts that I have calculated through two slightly different but still simple methods. There is much work to be done to improve the model and I am not very satisfied with it. It does give me a general view nevertheless.

Categories
Economics WDYT

[2423] Is it working? Could it work?

I was reading the Bloomberg Brief just now and I saw this graph.

What do you think best explain the situation above?

  • The bailouts were not big enough (22%, 5 Votes)
  • No bailout will work (65%, 15 Votes)
  • Other answers (13%, 3 Votes)
  • Don't know (0%, 0 Votes)

Total Voters: 23

Loading ... Loading ...

If your favorite answer is unavailable as an option above, do share in the comment section.

Categories
Economics

[2419] Japanese government bond yields during the 1990s

After reading my last post regarding the yield curve of the US treasuries, a friend asked if those curves replicate those seen during the Japanese Lost Decade.

The Japanese economy has been to where the US economy currently is. Arguably, Japan has not been out of it ever since the 1990s. Zero interest rate policy, or ZIRP, was popularized by Japan first. Because of this, a professor of mine quipped that “if anything, the Japanese central bank is more sophisticated than the Federal Reserve.”

So, how did the Japanese yield curves of the 1990s look like?

The year 1990 and 1991 were undoubtedly inverted, either reflecting or signaling something ominous was about to happen. This was after the Japanese property bubble. It burst and brought with it, the famed Lost Decade.

After those two years, the yield curve assumed some normality albeit some inversion in some years for some term in 1993 and 1995.

(Some of the curves do look too flat and that is because some numbers are missing from the Bloomberg terminal. I took the liberty of imputing average of the nearest readings to make the graph looks pretty.)

The curve continued to flatten over the years into the next decade. By 1996, Japan was very much running ZIRP.

The flattening of the Japanese government bond yield curve, or really the general shrinking of the curve to the point seen in the late 1990s offers a starkly pessimistic reading of the fate of the US economy.

Nevertheless, it is a kind of fatalism to assume that is the ultimate fate of the US economy. Right now, the yield curve in the US is still steep, although it is flattening (notwithstanding the talks of “Operation Twist”).