Category: Economics

Categories
Economics

[2170] Mengenai apabila kerajaan mencipta masalah, salahkan pasaran bebas

Bekas Presiden Bursa Saham Kuala Lumpur Salleh Majid menulis tentang dialog yang beliau hadiri di dalam Utusan Malaysia hari ini.[1] Beliau menyenaraikan pelbagai masalah yang dihadapi Malaysia, masalah yang diakui kewujudannya oleh kerajaan Barisan Nasional hanya selepas Pilihanraya Umum 2008. Masalah-masalah ini kemudiannya dijadikan sebagai alasan untuk mengaminkan campur tangan kerajaan di dalam ekonomi negara serta polisi Barisan Nasional. Walaupun masalah-masalah ini wujud, ia tidak boleh dijadikan alasan untuk campur tangan yang lebih hebat kerana kerajaanlah yang menjadi sumber kepada kebanyakan masalah-masalah ini.

Sistem pendidikan yang lemah disebut sebagai satu punca kepada struktur ekonomi negara yang tidak menyakinkan. Siapakah yang mempermainkan sistem pendidikan kita? Siapakah yang mengikat kaki dan tangan pelajar serta tenaga pengajar? Siapakah yang memperbodohkan beberapa generasi rakyat Malaysia demi kepentingan politik? Kerajaan.

Karenah birokrasi kerajaan adalah satu lagi faktor yang diketengahkan. Adakah birokrasi tersebut disebabkan oleh pasaran bebas?

Kemudian disebutnya masalah korupsi dan rasuah. Ini adalah perkara yang kelakar. Siapakah penyebab utama perkara tersebut berleluasa? Pasaran bebas? Bukankah bahagian eksekutif kerajaan yang dikuasai oleh Barisan sekian lama yang telah meluaskan kuasa mereka sehingga sistem timbal balik hilang reputasinya? Bukankah kerajaan persekutuan dan negeri Barisan Nasional yang sewenang-wenangnya menggunakan duit rakyat untuk kepentingan parti? Bukankah punca korupsi itu adalah kerajaan?

Kewujudan kartel dan monopoli adalah masalah yang besar. Tetapi, siapakah yang menggalakkan pembentukan monopoli ini? Siapakah yang menggalakkan industrialisasi secara penggantian import di Malaysia? Siapakah yang menyekat pemberian lesen? Kerajaan! Kerajaan! Kerajaan!

Beliau akhir sekali menyebut beberapa negara yang mengalami masalah ekonomi yang kononnya disebabkan oleh sikap free for all. Beliau menyebut tentang Sepanyol, Portugal, Itali dan Greece. Tetapi, bukankah masalah negara-negara ini adalah saiz defisit fiskal yang besar yang disebabkan oleh perbelanjaan kerajaan yang tidak terkawal? Adakah kemampuan kerajaan-kerajaan ini untuk mengawal keadaan fiskal mereka disebabkan pasaran bebas? Mereka yang memperjuangkan pasaran bebas kebanyakan mahu saiz kerajaan dikurangkan. Penyokong pasaran bebas mahukan perbelanjaan kerajaan dikurangkan lalu mengatasi masalah defisit.

Jadi, mengapa salahkan pasaran bebas apabila kerajaan yang menyebabkan semua ini?

Ini penipuan yang tidak boleh dibiarkan.

Yang lebih mengarut lagi, masalah-masalah ini ditulisnya akan menjadi lebih teruk jika pasaran bebas dilaksanakan. Kerajaanlah penyebabnya, tetapi beliau tidak mengakui akan kebenaran ini. Malah, menurut beliau, kerajaan perlu campur tangan untuk mengatasi masalah ini.

Ini adalah satu pegangan yang mungkin lucu, jika ia tidak pernah memusnahkan negara ini.

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

[1] — BEBERAPA kumpulan pertubuhan bukan kerajaan (NG0), usahawan Bumiputera Semenanjung, Sabah dan Sarawak telah berpeluang memberikan pandangan mereka tentang Model Ekonomi Baru(MEB) kepada Pengerusi Majlis Tindakan Ekonomi Negara, Tan Sri Amirsham Aziz pada hari Khamis 25 Februari yang lalu. [Dialog dengan Majlis Tindakan Ekonomi Negara. Salleh Majid. Utusan Malaysia. Mac 1 2010]

Categories
Economics

[2168] Of no to the policy of One Price

Prices of the same tradable items in different places tend to converge in a perfectly efficient market. Theoretically, motivated by profits, individuals and entities act as arbitrageurs. They will continue to arbitrage until there are no more profits to be made. That is when prices equalized and that is the essence of the law of one price.

Prices may not actually converge to one price due to several factors however because market can be inefficient. Limited access to information crucial for the purpose of arbitrage may prevent convergence. Transportation cost as well as government intervention in terms of taxation and subsidization are two of several other important frictions. Instead of prices equalizing, a price spread exists to reflect those frictions even as market participants exhaust arbitrage opportunity.

This is essentially the reason why there is noticeable price differential for the same tradable goods sold in eastern and western part of Malaysia. With the South China Sea separating Malaysia into two parts, it is only natural for prices to differ between the two regions. Even under the price and supply control mechanism that exists in Malaysia, a kilogram of sugar for example, is sold 10 sen cheaper in Peninsular Malaysia than in Sabah and Sarawak. Transportation cost is a considerable barrier preventing actual convergence.

This is a source of discontent for some. Member of Parliament for Kalabakan, Abdul Ghapur Salleh of UMNO said in November 2009 said, “We’re talking about 1Malaysia, but we don’t even have one price” while alleging that the price differential is more insidious in nature — discrimination against Sabah and Sarawak — rather than simple economic friction.

It is unclear how exactly he wants effort at standardization to proceed but the approach by the federal government is clear. In the same month, Minister Koh Tsu Koon supported the idea of standardized prices across Malaysia and proposed that transportation cost be shared by all; in other words, introduce subsidy. Nearly a year earlier, Domestic Trade and Consumer Affairs Ministry wanted to do the same: subsidize transportation cost. In Sarawak itself, perhaps a harbinger preceding a possibly wider similar nationwide policy, the same ministry plans to subsidize transportation cost with the intention of standardizing prices of essential items sold in urban and rural areas under its “One Sarawak, One Price” campaign.

They are turning the law of one price on its head. Rather than letting market forces find its equilibrium where a particular price fits a particular landscape through a narrow band, the government intends to impose unnatural standardized prices for all situations everywhere to force convergence. The government intends to introduce more inefficiency to standardize prices.

The discontent over price differential is overrated. Two economists — Lee Chin and Muzafar Shah Habibullah of Universiti Putra Malaysia — published a paper in 2008 showing that prices of tradable goods between Peninsular Malaysia, Sabah and Sarawak are converging. Furthermore, the recent liberalization of cabotage policy — a protectionist policy that contributed to persistent price differential between eastern and western part of Malaysia — will likely further strengthen the natural convergence trend.

Convergence aside, to iterate the idea of how the difference is natural, the price differential has nothing to do with discrimination between the two parts of Malaysia. It is a reality that there is a large body of water separating the two parts of Malaysia. It is likely that if the transportation cost is brought down either through liberalization or improvement in technology, prices are likely to equalize, all else being equal.

The price differential due to transportation cost or distance has nothing to do with the idea of unity as much as it has something to do with the idea of discrimination. In the United States for instance, gas prices in Michigan and in California are very different. Even in the same state, prices of gas in one town can be different from another town a mile away. That does not make the person who pays higher price as less American than the other person who pays lower price for gas.

This idea can be expanded to Peninsular Malaysia. The government should not standardize prices within Malaysia. This is not to say just prices between Peninsular Malaysia, Sabah and Sarawak, but within those regions as well. What a free Malaysia needs is not a Price Control Act, but a Competition Act or antitrust law to fight collusion among businesses in order to encourage competition — the most effective method at encouraging convergence and low prices — without suffocating entrepreneurial spirit.

On top of that, maybe, just maybe, the move of having manufacturers based in Sabah or Sarawak is a cheaper and a more profitable option compared to the option of transporting goods from Peninsular Malaysia or from abroad even after accounting for various other effects like clusterization.

If the subsidization program goes through, it removes that incentive and hence, the possibility of developing industries in eastern Malaysia. If a business owner could transport his or her goods free from western to eastern Malaysia, why would the business owner locate his or her factory in eastern Malaysia? There are better ports, roads, financial services — practically everything that matters in business — in Peninsular Malaysia than in Sabah and Sarawak. The subsidization program would continue to industrialize the Peninsula while leaving Sabah and Sarawak farther behind in terms of development.

Besides, the Prime Minister recently said that private initiates and market forces have to be given freer rein while subsidies be phased out. The standardization of prices across Malaysia through subsidization of transportation cost by the government clearly contradicts that. Is this a proof that there is no coordination within the government? Or does words mean nothing to the government?

For the answer to be no on both accounts, the policy of “One Price” must be rejected.

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

A version of this article was first published in The Malaysian Insider on February 22 2010.

Categories
Economics

[2164] Of a progressive GST?

There is a report by Bernama yesterday which states that a tax official claimed GST will not be inflationary due to lower GST rate compared to the rates of soon to be abolished sales and services tax. It is theoretically possible and I am leaning in that direction. One statement, however, troubles me:

KUALA LUMPUR, Feb 10 (Bernama) — The implementation of the Goods and Services Tax (GST) based on current estimates, will not lead to price increases due to the offset from the abolishment of the sales and services tax (SST), the Chairman of the Tax Review Panel in the Ministry of Finance, Datuk Kamariah Hussain, said Wednesday.

She said logically, with GST, consumers would pay 4.0 per cent tax compared with the current service tax of 5.0 per cent and sales tax of 10 per cent.

“GST is progressive rather than regressive, with tax incidence at the 4.0 per cent GST rate being lower than the current SST,” she said at the Affin Investment Bank forum on GST here Wednesday. [GST Will Not Lead To Price Increases, Says Tax Official. Bernama. February 10 2010]

Is GST progressive tax?

This is the first time I have heard somebody arguing that GST is a progressive tax.

To the best of my knowledge, GST is not a progressive tax. Why?

First, GST is a flat tax. There is only one rate. Therefore, it is not progressive in terms of rate structure. It is flat.

Second, a flat tax is regressive by the very nature that those earning relatively lower income will see greater fraction of their income taxed compared to those of higher income (it can be made less regressive by introducing exemption to staple food and other ingredients like sugar and salt). This makes it not progressive in terms of welfare.

So, in what way is GST progressive?

The only way I can think of that makes GST progressive strictly in terms of welfare, is by making way too many exemptions on goods typically consumed by the middle class and lower. In other words, practically, taxing only luxury items. Is that the case here?

There is no explanation in the article.

Categories
Economics

[2154] Of introduce targeted cash transfer instead of targeted subsidy

In spite of opposition that saw the streets of Kuala Lumpur filled with pro-fuel subsidy groups during the Abdullah administration, efforts to liberalize the fuel subsidy regime have gone a long way. Several arguments, including one that criticizes the untargeted and blanket nature of the policy have gained tremendous traction. The fact that it benefits those who do not need or deserve the subsidy is clearly one of the main motivators — the bigger drivers are probably cost and waste — behind the reformation of the policy.

The Najib administration is addressing this particular criticism. That has resulted in multiple novel moves and proposals from the federal government. Among the proposals reported in the mainstream media are different prices for different groups, a cap on subsidized fuel consumption and access to subsidy based on engine size. All of it tries to discriminate consumers at the pump. While the moves and proposals may reduce the size of fuel subsidy either in value or in quantity, the proposals under explicit fuel subsidy regime are too convoluted. The more convoluted the methods are, the more complex the implementation will be. That is a recipe for a disaster, policy wise.

I appreciate the government’s effort at making the policy more targeted and hence, making it less wasteful in terms of opportunity cost. Yet, these novel ways are unnecessary given the existence of at least one simpler alternative.

Just observe the recent attempt to limit the sale of subsidized fuel to foreigners at the border. So complicated was it that everybody was confused and in the end, it did not work. Consumers found ways around the restriction.

There is a better and much simpler way to do to this.

Before we proceed to that better and simpler policy, it is crucial for us to recall the purpose of the fuel subsidy. Its goal is ultimately to reduce the cost of living of the less well-to-do Malaysians. On top of that, fuel subsidy is not the only way to achieve that goal.

With that in mind, the better alternative to targeted fuel subsidy is a simple targeted cash transfer from the government to those who deserve it.

Why targeted cash transfer?

The first reason is that it paves the way for total elimination of fuel subsidy to free up the market. Since free prices signal scarcity, individuals and entities will make decisions that are more reflective of the reality of the energy market. On top of that, it creates real competition among pump owners. The same system of free prices already exists in the United States and Australia. Its effectiveness is proven.

Not only that, elimination of subsidy at the pump reduces consumption, all else being constant. That means lower carbon emissions. In times when carbon emissions are a worldwide concern and in light of the Najib administration’s promise to announce a carbon cut roadmap in the near future, this is an opportunity to integrate transportation and energy policies together environmental policy. Such integration is important given that, according to the International Energy Agency in 2007, the transportation sector was the source of 30 per cent of Malaysia’s carbon dioxide emissions in 2005.

Thirdly, cash can be used for a variety of things and not just fuel. Maybe a beneficiary of such a cash transfer appreciates books or food more than fuel. This has the potential of increasing the beneficiary’s welfare higher than what a fuel subsidy policy can bring. If the beneficiary does appreciate fuel more than anything else, then he or she can simply buy the same amount of fuel he or she would have otherwise bought under the fuel subsidy policy. In other words, there are more choices. The economics behind cash transfer is clearly more welfare enhancing than a simple fuel subsidy.

The next question is, naturally, how to do it.

If the sale of subsidized fuel is to be limited, then the government will have a good idea about the maximum amount of money it needs to spend on fuel subsidy. Furthermore, the lower the cap, the higher the likelihood a beneficiary of the subsidy will exhaust his or her quota. From there on, certain statistical manipulations can give us the size of money transfer per capita required to make the cash transfer method the equivalent of the fuel subsidy policy in terms of value.

The cash transfer itself can be delivered to the deserving via the existing tax system. Here is another beauty of cash transfer. It pays only to those who have filed their taxes. Thus, this is yet another incentive for those who have yet to file their tax to finally do so.

For those who just want to fill up their vehicles, here is another reason to support a simple cash transfer instead of an explicit targeted fuel subsidy policy: no weird rule at the pump. With cash transfer, any discriminative method used to ensure that the policy is targeted is done not at the pump but during the transfer of cash. This makes its implementation simpler.

So, what about it that is not to like?

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

A version of this article was first published in The Malaysian Insider on January 19 2010. Unlike the TMI edition, I added several sentences and phrases here to emphasize or rather, to clarify that the cash transfer is targeted in a sense that whatever discriminative method introduced in a subsidy regime can be applied to cash transfer system.

Categories
Conflict & disaster Economics

[2150] Of aid and logistical challenges for Haitian earthquake victims

When the gods battle in Malaysia, the gods forgot Haiti.

As always, the affairs of men are too important to be left in the hands of the gods. Christian conservative Pat Robertson may disagree. Instead, he thinks god wants Haiti to suffer because Haitians made a pact with the devil.[1] Ah, the glory of god.

Thank goodness for the reasonable and capable Bill Clinton!

Former President Bill Clinton yesterday spoke of the need to send cash to Haiti instead of items like food and blankets.

[youtube]W6H2hnGaUbk[/youtube]

He reasoned that in Haiti now, there is simply no logistical capability to handle various items from abroad in huge quantity. Haiti’s principle airport inability to cope with the volume of aid material is one evidence of that.[2] With an earthquake that devastating, it is probably a prudent to assume that transportation infrastructure in the country’s capital — a major population center located too close to the epicenter of a major earthquake  — is unreliable now.

In economics, cash aid is the best kind of aid because only the persons on the ground know how the money should be spent, especially when compared to some kind-hearted donors living abroad. It is a case of imperfect information.

That statement is made barring the issue of corruption, which is a major motivation behind the need of material aid.

The probability of abuse of material aid is lower than the likelihood of cash aid abuse. This does not mean that there can be no abuse with material aid — somebody may get all the material aid and start selling them when it should be free— but in comparison, material aid does better than cash aid in terms of abuse prevention. Due to this as well as the horrible record of the government of Myanmar, I advocated material aid to the victims of Nargis back in 2008.

I am ignorant of Haitian politics but Haiti is located not so far away from Myanmar in Transparency International’s 2009 Corruption Perception Index.[3] It is classified as above Myanmar but really but comparison to Myanmar is not much of a comparison. Corruption is a serious there.

I have a lot of respect of former President Bill Clinton. He is the US President I respect the most out of Obama, the Bushes and him. When he said something, I would think twice before disagreeing with him. Indeed, as a libertarian, I should be agreeing with Clinton on his assertion of the superiority of cash aid. And sending money is definitely easier than sending material aid. Yet, I have trouble accepting his advice that cash aid is better.

Perhaps, as an UN envoy to Haiti, as well as a person that has been to Haiti, he knows more than me. His knowledge might not be as good as the victims themselves but it is likely better than mine who lives two oceans across from Haiti.

Still, what good is cash when everything is destroyed?

The economy may rebuild and spontaneous order will establish itself during this chaos but as Clinton said himself, there is no logistical capability to handle the kind of volume of aid material in Haiti at the moment. Okay but will local production be able to match the heightened demand for food, blanket, etc.?

I doubt so.

Even if local production is able to do so, would the logistics be able to cope to the traffic of goods? Would local production be able to produce everything autarkically?

Clinton is right. There is no logistical capability in Haiti. But I think that problem adversely affects the effectiveness of both cash and material aids. I am not saying aid should not be sent at all. What I am saying is that the problem with logistics might not impact the relative desirability between both types of aid by too much.

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

[1] — American televangelist Pat Robertson has blamed the devastating earthquake in Haiti on a pact between the impoverished nation’s founders and the devil.

It is feared that up to 100,000 people may have lost their lives when the magnitude 7.0 earthquake flattened massive areas of the capital Port-au-Prince yesterday.

Speaking on his television program The 700 Club, Mr Robertson said the pact happened “a long time ago in Haiti”. [Haiti disaster blamed on pact with devil. ABC News. January 14 2010]

[2] — International relief to quake-devastated Haiti was reduced to a trickle this morning after the capital’s airport was overwhelmed by a sudden influx of aid planes, as the country’s President said 7,000 victims had already been buried in a mass grave. [Bottleneck paralyses Haiti relief efforts. Kim Landers. Craig McMurtrie. et al. ABC News. January 15 2010]

[3] — See [Corruption Perception Index at Wikipedia. Accessed January 15 2010]