Category: Economics

Categories
Economics

[2097] Of first comment on the proposed federal budget by DAP: culture of entitlement

The Democratic Action Party released its proposed 2010 federal budget this week.[1] This is definitely a good move as it brings substance to debate. It gives all of us an opportunity to debate on policies rather than engaging on ultimately empty rhetoric that boils blood.

This is not the first budget proposed by the DAP. The consistency on producing such document thus far deserves commendation and future production should be encouraged to develop policy debate in public sphere. PKR and PAS need to work with DAP or emulate DAP on this front.

Now that the pleasantries have been dispensed off, it is time to get down to business.

While I have yet to read fully the proposal, I disagree with a number of issues. One is the tweaking of contributions to the Employees’ Provident Fund (EPF). Two is the creation of entitlement culture.

For the uninitiated, the EPF is a social security fund providing retirement benefits for its members that, basically, includes all employees employed in Malaysia, making EPF a payroll tax. Employees in Malaysia are required to contribute a certain percentage of their wages into the fund. Employers are also required to contribute some kind of percentage into their employees’ account. Employees will be able to withdraw that money after retirement or at any other point of time before retirement for certain purpose that is not worth going into here.

Early in the section (Section 9.1.3 on page 37), the proposal begins by stating how important savings is, how low-income Malaysians have trouble saving and how unequal wealth distribution in Malaysia is. After stating so, it proposes that employers’ contribution to EPF account of low-income and middle-income workers be increased.

The problem with this relates to a typical argument against such benefits and payroll tax. Employers will compensate whatever required payment on top of direct pay to employeees imposed on them by law by reducing total wages and benefits paid to employees. The idea is that there is only a certain amount of total wages and benefits, which includes the contribution, that employers are willing to pay. Increasing the contribution requirement affects only the composition of total pay, not the pay itself, at present time.

For low-income worker, this is particularly worrying because it reduces their take-home pay. This in turn goes back to the problem of intertemporal choice. While savings is important, it is useless to individuals who are desperately in need of consumption today in the following sense: what is the point of having one million dollar of savings if one cannot use it today to avoid death from hunger?

The example is extreme but it aptly captures the time value of money and intertemporal choices. The time value of money remains material even if death is removed from the equation.

Furthermore, there is enough empirical studies to suggest that low income earners spend large proportion of their income compared to those with higher income. This impresses further on the need to strengthen these workers’ take-home pay given a certain total pay, making their savings less of an issue. I stress, not unimportant, but less of an issue compared to take-home pay.

However, different path is laid out several paragraphs later, with respect to EPF contributions.

As part of its FairWage initiative, DAP proposes to decrease workers’ contribution to EPF for those earning from RM900 to (but not inclusive of) RM1,400 and waive entirely for those earning below RM900. This addresses the concern on take-home pay but notice how it starts to contradict DAP’s point on insufficient savings for retirement of low-waged Malaysians.

As part of its FairWage initiative as well, employers’ contribution is proposed to see reduction to make these workers more employable. This is the right idea but again, this proposal suffers the same contradiction as the first FairWage point.

The third component of the FairWage initiative is a set of entitlements that comes partly in cash transfer and partly transfer from government coffers into the account of certain classes of workers. This perhaps plugs the the gap in saving caused by the two FairWage points but it raises a question of unnecessary complexity.

Notwithstanding the contradiction (it seems to me that there was a war between the left and the right in preparing the proposal; what else can explain the inconsistency? Or is it a case of trying to please everybody?), looking at the FairWage initiative as a whole, the bottom line is really about cash transfer from the government to those who the DAP considered as earning low and medium level income. In the proposal, the DAP states that this is practically an earned income tax credit scheme. It is basically a negative income tax regime where those earning below a certain level of income gets money or tax credit instead of paying tax to the government. In a sense, it is already in place in Malaysia, where, if I am not mistaking the number of I saw on my tax form, the government of Malaysia gives Malaysians tax credit worth RM8,000 for living expenses. I think the proposal by DAP only enhances it.

Whatever it is, the whole design seems overly complicated. Ignoring the normative issue which I will touch later, would it not be easier to not tweak the EPF configuration and just do the transfers instead? Instead of tweaking EPF, the government can, or rather, DAP could, tweak the composition of transfers instead to achieve the same goal sought by the reduction, or in general, changes in contributions to EPF by employees and employers.

That is issue one.

Issue two is the normative aspect of the whole proposal and perhaps, more seriously and more holistically. Without writing too many words, it risks creating a culture of entitlement. The FairWage is just one factor that suggests how entitlement mentality predominates the proposal. RM1,500 is proposed to be given to non-working spouse whose partner earn less than RM3,000 (per month, I assume). This simply robs incentive to work. Individuals are rewarded for not working. This may potentially lower local labor participation rate and eventually, lower output for the economy. To note, low labor participation rate is much worse than low employment rate.

Greater suggestion of creation of entitlement culture is the granting of citizenship bonus labeled as Malaysia Reversed Bonus. That is not the only citizenship bonus. Senior Malaysian Bonus another one. These bonuses are mentioned in other sections which I have yet to read thoroughly.

There is one aspect of the proposal that I like that falls within the section. It is a limit to employers’ contribution for those earning beyond a certain level of income. That decreases cost of doing business and even increases take-home pay of workers.

I will comment on the proposed federal budget by DAP further as I go through it slowly.

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

[1] — [Democratising Malaysia’s Economy: DAP Alternative National Budget 2010. DAP. 2009]

Categories
Economics

[2078] Of a good sign?

I should really be at University Library right now but I just could not resist blogging about this.

The latest Industrial Production Index produced by the Department of Statistics has it that electricity output increased and more importantly, it increased based on year-on-year basis in July 2009. This means, electricity output has been increasing on year-on-year basis for two consecutive months. It first registered positive year-on-year growth in June 2009 after months of output reduction. This is another blow to government spending-based stimulus advocates because it indicates that the economy is recovering well before the effect of stimulus spending comes into play.

Electricity output, or rather consumption (but really, the two should be almost the same) has been argued as a good indicator of economic performance. See this. The following table is taken from the Department of Statistics.

Sectors

Index July 2009

% Changes Year-on-Year

% Changes Month-on-Month
IPI

104.8

-8.4

7.1
Mining index

99.6

-1.9

10.0
Manufacturing index

106.2

-12.0

6.2
Electricity index

118.7

3.1

3.5

I will blog about this later. For now, I need to make a dash to the University, which is, like, 100 meters away. Oh, so far away!

Heh. I love my life.

Categories
Economics

[2076] Of anti-trust laws can defeat protectionism

Opponents of economic liberalization fear, among many other things, the possibility of giant foreign companies dominating the local market at the expense of local businesses. For those who are simply interested in better quality goods and services, market liberalization introduces competition in the market to improve quality, much to the benefits of consumers. While the war between the two camps is much relished, there is a middle ground for both to tread on and it involves anti-trust laws.

Increasingly in Malaysia, protectionist argument is becoming less and less relevant each time the sun rises and sets to rise again. Intellectually, it is bankrupt. Empirically, it has resulted in missed opportunities and needless sufferings. Examples of protectionist failures and its subsequent ejection are aplenty for all to observe.

Proton, for instance, is still unable to compete fairly despite years of protection granted by the government to the national enterprise. It has also cost Malaysia an opportunity to become a regional center of vehicle manufacturing that Thailand has become. Thankfully, such government protection that once resulted in effective Proton’s monopoly of the local car market will end by 2010, in line with the ASEAN Free Trade Area Agreement.

Another example relates to the imposition of cabotage between Peninsular Malaysia and East Malaysia. With intention of nurturing local shipping companies, it has caused unnecessary increase in cost of living of Malaysians in Sabah and Sarawak by hiking up transportation cost. Tradable goods became more expensive than it would have been under free trade environment. Again, thankfully, despite protest from local ship owners, the removal of the protectionist policy has been successful. Malaysians in Sabah and Sarawak can expect their real wages, ceteris paribus, to go up, thanks to liberalization.

Even as the roles of government see expansion all over the world in the aftermath of the global recession through massive fiscal policy and more, the rationale of liberalization in Malaysia continues to take root. While guarded optimism is called for, recent liberalization of multiple service subsectors as announced by the Najib administration is a proof that — to paraphrase slightly the Iron Lady Margaret Thatcher — liberalization is on the move.

The liberals are winning the intellectual jousting. Yet, this is no time for liberals to rest. This excellent opportunity to push for greater freedom — either economic or individual freedom, although the two should be inseparable — does not come as frequently as it should. With a government seemingly friendly to liberalization policy, there is no better time to push for greater liberalization.

Greater liberalization is required because illiberal market structure like price and supply control mechanism on essential goods such as sugar and flour are still imposed by the government. Just weeks ago, shortage occurred to rudely disrupt routine to remind all of inefficient market.

With momentum on the side of the liberals, they can afford to push liberalization forward. Shoving the agenda is especially easy when discredited protectionist ideas are demonstrable as actual and not merely as theoretical failures.

In spite of cache available for liberals to rely on, continuous shoving of liberal economic agenda does not create ally and it only alienates losers of liberalization.

As a sidetrack, liberalization does create losers but the rationale of liberalization, or actually, free trade, is not that it does not create losers, but rather, on average, it lifts all boats up. This should be juxtaposed harshly with the effects of protectionist policy, which may or may not create winners but guarantees everybody, on average, worse off.

Liberalization exercises are definitely colliding with the New Economic Policy, or whatever is left of it. While it is unclear if there is a majority who supports the policy any longer, there is no doubt that there exists a large segment within Malaysian society who do support it and see liberalization exercises as threats.

On top of that, local business owners, Malay or non-Malay alike, are likely to be hugely unexcited with liberalization effort that inevitably invites large multinational corporations with enjoy economies of scale that these locals could only imagine.

Together, these groups have the political power to derail liberalization exercise in the future.
In order to reduce that possibility, it is imperative for liberals to reach out to the potential losers and their sympathizers to partly, wherever reasonable, alleviate their fear. And their fear of monopoly is reasonable.

Perhaps, the act of reaching out should be an afterthought. The fear of monopoly, after all, should not exclusively belong to only protectionists and their cohorts.

Economic liberals celebrate competitive market. Purely competitive market is of course unachievable due to a myriad of factors but that does not prevent liberals for achieving second best solutions that approximate idealized environment.

The practice of anti-competitive behavior especially by colluding companies with excessive market power hurts the prospect of superior competitive outcomes associated with the ideas of free market.

Anti-trust laws may be able to curb anti-competitive practice. It has the ability to reduce the entry cost for newcomers, which can realize the spirit of creative destruction that every incumbent and even more so, monopolies, fear, despite its positive effect on society at large. Through this, protectionists’ fear should be somewhat addressed. And when it is addressed, liberalization can continue with its forward march to actualize the idea of liberty.

For liberals, the law has to be applied in equal weight. All monopolies, either local or foreign, should be subjected to the same law. If it is unclear, this means it must include government-linked companies as well as local cartels formed by private firms.

This cannot be stressed enough. Anti-trust laws directed at only foreign companies is only a protectionist’s tool and not an enabler of competitive market. Worse, without covering government linked-companies, such imperfect anti-trust laws would only open the path towards greater government intervention in the market.

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 September 7 2009.

Categories
Economics

[2072] Of the market can live without government bonds

Not too long ago when the Australian government ran a budget surplus, the Howard administration announced a plan to stop govenrment borrowing. That was around 2003. The financial industry was unhappy with it and lobbied the government to abandon that plan, citing havoc it would cause in the Australian financial market. The lobby was succesful. The Australian government continued to borrow even in times of fiscal surplus.

The idea how absence of government bonds in the local market may cause havoc is simple. All interest rates are more or less dependent on interest rate of a risk-free asset. In most cases, a risk-free asset is a sovereign bond of a reputable government, which more often than not, members of the Organization of Economic Cooperation and Development, the OCED, which is a grouping of the most developed as well as the most influential economies in the world.

It is risk-free in a sense that these governments, and in this case, the Australian government, would not default on their obligation to service the debts. Given the certainty that it provides, others instruments are priced with the rates of sovereign bonds considered. In other words, government bonds provide benchmark interest rate for the financial industry to use for other purposes ranging from simple lending and saving activities to complex derivatives.

How much disturbance would it cause if a government ceases issuing bonds?

I am quite concerned with this question because as a libertarian of largely minarchist tradition, the argument provides a hurdle to smaller government.

Firstly, by connecting the centrality of sovereign bonds as risk-free asset to the health of the financial industry and the economy at large, it legitimizes government intervention in the market.

Secondly, in time of budget surplus, it prevents valuable resources from being used in other areas. Borrowing imposes cost and the cost is being borne for no productive spending at all. It is like Santa Claus throwing money to the streets, except that it is the taxpayers that ultimately pay for it. It is not so much an issue in time of deficit because such deficit spending is grounded on other rationale, regardless whether that rationale is acceptable or not.

Thirdly, borrowing in times when the government has little use for extra fund introduces an unnecessary opportunity cost. “Oh, extra money! Let us spend it”. After all, with interest charged on that idle money, surely there are better ways to utilize it. That involves reinvesting that borrowed money into investments that provide higher returns. Or funding new government programs that veer away from the role of a limited government. That is not a libertarian-friendly idea.

Returning to the question, how much disturbance or havoc?

I would argue not much since the market will adapt to a scenario without government bonds in the local market.

It is true that without government bond in the market, market players will not have a risk-free asset to base their pricing on, within local context. I am sure they will be able to substitute it with other assets locally however. It will not be risk-free but it is still high quality assets. That probably may cause cost of borrowing to go systematically up since the minimum interest rate in the market that forms the base of all pricings increases to correspond with greater risk faced by market participants. Nonetheless, the industry will find an alternative benchmark.

Furthermore, that alternative benchmark does not have to originate from the local market. Other governments do borrow and some of the most reputable governments, as far as fulfilling their debt obligation go, borrow massively. Save for foreign exchange rate fluctuation risk, there is no reason why the rate at which reputable foreign governments borrow cannot be the benchmark.

I suspect the argument against zero-debt made by the Australia financial industry players is about protecting their revenue rather than problem that it might cause to the market’s ability to price assets.

Categories
Economics

[2068] Of o stimulus, where art thou?

Apparently, the second quarter GDP results came out way better than expected.

Aug. 27 (Bloomberg) — Malaysia’s economy is expected to resume growth this year after slipping into its first recession in a decade last quarter, mirroring recoveries across Asia.

Gross domestic product shrank a less-than-expected 3.9 percent in the three months ended June from a year earlier, after a 6.2 percent contraction in the first quarter, the central bank said yesterday. Economists, who were expecting a 5 percent decline, are raising their GDP forecasts for Southeast Asia’s third-largest economy.

Asian economies are reporting better second-quarter GDP numbers as the global slowdown eases after fiscal and monetary stimulus around the world. Malaysian central bank Governor Zeti Akhtar Aziz said yesterday that the government will revise its GDP forecast for a 5 percent contraction this year in the budget to reflect the nation’s economic improvement. [Malaysia’s Economy May Resume Growth This Year on Higher Demand. Shamin Adam. Bloomberg. August 27 2009]

Now, first of all, this dismisses concerns from some quarters that there was a need for a third stimulus package. These alarmists should be shot. No, I am not kidding. I really mean shot. I almost had a heart attack when I read about the suggestion months ago.

Secondly, we will only notice the stimulus money in full action only after recovery has taken place. I have taken this position from early one and I am being proven right. In fact, signs for recovery began as early as February, way before any stimulus has any impact. Since February, various indicators have shown general improvement independent of stimulus.[0A] The good news is that exports also improved;[0B] I have also maintained that recovery will be export-driven.

The official line is that the stimulus package helped cushion the fall. It may help by a tiny bit but changes in exports is more significant than increase in public spending, which more or less. a proxy of the stimulus package. Imports too went up but it is unclear if it was due to domestic consumption or instead, correspond to the increase in exports. Given that the make-up of the economy is that many of imported goods are intermediary goods which are used for exports, I am more inclined to favor the exports answer.

On top of that, in contrary to the celebrated increase in private consumption as announced by the Governor, in real terms, it fell to further gives credence to the exports explanation.

The same could be said about the increase in for capital formation. It is probably due to increased exports more than it could be about stimulus spending.

Furthermore, it appears that Malaysia may not have any need for a stimulus in the first place, or at the very least, the kind of outrageous size that we saw earlier. Proponents of stimulus, especially ones who advocated greater government spending as the base of that stimulus, were merely panicking more than anything else when they decided to unveil a large stimulus package, as I have accused them of.

As an aside, the much hyped Rangsangan Ekonomi website[1] which was announced as a site to make the stimulus spending transparent is especially a great cheat. For the second stimulus, it does not give actual progress. Rather, it only gives distribution of money. The whole thing is a big fat lie.

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

[0A] — See The Coincident, Leading and Lagging Indicators, and Growth Rates, 2005-2009 table by the Department of Statistics.

[0B] — See Gross National Income (GNI) by Expenditure Components in Constant Prices (2000=100) and Current Prices table by the Bank Negara Malaysia.

[1] — To see it, go to http://www.rangsanganekonomi.treasury.gov.my/. Information for the first stimulus package however is respectably shared, unlike the second and much larger one. Accessed on August 27 2009.

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

p/s — I am delighted to discover that the BNM website has been upgraded. Kudos to BNM.