Category: Economics

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Economics Environment

[1807] Of Beijing would do better with congestion pricing

Beijing is notorious for its dismal air quality. I have never been there myself but many news reports have convinced me that Beijing is not really a place I would want to live in. My experience in Kuala Lumpur during the one of those hazy periods was bad enough. I also hate Los Angeles because of its constant smoggy sky and I doubt I would love Beijing for the same reason. The authority there however is trying to do something about it and among it is a requirement for all cars to stay off the streets for a day out of a week.[1] This may work in the short term but in the long run, it could be ineffective.

The policy — in its six-month trial run — calls for car with registration ending with a particular digit to be barred from being driven on the road on a particular day. With this rule, the local authority expects to reduce traffic by 6.5%. The same authority also has an ambition to take half of the cars in Beijing off the road on a very bad day: that is equivalent to 3.4 million cars.[2]

It is not really rocket science to find a way to go around this restriction: buy or use another car with its registration number different from the existing one. Or buy or use other kind of vehicle. Or use public transportation which is probably the ideal path. In any case, one unintended consequence of this policy could be an increase in car ownership per capita while traffic remains to be high, or only see limited reduction, with all else being equal.

The scary part is that in the short run, this policy might work. Individuals probably need some time to acquire new car or vehicles. And it would probably take the most of the public some time to discover a way to beat the system. The bottom line is that adaptation requires time. Slowly however, the policy would be useless as more and more individuals move to capitalize over the weakness of the policy. How long would that be would be anybody’s guess, until the results from the test run are finalized.

Why is this scary?

The trial run will last only six months. The time length is probably insufficient for the authority to obtain the necessary empirical data to prove the ineffectiveness of the policy. The way the test run is being conducted has a temporal bias and may lead those conducting the experiment to a wrong conclusion.

But fret not Beijing for all is not lost in your quest for cleaner and clearer sky! There is a proven superior market-based alternative known as congestion pricing!

Congestion pricing policy suffers no such weakness as no vehicle, save those exempted, will escape the policy, assuming enforcement is carried out. This market-based policy also has the potential of eliminating negative externalities such as traffic congestion and pollution. Another is that the policy, unlike the currently tested in Beijing, fills the city’s coffers. That money could then be used to maintain or even improve the public transportation system!

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

[1] — Traffic restrictions have been re-introduced in China’s capital Beijing, in an attempt to bring back the clear skies seen during the Olympics.

Each car must spend one day a week off the road, in a scheme based on registration numbers. [Beijing reintroduces car rules. BBC. October 13 2008]

[2] — The new rules are expected to take some 800,000 cars off the road every day, according to the Beijing Municipal Committee of Communications.

“It’s expected to reduce Beijing’s average road traffic flow by 6.5%,” a committee official told the state news agency Xinhua.

During periods of exceptionally heavy pollution, the restrictions will be increased so that half of Beijing’s 3.4 million cars will be taken off the roads, state media reports. [Beijing reintroduces car rules. BBC. October 13 2008]

Categories
Economics

[1806] Of holy macaroni! Krugman wins the Prize in Economics!

Totally unexpected!

Oct. 13 (Bloomberg) — Princeton University professor and New York Times columnist Paul Krugman won the Nobel Prize in economics for his work on trade theory. [Princeton’s Paul Krugman Wins Nobel Economics Prize (Update3). Simon Kennedy. Benedikt Kammel Bloomberg. October 13 2008]

And what did the good professor say in his blog?

A funny thing happened to me this morning… [An interesting morning. The Conscience of a Liberal. October 13 2008]

Categories
Economics

[1803] Of the dramatic decline of the Australian dollar against the Malaysian ringgit

Just several weeks ago, it cost approximately MYR3.00 to get AUD1.00. I know this because I needed considerable amount of Australian dollar soon and I have been watching the exchange rate between the two currencies very closely to figure out when will be the best time for me to purchase the Australian dollar in bulk.

Since then, the Australian dollar has lost over 16% of its value compared to the ringgit. As a direct result, I found whatever cost I need to bare in Australia went down by the same percentage.

The decline is spectacular because of its suddenness as well as the fact that the last time the Malaysian ringgit fared so well against the Australian dollar was over 5 years ago. For this week alone, the dollar lost 8% of its value; on the day after the rate cut was announced, at maximum, it lost 6% of its value compared to the ringgit.

This is definitely a chance for me to buy up Australian dollar cheaply.

I am unsure if I should wait since I am unsure if the Bank Negara would keep the Malaysian rate at its current level. With inflation moderating and the economy slowing down, the Bank might be tempted to reduce the rate. If the interest goes down, the ringgit would likely see some depreciation against the Australian dollar.

Also, with the impressive coordinated rate cuts across the world yesterday, the ringgit has appreciated markedly against the British pound sterling and the Euro, among economies saw a rate cut.

But for those interested in the economic implication rather than my networth, does this mean the Malaysian economy is doing good?

That is hard to say because the exchange rate is not a good measure of economic health. Especially in the case between the Australian dollar and the Malaysian ringgit, it is clear that the rate differential plays a huge part in the depreciation of the Australian dollar rather than the health of the Malaysian economy per se. Indeed, the cause of the depreciation is the confidence crisis faced by the Australian economy and less to do with improvement of confidence in the Malaysian economy on general. This causal relationship becomes more convincing when the Australian dollar is depreciating in large magnitude against its trading partners.

This is an important factor to remember the next time you heard anybody trying to pass off the strengh of the ringgit against any currency, including the US dollar, as a reflection of the Malaysian economy. The relationship between the two is not quite so simple. Before believing that person, among other things, check out what is happening in the other economy first. In other words, check the various indicators of the real economy.

Categories
Economics

[1802] Of looking at the wrong barometer

The Malaysia Deposit Insurance Corporation sure does take its job seriously. Amid news of bank runs, financial meltdowns, recession abroad and the spectre of — heaven forbid — depression in the United States, the corporation or PIDM is going all out to inform the public that their savings are insured up to a certain level. It is great that the PIDM is taking the initiative to assure savers but I wonder how justified is it for savers and the public in general to take such a negative perspective of the local economy.

I certainly do not expect a bank run to occur in Malaysia. To expect otherwise just because there are bank run in other countries seems excessively pessimistic. The reason is that the economic circumstances in countries where bank runs have occurred in the past months are different from that in Malaysia despite the fact that the world economy is more integrated than ever before.

But then again, a bank run is usually about a crisis of confidence and rarely about the soundness of a bank. With doomsayers and conspiracy theorists working overtime all over to undermine public confidence, maybe explaining to the public the benefits of savings insurance is not a bad idea after all.

Perhaps, especially so when even the latest data released by the Merdeka Centre showed that “economic issues” is among the top concerns of Malaysians. With the stock market not doing too good either, the headlines in the business section typically play an unhappy tune.

Despite the concerns, yet, looking at various economic indicators, the Malaysian real economy seems to be doing okay. It is not doing great but the sky is not falling either.

One of the few things which may be helpful in judging the state of the economy is to watch for the yield curve of Malaysian government bonds.

An inverted yield curve could signal an economic slowdown because a yield curve in a way measures the expected economic environment in the future. A rising yield curve may indicate better expected returns in the future while an inverted curve may indicate worsening expected returns in the future.

A brief check shows that the yield curve for Malaysian government bonds is healthily normal. The yield for a three-year bond is over 1 per cent lower than that of 20-year bond. Suffice to say, the future does not look too gloomy from this perspective.

Meanwhile, the consumer price index is expected to tatter the further we go into the future. At the same time, core inflation remains relatively low. The reason Bank Negara did not increase the overnight lending rate the last time it deliberated on the matter is exactly because expected inflation is expected to be low in the near future.

Granted, Bank Negara’s loose policy may increase inflation rate in the future and even the yield seems to show that inflation may rise. Still, with falling crude oil prices in part due to an economic slowdown as well as perhaps persistent adaptive responses made earlier with respect to record fuel prices, a tendency for the rate to increase will be met with a downward force.

And how many people are jobless right now?

Surely we would expect a lot of people to be out of jobs if the Malaysian economy is melting away like an ice cream in a middle of a field at noon time. Yet, the unemployment rate was just about 3.5 per cent in the second quarter of 2008. That is pretty much the same for the second quarter of 2007 as well as 2006. How similar?

Well, the unemployment rate for the second quarter of 2006 and 2007 was both 3.4 per cent. That is not exactly a disaster, if you ask me.

Furthermore, it is quite hard to see how the measure of joblessness would increase dramatically, especially when the industrial production index does not show a decrease according to the latest figures we have for this year.

The prospect of growth also does not convince me that the unemployment rate would go up after controlling for seasonal effect. The growth rate of Malaysia’s Gross Domestic Product is expected to be positive in spite of mountains of bad news from overseas. In the most liberal manner, a recession happens if two consecutive quarters see negative growth rate. Malaysia has yet to see that and probably would not see that happening anytime soon.

Malaysia will miss its target but the rate will still be positive; both the Asian Development Bank and RAM expect the country to grow by at least 5 per cent. To make it clear how the fundamentals do not align with the prevalent pessimism in the market, the GDP growth rate for the second quarter of 2008 actually is higher than that for the same period a year ago.

Despite the respectable showing of various indicators including those of the real economy, the public and even the media are accepting the stock market as the barometer of the economy. Hell, some even take whatever direction the Dow Jones would take as indicative of the future path of the Malaysian economy.

The stock markets, however, do not measure the real economy. In fact, the stock market actually lags behind economic cycles. What it means is that whenever the stock markets are down, it is probably already too late to do anything. On top of that, the stock markets take into account various information which has little to do with the real economy. And the fact is that the real economy is doing better than the stock markets.

However, I am not belittling the economic slowdown we are experiencing. For some people, it is getting harder to make a living. After all, the coincident and the lagging indices do suggest that the economy is slowing down. Indeed, the situation in the US, the largest trading partner of Malaysia, is adversely affecting the local economy. Yet, despite dire prediction, the exports sectors are doing better than expected. Truly, believe it or not, the electronics sector is actually growing. The growth is at a snail pace but growing nonetheless.

What I am trying to get at is you should take your eyes off the stock markets and watch the indicators of the real economy instead. That, and keep your chin up.

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 published in The Malaysian Insider.

Categories
Economics

[1801] Of minimum wages as a tool to retain local talent in a free flow of labor environment

Today:

Subramaniam said while the Government did not agree on the implementation of a minimum wage for all workers, it recognised that it was necessary to offer decent salaries as the country was losing its skilled employees to its competitors.

”We are losing our skilled workers to Singapore and the Middle East. We may end up losing even more so we must come up with attractive salaries as a way of persuading them to stay on. [Council to look into salaries of electronics, textile sectors. Sim Leoi Leoi. October 7 2008]

Basically, it is an idea to use minimum wages as a tool to retain local talent.

I do not think that it is a good idea. Consider the following scenarios and questions.

If there is free flow of labor as the Minister suggests, then it is far better to let employers and employees to negotiate with each other and decide what levels of wages are the best for both. If the businesses really need the talent, then the employers will offer wages high enough to effectively match wages offered outside of the country. For brevity, let us call this kind of wages as parity wages.

If there is no or little need for the talent, then there will be no parity wages. And when there is no or little need for such talent, would imposition of minimum wages help keep talent local? How does the Minister plan to keep talent local if there is no need or little need for such talent in the first place?

As for businesses based locally but unable to offer parity wages and yet are able to find willing talent, would minimum wages, which increases the cost of factor of production for the business help increase hiring? How would imposition of minimum wages encourage job creation in the country? How would imposition of minimum wages ensure that the businesses do not close down or migrate to somewhere cheaper, and hence, worsen employment opportunites in the country?