Spot the error:
In the first place the Government should not have floated the Ringgit. A floating rate creates uncertainties and we cannot gain anything from the strengthened Ringgit. Certainly the people have not experienced any increase in their purchasing power because of the appreciation in the exchange rate between the US Dollar and the Ringgit.
Actually the Ringgit has increased by about 80 sen (from RM3.80 to RM3.08 to 1 US Dollar) per US Dollar, i.e. by more than 20 per cent. Had the Government retained the fixed rate system and increased the value of the Ringgit, say 10 per cent at a time, the cost of imports, in Ringgit terms can be monitored and reduced by 10 per cent. At 20 per cent appreciation the cost of imports should decrease by 20 per cent. But we know the prices of imported goods or services have not decreased at all. This means we are paying 20 per cent higher for our imports including the raw material and components for our industries.
Since oil prices are fixed in US Dollar, the increase in US Dollar prices of oil should also be mitigated by 20 per cent in Malaysian Ringgit.
But the Government wants to please the International Monetary Fund and the World Bank and decided to float the Ringgit. As a result the strengthening of the Ringgit merely increased our cost of exports without giving our people the benefit of lower cost of imports. [Oil Price. Dr. Mahathir Mohamed. June 5 2008]
If you cannot find the mistake, I would like to point out that the former Prime Minister does not appreciate the concept of ceteris paribus.
13 replies on “[1679] Of Dr. Mahathir’s got his economics wrong”
the conclusion iz?
vote economists for PM
ha3~
1: I understand his point completely and I’m saying his economics is wrong.
2: That does not explain it my friend. If you read, Mahathir was giving an example to support the idea of a fixed rate, not that he is advocating a “10%” in particular. I doubt you understand his argument or mine.
Besides, you can’t just pick a number out of thin air to conform to a 10%. There has to be a reason why. Does that “10%” bring a right condition for export and import, etc?
3: Criticizing does not mean hate. If a person thought 1+1 is 3 and I pointed out that he is wrong, would that me I hate the person whom committed the mistake?
If you want to talk about Orwell, then you shouldn’t condense the meaning of criticism into hate. That action of yours itself is an effort at doublespeak.
Number 1
I dun get it….
you still don’t understand his Simple point.
I deal later… too long too explain again,,,
Number 2
3.45 was chosen not by me but by Mahathir..
he said 10 percent at a time which derive from
3.8 – 0.1(3.8) = 3.42 which is roughly about 3.40/3.45.
Number 3
Maybe ‘hate’ has suddenly become such a strong and bad word… Must be all this hate campaign stuff..
Tell you what, as far as 20 years ago, hate was a simple word just an expression about ones feeling.. just the opposite of the word ‘like’…
how things have change….
Just like you still haven’t figure why we should use B.C and A.D not this trendy before/after Common Era thing, simply becos there is no such thing as common Era!
Just as Orwell said if one can control one’s language one can controls one’s thinking!
But really…. You should listen to what senor Hugo chavez…. just Youtube the Hugo Chavez and why the revolution will not be televised!!!!
JeD Yoong
Even before Mahathir became TPM and PM … the guy had shady background… so plz don’t laugh about it! :)
Hafiz,
You wrote in your first response:
“So, when he said stronger RM is the cause of higher import prices, that is just totally wrong. On specific basis, it is the opposite.”
I agree.
“on interest rate, it has been considered into the exchange rate. the exchange rate and the interest is closely connected.”
Yes, one basic theory is interest rate parity, based on arbitrage opps that may exist due to diff i/r, FX rates will reach an equilibirium where arbitrage becomes impossible, according to the theory… ;)
Kukuman:
Don’t want to be elitist but most fundamental economic theories are based on assumptions and logic. They usually fall apart in the real world as nothing is ceteris paribus or as assumed.
You are right that sometimes common sense may be better.
But when you wrote:
“But one thing you must know, the Man Mahathir knows and has knowledge about the ‘forbidden knowledge’.”
HA HA HA HA HA HA HA HA HA. You must be joking. Look at the state of the economy now. That’s the result of 22 years of Mahathirian economics.
With luck, Malaysia may even make it into the case study syllabus of business schools.
HA HA HA HA HA HA HA HA HA HA HA
But you are right, nothing is black or white. But logic remains logical.
I’ll touch only three things:
Number 1:
I assume that you meant “hardship of [importing] of our more expensive produce” instead of exporting.
Like I said, the analysis is ignoring an essential concept. That is why “something is not right here”. He is mixing the effect of stronger ringgit against higher prices of raw material.
It is possible that the effect of higher raw material prices (or something else) is overpowering the effect of stronger ringgit. The forex is not the only factor needs to be considered. Life is not that simple. Neither is economics.
Dr. Mahathir (and you) doesn’t see this. So, he arrived at the wrong conclusion. This is not a matter of opinion. It is matter of fact.
Number 2:
Why 3.45? Why not 3.60? Why not 3.00? Do you have a reason for that particular number?
Number 3:
Wow, just because I spotted his mistake, you think I hate him?
Hello,
First of all, I am not an Mahathir supporter!
But one thing you must know, the Man Mahathir knows and has knowledge about the ‘forbidden knowledge’.
Somethings that is and has never really been taught in any University, be it Harvard or Michigan.
Maybe we need to take a back seat and throw away for a while all this Economic theory which by it’s very nature are not scientific law.
One of the major weakness in Badawi Government beside plundering n corruption n cronyism is weakness of his adviser following this free trade and liberalization of economy dogma. He single handedly destroy Proton..so stupidly.
If you don’t make your own cars… then you don’t buy(sell) them! That is the general rule. Meaning that all cars are needed to be made very expensive! So No one use it! Becos cars are really not a fundamentals needs but a luxury
But becos free trade dogmas dictate that subsidizing and helping one owns interest(industry) is deem a bad thing. So Proton needs to be more competitive or just die, so no more protection and subsidy(off course not really the biggest reason but the AP money is just too good really).
So the stupid Malaysia guy thinks he is buying a cheap imported car which really he(or the nation) cannot afford? yup it is really true. imagine how many tones of Palm Oil does it need to trade a car?
The first job of Proton was to lessen the impact of both relative cheap and medium price of imported car. Malaysia cannot afford to buy imported cheap tin car because the are too expensive. It simply better to import the raw material and expertise and create an industry with many sub industry. Later on the buying of expertise can be reduce by time.
But it makes local cars expensive to make, So we subsidizer in form of discriminate taxes and subsidy. But helping your own ‘son’ is a consider bad thing to do! Because it is deem less efficient less competitive.
So with now the local car being more expensive and therefore is harder to sell. With sale down and The Company is tanking. Capital and expertise is needed.
Remember Don’t help him…. leave him alone and if he live he will be stronger(if)!
Therefore one must allow your industry to be bought up so to be so called competitive, receive some paper money and then let the rest of us be the hardworking efficients workers.
N when the real owners deem that some other poor country is deem more efficient(cheaper)than us, we then move our industry outside leaving us with no industry and no efficient workers.
Now we have no industry….no asset…no work!
Finally we can receive and import the poorness and giveaway and export our richness.
you see
being competitive is good…
being efficient is good…
being independent is good…
but one must also be smart! street smart.
one must first be able to live..
Remember history… in the name of free trade the British went to war to sell opiums to the Chinese.
You can argue all you want whether it was good for China at the end of the day, but you must be alive for to argue about it!
Mahathir may not be an economist, but with his shady background he understand basic fundamental economy and how the real worlds operate.
all this free trade dogma and globalization nonsense needs to be put back a side for awhile.
One of his smartest moves in 1998 was to listen to British(Muslim) Economy advisor who knew the truth of the power of ‘hidden hand'(the forbidden knowledge)
who told Mahathir to close up the ringgit, follow China and focus on the real economy! Forget the useless international paper or electronic money and all the useless speculation.
Focus on your local Export and import. You see in a real economy, everything can be traded in barter! In a barter system Money just act as a tool/medium of bartering which is the real purpose of Money.
What Mahathir said is very Right… With a stronger ringgit it should mean we benefit of imported goods from the increase richness of the ringgit but which did not actually/really happen instead we only receive the hardship of exporting of our more expensive produce. so something is not right here.
A reevaluation of say 10 percent around 3.45 ringgit per dollar would actually be better for us than the uncertainty of a floated Ringgit which we have no control.
Remember this for you free traders and Globalist it was in 1996 that Mahathir was blabbing about a global economy with no borders. Globalist world then had a diff tune to it off course, that is just word play just like Communism comes from a relatively good word community but is oa a diff beast in reality.
THe danger of this Golabalization system if you may not know it by now is we are headed for
a One World Trade….
a One World Economy….
a One world system….
a One world Order…
with less benefit and finally…
a One world Dogma/Religion!
Maybe if you hate Mahathir that much it is best you listen to talking of the much hated Leader of Venezuela…
Senor Hugo Chavez!
You could learn a lot from that guy!
Because in real life all politics are Local(not global)!
Of course, many factors are involved in the determination of forex but that seems to digress from the mistake that Dr. Mahathir made, which is failure to keep one causal relationship differentiated from another.I may have misunderstood you when I first posted my response to your latest comment. But yeah, the world is not one-dimensional. Mahathir fails to understand that there are many factors involved.
He just takes the net effect of all of these factors and attributes it exclusively to one factor, which is wrong.
p/s – on interest rate, it has been considered into the exchange rate. the exchange rate and the interest is closely connected.
Yes. Ceteris paribus, mate. ;)
IMHO, interest rate parity comes in when he talks about the ringgit rising vis-a-vis the USD to negate “inflation”. But the Fed Rate in the US is about 2 per cent, which based on the theory will lead to capital leaving the currency, hence causing it to depreciate while real inflation is rising. That is the depreciation of the USD may not ONLY be due to the trade balance but also due to the low interest rates.
Many factors involved the the change in FX rates — trade, inflation (real), money supply (i/r), IMHO. If only all was ceteris paribus sometimes in real life. ;)
Tks for clearing it up. Hazy. Ha ha ha. Dr M is indeed the “best”. Ha ha ha ha. I spent about 30 minutes thinking through it.
:)
Yup, that is right though I don’t think we need to go to interest rate.
He seems to understand the effect when he mentioned about the ringgit strengthening against the dollar and its effect on export and import.
By he seems to confuse is the cause and the effect. There are at least two “cause and effect” relationships and he mixed them up. As mentioned, one relation is about the exchange rate and export/import and the other being the actual increase in raw material (which has nothing to do with exchange rate; even if these raw material were produced locally and priced worldwide in RM and thus eliminating the requirement for forex transaction, prices of the material will still go up) The net effect of the two relationship bring about the final result but he doesn’t separate the two components.
And in his analysis, he linked one cause with the net effect, not the specific effect. So, when he said stronger RM is the cause of higher import prices, that is just totally wrong. On specific basis, it is the opposite.
Thus, he fails to maintain the “all things being equal” requirement.
You know what, I discussed this with my editor and was trying to figure out if I got it wrong… ;)Will leave it to the economist, YOU, to confirm the mistakes.
Generally, he needs to understand interest rate parity and the theory of exchange rates esp in relation to inflation, trade in relation to our biggest trading partner.
Thank you. And I would love to know where else he’s mistaken though I think, your criticism of him is too harsh.
ps: your piece on MalaysiaInsider is nicely written. malaysians should wake up to the economics reality. life sucks…adapt!
pps: I have previously added much longer comment on tun mahathir’s misleading statement… and i don’t think it’s as simple as “all equal” assumptions. his statement is fundamentally flawed in many other ways too. [just as datuk abdul kadir jasin’s post recently]
ex PM has a deg in medicine, which he failed to practice for 30 odd years. He is a master in fact spinnings…i.e. making facts out of thin air. by putting a few numbers and statistics, surely, he fooled the common simply uneducated minds. honestly, how many malaysians have basic training in economics?