Category: Economics

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Economics Politics & government

[2322] Bus operators should go bust

Here is another case of private gains but socialized losses.

The Star reports that some bus operators wanted the government to bail them out. They reasoned that they would go bankrupt. Fares “that they collect can no longer cover costs.”[1]

That is nice, is it not?

When things go awry, get somebody to pay for you. When the going is good, keep the money for yourselves.

Without any doubt, I prefer bankruptcy to bail out. In fact, bankruptcy is likely to be good for these bus operators.

One, if they face competition along the routes that they serve, then some of them will be out of business, which then grants the surviving operators  monopoly power. The fares can be raised after that, subject to other constraints, like train services, cabs or private cars. The government of course should refrain from the temptation of regulating those fares. If they cannot compete with these other means of transportation, then clearly the market does not appreciate the bus service, and thus, no need for this type of bus service.

Two, these bus operators will stop losing money once they are bankrupt. That is the point of bankruptcy, anyway. Coupled with limited liability, bankruptcy can do wonders. Of course, some banks in Malaysia demand individual guarantee, which makes limited liability irrelevant. Still, that is a different issue that requires solution that I cannot think of right now.

Apart from that, the Pan Malaysia Bus Operators Association president Ashfar Ali reasoned that the “government is no longer our proponent, but our competitor.”

This is the only hard point to counter.

I however prefer the government to privatize some of the services instead, like that belonging to Mara, i.e. Transnasional. For others like RapidKL and RapidPenang, I wonder how many of these private bus operators actually compete with RapidKL and RapidPenang?

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[1] — PETALING JAYA: Hit by escalating cost of operations, stage bus operators nationwide have asked the Government to take over their businesses and liabilities.

Pan Malaysia Bus Operators Association president Datuk Ashfar Ali has sent a memorandum to Land Public Transport Commission (LPTC) chairman Tan Sri Syed Hamid Syed Albar proposing that the Government buy over their assets. [It’s bailout or bust, bus firms tell Govt. Teh Eng Hock. The Star. February 21 2011]

Categories
Economics

[2316] Of would goldbugs support a large diverse monetary union?

I took a long hard look at a one-euro coin in my hand while I was on a train to Versailles from Paris. For a huge monetary policy controversy across the Eurozone, the coin does not look so special. It is a small unassuming bimetal. Not too many would take a second look at it. Everybody here in France uses it for mundane purposes. Yet, its link to Eurozone’s policy is there and is no small matter.

I was focusing on the coin to avoid thinking of somebody that I care a lot about. After awhile, I began to retrace the cause of the controversy with Eurozone and the weaknesses of monetary union in general. A question soon popped in my mind. Would some hard currency advocates — goldbugs and others — support a large monetary union?

A typical weakness of a large monetary union is its inflexible interest rate as set by its central bank.

A large area with diverse parts that economically grow or shrink differently. That demands different monetary policies and specifically, different interest rates to be pursued by different parts of the union. A monetary union prevents these different parts from pursuing individual rate however. There is only one rate by definition.

The politics between members of the union will inevitably decide the union’s single rate. Each representative at the table will promote the interest of the member who they represent.

The more diverse the members of the union, the harder it will be to achieve a consensus. It is hard because the rate cannot accommodate everybody easily, if ever.

The debilitating politics of a diverse monetary union discourages the rate from becoming flexible. It would be hard to change the interest rate at any one time, unless there is to be some kind of systemic shock that would make everybody to agree to some magnitude of rate change on top of individual needs, and unless the composition of the decision-making body is skewed to side that makes the body unrepresentative.

Through this, the central bank effectively loses control of the rate. This, I think, is a close equivalent of having a hard currency because the central bank loses its power to print money arbitrarily.

Given this, I think many advocates of hard currency will likely like the creation of a large and diverse monetary union. Or at least, they would prefer this to a normal fiat currency regime.

Categories
Economics

[2294] Of favoring the fat over the fit

The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

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First published in The Malaysian Insider on December 28 2010.

Categories
Economics

[2287] Of a not so surprising consumer spending trend

There is an article in the New Straits Times about consumer spending in Malaysia. It reports that spending of the so-called affluent individuals was not affected by the recession in 2009. The managing director of Synovate, the firm responsible for the survey, was surprised.[1] Is the trend a surprise?

It would be a surprise if the affluent workers were affected by the recession but I do not think they were, or at least were not badly affected.

The recession that hit Malaysia in 2009 came through the trade channel and in the trade channel, the manufacturing industry dominated it. A majority that worked in industry are blue-collar workers, who did not earn high salary. The high-salary individuals were likely those with college degree and they were up in the chain of command or in the service industry. At the height of the recession, news of blue-collar workers suffering retrenchment were aplenty; Freescale, Western Digital, Seagate, etc. The same was not true for the white-collar workers; we did not hear too much of CIMB, Citibank, Ernst & Young, (or, McKinsey and gang. If any, they probably increased their intake given the kind of dealings they have with the bloated Malaysian government! Okay, okay. Unfair jibe), etc, in the news in the same context as the blue-collar workers.

So, are you surprised that those with salary of over RM5,000 per month did not cut their spending in 2009?

I do not understand why anybody should be surprised in hindsight. In fact, if a person believes in Friedman’s permanent income hypothesis, there is no room for surprise.

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[1] — Affluent Malaysians show no sign of cutting purchases in good times and bad.

MALAYSIANS are big spenders, splurging on high-end technology items like flat
screen, plasma or LCD televisions, and smartphones, last year, ”defying expectations”, a survey has revealed.

Nearly half of consumers who earn more than RM5,000 a month own a flat screen,
plasma or LCD television, and over the last year, smartphone ownership among them rose by about a third.

A recent Synovate survey, comprising 1,708 respondents in Kuala Lumpur, revealed that “affluent” residents — those who earn more than RM5,000 a month or have a combined household income of more than RM6,500 — are splurging on these gadgets and gizmos, and the trend is set to continue.

The survey was also conducted in 10 other countries, including Hong Kong, Singapore, South Korea, Taiwan, Thailand, India, Indonesia, the Philippines, Japan and Australia.

Synovate Malaysia managing director Ben Llewellyn believes that this defied expectations given the fact that the greater Malaysian economy was impacted by the global financial crisis during the period surveyed. [Our elite flaunt success with big spending. Audrey Vijaindren. New Straits Times. December 12 2010]

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p/s – hat-tip to @ctchoo, who is also the owner of de minimis. I first spotted the New Straits Times report at his/her Twitter account. Yes, I spend an insanely large amount of time on Twitter.

Categories
Economics Politics & government Society

[2286] Of underestimation in Transparency International’s report

While I am at the issue of bribery, I would like to touch on the recently released Transparency International’s Global Corruption Barometer 2010 report that the chart from the Daily Chart blog is based on.

After reading it, or rather, skimming through it, I suspect some of the results underestimate what are actually happening on the ground. Of a particular interest in one question where it asks whether the questionnaire participant has bribed a public official within the past 12 months. According to the report, in Malaysia the survey was done through face to face method.[1]

Now ask this question. If some stranger asked, ”Have you bribed a public official before?”, what would be your answer?

Given that you do not know who the stranger is, and if you have bribed a public official before, would you actually say yes?

What if the stranger is a police officer and he or she is trying to trap you? What if the stranger recognizes you and reports you to the police after the interview? What if the stranger shares the information with the public, thus ruining your reputation?

Would it not be safer to say no?

I would think there is an incentive to be dishonest and say no. It is the most rational action to take given the uncertainty caused by the face to face method.

Thus, the aggregate answer to the question is likely to underestimate the true occurrence of this specific kind of bribery.

The further implication arising from this problem is this: the report indicates that 9% of members of the Malaysian sample have bribed a public official before in the last 12 months. Assuming good faith that the survey is representative, one could generalize that 9% of Malaysians have bribed a public official before. Due to the concern of underestimation however, the best one could say about the result is that at least 9% of Malaysians have bribed public official before in the same period.

If one wants to take the implication to the extreme, notice that there is no qualification about the maximum limit. Scary, is it not?

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[1] — Global Corruption Barometer 2010. Page 35 and 39. Transparency International. December 2010