Category: Economics

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Conflict & disaster Economics Liberty

[2402] The cost to the Beijing development model

The rapid and successful economic development of China so far has been presented as the superiority of central planning over the approach taken, for example, by India. It is the Beijing development model as some would say. Authoritarian top-down approach gets things done, unlike the messy democratic means from the bottom up. All those criticisms weigh things down needlessly.

The recent high-speed train disaster that killed nearly 40 persons[1] should give advocates of the authoritarian approach a considerable pause the next time they try to sell the Beijing model over democratic ones. Reports are coming out that these infrastructure projects were rushed for the 90th anniversary of the Communist Party.[2] Results do not look good for the Chinese government.

The Beijing way of doing things has become controversial, especially after the accident.

How much of infrastructure projects all around China suffer from abuse of power or corruption in general? Was the accident a symptom of a rotten system?

Between authoritarian and democratic states, the former lacks real mechanism to make the state accountable. It will be hard to answer the questions even in democratic states, much less in ones like China’s.

Typical of authoritarian governments, the Chinese government is trying to muzzle investigations into the incident.[3] This is amid angry allegations of corruption with respect to these projects and specifically, the high-speed train system. That is an example how there is little accountability in China. Any reprimand is for public show only. Such reprimands have proven to be inconsequential. In Malaysian parlance, small fish.

Even before the train disaster, the system was already suffering from service interruptions, barely weeks after its official opening. Something must be wrong when so many glitches happened so frequently so soon.

Something is rotten in the state of China. That rottenness is the cost of the authoritarian model. There is a cost to absence of check and balance, of accountability, of freedom. It is a shame somebody has to die to learn that.

While India suffered from embarrassing criticisms before and during the last Commonwealth Games due to perhaps their incompetence in meeting deadlines, at least we knew the problems before it was too late. Remedies were taken. For China, there is a guessing game: which one is the facade and which one is real. As the train disaster showed, we found out about the rotten apples way too late.

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

[1] — BEIJING—The first high-speed train passed through the tracks where a deadly train collision occurred in eastern China, as authorities sought to soothe public concern over safety and the handling of the accident as well as jitters about the future of its prized high-speed rail system. [Norihiko Shirouzu. Beijing Seeks to Soothe Train Jitters. Wall Street Journal. July 26 2011]

[2] — China’s high-speed rail line between Beijing and Shanghai has been beset by glitches in the two weeks since it opened to great fanfare on the eve of the Chinese Communist Party’s 90th anniversary celebration. [David Pierson. China’s high-speed rail glitches: Racing to make errors?. Los Angeles Times. July 16 2011]

[3] — BEIJING — China has banned local journalists from investigating the cause of a deadly high-speed train crash that has triggered public outrage and raised questions over safety, reports said Tuesday. [Allison Jackson. China seeks to muzzle reporting on train crash. AFP. July 26 2011]

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Economics

[2400] Good news for the hawks

An argument goes that rate hike will not address inflationary pressure in Malaysia.

It is not as effective against cost-push inflation as it is against demand-pull inflation. And right now, the economy is experiencing cost-push inflation. More importantly, the push is coming from abroad. It is practically exogenous, discounting the liberalization exercise (which itself originates from exogenous pressure applied on government finance).

Hike the rate and price increase will not slow down by much. Local demand is not big enough to slow down the advance of the prices powered mostly by the larger foreign demand.

So, there is little need to increase the rate.

If the mysterious author at Economics Malaysia is correct, then rate hike might be more effective than proponents of the cost-push narrative are willing to accept. The author believes that the economy is already running at its full capacity. He believes the unemployment rate basically is bottoming out and is unlikely to go down any further in a significant manner.[1]

I am will not go into the numbers but the logic is sound.

Because it is sounds, it suggests that demand-push inflation making its round, thus making the exogenous cost-push story line less weight in the determination of monetary policy.

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

[1] — I’d still take this as a signal that the economy is at full capacity, as we’re looking at near historical lows in the unemployment rate. While GDP growth likely softened in 2Q 2011, there’s been little impact on jobs so far — June’s numbers however may show a different story. [Hishamh. May 2011 Employment Report: Softly, Softly. Economics Malaysia. July 25 2011]

Categories
Economics History & heritage Politics & government

[2391] Tunku Abdul Rahman on the development of East Malaysia

As the Malaysian Parliament planned to vote out Singapore from the Malaysian federation, Tunku Abdul Rahman said this in the Dewan Rakyat:

…On the other hand, our relationship with Sabah and Sarawak has been excellent. We are desirous of carrying out extensive development programme in these two States, because we realise that under the colonial rule the development in the two States had been neglected. We know that they had joined us on their own accord and of their own free will, in hope that they would enjoy not only the independence, the prestige, which freedom brings with it but also to enjoy other fruits of freedom. They fit into the pattern of administration with the rest of the States of Malaysia so admirably well; and unless we can carry out some development however small it may be their hope and trust in us will, I am afraid, inevitably lessen… [Hansard. Parliament of Malaysia. August 9 1965]

Categories
Economics

[2388] Nudge, nudge, wink, wink

It is the practice of some labor unions to produce one or several publications annually to inform their members of various activities and developments related to the unions.

As with many things in this world, it costs money to produce these publications. These unions finance the publications through a number of ways. Membership fee is one example. Another is selling advertising space to non-members, especially to the business community. This, however, can be an ethically grey area.

This kind of funding can be ethically iffy if the union members comprise employees of public regulators or law enforcement agencies, like the police, the Fire Department or Customs. This particular interaction between the unionized employees and the business community through the sale of advertising space creates perverse incentive.

It is a potential channel for corruption. It has the ability to affect adversely the traditional relationship between the public and the government.

Everybody deals with some of these regulators and enforcers in one way or another. The police maintain public order. The Fire Department apart from firefighting ensures public adherence to certain codes. City Hall and other local councils enforce even more codes. Many other regulators and enforcers exist out there to match the hundreds or thousands of laws that govern too many things.

Services provided by the enforcers and the regulators are funded by public money. To put it simply, the public pays for the services and these government arms render the services to the public. This is the traditional relationship. It is simple and clean.

This traditional relationship between the two must not be influenced by any other factor, lest the regulators and the enforcers filter their customers for their own benefit.

The sale of advertising space by unions especially to business establishments twists the traditional relationship by creating another channel for the public to interact with the regulators and the enforcers. That new channel runs through the unions to form a special relationship between the space purchasers and sellers, who are part of the government or its agencies.

There are at least three ways this is detrimental to the traditional relationship.

One, the sale and purchase of advertising space can be done by the business community to return a favor previously done or will be done by certain unionized employees. This is downright corruption.

Two, the sellers, who are employees of the government bodies and agencies, will feel indebted to the purchasers. It is a profitable relationship and one always keeps profitable relationship intact.

By doing so, the purchasers will have special relationship with the seller and, implicitly, to the regulators and enforcers. Those particular employees or any member of the union may systematically handle future requests or transgressions by the sellers leniently. This runs contrary to the ideal that prescribes everybody as equal before the law.

Three, even without such favors or the feeling of indebtedness, a mere request by the unions may create consternation among the solicited. A forward-looking person, and especially businesses, upon receiving the advertising request would ask, how would this affect us? For those who conclude that a negative reply would affect the likelihood of approval to future transactions, they might feel compelled to purchase the space from the unions. This can happen even if there is no intention by the union to abuse its influence. In other words, it creates a perception of corruption even though there is no actual corruption.

The way the incentives have been perversely structured inadvertently or otherwise may make it necessary for the relevant authority to look into this particular activity of these particular unions.

Despite all that, this is not to say that there is actual corruption in the system. This may sound like a cop-out but the whole structure is an opportunity for corruption nevertheless.

Individuals are not inherently good or bad, clean or corrupt. Many times, it is the institutions that provide the incentives for corrupt practice to flourish.

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 27 2011.

 

Categories
Economics

[2385] A case of MPs subverting the independence of the Bank Negara?

The importance of central bank independence has a lot to do with inflationary concerns. By independence, it typically means independence from political pressure. That entails strict separation between the central bank and the government. The central bank is not answerable to the government in general and the government does not represent the central bank. These two different entities are of two different minds. If they ever agree with each other, then it is necessarily a coincidence, or a conclusion achieved independently of each other. In its strong form, it is not achieved through any kind of discussion between the two parties.

It is feared that without independence and with exposure to political pressure, the central bank would embark on a populist policy, just as a democratic government that is susceptible to popular sentiment would. In times of crisis and without independence, the bank could run a loose monetary policy to appease the masses, eventually causing unacceptably high inflation simply by the operation of expectations.

The relationship between inflation and the independence of the central bank is widely known and is largely accepted within the field of economics: independence is correlated is an environment of low inflation. There are ample evidence for this.[1]

This is probably not subscribed by some Members of Parliament in Malaysia. Or they are unaware of it. Or that they define it very differently from what it is unusually understood. Whatever it is, three MPs are heading in the direction of subverting the idea.

According to The Malaysian Insider, MP for Kuala Selangor, Dzulkefly Ahmad of PAS wanted the Prime Minister to justify the recent rate hike by the Bank Negara. MP for Lembah Pantai Nurul Izzah said in the same report, despite stating she “was not asking the government to intervene”, she effectively blamed the government for the rate hike.[2] In the Parliament today, MP for Rembau Khairy Jamaluddin asked the Finance Minister to explain whether the Bank Negara would change the base interest rate and the reserve requirement between now till the end of the year.[3]

Truly, the concern for the rate especially is not for the Prime Minister, the Finance Minister or any person of their choosing to explain. These questions should be directed to the Bank Negara itself.

If these elected officials do try to explain it, then it will create a perception that the government and the Bank Negara are in cahoot in managing monetary policy. A mere hint of relationship as far as monetary policy is concerned is damaging to the idea of independence. The relationship suggests that the central bank in some ways is responsive to popular demand; popular demand is a code word for loose monetary policy.

What will make it worse is the possibility of the government flip-flopping, which is not rare at all in Malaysia. For a central bank that is not independent, any u-turn is especially damaging to the the credibility of the bank. Without credibility, the bank can say goodbye to its ability to manage inflation expectations.

Because of the possible implications, the Prime Minister and his Cabinet members should be careful in answering any of such questions.

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

[1] — The degree of central bank independence varies considerably across countries. Several authors including Bade and Parkin (1982), Alesina (1988, 1989), and Grilli, Masciandaro, and Tabellini (1991) found that more independent central banks are associated with lower levels of inflation. This note investigates whether one can find a correlation between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. Our conclusion is that while central bank independence promotes price stability, it has no measureable impact on real economic performance. [Alberto Alesina. Lawrence H. Summers. Central Bank Independence and Macroeconomics Performance: Some Comparative Evidence. Journal of Money, Credit, and Banking. May 1993]

[2] — PAS MP for Kuala Selangor Dr Dzulkefly Ahmad said that the prime minister, who also holds the finance portfolio in cabinet, should explain the move, which surprised economists who were expecting Bank Negara to maintain the benchmark lending rate to preserve the country’s growth momentum in the face of dimming global economic prospects.

…

PKR MP Nurul Izzah Anwar also stressed that they are not asking the government to intervene in Bank Negara’s policies but said that it was important for the finance minister to clarify what she claimed were ”very inconsistent justifications.”

Nurul said that while the government could be trying to cool down the investment climate with an eye on keeping a lid on inflation, she was unconvinced that an interest rate hike could also drive the growth of the local domestic economy at the same time. [Melissa Chi. Justify May interest rate hike, PR MPs tell Najib. Journal of Money, Credit, and Banking. June 21 2001]

[3] — Tuan Khairy Jamaluddin [ Rembau ] minta MENTERI KEWANGAN menyatakan apakah Bank Negara Malaysia berhasrat untuk menyemak atau meminda Kadar Dasar Semalaman (Overnight Policy Rate) dan Keperluan Rizab Berkanun (Statutory Reserve Requirement) bagi bank-bank tempatan sehingga akhir tahun ini. Sila jelaskan sebab-sebabnya sekiranya ya mahupun tidak. [Order Paper. Dewan Rakyat. June 21 2001]