Category: Economics

Categories
Economics Liberty Politics & government

[2235] Of hitting the brakes of subsidy liberalization

I am generally in favor of subsidy cuts in Malaysia. Yet, I hesitate to support the recent liberalization.

The economic rationale for liberalization is clear. Public discourse on this front has seen enough progress that liberalization is a popular position to take in Malaysia.

Let us recap the most commonly cited arguments.

Firstly, the subsidy program has an opportunity cost, as with all policies. If a government spends on one particular program, it necessarily means not spending money on others. Moreover, blanket consumption subsidy is probably the worst of all policies in terms of opportunity cost.

Secondly, there are better policies — cash transfer or tradable quotas for the needy are two examples — compared to outright subsidy. These alternative policies can address welfare concerns more efficiently.

Thirdly, the subsidy program has to be financed. That means taxation. While taxation is required to maintain a government, the level of taxation can be controlled to accommodate other concerns. There are various reasons why a low-tax environment is favorable. A bloated subsidy program does not help in this aspect.

Finally, together with a subsidy program, multiple suffocating supply and demand control regimes typically exist to support the program. As a result, the market becomes inflexible as more and more controls are set in place. The inflexibility causes hardship to more individuals than necessary.

The subsidy cut appeals to these arguments. If these were the only concerns, I would wholly support the liberalization exercise.

But it is not.

Two pillars form the basis for my support for liberalization. One is economic concerns. The other involves concern for freedom. Specifically, it is the idea of small government.

The weight I put on these two factors changes from time to time according to situation and the situation has changed since the last time subsidy liberalization took place. The size of subsidies and the drag these place on government finance are less of an issue today compared to a year or two ago. That convinces me to place more weight for freedom vis-à-vis economic concern, although the two concerns are not mutually exclusive most of the time.

While liberalization satisfies the economic side of the balance, the desire to see a reduction in government size is unmet.

Take the Prime Minister’s Department, for instance. Member of Parliament for Bukit Bendera Liew Chin Tong shared recently that the size of the department has more than doubled in less than a decade. The statistics regarding the size of the civil service and the government as a whole are more harrowing. All this contributes to the structural fiscal deficit that Malaysia suffers from.

The deficit caused by rocketing expenditure is an indictment of a fat old man called the government. The current government has announced its intention to reduce it, presumably by reducing government expenditure. Whether the plan will be successful is another matter altogether.

Amid the liberalization and other government initiatives that include the formation of new government-linked companies, I have a disturbing narrative at the back of my mind: Effort to free up resources is aimed at merely funding government expansion in other areas.

It is hard to predict the net effect but experience does not encourage much hope. One possible outcome is a scenario where the areas of expansion require a more active government hand compared to the one where the government retreats.

Already, government supporters are using the opportunity cost argument eagerly to justify the recent cuts. They say the government will put the money in good use. Good use or not, they are setting the ground to use the retreat as a justification to expand the other sides of government.

The opportunity cost argument is not exclusively used by government supporters. Opposition sympathizers and others do have ideas on how to spend the money. Politics may create a trade-off between economic concern and freedom in the end.

I fear that, and that fear is holding me back from supporting the recent liberalization.

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 August 4 2010.

Categories
Economics

[2232] Of fiscal stimulus, timeliness and transparency

Although the debate on fiscal stimulus has died down in Malaysia, I am still very much amused, if not outright dismissive, of a number of arguments made by advocates of stimulus. One argument is related to transparency: stimulus has to be transparent. Although the argument for transparency is a generic one and many have voiced it, it was reiterated by somebody well-known in Malaysia recently. I am thinking of Nazir Razak of CIMB but at 3 o’clock in the cold Sydney, I have lost all desires to look for the article.

My criticism of having a timely stimulus and transparency is summarized in one word: naive.

Fiscal stimulus has to be timely, especially when there is no automatic stabilizers with arbitrary stimulus. If it takes too long to implement, or in other words, it takes the government too long to spend the money, there is a good chance that the stimulus will be obsolete by then. By the time the money is spent, the market situation has already improved that the stimulus is not required any more.

In fact, untimely implementation might disrupt recovery through, for instance, crowding out process by the government.

Unfortunately, transparency does not run parallel with the concern of timeliness.

Why transparency is inconsistent with timeliness?

Simple.

Transparency requires processes. Reporting is paramount. In other words, bureaucracy.

Red tapes have been derided as suffocating but it does play a huge role in rule of law. It is only through bureaucracy can controls be exerted on spending. Through those controls based on known clear rules and not through arbitrary acts which are susceptible to  abuse compared to rule-based system, transparency is achievable.

That rule-based system aimed at transparency is more convoluted than the paragraphs I have just written before this one. It take time to go through the bureaucracy. Hence, the issue of timeliness.

So, how useful is a stimulus if it is untimely done?

You know my answer.

I am for transparency but I am also a realist here. I understand that if one is concerned with transparency, it is hard to support a timely stimulus.

If you want a timely stimulus, something has to give. It is a dilemma.

Before I am accused of supporting corruption, leakage or anything of such, do note that I do consider those things negatively. Remember, I am arguing against fiscal stimulus, not transparency.

I do not have that dilemma. I am typically anti-stimulus; I cut through it.

Stimulus advocates cannot accuse me of giving nontransparent practices a blind eye. For those who like to moralize about transparency however, you my dear have a moral problem.

Categories
Economics

[2229] Of a huge decrease in labor participation rate

I just ran through the recently released Malaysian labor force participation rate for May 2010 and I find it odd to see a huge drop in the rate. I wonder what explains the drop. Why suddenly a lot of individuals decided not to look for jobs anymore in May?

Categories
Economics Fiction

[2226] Of the road to hell…

It begins with a good intention. Everybody deserves to consume fantastical juice. After all, everything is made out of it. It would be a grave injustice to limit its consumption only to those who can afford it.

Invested with executive power, a group of individuals with only the interest of the public at heart intends to make the fantastical juice available to everyone. They — the do-gooders —decide to introduce a policy to subsidize the production of the fantastical juice.

What follows is a production boom that lowers the prices of the fantastical juice to affordable levels. In fact, the fantastical juice sold here is the cheapest in the region.

On the breakfast, lunch, brunch, tea, dinner and supper menus, the fantastical juice is a star. Consumers are happy. The policy becomes popular. The do-gooders are popular.

All is fine and dandy until one little problem pops up: scarcity. They realize the subsidy policy demands a whole lot of resources. The policy is depriving resources from other programs. They begin to realize that good intention is expensive.

It is all the more expensive when the producers are guaranteed payment through the subsidy scheme. Producers of the fantastical juice just keep on producing even when there is no need for more fantastical juice. After all, who does not want free money?

The do-gooders complain, ”Oh those pesky producers. How dare they take advantage of this noble effort to make the fantastical juice available everywhere to everybody at affordable prices? Never trust them. They are only in it for themselves. They leave us no option. We must regulate them.”

And so, the do-gooders decide to have producers of the fantastical juice licensed. Quota is imposed on production.

The producers protest but not too hard. After all, the policymakers still pay them money. ”At least, we are still making profits.” Without the government and the subsidy program, they would have been left at the mercy of the market. ”We might make a loss if there was no subsidy!” They figure, better work with the government than be at the mercy of the greedy consumers.

That stops the cost of the policy from ballooning further. It solves one problem but it creates another: the fantastical juice mysteriously begins to disappear from shelves of grocery stores.

Consumers are infuriated. Consumers demand action.

The do-gooders panic. They need a scapegoat fast. No, they do not need a scapegoat. One cannot make scapegoats out of smugglers. It must be those greedy smugglers abusing a system designed to benefit all. ”We will double officers at the borders and we will triple the penalty.”

They catch those smugglers but fantastical juice still disappears into thin air. At some point, they realize that they cannot continue to blame the smugglers. If they still do so even after greater enforcement, they would send out a message of failure that there is something wrong with the good policy, and that it is not the smugglers after all. That would undo all good work they have done. Support for their policy would plummet with the slightest hint of admittance of failure.

”We need to identify the problem,” demand the do-gooders.

They conduct a thorough study of the supply chain of the fantastical juice and they find it. It is the retailers. ”These retailers are hoarding the fantastical juice and profiteering from our noble effort. They leave us with no choice. We must regulate them.”

And so, the do-gooders decide that only retailers with the special license can sell the fantastical juice. The do-gooders also introduce price control and ensure that there is a fat margin for retailers. This will encourage the retailers to be more honest because if they are caught, they will lose their license and, because of high demand for the fantastical juice, they will lose a guaranteed profit. The elimination of price variation eliminates the opportunity for retailers to indulge in profiteering as well.

The retailers register a protest, claiming that it is not their fault. ”Supply, being inflexible, is unable to match demand. We do not hoard it. We cannot sell what does not exist.”

”Oh, if that is the case, then you are not managing your inventory efficiently enough for the good of the people. There is enough production for the whole country. We will manage the supply for you.”

Just to keep it airtight, only government-owned transporters are allowed to deliver the fantastical juice in the country.

The do-gooders marvel at their new master plan for the fantastical juice. Their proudest achievement is this: the cheapest fantastical juice in the region is still here.

Alas, shortage persists. ”Someone must still be profiteering from this noble effort,” cry the do-gooders.

Being at their wit’s ends, the do-gooders approach several consultants. These consultants point out that the consumers are consuming too much of fantastical juice. ”That is why there is shortage. They are over demanding it.”

The do-gooders are angry. ”Those no good consumers! They are abusing the system! We want to help everybody, but everybody is abusing our trust! We must regulate them!”

And so, consumption quota is imposed on every consumer. With control at every point, the do-gooders match demand and supply to solve the problem of shortage.

At least, theoretically because those with low demand get too much quota and those with high demand get too little quota. To solve the problem, consumers participate in the black market. Consequently, crime associated with the black market flourishes as cartels are formed to profit from the unlicensed and hence, illegal trade.

”Criminals! All of them are criminals!” shout the do-gooders, ”Send in the police.”

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 July 18 2010.

Categories
Economics

[2224] Of merger or not, get the government out first

Malaysian national carmaker Proton celebrated its 25th anniversary yesterday. In conjunction of the celebration, Prime Minister Najib Razak said, as reported by The Star, “[i]f overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?“[1]

This has been interpreted by the media as a call for merger instead of a hypothetical question. The managing director of Proton echoes the call for merger.[2]

With the government having business interest in Proton — the government is likely to have the same interest in that merged entity — it inevitably raises the question of protectionism. It becomes the government’s interest to protect that giant local car maker.

The government of course does have interest in Proton but the larger the carmaker becomes, the harder it is for the government to resist the tide of protectionism.

There was a time when Proton was the monopoly in Malaysia, and backed by the government wholeheartedly in form of tariff on imported cars. The tariff was obviously introduced to protect Proton. Or in the words of protectionists and nationalists, to encourage the local automotive industry. Unfortunately for protectionists nationwide, the policy stunted the growth of local automotive industry and helped Thailand emerged as the ‘Detroit of Asia’.

Not that Detroit is the hallmark of the automotive industry…

The policy limited  options for a majority of local consumers. What made it worse was that only not-so-high quality cars were available to a whole lot of us.

That is less of a case now due to ASEAN Free Trade Area Agreement that demands the abolishment of tariff between ASEAN countries.[3] Still, import duty on vehicles originating from outside of ASEAN is as high as 30%, signaling protectionism. The involvement of the government in the automotive business heightens the concern. There is no guarantee protectionism of the past will not repeat itself.

It may make business sense for local car manufacturers to merge but I am in the opinion that such call for merger should come from the industry, and not from the government. That means the government has to exit the industry first. Let the carmakers fight their own fights without dragging the taxpayers into it.

Once the government is no longer wedded to the carmakers, there would be less room and possibility for the government to protect the car industry. The consumers meanwhile would have the opportunity to make choices unadulterated by protectionism.

Whether there should be a merger or not later on, that is less of my business or that of the government. That would be entirely up to local car manufacturers, and probably the regulators if the anti-competitive bill is passed.

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

[1] — KUALA LUMPUR: Local automotive companies could merge to create a bigger and more capable company, proposed Datuk Seri Najib Tun Razak.

The Prime Minister said one of the ways to overcome the issue of overcapacity in production was for the industry to consolidate.

“The automotive industry in Malaysia needs to undergo a process of re-looking at its structure, to determine whether it can ride all challenges.

“If overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?” he said in his speech at the Proton 25th anniversary celebrations last night. [Merge automotive firms to create bigger and more capable company. The Star. July 9 2010]

[2] — KUALA LUMPUR, July 10 — Proton’s managing director Datuk Syed Zainal Abidin Salleh Mohamed Tahir said that the consolidation of local automotive companies is important to ensure that the industry remains competitive.

He said that mergers were a step forward in the liberalisation of the automotive industry.

“I think it is timely and it is the most natural thing to do. I think we need to sit down and discuss on how to do it properly. I think it is a good way forward to prepare the entire eco-system for liberalisation and it will make us more competitive. The government has already made the call and I think it is time for the people in the industry to sit together and decide what is best,” he told The Malaysian Insider. [Proton chief says mergers future of local car industry. Asrul Hadi Abdullah Sani. The Malaysian Insider. July 10 2010]

[3] — See Duties and taxes of motor vehicles. Malaysia Automotive Association. Accessed July 10 2010. For example, from the MAA, the following schedule for cars:

Import Duty Local taxes
CBU CKD MSP CBU & CKD
Engine

Capacity (cc)

 MFN ASEAN

CEPT

 MFN ASEAN

CEPT

 MFN ASEAN

CEPT

 Excise

Duties

 Sales Tax
< 1,800
30%
0%
10%
0%
10%
n.a
75%
10%
1,800 – 1,999
30%
0%
10%
0%
10%
n.a
80%
10%
2,000 – 2,499
30%
0%
10%
0%
10%
n.a
90%
10%
Above 2,350
30%
0%
10%
0%
10%
n.a
105%
10%