Tag: The Malaysian Insider

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Economics

[1926] Of mini-budget fails to reduce friction and cost of doing business

Despite being a person who is generally skeptical to the idea of economic stimulus, I did hold high hope for the second stimulus package or the mini-budget as it is called. I thought this would be the time when we would finally do things differently. Like a crystal glass thrown into the air only to meet the harsh earth, that hope of mine was crudely shattered into millions of pieces.

As it turned out, it was business as usual. Same old same old.

I had expected for a new way of managing the economy that reduces cost of doing business by reducing frictions in the economy. This expectation did not come out of thin air. There were signs to rationalize it.

The biggest was the courage shown to reform the outdated fuel subsidy regime which was costing the country billions of ringgit in terms of opportunity cost. Meanwhile, as the world economy slugged it out, out came statement from the Prime Minister urging countries not to fall back on protectionism.

Then there is the Deputy Prime Minister who is expected to assume the Prime Ministeship soon. He is eager to break from the past and start anew. He wants to differentiate himself from the current administration. Even if he did not want to change, local political circumstances demand change. To ignore that demand is to court doom for himself and his political party. He simply has not choice but to change if he is to survive.

That requirement for change was what fueled my expectation of continuous reform of the economy. Unfortunately, the mini-budget contained more than a billion ringgit worth of subsidy to undo reforms of the past. Clearly the lesson of shortage caused by price and supply controls not too long ago has been left unheeded.

The highway toll subsidy is another disappointment. I have no doubt that the inconsistent nature of the current administration is why that particular subsidy is included in the stimulus package. The users of the highway are not doubt happy about it but I am positively not because I now find myself subsidizing those users. That is what I call highway robbery.

The story on subsidy does not end there because somewhere in the mini-budget speech is a section on what is called the private finance initiatives. PFI sounds attractive with so-called partnership between public and the private sector but the more I learn about it, the more I think it is a farce.

In truth, it is nothing more than a subsidy re-branded under a different term. It is just a term to sanitize the idea of government subsidizing businesses. Under the program, the government will in essence subsidize projects that would otherwise be unviable without government intervention.

Malaysia has a lot of these government-subsidized businesses. They are unsustainable and driven by motives which rarely survive economic scrutiny. They pretend to be public goods so that there is moral justification for the subsidization. It is these kinds of projects which impose efficiency cost on our economy but they continue to not only exist, but unashamedly flourish in our country.

This is the reason why I generally prefer to not have economic stimulus and let the market does it job. The only stimulus I make exception for is generally the one that reduces friction in the economy, like tax cuts. I prefer Darwinisn to rid us of unsustainable businesses so that in the long run, even if we would be dead, at least we could leave our children with a better world.

Economic downturn — call it whatever you like — is a time for exactly that. It is a time for spring cleaning. What we have seen so far only amounts to merely sweeping dust under the carpet, hoping that the dust would go away to somewhere.

By the time the business cycle is complete, we will look back and lament the missed rare opportunity to improve the structure of the economy while stimulating the economy: the stimulus failed to reduce transactional cost. The cost of doing business caused by friction in the economy is not removed.

There were tax cuts announced in the mini-budget but it fell far short than how I would have done it. The RM3 billion tax cuts were done in a manner than only profitable ventures would enjoy it whereas the ones in trouble are the ones that are making losses. Reduction or elimination of taxes that contributes to transactional cost is able to address that problem but it is nowhere in sight.

If that bad news does not move you, wait till you read this: not only the cost of doing business sees no reduction, it is being pushed up instead!

Indeed, initiatives of the stimulus like absorption of excess labor possibly regardless of business requirement and restriction on foreign labor recruitment increases cost of doing business.

Surely, in times when revenue is stagnating, the absorption of more people into various such organizations adds drag to their overall health. Of particular note are government-linked companies which are expected to recruit more people into its programs of fanciful acronym.

On foreign labor, it is true that the issue requires urgent address but such restriction as proposed in the mini-budget is hardly necessarily. There is a Malay saying that appropriately describes the restriction: it is akin to burning the whole mosquito net merely cause of an annoying mosquito.

What requires attention is not foreign labor per se but the recruiting agents and the system. These foreign labors are brought legally complete with permits into Malaysia through our suspiciously porous system without any guarantee of jobs. It is only after they reach Malaysian shores will they start scouring for jobs.

A proper system should do things the other way round because if there is no job, there would be unemployment problem among these foreigners. This will further exacerbate the problem we are already facing in Malaysia in light of weak external demand that is hurting the export sector rather badly. Jobs must have to be guaranteed first before permits are given out.

Cost is further pushed up by resorting to the always popular protectionist policies. Yes, despite going to the international stage to reaffirm Malaysia’s commitment to not to fall back to protectionism, there are elements of protectionism in the mini-budget.

The restriction of foreign labor itself is a form of protectionism but two paragraphs in the speech by the Finance Minister said it most clearly. One of the two indicates that the ”Government will continue to support the development of domestic industries through Government procurement. The Government has mandated the use of local materials, products or services and give priority to local manufacturers in Government procurement.”

This seems that government spending will be done without taking into account the question of price and quality. If the origin of the vendors and manufacturers is the only point of concern, it is likely that the cost of various projects associated with the massive government spending to increase unnecessarily. The lack of competition is known to do that. If the fiscal deficit is to go higher than projected, this is likely to be the principal cause of that.

But clearly, the fiscal deficit is not an issue of concern to the current administration. In order to be popular, these protectionist and Keynesian measures are required.

While the next administration is desperate to be popular, they should be warned of the pitfalls of populist policies. Quick fixes like these have its consequences. Much like the now controversial highway concessionaires negotiated under the Mahathir administration, it will bite back.

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 March 17 2009.

Categories
Economics

[1921] Of back to the definition of stimulus

Have you ever engaged in animated conversion with friends, debating intently on a point only to find out later how off tangent the discussion had become? How about a time when asked what was the original contention, all involved in the little discussion somehow had trouble answering the question? Well, something like that has happened to the discussions surrounding the stimulus package for Malaysia.

I think I have seen a fair share of suggestions and criticism related to the composition of an economic stimulus. The perception I have is that a majority of them involves the typical tools of macroeconomics: fiscal and monetary policies. Between the two, the debate on fiscal policy is probably the one that takes center stage, as proponents of government spending and tax cuts rattle sabers only to come to a uneasy compromise of having a little bit of both.

While the two giants wage an intellectual war against each other, a notable minority refuse to participate in the age-old debate. Instead, they are convinced that in order to stimulate a faltering economy, we must go beyond fiscal and monetary policies. Almost always in place of traditional policies, they propose long term measures which perhaps nobody could argue against.

How could anybody say no to their suggestions?

It is impossible to say no to them because more often than not, they touch on the need to improve the framework of the economy. This includes improvement of rules and regulations. The enlightened few have cited Nobel Prize laureate Douglass North on emphasizing the need for strong working institutions, which sadly, Malaysia sorely lacks these days if events of recent weeks are anything to go by. Others call for improvement of real income of Malaysians by pushing industries in the country up the value chains. To put a cherry on top of cake of wonderful ideas, CEO of CIMB group Nazir Razak suggested for the country to focus on strategies and not just on fiscal and monetary policies.

These paths beyond fiscal and monetary policies must be taken and that is for sure. The crucial caveat is that they have to be taken regardless of economic situation.

Sure, as the cliché goes, behind every crisis there is an opportunity. It is in times of crisis when it is easiest to stress the importance of these efforts. We saw how the inefficient fuel subsidy regime in Malaysia — as well as in other countries — was finally reformed much to the benefits of the long term health of the economy. Without the energy crisis, such liberal reform would be unlikely and Malaysia would continue to waste good money on artificially supporting the economy rather than investing in things that matter — like in our education, our security, our instititutions — that really build up the economy.

One however does not have to wait for disaster to strike to commit to structural improvements. To commit to those improvements only in times of crisis is to take that cliché too close to heart and miss the entire reason for those structural improvements.

Those structural improvements, be it diversification of export markets, closer integration among ASEAN members state for a European Union-style entity, revision of the New Economic Policy, strengthening of the judiciary, greater investment in human capital by way of having better curriculum and teachers, etc, are developmental in nature.

That is right. These measures beyond the traditional fiscal and monetary policies are meant to develop the countries in the long run. It takes time, almost definitely far longer than it is required to complete a business cycle.

That of course does not mean any of those improvement, if it has not started yet, should be delayed. The point which I want to stress again is that these structural improvements of the economy should take place regardless of business cycle. Because it is developmental in nature, it almost by definition takes the noble long term view.

I am reluctant to quote Keynes mostly because I abhor half-baked Keynesianism practiced in far too many places at the moment by newly self-discovered Keynesians, which is worse than Keynesians calling for proper Keynesian counter-cyclical policy. Nevertheless, his words here at this juncture are most appropriate for rhetorical purpose: ”Long run is a misleading guide to current affairs. In the long run we are all dead.”

Malaysian trade fell by about 30% in January on year-on-year basis. How exactly do these long term proposals immediately deal with immediate fall in external demand?

In the first week of March, Flextronics shared that nearly 1,400 workers of its workers in Shah Alam, Selangor were laid off. How exactly do these long term proposals immediately deal with the immediate increase in unemployment rate or the immediate reduction of disposal income of Malaysians?

Structural improvements do not address these immediate concerns. If a person’s goal is to address immediate concerns, then he or she will face an obvious temporal problem.

That very reason is why most structural improvements of the economy if not all — while it may help in no little way in future crises — does little to address the current crisis.

The idea of a stimulus is to address these immediate concerns. It does not seek to address developmental concerns, which forward looking structural reforms — regardless of philosophies — are meant to do.

Notwithstanding criticism directed at government spending as a stimulating tool that I personally agree with, it at least seeks to solve immediate problems. So too tax cuts except that it seeks to do it in a faster manner while maneuvering away from the weaknesses of government spending. The effect of monetary policy is probably even faster in this age of light speed communication. One announcement by the Governor and everybody from single individuals to large institutions will quickly react to it.

This is why fiscal and monetary policies remain and will remain the thrust of the economic stimulus in Malaysia, or any stimulus for that matter. The pillars of economic stimulus will remain revolve around fiscal and monetary policies, even if they are becoming stale and frustrating.

Hence, the fixation with fiscal and monetary policies is not a symptom of short-termism, as some have begun ridiculing the advocates of government spending, tax cuts and monetary policy. Quite the contrary, the focus on fiscal and monetary policies is about putting one’s feet on the ground and settings eyes on the targets, which many have unfortunately forgotten to do.

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 March 9 2009.

Categories
Liberty Society

[1915] Of free press is fair press

Ownership of the press by political parties is a contentious issue especially among urban and educated section of Malaysian society. Underlying the debate of ownership is a desire for objective press. The concern is understandable: it is quite reasonable to expect the press to exhibit political — sometimes rabid — bias if it is owned by political parties. While I do consider excessively biased content as angering, I do not believe the question of press ownership should be a call to legislate it. Rather, a far more important issue at hand is freedom of the press.

I am quite unsupportive of effort to bar political parties or any entity for that matter from owning the press, be the press falls under the mainstream media category or in other less formal groupings because such action clearly violates a person or an entity’s right to property, one of several concepts central to the idea of liberty.

I hold liberty sacred. Hence, I am unprepared to trample upon liberty for the sake of giving birth to an objective press, as much as I am unprepared to kill a person merely because the other person holds views that I consider as unpalatable.

Objectivity nevertheless is a noble idea to adhere to, especially for those active in the field of journalism. Honest journalists must reports an event without value judgment and as it is with equal weight to the subjects mentioned. Yet, even those who place the ideal of objectivity on the highest pedestal suffer from biases.

Why?

Each and every one of us is a victim of history. Our experience shapes our perception of the world. Our values, however fluid it may be, arise from our perception and we live our lives by our values. By this alone, none of us can truly be neutral in living our lives. Even when a person dedicates himself to neutrality, hidden beneath it all is a subtle hint of bias. Unless somehow we are able to make decisions without falling back to our experience, to be truly neutral is an impossible act to commit in my humble opinion, especially in an environment of diverse values.

Compounding the impossibility of neutrality is perhaps the possible diverse definitions of objectivity and neutrality that exist. Absolute neutrality will require the definition of the very idea to be synchronized across differences of values.

To make it worse, it cannot be denied that there are those who cry for neutrality and objectivity only when it suits them. To these individuals, the only neutral views are views which conform to theirs. Effort to synchronize their definition will prove problematic.

The inherent bias that we all maintain deep inside ourselves is exactly the reason why the act of barring political parties from owning part of the media does little to create objective press. Even without having connection to any political party, editors and reporters the world over are capable of holding personal views. These views could sway to any direction without any encouragement from their employers, whomever that may be.

I confess however that while absolute neutrality is impossible, a society or groups within the society with some shared values does acknowledge a certain level of acceptable objectivity. Any entity that works at that level will escape the accusation of being impartial within local context.

Objective or not, expressing biased views, however distasteful these may be, is part of freedom of expression. To coercively prevent an entity from expressing his, her or its biases is a transgression of free speech and expression. Such transgression is plainly wrong. To coercively prevent the same entity from utilizing his, her or its property to express the biases is a transgression of right to property. Such transgression is doubly wrong from libertarian point of view.

For those who are truly concerned with the objectivity of the press, there is a better way to resolve the issue. The solution involves not the suppression of liberty but rather, the enhancement of liberty. It revolves around the idea of competition of sources.

If there truly is demand for objective press however impossible the idea of absolute neutrality is, then the practice of free press will work to satisfy that demand without relieving anybody from their rights.

The market will correct the situation, if there is demand. Those concerned with objectivity of the press have to be mindful that grossly and consistently impartial and unfair press will quickly lose credibility. To a large extent, the mainstream media closely associated with Barisan Nasional, especially Utusan Malaysia, Berita Harian and New Straits Times did suffer credibility loss when they clearly were not objective and at times printing questionable materials without facts. They have yet to recover whatever credibility they had in the past.

In place of these channels, other less-than-mainstream media have taken over roles of the traditional players as sources of public information, with many actively and continuously successfully challenging the truthfulness of information originating from the so-called mainstream media.

With this cognizance, for an aspiring liberal society, the quest for objectivity should be pursued as part of a larger quest for liberty. What is required instead is a consistent demand to unravel the unholy shackles placed around all forms of press. The issuance of licenses for printed press should be liberalized, book banning should be outlawed and efforts at censorship backed with coercion should be fought against; all that and more in the name of competition of sources.

If objectivity is of value to most, then just like in mechanism of free market, competition is the most efficient manner of bringing objectivity up front in the open above the noise of biases and propagandist shouting matches.

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 March 3 2009.

Categories
Economics

[1909] Of stop the cliché in favor of precise argument

A cliché can be dangerous sometimes. It can be so because behind a cliché is an implicit assumption of generalization which ignores differences that exist between cases. A cliché is especially damaging when it begins to be repeated by a whole lot of people who lack comprehension of the original context which introduced the cliché came into being in the first place. It amplifies an already faulty generalization. This is evident in debates surrounding the second stimulus package expected to be announced this coming March: government spending advocates’ criticism against effectiveness of tax cuts are based too much on clichéd generalization.

A particular criticism that needs response is the assertion that tax cuts do not encourage spending. While there are multiple parallel instances supported by mainstream economic theories to back that up in specific scenarios, recent incarnation of the argument has its origin in the first stimulus package planned by the Bush administration which was subsequently approved by the Congress in February 2008. The central theme of the package was one-time tax rebates.

For the purpose of clarity, tax rebates could be seen as back-dated tax cuts. The US government implemented the program by returning to taxpayers’ part of the taxes they paid in 2007.

Many economists were skeptical of the effectiveness of the one-time tax rebates because of the works of at least four prominent individuals working separately — John Maynard Keynes, Irving Fisher, Franco Modigliani and Milton Friedman. Modigliani and Friedman were Nobel laureates. There is no doubt that if the Nobel Prize in Economics were introduced earlier when Keynes and Fisher were alive, they too would have won the Prize.

While Keynes and Fisher set the foundation of the debate, Modigliani and Friedman placed the keystone. Modigliani and Friedman’s works indicate that consumption, savings and everything in between depend on long term patterns. Friedman through his permanent-income hypothesis especially proposed that those items are really dependent on future income, or in his own phrase, permanent-income.

The implication of the hypothesis is clear: temporary changes to income do little to affect current consumer behavior.

Months after the passing of the stimulus package as proposed by the Bush administration, US taxpayers finally received their tax rebates. Soon, data were in and consensus forged. The result was mostly in the negative and yet another blow to the already battered Bush administration.

The stimulus — though it did raise consumption by a tiny bit — largely failed to stimulate the US economy. What mostly happened was that the recipients of the rebates either saved the extra money or used it to finance their debts. It did not create enough additional demand to keep the economy going. It did not stop an economic avalanche of historic proportions from happening.

The same conclusion was arrived previously, as examples, in 1964, 1968, 1975 and 2001 in the US when temporary changes to the US tax rates were introduced only to fail to affect the economy. In Malaysia itself, the same conclusion could probably be reached with respect to the one-time fuel rebates dispensed in June 2008 though the objective of the rebates is hardly to stimulate the economy. Alas, I am unaware of any local study into that matter.

Yet, somehow, policymakers never learned from these episodes of natural experiments. Worse, not only did far too many individuals fail to learn from the past, many others outrageously reached at the wrong conclusion.

Many are already passing judgment that tax cuts as a whole do not work, citing the failed 2008 Bush’s tax cuts as proof. This has become the cliché argument against suggestion for tax cuts to be included in the second stimulus for Malaysian economy in March 2009.

During the course of the debate, the so-called experts in various banks and think tanks in the media have begun parroting the line, without making reference to the 2008 episode. The loss of reference — removal of the key phrase ‘one-time tax rebates’ — slowly generalizes the debate in the mind of the public, especially in the mind of those without basic economic training. With that crucial qualification gone, it further encourages the generalization that tax cuts do not work.

Far from correct however, the cliché disastrously missed the point. The lesson from 2008 is the lesson of Friedman’s permanent-income hypothesis. Temporary tax cuts do not affect current consumption. Instead, permanent or sufficiently persistent changes to the tax rates do.

The differences between temporary and permanent changes are not the only victim of the clichéd generalization made against tax cuts as part of a larger debate on government spending and tax cuts as part of effort to stimulate the local economy. Another generalization is that all tax cuts are the same, be it on personal income tax, corporate income tax, sales tax and tariff, among others.

Apart from the effectiveness of tax cuts, the size of tax cuts is also questioned given that taxpayer base in Malaysia is small. A person said to me, “even if tax cuts are effective, it will not make a dent here.”

Yet another supposedly heavy punch directed as proponents of tax cuts is that tax cuts mean nothing to loss making companies. Companies do not pay tax if they make losses.

The two arguments, while directed to tax cuts as a whole, are only relevant to personal income and to some extent corporate taxes only. Somehow, the size of sales and service taxes and its contribution to transactional cost are conveniently forgotten.

What has been ignored is that tax cuts on transactional taxes reduce procurement cost for companies and increases revenue for others, depending on elasticity of supply and demand. By cutting these taxes, the government could help companies to stop bleeding, retain their employees and directly on the macro level slow down the rising unemployment rate.

The bottom line is that differences do matter. Therefore, it is imperative to notice the differences between temporary and permanent changes as well as the existence of different kinds of taxes while not falling into the trap of generalization. Tiresome clichés propagated by parrots meanwhile need to be disposed of in favor of more precise arguments conscious of the context we are in.

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 February 23 2009.

Categories
Politics & government

[1902] Of the dishonesty of blind partisanship

Diversity of thought is a natural phenomenon in any society. It is unavoidable because we are all victims of history. Our values are formed by our experience and no one experiences exactly the same life path. It is this uniqueness which leads to diversity of opinions as we utilize our differing values to form our worldview. Any honest difference must derive from this logic.

These days in Malaysian politics however, this particular reasoning is sorely lacking. Almost everywhere I turn I can find individuals taking up lines in the spirit of blind partisanship. It does not matter what the issue at hand is but to these individuals, their positions are determined before sufficient information is available and before debates and discussions take place earnestly. Even after all that have taken place, their opinions remain unmovable regardless of palatability of their positions.

Blind partisanship may be easy to spot. There are hints of that when various arguments thrown in support of a position are done only after the fact merely to justify it, rather organically reaching a solution by putting the building blocks first. Sometimes, even strong convincing primer reasoning is not in place. These are signs that the positions taken are not thought through thoroughly. There has to be a reason for that and the reason is likely a gross bias, possibly blind partisanship.

Worse, sometimes organic efforts to reach to a conclusion by considering all sides objectively are derided as biased by those subscribed to blind partisanship. This reminds me of a certain professor that I know from my undergraduate years who lamented about the political jabs he received from all sides for trying to tread the organic path. He said “the Left thinks we’re Right and the Right thinks we’re wrong” for merely suggesting for both sides to consider an issue more objectively and free of prejudice.

For individuals with blind partisanship, loyalty is an attribute regarded as higher than honesty. This is easily comprehensible especially because a political structure of a country like Malaysia takes the Westminster model as its basis. In that model, party unity in the legislative arm of government is crucial in determining who exactly leads the executive. It is this factor that fuels the threat and act of defection.

While strongly opposed to the change in Perak, PKR was equally fierce in supporting a change of federal government through defection in the Parliament. The morality of defection for PKR — as well as BN — suddenly changed when the situation switched. As I have opined previously, this indicates that the debate on political defection by these two political actors revolves merely around convenience and not around morality or conviction as many pretend to be so. Why? The path of convenience preserves party unity while conviction leads to division.

The importance of loyalty vis-à-vis honesty can further be impressed upon by making reference to 2006 when Shahrir Abdul Samad, an UMNO Member of Parliament for Johor Bahru as well as the chairman of Barisan Nasional Backbencher Club came under fire from his own party for supporting a motion moved by the Opposition against his fellow UMNO MP.

If the instance has been placed in an attic full of spider web, it is worth recalling that a former UMNO MP for Jasin, Melaka, Mohamad Said Yusof, allegedly requested for the customs authorities to “close one eye” to an illegal shipment of timber owned by his business. The then leader of the opposition, Lim Kit Siang, wanted for the Jasin MP to be referred to the House Committee of Rights and Privileges.

Shahrir Samad supported the motion and broke rank. Suddenly, the issue became a question of loyalty instead of the alleged wrongdoing of the Jasin MP. Shahrir Samad was harshly criticized because of his disloyalty and he eventually had to relinquish his chairmanship.

There are many other cases proving how loyalty and unity are embraced much closer than honesty and all of them show that nobody monopolizes blind partisanship. That much is certain.

It is this demand for unity and loyalty that suffocates the desire for honesty and this is why blind partisanship is so dangerous. It encourages groupthink while too easily dismisses the possibility that a partisan position might be wrong.

It cannot be overlooked that groupthink is one of those little things leading to fascism. In fascism, loyalty is ultimate and the slightest hint of disagreement is treason. Sure, the juxtaposition between blind partisanship and fascism may be a hyperbole but blind partisanship with political party or a community as a pillar is as much as dismissive of individual politics of self-empowerment as fascism. Blind partisanship contemptuously disrespects the ability of individuals to think as much as fascism, even if blind partisanship has miles to go before becoming fascism.

Yet, partisanship — including blind variety — is part democracy. But what a healthy liberal democratic society requires is idealistic partisanship based not on the concept of loyalty but rather on specific honest ideas held a priori where events become tests of ideals, not merely a chance to demonstrate one’s loyalty to an entity, or even an idea for that matter. A person may chance his or her position after experiencing those events but only if the change is organic. In other words, the change needs to be genuine and sincere. Blind partisanship gives no heed of that at all.

What we need instead are individuals who have the courage to stand up and call a spade a spade. What is wrong will always be wrong, regardless the perpetrator. If the question of right and wrong — and everything in between — is dependent on the identity of the perpetrator than the action and its context, then something is awfully wrong.

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 February 16 2009.