Category: Economics

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Economics

[2278] Of capital control, expectations and policy irrelevance

There has been a low clamoring for capital control for a while now. The latest call was made by Member of Parliament Charles Santiago of DAP.[1] Regardless of the pros and cons of capital control, its imposition, if it is to be imposed, needs to be done relatively quickly without much warning. Slow imposition in form of heated debate among policymakers may reduce its effectiveness. Here is why.

Proponents of capital control fear hot money in a sense that when it is withdrawn, it would affect the local economy badly. While capital control is aimed typically at hot money, it also affects other flows that are more innocent in nature in the eyes of these proponents.

Liquidity is important. With the reduction of liquidity that what capital control causes, individuals, foreigners especially, will be less willing to bring in money into a country that imposes control. Those who already have money in a country where there is risk of capital control might want to take money out to preempt the control.

The greater the call for capital control, the greater the risk of actual implementation will be. Forward-looking owners of fund will do the necessary to reduce their risk of low liquidity. This means the impact of capital control can be as devastating as the impact of withdrawal of hot money under a system of no control. Money flows out either way. It is just a matter of when. That may make capital control as a tool as somewhat irrelevant.

Capital control can be relevant if the announcement and implementation are done in a sudden move. Sudden implementation preempts expectations build-up.

But there lies the catch-22. Talk about it and it becomes irrelevant. Not talk about it and there is no call for control, hence no control. For a secretive government that does not tolerate free speech however, this might not apply.

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

[1] — KUALA LUMPUR, Nov 23 — A DAP MP wants Putrajaya to impose capital controls like that which former prime minister Tun Dr Mahathir Mohamad enacted in 1997 to prevent what he called an impending surge of hot money into the local market would put Malaysia into a tailspin similar to the Asian Financial Crisis.

Klang MP Charles Santiago explained that this time the hot money would come from the US Federal Reserve’s move to spend a whopping US$600 million (RM1.8 trillion) to purchase US Treasuries over the next eight months under its quantitative easing programme. [DAP MP wants Malaysia to impose capital controls. Clara Chooi. The Malaysian Insider. November 23 2010]

Categories
Economics Education

[2272] Of PTPTN’s gapping fiscal hole

The Malaysian government-setup National Higher Education Fund Corporation (PTPTN) is apparently in trouble. It finds itself in a big fiscal hole. With a mandate to provide Malaysian students at local tertiary institutions with cheap source of education financing, PTPTN lends at 1% to students but borrows at much higher rates from financial institutions, according to The Malaysian Insider.[1] If things keep going on its current path, something disastrous ought to happen.

Not only is the rate differential outrageous, borrowers are not paying back their loans. Talk about double whammy. The same report paints a scary picture: since 1997, RM22 billion worth of loans have been made but only 9% of it has been paid back.

PTPTN’s way of doing it is not working. The financial loss if left unmitigated will leave PTPTN unable to fulfill its role in the future. But it is unlikely that the government will let PTPTN fail. So, the whole setup is a recipe for a large bailout in the future.

Before it hits us all in form of yet another government bailout, a solution has to be found.

One solution to this ugly situation is for PTPTN to increase its lending rate above its borrowing rate. No brainer, right? This might create a problem though: if it charges a rate higher than market rates, what would its raison d’être be? Potential borrowers might be better off borrowing directly from the very institutions that PTPTN obtains its loans. But maybe, due to PTPTN’s size and the implicit guarantee it enjoys from the government, it can borrow at a lower cost from the market, as compared to what individual borrower can. That may make a hike not to necessarily remove PTPTN’s purpose.

Even if a hike is only logical, politically, it is very hard for PTPTN to raise its lending rate. The current government will receive a backlash from the hike, especially since the Prime Minister has given signals that the national election might be held soon. Nevertheless, the government has proven that it is willing to increase fuel price. If the government is willing to face voters’ wrath with respect to fuel price, how much larger wrath, with respect to PTPTN, can rate hike be?

Another potential solution is for PTPTN to borrow directly from the government if it has not done so, rather than borrowing directly from the market while relying on explicit or implicit guarantee from the government. The government can typically borrow at a much lower rate than anyone else can in the market. Once the government obtains the funds, the high lords in the Treasury can probably lend a soft loan to PTPTN at a very generous rate. This might lower down the repayment burden of PTPTN by lowering its borrowing cost. This of course works better if PTPTN raises its lending cost as well, assuming collection is not a problem. Having the government involved in this way is really no different from the way it is currently done. If PTPTN fails, the cost will likely be borne by the government anyway. As a result, the level of government intervention is unlikely to change.

The first two solutions have one problem unaddressed however and that is recollection. I do not know why it is a problem. The financial institutions obviously face the same problem but they do not suffer it nearly as badly as PTPTN. Something about government bodies, I guess.

Third possible solution is for the government to provide free tertiary education for those the deserve it. The government will borne all the cost. The repayment comes in the form of higher tax revenue that may come from increased economic activities due to higher average education level of the public in the future. At the moment, given PTPTN’s weak recollection mechanism, PTPTN is effectively giving these former students free money anyway.

The fourth is for the government to cut its potential loss and close down PTPTN. Let that market do it instead. This is my preferred solution, for the obvious reason. Declare PTPTN bankrupt and have the lenders take over PTPTN’s assets and liabilities. They will collect what PTPTN cannot.

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

[1] — KUALA LUMPUR, Nov 12 — The National Higher Education Fund Corporation’s (PTPTN) practice of borrowing money from financial institutions at higher interest rates to lend to students at very low interest rates has led it to its current deficit crisis.

The Malaysian Insider understands that PTPTN admitted to taking out 10-year loans from financial institutions to bankroll students who then have up to 20 years to repay them when it briefed the Public Accounts Committee on Tuesday. [Interest rates mismatch ails federal students’ loan provider. Yow Hong Chieh. The Malaysian Insider. November 12 2010]

Categories
Economics Humor

[2271] Of Obama is not a Keynesian, he’s an American damnit

Hahaha via Greg Mankiw.

[youtube]_23Nt5XumaU[/youtube]

This takes the cake.

Agitated woman: Why, why do you have the sign?

Man: Arr… do you disagree with it?

Agitated woman: …that he’s Keynesian, that he’s like not American. Is that what you’re saying?

Man: Well, we’re… we’re asking a question.

Categories
Economics

[2270] Of long run growth versus business cycle

For some economists, such as Prescott (1996), the renewed interest in growth over the last 20 years stems from their belief that business cycle fluctuations ”˜are not costly to society’ and that it is more important for economists to worry about ”˜increasing the rate of increase in economy-wide productivity and not smoothing business fluctuations’. This position has been publicly expressed earlier by Lucas in May 1985 when delivering his Yrjo Jahnsson lectures. There he argued that post-1945 economic stability had been a relatively ”˜minor problem’ especially in comparison ”˜to the costs of modestly reduced rates of growth’ (Lucas, 1987). More recently, Lucas (2003) has repeated this message using US performance over the last 50 years as a benchmark. Lucas argued that ”˜the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management’. [Brian Snowdon. Howard R. Vane. Page 33. Modern Macroeconomics: Its Origin, Development and Current State. 2005]

Categories
Economics

[2265] Of does minimum wage discriminate poor entrepreneurs?

I am unsure how seriously I should entertain the current thought I am harboring. I am thinking of something that is absurd at the first pass but on second thought, it is not so. I meant to write this as a satire for The Malaysian Insider in a fashion that I have done earlier but given my tight schedule, I have refrained from doing so.

I fear I might forget this line of reasoning if I do not record it down anytime soon. And so, here it is.

Minimum wage can be redefined as a guarantee of certain level of wages to those who are employed at the minimum wage level at a firm covered by the minimum wage law. Consider an economy-wide minimum wage law that typically covers low-skilled employees.

In that case, the law discriminates between those who work as employees and those who work by themselves. This statement can be stated more convincingly as a comparison between, for example, a security guard (essentially a low-skilled employee) and a pisang goreng (Malaysian-style banana fritters) seller. Let these two individuals have the same expected income from their economic activity sans minimum wage for the employee.

Is there a reason why the security guard deserves minimum wage, but not the pisang goreng entrepreneur?

The discrimination is unfair and unjust.

This of course is not a call for minimum wage for entrepreneurs. That would be ridiculous. This is just to highlight some of the moral deprivations of the policy.