Tag: stimulus

Categories
Economics

[2496] Taylor’s OPR (more proof we did not need that stimulus)

Since the Monetary Policy Committee will be meeting next week, it is only natural to talk about the Overnight Policy Rate. It currently stands at 3.00% and it is likely to stay like that after the MPC meet. I personally (and professionally!) am betting a cut only in March as I think while inflationary pressure is receding, it is still high. Maybe, there is a bias in that expectation. What can I say?

But what would a customized Taylor’s rule say?

This particular Taylor’s rule is imperfect as the “equilibria” are somewhat squishy and not quite as methodical as I would like it to be, but in the coming weeks I should be able to calculate better coefficients to produce better hypothetical rate to compare with the actual OPR.

But observing the preliminary customized Taylor’s rule of mine, the OPR does seem to lag behind the rule. When I met some officials and economists from the Malaysian central bank a month or two back, they cheekily said they would not reveal the “natural rates”. The next time I meet them, I plan to cheekily share with them my Taylor’s rule, and say “you don’t have to tell me because I can read your mind.”

What I find interesting is that during the last recession, the Taylor’s rule suggests that Malaysia would have been in some kind of liquidity trap if the OPR had followed the rule closely. More interestingly, since the monetary policy was tight during that time, it could have been loosened more, leaving little if any need for  the 2008/2009 fiscal stimulus. Yet another proof against the Najib administration’s fiscal stimulus (or non-stimulus as Mr. Hisham, I would imagine, would put it).

Categories
Economics

[2341] Too late for the rest of the Malaysian stimulus to be of any use

You know how that one particular argument against fiscal stimulus goes. There is a temporal mismatch between crisis period and the actual spending. The bureaucracy and incomplete information act to delay the implementation of the stimulus. If transparency is of a concern, then it will further affect the timeliness of the stimulus spending. The crisis may end well before stimulus spending is done, making the stimulus useless and may even hurt the economy by crowding out private spending.

Well, there is not a theoretical concern. Malaysia is a concrete example.

As of March 2011, more than 2 years after the RM67 billion stimulus spending was announced, more than 20% of spending component of the stimulus (which was really RM20 billion and not RM67 billion; RM7 billion of actual spending as announced in the first stimulus package and RM13 billion for the second) has yet to be spent. This is recorded in the Hansard: read page 74 of the Hansard dated March 29 2011.[1]

Twenty percent unspent as of March 2011.

Now, consider that the Malaysia economy might have recovered as early as December 2009. And everybody knows that the first quarter of 2010 grew by 10.1% from a year ago in constant prices. So, how much stimulus money had been spent by the end of 2009?

December 2009 is an important point because it is arguable that the economy did not need any stimulus by then anymore, if one believes in the efficacy of stimulus spending.

If the growth of the stimulus spending had been linear, then by December 2009, about 30% would have been spent, which is about RM6 billion. To be honest, the spending is unlikely to take a linear function. I personally suspect the figure is lower. Nevertheless, it does give you an idea how much money could have been spent by December 2009.

The point I am driving that it is possible that a majority of the spending was useless as far as cushioning the recession.

The 30% figure is obtained by assuming that nothing was spent prior to the announcement of the second stimulus package in March 2009, which is, really, not a bad assumption. We know that by May 2009, only three quarters of a billion of the first fiscal stimulus was spent. Only half a billion was spent by March 2009. Given that the economy lost RM20 in the first quarter of 2009 compared to a year ago,[2] half a billion was nothing.

Contrast the RM6 billion money spent with this: between 2008 and 2009 alone, the economy contracted by RM64 billion in nominal terms.[3] Remember that the source the recession for Malaysia was reduced international trade. In the same period, net exports itself fell by RM23 billion in current prices.[4]

I also wonder how much resources had been deprived from the private sector due to government spending. The crowding out effect is a concern given that a considerable chunk of this spending was done in time when the stimulus is not required. Signs of crowding out were seen as early as July 2009.

If one accepts the excess capacity argument that government spending does not crowd out the private consumption or investment because of excess capacity due to low demand in times of recession, then that argument has become very tenuous with the spectacular growth seen in the last several quarters. Meanwhile, the crowding out argument becomes much, much stronger.

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

[1] — Pakej rangsangan ekonomi pertama berjumlah RM6.695 bilion telah dilaksanakan dengan prestasi perbelanjaan mencapai 93.2 peratus. Pakej rangsangan ekonomi kedua terbahagi kepada perbelanjaan fiskal dan bukan fiskal berjumlah RM60 bilion daripada peruntukan fiskal yang berjumlah RM13.26 bilion. Prestasi perbelanjaan setakat sudah hampir 77 peratus. Jadi masih ada sedikit lagi tetapi nampaknya sedang berjalan dengan baik. [Page 74. Hansard. March 29 2011]

[2] — See Gross Domestic Product at Current Prices 2007 – 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

[3] — See page 5 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

[4] — See page 48 of the Malaysia Economics Statistics – Time Series 2009 by the Department of Statistics Malaysia. Retrieved April 3 2011]

Categories
Economics

[2232] Of fiscal stimulus, timeliness and transparency

Although the debate on fiscal stimulus has died down in Malaysia, I am still very much amused, if not outright dismissive, of a number of arguments made by advocates of stimulus. One argument is related to transparency: stimulus has to be transparent. Although the argument for transparency is a generic one and many have voiced it, it was reiterated by somebody well-known in Malaysia recently. I am thinking of Nazir Razak of CIMB but at 3 o’clock in the cold Sydney, I have lost all desires to look for the article.

My criticism of having a timely stimulus and transparency is summarized in one word: naive.

Fiscal stimulus has to be timely, especially when there is no automatic stabilizers with arbitrary stimulus. If it takes too long to implement, or in other words, it takes the government too long to spend the money, there is a good chance that the stimulus will be obsolete by then. By the time the money is spent, the market situation has already improved that the stimulus is not required any more.

In fact, untimely implementation might disrupt recovery through, for instance, crowding out process by the government.

Unfortunately, transparency does not run parallel with the concern of timeliness.

Why transparency is inconsistent with timeliness?

Simple.

Transparency requires processes. Reporting is paramount. In other words, bureaucracy.

Red tapes have been derided as suffocating but it does play a huge role in rule of law. It is only through bureaucracy can controls be exerted on spending. Through those controls based on known clear rules and not through arbitrary acts which are susceptible to  abuse compared to rule-based system, transparency is achievable.

That rule-based system aimed at transparency is more convoluted than the paragraphs I have just written before this one. It take time to go through the bureaucracy. Hence, the issue of timeliness.

So, how useful is a stimulus if it is untimely done?

You know my answer.

I am for transparency but I am also a realist here. I understand that if one is concerned with transparency, it is hard to support a timely stimulus.

If you want a timely stimulus, something has to give. It is a dilemma.

Before I am accused of supporting corruption, leakage or anything of such, do note that I do consider those things negatively. Remember, I am arguing against fiscal stimulus, not transparency.

I do not have that dilemma. I am typically anti-stimulus; I cut through it.

Stimulus advocates cannot accuse me of giving nontransparent practices a blind eye. For those who like to moralize about transparency however, you my dear have a moral problem.

Categories
Economics

[2213] Of taking undue credit from the growth

When the economy first began to tumble down in 2008, those within the government were eager to point out that weakened external demand caused it. The financial crisis that began in the United States hurt global trade. Being a highly trade-dependent economy, there was no escaping for Malaysia. To put the blame on those in the government was unfair and wrong.

Now that the economy is rebounding in a spectacular fashion, those within the government are eager to claim credit for it. Perhaps, way too much credit.

Although it is arguable that the stimulus spending did contribute to the encouraging 10.1 per cent year-on-year growth of GDP — controversial claim but let us leave it at that — it is likely that the growth was mostly due to the same external factor that caused the recession in the first place. Contribution by the stimulus package was probably very pale compared to contribution from external demand.

It helps to rewind back to 2008 and 2009 when it all began. We need to understand that the cause of the recession was the drop in international trade, as far as Malaysia and other trade-dependent countries were concerned.

Furthermore, it is crucial to remember that not all of the RM67 billion of the stimulus package announced was actual spending. For instance, some came in form of guarantees. This lessens the potential impact of the stimulus, unlike what the proponents would like to believe. When they speak of the stimulus, they almost always speak as if the whole RM67 billion was direct spending, which is not true.

Even if all of the RM67 billion were in form of direct spending, it would still not counter the effect of falling trade volume. The spending did very little to reverse the fall. At best, one could claim that it cushioned the impact of the recession.

Here is a digression. Fiscal stimulus proponents argued earlier that it was a cushion. It was not much of a cushion, as we all saw. Their narrative has changed. They now claim that it aids recovery. Funny how the story changes, is it not?

The reverse in trade trend was so great that it created a great chasm in any graph. No government spending could overcome that chasm. The fact that the country entered a recession despite what Prime Minister Najib Razak called unprecedented spending is proof enough.

Toward the end of 2009 and in the first quarter of 2010, world trade recovered as spectacularly as it had fallen during the so-called Great Recession. For high trade intensity countries like Malaysia, it was extremely good news simply because it signals normalization.

Nothing more. This is a crucial point. The 10.1 per cent is merely a sign of normalization rather a sign of actual rapid growth, in the bigger picture. More than that, it is about the normalization of trade.

The big picture is this: The big growth numbers in high trade dependent countries that suffered significant contraction — be it in Malaysia, Singapore or Taiwan — are due to base effect rather than proof of excellent economic management skill of the countries with respect to growth. That chasm in the graph allows base effect to take a prominent role in exciting growth.

What is base effect?

Consider a person investing RM100 in a fund for two years. At the end of the first year, suppose the fund makes a loss of 50 per cent and hence, the person has only RM50 now. At the end of second year, the fund makes a return of 100 per cent and hence, the person has RM100 again.

Notice that the person, after two years, makes no profits or loss. Yet, the person makes a staggering 100 per cent return in the second year, if the second year is taken in isolation. That 100 per cent return is only impressive if the full context is unaccounted for.

Consider the case of Malaysia for the past two years. The year-on-year growth for the first quarter of 2009 was terrible: -6.2 per cent. The year-on-year growth for 2010 was magnificent: 10.1 per cent. What does two-year growth from the first quarter of 2008 look like?

A mere 3.2 per cent.

If one takes a ten-year horizon, then one will realize the mediocre contribution of the first quarter of 2010 to the Malaysian economy compared to other years. Take an even longer view and January, February and March of 2010 become insignificant points.

The reason for its insignificance is that base effect is temporary.

This story is repeatable in other Asian countries badly affected by the recession. Singapore suffered 11.5 per cent contraction in the first quarter of 2009. In the first quarter of 2010, it registered 15.5 per cent growth. Taiwan contracted 10.2 per cent. It grew 13.2 per cent later. These are extraordinary numbers caused by extraordinary circumstances, not by extraordinary government.

The story of able administrators becomes weaker and weaker as more and more countries with high trade intensity — which Malaysia is one of — exhibit the same pattern of growth. There must be a reason why multiple countries that share similar characteristic with Malaysia are showing great growth.

That reason is base effect. It comfortably explains the phenomenon to a large degree.

Are you still unconvinced about the centrality of base effect?

Take Thailand. Despite all of its troubles, it is expected to achieve stellar growth of 8.9 per cent in the first quarter. It contracted 7.1 per cent a year earlier. It is hard to believe that the growth in Thailand was due to good economic management by the government. Base effect is able to explain it rather well.

Supporters and proponent of fiscal stimulus maybe unconvinced by the base effect argument. They may insist on multiplier effect from two previous stimulus packages. Unfortunately for them, increased trade dominates the celebrated statistics of the first quarter. This increased trade drives the base effect.

And what about the multiplier from trade? Surely, the benefits of trade spill to other sector of the economy.

If somebody or something deserves to take credit for exciting the economy, it is world trade. It is consumers of the world. It is not the government or the fiscal stimulus.

Lastly, the second and third quarter of 2009 registered lower levels of GDP compared to the respective quarters a year earlier for Malaysia. That means the base effect will likely disappear only in the fourth quarter of 2010. Opportunity for spectacular growth will diminish soon enough.

For his administration claim credit — or for somebody to credit the administration — for the performance of the economy, before the base effect peters out, especially as early as the first quarter, is premature.

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 May 24 2010.

Categories
Economics

[2172] Of did we need the stimulus package?

The fourth quarter of 2009 saw Malaysian economy recorded strong recovery on year-on-year basis.[1] So strong it was that the monetary authority of Malaysia went for a rate hike, making Malaysia the second country after Australia to adopt a hawkish monetary policy.[2] The question that should be asked now is, did we need the big stimulus?

The question is particularly relevant because the main driver of recovery has been external demand. This is something I have been stressing from the very beginning and it is the thrust of my opposition to economic stimulus, especially in the fashion of fiscal expansion, given the effect of the expansion on fiscal deficit, effect on future taxpayers as well as its potential adverse effect on private borrowers and therefore the economy sans the public sector.

Growth for external demand for domestic goods almost doubled the growth of domestic demand for goods.[3][4] Add the fact that external demand makes up a very large part of Malaysian GDP, in fact approximately 100% in terms of exports-to-GDP ratio,[5] the stimulus seems unnecessary.

Without the stimulus, recovery might have been less impressive than what was registered recently; it would be a recovery nonetheless. This however assumes that the government spending has no affect on interest rate and thus, the exchange rate. This is possible if the monetary authority, which is the Bank Negara, colludes with the executive branch of the government.

But expansion of fiscal policy does affect interest rate and the exchange rate assuming independence of the monetary authority, at least within the typical IS-LM model under open economy.

With that model with that particular settings, recovery without stimulus could have been just as impressive. If the extraordinary fiscal expansion were absent — the factor inhibiting exports that is higher exchange rate due to fiscal expansion would be absent — external demand for domestic goods could have increased much more than the already impressive level we saw at the end of 2009.

Remember, a lot of people were pleasantly surprised by the fourth quarter growth.

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

[1] — Malaysia’s economy expanded 4.5 percent in the final three months of 2009 from a year earlier, Prime Minister Najib Razak said yesterday. Economists expected a 3.2 percent expansion, a Bloomberg survey showed. Gross domestic product fell in the preceding three quarters as exports slumped amid the global financial crisis. [Malaysia May Beat Korea, India to Asia Rate Increase. David Yong. Bloomberg. February 25 2010]

[2] — March 3 (Bloomberg) — Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia. [Malaysia May Pull Monetary Stimulus Before Indonesia . Shamim. David Yong. Bloomberg. March 3 2010]

[3] — The external sector performed favourably with both Exports and Imports turned over by 7.3 per cent and 6.9 per cent respectively. The improved demand for the products of Electrical & Electronics, Animal & Vegetables Oils & Fats and Chemicals have contributed to the increase in Exports. Meanwhile, the growth in Imports was due to the higher demand for intermediate goods and capital goods. [National Product and Expenditure Accounts Fourth Quarter 2009. Department of Statistics of Malaysia. February 24 2010]

[4] — Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%. [A tale of two recoveries: Malaysia vs. Germany. Rebecca Wilder. News N Economics. February 25 2010]

[5] — See trade profile of Malaysia at World Trade Organization. Accessed March 5 2010.