Categories
Economics Politics & government

[2280] Of centrists lose with a viable “third force”

There is talk of a third force in Malaysia. Lawyer and activist Haris Ibrahim has stated that the third force is a bunch of independents ready to co-operate with Pakatan Rakyat. Zaid Ibrahim wants to form a third political party. If in the end, it comes to a third competitive and national political grouping capable of affecting national elections, then I do not think it is the wisest of all moves.

A third party will adversely affect Pakatan Rakyat more than Barisan Nasional, given that members of the so-called third force seem to be those disillusioned liberals. They sided with Pakatan Rakyat in the last general election but that alliance is unraveling. They are disappointed with Pakatan Rakyat due to various reasons.

While liberals, they are liberal in superlative terms instead of being proper liberals who adopt a comprehensive liberal worldview like the classical liberals. Some may even be social liberals, however, noting how Kua Kia Soong has written that the third force has to stand on the left of Pakatan Rakyat, assuming he is part of the so-called third force. But never mind whether they are proper liberals or not. What matters is that these groups disagree with the status quo in the country.

Furthermore, Barisan Nasional, the beneficiary of the status quo, does not have too many liberals within its ranks. The liberals are closer to Pakatan Rakyat than Barisan Nasional, hence any competitive third grouping will compete more against the former rather than the latter. I would be in agreement with Nik Nazmi Nik Ahmad about the effect of a third force as defined earlier in encouraging the status quo, i.e. having Barisan Nasional continue to be in power, for better or for worse.

Pakatan Rakyat, however, will not be the only side to lose because of a third force. A system of one-party dominance is bad for centrists because it provides only one choice to centrists. Instead of Sophie’s choice, one faces Hobson’s. In fact, it is worse than that. Regardless of choices, there is only one outcome: more of the same.

Another point on the adverse effect of a third force can be demonstrated through the famed Hotelling-Downs model.

The model is a location game. In a two-party (or two coalition like in Malaysia; it does not matter as long as the parties within the respective group collude) democratic system, both political parties gravitate to the center. This happens because political parties want to win elections and they win it by garnering the most votes. Meanwhile, voters will vote for the party that is closest to them. As a result, a party that sits farther from the center with respect to the other party will get fewer votes than its rival. Both sides know this, sooner or later. Eventually, there is only one solution: sitting at the center is the best winning strategy.

Now, I do not think highly of centrists. More often than not, their positions are inconsistent. It is forged out of convenience rather than conviction. Their positions are a hodgepodge of points assimilated from everywhere, regardless of contradictions. Some centrists are centrists simply because they are apathetic.

Nonetheless, centrists do provide the stability required in a political system. They are the anchor in society. Given that many views are diametrical, centrists would process these views and hold compromised ones instead, if they care at all. Since the Hotelling-Downs model suggests centrist voters — more accurately the median voters — will win, the other side of the coin suggests that a competitive two-party system has the capability of preventing extremists from assuming power.

Unfortunately, this central tendency within the model is weak. The moment the system accommodates a third competitive third party or more, the central tendency weakens, or even disappears. It has been proven under the Hotelling-Downs assumption that there is no equilibrium with three competitive parties or more.

It will always be optimal for parties to change their positions, be it at the center or somewhere else. A party can always do better than the others can until the other parties respond by changing their positions. That in turn encourages the original party in question to change its position to outdo the others. The process will continue on forever.

There is no guarantee that the center position will be taken. There is really no reason why the center position is special anymore. The political centrists cease to be the anchor. Their influence on national politics decreases with respect to extremists. Thus, it is quite possible for extremists to hold power in the end, even if for a short while.

The lack of equilibrium is not necessarily bad, of course. It is an opportunity for diverse political views to prevail. There are many other benefits to having a third competitive party, but breaking the one-party dominant system is not it.

Even so, it is hard to see these liberals switching their positions too much in order to win elections. Their views are ones based on conviction and not convenience. The same cannot be said about Barisan Nasional and Pakatan Rakyat. If the Hotelling-Downs model can be used and if the competitive third party is strong enough to affect the election outcome, then this suggests that it will be optimal for Barisan Nasional and Pakatan Rakyat to move away from the third party and away from the center.

Again, centrists will lose out.

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 November 24 2010.

Categories
Economics Education

[2279] Of PTPTN exacerbates its problem

Not all borrowers are the same. Some are goods borrowers who repay their loans mostly on time. Others do not.

Under typical market operations, the good borrowers get to pay lower rates as compared to the bad ones. This mitigate the risk of default and it discourages too many bad borrowers from borrowing. If everybody pays the same rate, then too many borrowers will likely default. That is happening to the National Higher Education Fund Corporation (PTPTN) in Malaysia, essentially.

PTPTN is having a serious loan recollection problem. As stated earlier, RM22 billion worth of loans have been lent out since 1997 but only 9% of its have been paid back.

Now, here comes something outrageous. PTPTN is waiving loans given to top performing students.[1] The intention is noble and it does provide students with an incentive to perform, provided that they know a waiver is possible.

Unfortunately for PTPTN, good students are likely to be the ones who are good at repaying their loans. I do not have the data to back this up but it is a reasonable assumption to make. Good students excel partly because they have good ethics. They are disciplined given all else the same. Paying back one’s loan is always good ethics. On time repayment requires discipline. Bad students have less discipline and maybe, less ethics as well.

At the same time, good results will likely allow good students to land some good jobs with good wages, which makes them all the more capable of paying back their loans. The same might not be true for the bad ones.

So, if the good students are left off the hook to leave PTPTN with bad borrowers only, then PTPTN will exacerbate its situation.

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

[1] — TEMERLOH: The National Higher Education Fund Corporation (PTPTN) has written off RM59mil in loans to 2,162 students who obtained Class One Honours from January to July. [PTPTN writes off RM59m loans to top students. The Star. November 24 2010]

Categories
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.