Category: Economics

Categories
Economics WDYT

[2383] Do you support the merger?

Do you support the possible RHB-CIMB/Maybank merger?

  • Yes (15%, 6 Votes)
  • No (73%, 30 Votes)
  • Undecided (12%, 5 Votes)

Total Voters: 41

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Background: Rivals CIMB and Maybank are racing against each other to merge (takeover?) with RHB. It is a high-stake game. The winner will have a significantly increased regional profile.

At the same time, a current shareholder of RHB, Abu Dhabi Commercial Bank (ADCB) is selling its stake to its sister’s company Aabar Investments. Both the ADCB and Aabar Investments are owned by the government of Abu Dhabi.

Something fishy is going on with that sale, especially when such transaction is being done knowing that CIMB and Maybank are in competition to merge with RHB. Maybe the government Abu Dhabi is artificially pushing the value of RHB up. It is bad sport but they cannot really be blamed for that.

Reacting to that, the Bank Negara has told RHB that the transaction price between ADCB and Aabar should not affect the prices to be offered by CIMB and Maybank. A truly “what the hell” moment from the Bank Negara. If the transaction between ADCB and Aabar is fishy, the Bank Negara’s involvement is a complete dung.

Initially, I was neutral with the merger, despite knowing that a successful transaction between RHB and CIMB or Maybank would create a giant government-linked company.

With the Bank Negara’s latest position, I am moving towards the opposition camp. I am waiting for somebody to have the balls to flick to the bird to CIMB, Maybank, Khazanah Nasional, Permodalan Nasional Berhad, the Bank Negara and the government of Malaysia.

Oh, you should really try to form your own opinion before voting.  Sorry for about trying to affect your opinion. Naughty me (but hey, this is a libertarian blog. The default opinion is likely to be obvious).

Categories
Economics Politics & government

[2375] Reducing the political cost of liberalization

A price-control mechanism has its economic cost, on top of that associated with the current subsidy regime in place in Malaysia. There are also some political costs to the control. In tight times when commodities are becoming dearer, any government that dares to reset retail prices upwards invites public wrath.

There was talk of an early general election, but the rumor machines now suggest that the election will be held only later. The Barisan Nasional-led federal government needs room to maneuver before renewing its mandate.

The prime minister is under pressure to seek a mandate of his own. One has to remember that Najib Razak is running on the 2008 mandate secured by the highly unpopular Abdullah Ahmad Badawi. Not only that, the prime minister also needs Barisan Nasional to do better than it did in the last general election. He must get the two-thirds majority in Parliament to prove that his government is better than the one led by his predecessor.

That is one of the ways the political cost matters. The political cost can affect cold but rational economic calculations. This is especially relevant for those whose conviction is measured by their appetite for adventure, or lack of adventure rather. That makes it important to reduce the political cost of liberalization lest the liberalization agenda, however disappointingly incomplete it is in its current form, be left high and dry.

The local political cost that exists is unfortunate because global economic reality largely ignores local political reality. In many cases, the increase in retail prices is inevitable amid rising world prices of various commodities.

The factors fuelling the hike are real: growing population, growing affluence and therefore growing demand. That is the current long-term trend. Mere business cycles neither erase nor change long-term trends by much.

There are some institutional issues affecting local retail prices as well. Without hurting the trustworthiness of the government, these problems have to be solved.

Liberalize the market instead of granting monopoly power to specific firms. Make the market open instead of having deals made in the shadows. Stop signing contracts that are grossly lopsided at the expense of public money. All that can lessen the degree of the hikes in the long run.

Yet, local issues just like short-term fluctuations are unlikely to drown out long-term trends. Until new technology, new culture and new alternatives prevail over old ones — or if total world population drops — prices will generally go up to clear the markets.

Because of the dissonance between local political and global economic realities, the political cost should be reduced so that both run parallel to each other. The political cost is a disincentive to good economic policy.

Democracy coupled with entitlement culture is a recipe for irresponsible populism. This is especially true for the fuel subsidy regime where the subsidy fixes the price ceiling and in effect subsidizes everything between retail prices and world prices. Under this arrangement, the government risks hypothetically unlimited expenditure. The higher the world prices, the larger the subsidy bill.

So, how does one reduce the political cost?

The government can stop being the fall guy. To do so, the government needs to stop managing prices. Relax the control. Let prices float. Let the market take charge instead. Let those closest to the ground — the actual buyers and sellers — determine the prices.

Using the fuel subsidy as an example, the relaxation can exist together with fixed per unit subsidy regime rather than the current unfixed per unit subsidy. In this way, the subsidy burden shouldered by the government will remain constant given a consumption level. Any increase or decrease in retail prices will be due to market forces only.

This particular arrangement will reduce the political cost faced by a liberalizing government by making the link between prices and primary market participants clearer. Prices will no longer be linked to the government. With the government out of the way, then perhaps the government will receive less flak.

The question of subsidy reduction itself will not even surface because increase in world prices will not increase the subsidy bill given the level of consumption. Indeed, a typical model will suggest that an increase in world prices might actually decrease the total subsidy bill due to decreased consumption.

In the end with less flak, perhaps the liberalization agenda can go farther down the road without unnecessary undue erosion of political capital.

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 June 2 2011.

Categories
Economics Politics & government

[2373] Speak plainly about the price hikes

Subsidy reduction has its pros and cons, even as on the net in the long run, it is beneficial to the economy as a whole. There is no need to soften the negative aspects by putting them in a little colorful box with ribbon on top.

The series of subsidy reduction leads to price hike and in the immediate time frame, it is burdensome. It is painful. With all the lags that exist, it is an intertemporal problem. The pain comes early, the benefits come only later.

A price hike is a price hike. It hurts in one way or another. Nobody likes to pay more no matter how small the increase is, even if the increase is justified. I myself do grudge a little about having to pay more than I used to, despite largely supportive of the subsidy reduction initiative, or some call it as the rationalization program in the spirit of euphemism.

Yet, we have apparatchiks and their agents writing and suggesting that the series of price hikes currently undertaken by the Najib administration will not burden the consumers.

These consumers are not kids. They are not kids visiting the family doctor, about to face the needle. The story of how the needle only stings like an ant is not for the mature audience.

Instead of trying to convince these consumers that the pain they feel is an illusion, those in the government and their supporters should really stick to the plainly true traditional rationale: it is wasteful. It is inefficient. It is distortionary.

Break the message down to bits and pieces that laypersons can understand (What we have instead is that these messengers misunderstand those very economic concepts themselves! They use big economic jargons without understanding the basic concepts. And these people fancy themselves as the economic planners of the country. Pfft!).

Just speak plainly.

I think the majority will appreciate it, even if it angers them.

To manipulate words and then say things that the consumers can affirmatively see, feel and conclusively disprove will compound the anger. I mean, something must have gone absolutely wrong when I, a supporter of liberalization, become angry reading these manipulated messages in the media.

Worst, these untruths will only erode any support for liberalization. These apparatchiks will have themselves to blame when everything fails.

Categories
Economics

[2368] Subsidy is not the only thing

Subsidy reduction will allow market forces to allocate resources more efficiently. Prime Minister Najib Razak was reported saying so recently to justify his administration’s commitment to subsidy reduction in the long run. By doing so, the Najib administration claims to be an advocate of free market. A claim that is not necessarily true, however. At best, that claim reveals a selective belief in the free market.

The truth is that market forces are restricted not only through price mechanism. The restriction also comes in form of quantity control, among others. This is especially relevant in Malaysia where the government has introduced various regulations and institutions to control the price and supply of various items. Among those items are flour, diesel and sugar.

In fact, the government has wide discretionary power over this matter. Proof: the new Price Control and Anti-Profiteering Act grants the government the power to fix the price of any goods and services in the country. Yes, that is any goods and services. The net has been cast widely.

Despite the various channels where market forces are prevented from distributing resources efficiently, for some reason the price mechanism is receiving all the attention while the quantity side remains relatively untouched. As an example, look no further than the domestic sugar industry.

The government recently reduced sugar subsidy and effectively raised the retail price of sugar. All the liberal benefits of reduction have been thrown out in the open: fiscal deficit reduction, efficient resource allocation, investment over consumption, etc. You just need to name it.

At the same time and less discussed is the existence of the illiberal import quota system. The government through a quota system controls the importation of sugar. The government also grants the quotas only to several refineries ultimately owned by Felda and Tradewinds, which themselves are closely connected with each other.

It is not an understatement that the two companies control the sugar industry with a clear government sanction. As a side note, it will be interesting to see how the two companies will be subjected — if ever — to the new Competition Act, which has a highly questionable purpose.

If the government gets one point for liberalization due to subsidy reduction, then the government must lose a point from the import quota policy. Given how the import quota policy has created two related monopolistic companies — one being the favored entrepreneur of the government of the day and the other being a government-linked company — and that prices are controlled, the government must lose more than a point.

However one wants to keep the score, the inevitable conclusion is that this liberalization done through subsidy reduction is merely a half-hearted liberalization.

Whatever market forces are mentioned to justify the reduction in subsidy, it is stated insincerely. The liberal argument is just something convenient that the administration grabbed out of the air just because it fits its agenda of day. When one does not derive an argument from the first principle, one cannot expect anything less than inconsistency; the Gods of Inconsistency are staring straight into the eyes of the Najib administration.

The government can prove its credential as an honest advocate by deriving its policy from the first principle. That is, the whole industry must be liberalized. The removal of subsidy and price control must happen together with the loosening of the import quota system.

This goes not just for the sugar industry, but also for the relevant others.

It is only then that the prime minister can state that subsidy reduction will enable market forces to allocate resources more efficiently with a clear conscience.

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 May 23 2011.

Categories
Economics

[2366] Does the rounding mechanism contribute to inflation?

Does the rounding mechanism in Malaysia contribute to inflation?

Malaysia implemented the rounding mechanism in 2008. All prices are now rounded to the nearest five sen. The mechanism makes the one sen coins redundant although the coins themselves are legal tenders still.[1]

To answer the question, I have an anecdote to tell.

Australia also employs the rounding mechanism. The only difference between the Australian and Malaysian systems is that the Down Under version applies to cash transactions only. In Malaysia, prices are rounded regardless of transaction types.

I am a stingy person. In the case with the Australian system, I was literally penny wise, pound foolish. Well, more penny wise and less pound foolish. Considerably less for the latter.

Really.

Anyway, whenever I went out shopping in Sydney, I would check up on the price and see if whether it would be rounded up or down. If rounded up, then I would use my card so that I would save a couple of pennies. If down, I would use cash to get penny discounts.

I did that because I thought these firms were getting too much of the good stuff. I also thought they might have purposely priced their items so that prices would always rounded up in their favor. Hey, if I were the shopkeepers, I would do that too. And some of these businesses are big. I am not anti-business or anything but I sure do think they can make do just fine by not squeezing another penny out of me. Not when I am still alive damnit!

So, I would do that. After awhile, I thought maybe, it did not matter in the end. The saving from this little exercise was really small that if the whole two years worth of saving were combined, I could probably get a candy. One candy. That would not have impressed the ex-girlfriend by much.

The point is that even if the rounding mechanism contributes to inflation, I doubt it is significant.

But that is an anecdote. Here is something more scientific.

Chande and Fisher in 2003 wrote about the effect of rounding mechanism in Canada. They concluded that the expected impact was small. In fact, the effect of rounding on inflation is expected to be zero. Why?

They assumed the last digit that matters in rounding is uniformly distributed from 0 to 9. Therefore, the probability of each digit occurring is 10%. Since four digits will be rounded up, four digits will be rounded down and another two do not need to be rounded, the expected extra cost or revenue incurred or earned from the mechanism is zero. In simpler terms, the mechanism’s expected contribution to inflation is zero. On average, the sellers and the purchasers do not enjoy or suffer extra revenue or cost due to the rounding mechanism.

The authors ran a simulation and concluded that for purchases more than two items, the last digit of the price did distribute uniformly across the natural number line.

For purchases of less than three items, the digits did not distribute evenly. This suggests that this kind of purchases does contribute to inflation but since it is one or two purchases, its impact is likely small as suspected by Chande and Fisher.

How about strategic pricing?

Let me quote the paper I mentioned:

Thus, in order to take advantage of rounding, a retailer would need to know how frequently different combinations of items are purchased. While retailers like Tim Horton’s would have access to such data, Table 2 suggests that even if prices were strategically adjusted by firms to squeeze extra revenue from their customers, the amount per transaction would be so trivially small as to have little impact on consumer behaviour or welfare. Moreover, we have focused on price-setting by a single firm and ignored the reaction of other firms selling in the same market. It is an open question whether an oligopolistic market would lead to equilibrium prices that exploited rounding to the detriment of consumers. Indeed, anecdotal evidence from New Zealand suggests that such fears maybe unwarranted. Correspondence with the Reserve Bank of New Zealand, which in 1990 removed its 1- and 2-cent coins from circulation, revealed that some supermarkets at the time advertised they would always round in favour of the customer. [Dinu Chande. Timothy C. G. Fisher. Have a Penny? Need a Penny? Eliminating the One-Cent Coin from Circulation. Canadian Public Policy. December 2003]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — The Rounding Mechanism is a method whereby the total bill amount (including goods and services subject to tax) is rounded upwards or downwards to the nearest multiple of 5 sen. In this regard, total bill amount that ends in 1, 2, 6 and 7 sen will be rounded down while 3, 4, 8 and 9 sen will be rounded up to the nearest multiple of 5 sen. [Frequently Asked Questions on Rounding Mechanism. Bank Negara Malaysia. Accessed May 19 2011]