Categories
Economics Politics & government

[2106] Of thumbs up for MP from Bukit Bendera on GST

With respect to the proposed implementation of the goods and services tax, MP Liew Chin Tong said:

“This is a huge sum for a study. The Finance Ministry should explain what kind of study this is, who is conducting it and which consultancy firm is handling the study.

“The idea of implementing this kind of study needs serious national debate.

“When Australia implemented the GST in 1998, it was decided based on a referendum.

We need to debate whether we need the GST or whether the Government should cut down its spending instead” [Parliament: Why RM22m for GST study? Zulkifli Abd Rahman. The Star. November 3 2009]

Indeed.

Categories
Economics

[2104] Of the government continues to expand under the 2010 federal budget

As a libertarian that I am, I can only sigh after reading the 2010 federal budget speech delivered by the Finance Minister.

I begin from a point deep in the realm of skepticism. I never actually believe any government in Malaysia — now or in the near future, neither Barisan Nasional nor Pakatan Rakyat — would largely retreat from the marketplace to leave the market to its own device in most cases. There are simply too many political considerations that go against the notion of free market here in Malaysia.

Firstly, businesses are politically-connected to make the government pro-business. In fact, the government itself is involved in businesses through its oligopolies to crowd out private initiatives. This has not even considered the erased line between the government and Barisan Nasional, where public properties are used for personal and political gain. For the government to touch itself openly is inevitable. That is the likely result in the case of conflict of interest, which is hardly surprising at all. There is no decency anymore these days.

Secondly is the developing entitlement mentality. Fuel subsidy is a right. Free highway is a right. Scholarship to universities abroad is a right. Bonus is a right. With such mentality and with both Barisan Nasional and Pakatan Rakyat racing on this front, government expansion is the only logical way forward. We have seen how the Islamization race between UMNO and PAS ended. It does not take a leap in imagination to picture the end result of the race between Barisan Nasional and Pakatan Rakyat to the left.

Early in the speech, the Finance Minister mentioned the scope of government intervention and it is wide. In his own words, the government ”will transform Malaysia through a comprehensive innovation process, comprising innovation in public and private sector governance, societal innovation, urban innovation, rural innovation, corporate innovation, industrial innovation, education innovation, healthcare innovation, transport innovation, social safety net innovation and branding innovation.”

That is a mighty goal, especially given that many governments perform poorly in the area of innovation when put head to head with the free market.

No matter. The government knows best and god saves us all.

Regardless of the budget, a new industrial policy that necessarily calls upon government intervention appears imminent. The talk of a so-called new economic model or really, a central planning exercise with new emphases has been going on for months now. Different goals, same paradigm.

The best symbol of paternalism available in the budget that a layperson can identify with is the proposal to charge an annual lump sum fee on credit cards. The Finance Minister claims that this is done to promote prudent spending. It is, as if, all individuals are doomed to spend all of their money dry.

Never mind that the government itself is spending imprudently. I wonder if an individual with his or her own money would buy a laptop priced at RM42,320. Whatever the answer, we know that some government institution has done that. Open up the auditor report. Year in and year out, it is the same old story. Yet, individuals have to suffer paternalistic attitude from a hypocritical government, which is convinced that individuals cannot manage their finance.

On the contrary, the government should really worry about its own financial status first rather than trying to tweak individual behavior, from savings to spending. Its revenue is going down and its expenditure is growing, the abnormal spending caused by the stimulus package notwithstanding.

The government seems to be addressing that problem by introducing goods and services tax later in hope to increase its revenue; not in 2010 but maybe in 2011. I personally like such consumption tax, but only if it neutralizes amount of theoretical loss due to income tax. To have both is to reduce welfare of individuals. Other than that, the government is even preparing to rents out some of its premises to the public, among other things.

The reform effort at the fuel subsidy regime is likely to help but it is unclear how that would be effective in rectifying government finance in light of expanding roles of government in the country.

The size of government expenditure — regardless whether it is caused by corruption, incompetence or by simply misguided conscience to help — needs curbing, if the problem of government finance is to be effectively addressed.

With a little luck, such retreat will give the private sector more space to flourish and contribute to government coffer, in the long run.

Yes, in the long run, we are all dead as Keynes wrote. Remember however that we are here now because of quick fixes — get the government to do it.

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 October 27 2009.

Categories
Economics Politics & government

[2101] Of the economic story, so far

The Najib administration faces challenges from multiple directions. On economic front, two major factors drive changes in the federal government’s economic policy. One is the global economic turmoil. The other is electoral pressure applied against affirmative action policy favoring the Bumiputra, or mostly, the Muslim Malays.

Both challenges began before the new administration came to power. Najib Razak had the opportunity to address a challenge before he assumed the office on the fifth floor of Perdana Putra in Putrajaya. He assumed the responsibility of Finance Minister early and was credited for launching both stimulus packages announced in November 2008 and later in March 2009.

The stimulus packages have been ineffective so far. Government admitted that spending was slow and further shared that the effect of the stimulus would only be felt in the third quarter of 2009, approximately seven months after the first stimulus was tabled in the Dewan Rakyat.

Nobody is quite sure when the economy would turnaround but signs of improvement are already visible. For instance, demands for electronics are already up, with factories reportedly having trouble fulfilling their orders. There is a good chance that the economy may improve earlier than the estimated period the stimulus packages are estimated to become effective. If that happens, the stimulus may prove to be irrelevant in smoothening fluctuation in economic growth and may really only contribute in creating structural fiscal deficit.

Malaysian federal government has been running on deficit since the Asian Financial Crisis hit the country in the late 1990s. The Najib administration began its era by enlarging the hole in an unprecedented manner: a stimulus totaling RM67 billion comprising of RM21 billion worth of government spending spread over 2009 and 2010.

If the Najib administration is concerned with the size of fiscal deficit and the level of national debt, the government will suffer from severe constraint in its finance and inevitably, its plans.

The deficit will definitely affect the implementation of the so-called new economic model — or more appropriately, a new industrial policy — currently being drafted by the Najib administration. Any respectable industrial policy will require manipulation of tax and tariff structure. This in turn affects government revenue, at least in the short term if the industrial policy is successful. Not all industrial policies have been successful implemented: the clearest failure is the industrial policy on biotechnology.

The impetus for the new industrial policy, from the point of view of the government, is definitely the drawbacks of export-driven model. The export-driven model advocates for reliance on exports as the engine of economic growth. For countries, like Malaysia, which have chosen that path, their economic health is susceptible to economic fluctuations of their trading partners. In the case of Malaysia, mostly, it is the United States of America, the source of recessions in many other economies. It is from this approach in economic development that gives the cliché ”when America sneezes, the world catches cold” its truth.

Impetus asides, the exact details of the new industrial policy are not available publicly currently. The government indicates that actual plan will only be ready later in the year.

The administration has given out some hints however. Key ideas leaked so far are the strengthening of domestic demand vis-à-vis external demand, creating high-skilled based economy, improving the quality of wages of local jobs and reversing — or at least reducing — the rate of brain drain that Malaysia suffers from.

Along with the main ideas, on the sidelines seem to be the rejection of export-driven model and the lessening of reliance on cheap low-skilled foreign labor.

This may implicitly suggest a quest for some kind of independence from the fluctuation of world economic system that one cannot hope of achieving without jeopardizing Malaysia’s future. In a sense, the idea of economic independence is a continuation of the Abdullah administration. The previous immediate administration emphasized on achieving self-sufficiency in food production, signaling the government’s failure in understanding the basic economic concept of comparative advantage. It is a fact that it is cheaper to trade for food — and achieves security of food supply while at it — than to achieve self-sufficiency in food production.

Yet, really, there is nothing wrong in trying to create a local economy with stronger domestic demand manned by high-skilled workers. Those goals can be achieved and indeed, it is desirable to achieve it, without rejecting export-driven model and being excessively hostile to the role that cheap low-skilled labor plays in Malaysia economy.

Full ejection of export-driven model is unwise despite popular current advocating its abandonment. Malaysia has only a small population while there are much larger markets abroad. There is no way on earth domestic demand can absorb the size of external demand, if total demand is to be at least maintained at its current level, unless the real wealth of Malaysians goes up in a very dramatic manner.

It will be all the more impossible to improve domestic demand if Malaysia adopts unwelcoming stance toward foreign workers. These foreign workers do help sustain domestic demand, apart from providing their services. The administration has not shown that it understand that.

Under the stimulus package, the government did plan to impose restriction on hire of foreign workers, which increased the cost of doing business in Malaysia, in times when demands were falling precipitously. That action was postponed indefinitely only after manufacturers lobbied against restriction. If the restricted saw implementation, it would have been a disaster for the manufacturing industry. Malaysian economy could have gone into steeper recession than it would have without the restriction.

Whether the new industrial policy will take cognizance of that is something Malaysians will only know after the government shared the full plan.

Despite that, it is already clear that policy will work hand in hand with liberalization of the economy from instruments relating to affirmative action closely identified with the New Economic Policy, a policy that officially ended in 1990. The frequently debated quota requirement of 30% for Bumiputra in all public listed companies has seen a dismantling along with the very pro-affirmative action Foreign Investment Committee.

The liberalization is partly caused by the realization that affirmative action as practiced in Malaysia is adversely affecting Malaysia’s potential in times when there are other comparable if not better investment destinations, partly by the current economic recession and partly political since Pakatan Rakyat successfully campaigned against the policy.

Of all that Najib has done as either Prime Minister or Finance Minister, the liberalization of the 30% quota reserved for Bumiputra is the boldest of all. The conservative Malay base is likely rattled by the liberalization effort. The courage for that may have come from realization that Barisan Nasional — UMNO in particular — has more to gain by moving to the center rather than appealing to the Malay far right clusters in UMNO. After all, these far right groups have nowhere to go but UMNO. They have no choice.

In this sense, the liberalization of affirmative action is Barisan Nasional under Najib Razak is flanking Pakatan Rakyat. During the election campaign, Pakatan Rakyat more or less advocated the same kind of liberalization. Barisan Nasional is now adopting it. Continuous liberalization of the policy by Barisan Nasional may bring it more votes from the non-Malay groups in the future, at the expense of Pakatan Rakyat.

Regardless of political implication, the good effects of liberalization are unlikely to be felt so soon. As much as the economic downturn seen in Malaysia is caused by drop in external demand, recovery will be driven by external demand too. The sheer size of external demand makes improvement in domestic demand incapable of driving recovery in the local economy. This probably limits what the Najib administration can do in the short run. Such is the curse of a small open economy such as Malaysia.

When the economy does finally rebound however, Malaysia has good chance to capitalize on its new liberalized market environment.

All in all, perhaps there is one term that can describe the economic policy of the Najib administration: pragmatist. When governments all around the world spend, so does the administration. When everybody talks about the end of export-led model, here comes a new industrial policy. And when the voters expressed hostility against affirmative action as called for by the NEP, the government liberalizes the affirmative action. The government bends to whichever direction the wind blows.

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

First published in Oon Yeoh’s Najib’s First 100 Days: No Honeymoon.

Categories
Economics

[2100] Of credit card service charge; the government should look into the mirror

I am in no position to give full opinion on the proposed 2010 federal government budget tabled earlier today. That is mostly because I need to read the whole text first. Nevertheless, I feel strongly against the idea of imposing service charge on credit card; as stated by the Finance Minister, the purpose of the charge is to curb reckless spending by individuals.

According to the budget, RM50 is to be charged on main credit card while RM25 is to be charged on each additional credit card. I would assume the fee will be charged to new users of credit cards during application period. I am unsure how preexisting users will be charged.

But no matter because as long as it is charged as fixed amount annually, here are my first thoughts that lead me to disagree with it.

Firstly, the charge is too small to be significant and on top of that, it is a yearly charge. If a person cannot afford to pay RM50, I would think that the credit card company would notice the financial status of the user and refuse the user the card. Therefore, the effectiveness of the charge deserves skepticism. If credit card companies do not filter their customers, then the companies deserve to go under.

Secondly, this is a blanket policy. Individuals with good and bad spending patterns are being punished. Of course, it is just RM50 but it is the idea of being punished for other individuals’ stupidity that makes this maddening. Recklessness should be punished while prudence should not. The free market already provides for that mechanism: bankruptcy. It works superbly. But the government has other idea it seems.

Thirdly, if RM50 is significant, which I really doubt, it mainly punishes those in the middle income bracket and more so of those in the lower income bracket who use credit cards to smoothen their consumption pattern instead of committing “reckless spending”.

Fouthly and more importantly, it suggests that the government knows better than the individual in managing their finance. Can you say, paternalism? Is the era of government knows best over? I think not.

Finally, the intention of introducing the charge, so reasoned the Finance Minister, is to curb reckless spending by individuals. To that which I will say, the government should look into the mirror.

Categories
Economics Liberty

[2099] Of Ostrom’s Prize in Economics, commons, coercion and libertarianism

Libertarians celebrate two winners of the Prize in Economics of whom one of them is Elinor Ostrom. That is because her works show that commons can be managed efficiently by groups of users rather than the State. I am unsure, however, if libertarians, especially the free market purists quite absorb the full implication after accounting for footnote associated with Ostrom’s works.

Her findings do very little to expunge coercion from solutions relating to large tragedy of the commons. This fact, through my observation, is what many libertarians have missed.

On purists, I know, I know, I have been accused as a purist myself but if I am a purist, then you are in for a big surprise at how other people can be purer in this thinking that me. These purer purists, if I may say so, are more anarchist than libertarian, with their hostility against the State bordering madness. I may sympathize with these anarchists however but I am convinced that the state of anarchy is unstable and in fact, detrimental to individual liberties. I am becoming more convinced of that position as I finally begin to read Robert Nozick’s Anarchy, State and Utopia, further settling in the minarchist pool of libertarians.

Many, I have seen, tend to celebrate one conclusion of Ostrom’s work but tend to ignore the other consequence that comes from the footnote to the celebrated conclusion. Most unfortunate, that footnote does not eliminate the case for intervention. Such intervention or really, coercion, may not originate from the State but by groups of individuals nonetheless.

A group of individuals should really be no different from the State if there is coercion. Coercion is really the key here and it is not whether it is the State or not. This is what most libertarians, when discussing this, have overlooked. To miss it is to miss the entire point of libertarianism.

When it comes to commons, I have long accepted the need for government, or any kind of intervention for that matter, for fear of tragedy of the commons occurring. I first accepted it when I first learned of it as an undergraduate in economics. Concern for tragedy of the commons, is perhaps, the only remnant of environmentalist thinking that remains with me.

That is the reason why, if I want to differentiate myself from other libertarians, I identify myself as a green libertarian. The green symbolizes my concern for market failures, which is what tragedy of the commons really is.

Market failures here are not as left-wingers tend to define it, which is more of rhetoric wrongfully attacking free market principles through mischaracterization and misleading definition but rather it refers to the economic definition, which is when there is a large difference between public and private costs, or more concisely, when there is externality. Examples include emissions of carbon or harvest of the ocean. It is for this reason too that I am largely supportive of Pigovian taxes: I definitely would like, for instance, to see fuel subsidy in Malaysia be replaced with carbon tax.

While I am admonishing libertarians here, I too made a mistake of celebrating Ostrom’s work prematurely, thinking that it solved my problem. I am well aware how hard it is to reconcile my concern for market failure with free market libertarianism that I hold. So, I was happy to see Ostrom seemingly offering a solution to me by stating users of commons do spontaneously organize themselves to prevent tragedy of the commons. Alas, upon further reading, I realized that I initially failed to comprehend the full conclusions by overlooking the footnote. And I do think libertarians who are celebrating Ostrom are misreading her conclusions by not reading the footnote too.

Traditional solutions to tragedy of the commons do not fall within the compound of pure free market libertarianism that completely intolerant of government intervention save for the classical liberal purpose of the state and that is the protection of individual negative rights. Such solutions typically involve the allocation or assignment of rights to users of resources of commons. In other words, to price such rights to internalize externality and then auction to it to achieve allocation efficiency.

In commons with multiple claims on it, some entity — government or some local body — has to be the final arbitrator for allocation of rights purpose and that will require coercion. These rights may be in form of permits that expire regularly or outright privatization (privatization is attractive but it does present complications; for instance, how do you privatize the atmosphere with respect to climate change? Clearly, enforcement of such rights is impossible, at least with current technology). Ostrom simply discovers that local groups may be better managers of the commons than government. She does not specifically say that it is will be done voluntary.

Yes, these local bodies can be voluntarily formed by users of commons. Self-organization out of spontaneous order which of voluntary in nature can be achieved but as stated in a write-up by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences[1] and Ostrom’s article in Science Magazine[2], size of users and engagement time length matter, among others, affect the success of having such spontaneous order. There are multiple other factors but I am in the opinion that these two are the most important. The bigger the size, the harder it is to agree on voluntarily act to prevent exhausting the commons and make everybody worse off. The shorter the period of engagement, the harder it is to reach to an agreement.

The issue on number of users is really a matter of cost. As in the case of climate change, which is really the biggest common of all, bringing 6 billion individuals together is clearly unfeasible. Consider also the fact that even with hundreds of representatives sitting together in one hall, an agreement is hard to achieve. The planned climate summit in Copenhagen organized to find a replacement for the failing and expiring Kyoto Protocol is widely expected to fail.

On top of this, monitoring activities are costly. Monitoring is important because there is a strong incentive to — out my lack of creativity in selecting a word — cheat in the case of tragedy of the commons. Monitoring and enforcement are important in discouraging cheating.

On time length, it is a matter of repeated game. To make it more explicit, it is a repeated prisoner’s dilemma where cooperation is clearly a better option for both to failure to cooperate but there exists strong incentive to not to cooperate. Repetition of that game with the ability to communicate could bring about cooperation but again, that is highly dependent on the size of participants. Ultimately, achieving cooperation may take too long a time before the system collapses.

Further strengthening the argument, status quo effect is strong. Look at the Israeli-Palestinian conflict. Such conflict can be modeled as hawk and dove model, which is essentially another form of prisoner’s dilemma. They could cooperate and skip the deadly conflict, but they do not. In a game like this, it is crucial for trust to be built at the very beginning.

Trust simply takes a long time to rebuild once broken, if it is to be rebuilt at all, if the first step proved to be disastrous. This, known as tit-for-tat game, is one of the basic important lessons of game theory, in my humble opinion.

Given that, solving the problems of the commons through voluntary means, are likely hard if not impossible. Thus, intervention is still required to introduce market instruments like quotas, permits or taxation. Intervention may originate from the government, or some local groups but it is an intervention nonetheless, with not too implicit coercion demanding certain positive action, positive as defined by Isaiah Berlin when he differentiated between positive and negative rights.

If Ostrom is to be celebrated, then it is decentralization from government to local groups. That however should be mistaken as solving the problem of tragedy of the commons by voluntary means. Someone or something has to assign rights to users to commons. That means, the element of coercion, unfortunately, is still present.

That certainly does not solve my problem of reconciling concern for tragedy of the commons and free market libertarianism.

To summarize: it is a common and somebody or someone has to take control and assign rights to solve the problem of externality, i.e. tragedy of the commons. It does not have to be the government and local groups may be better manager but something or someone has to act as the assigner. And the footnote to Ostrom’s works indicate that it is hard to do so voluntary, save for, I think, localized commons. In the end, the element of coercion exists.

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

[1] — See Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009: Economic Governance. Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences. October 2009

[2] — See A General Framework for Analyzing Sustainability of Social-Ecological Systems. Elinor Ostrom. Science Magazine. July 24 2009.