Tag: The Malaysian Insider

Categories
Economics

[1874] Of expropriation is not necessarily cheaper than status quo

MP Tony Pua made a statement that expropriating the LDP highway is cheaper than maintaining status quo.[1] This is not necessarily true. As typical in the realm of economics, the answer is it depends.

What exactly does it depend on?

The biggest assumption lies in the discount rate. The discount rate is required to incorporate the time value of money in any calculation. In a calculation that spans for a very long time, the slightest change in the discount rate could imply a very different solution to a particular fork. In our case, the time length is 20 years because the contract between the government and the operator of LDP only ends in 2028.

Before we inspect Mr. Pua’s comparison which leads him to call for expropriation, a brief introduction to theory of time value of money is most appropriate.

Time value of money says that rational individuals prefer to have money now rather than later. An ice-cream, for instance, is worth more today than tomorrow with all else being equal. The discount rate acts, as the name suggests, to discount the value of the ice-cream as we progress along a certain timeline.

Next, two crucial variables will need clarification.

The first is the cost of expropriation which is RM1.327 billion. This is the cost the government will have to pay if it ever plans to exercise its rights in eminent domain. The cost in my calculation is assumed to be paid in one lump sum as soon as possible.

The second cost is the cost of compensation which the cost at 0.00% discount rate is RM1.929 billion. The compensation is presumably, as it should, paid in the year that the compensation is required. After all, the compensation is really a subsidy of RM0.50 the government gives to the operator in order for the operator to reduce the toll from RM2.10 to RM1.60. While I have not read the agreement relating to the Highway, it seems that the arrangement is more or less a pay-as-you-go.

For expropriation to be desirable, the expropriation cost must be cheaper than the compensation cost.

With that out of our way, let us get down to business.

If the discount rate is 0.00%, Mr. Pua would be right. At 0.00% discount rate, the cost of expropriation does not exceed the cost of compensation. Under this scenario, it makes sense to expropriate the highway from an economic point of view.

As the rate goes higher, however, the narrative veers to the direction of the other side as the differential between the two costs shrinks; the time value of money reduces the cost of compensation. This is so because all future compensations are redefined in present terms.

At approximately 3.89%, the difference becomes zero. This is where the philosophically agnostics celebrate their existence on this fair planet of ours.

Anything above 3.89%, with all else being equal, empirically leads to the logical conclusion to oppose expropriation. This is where libertarians hold wild party with contrabands filling the cocktail table.

For Mr. Pua to be right, he needs to pray that the government’s discount rate is less than 3.89%.

The following table illustrates how various discount rate affects the compensation rate and the case for expropriation.

Finally, caveat.

Mr. Pua places total compensation as RM2.2 billion with 0.00% as the discount rate while I estimate it to be only RM2.0 billion at the same rate. Why is the difference?

First of all, Pua includes a 2008 sunk cost of RM0.6 billion. Sunk cost however is irrelevant in this comparison. We are interested at projecting the future and our decisions cannot change the past, unless we decide to cook the books. To include the extra RM0.6 billion is to commit logical fallacy. A fair comparison must align the stream of payments together and only then an apple to apple comparison is possible. Regardless, Mr. Pua has been careful with that and has added the necessary qualification with respect to the RM0.6 billion. Therefore, this is hardly an issue.

Secondly, Mr. Pua mentioned that the toll is scheduled to increase to RM3.10 from RM2.10 in 2016. Yet, he did not include that in his calculation. In effort to paint a more accurate picture, I incorporate that increase into the compensation calculation while holding the fraction of subsidy (approximately 23.81% with a RM0.50 subsidy over total toll of RM2.10) constant from 2009 to 2028.

The effect of the exclusion and the inclusion of the two factors lead to the difference of RM0.2 billion.

There are several other assumptions made but I think those caveats are insignificant unless the wonks come out of their caves with their arrows and spears. In any case, the calculation is available here for public consumption.

Finally, the consideration for the time value of money is not the only indicator we should concern ourselves with if we want to expropriate the LDP. Even if the time value of money proves that it is cheaper to expropriate it, several questions remain. One of them is: can the government operate the highway more cheaply than the current operator?

It is possible that even if the expropriation cost is lower than status quo, the operation of the highway by the government may actually impose greater overall cost on the government where everybody, including those who do not use the highway. All taxpayers of which a majority do not use the highway would have to support a small group of taxpayers who use the highway.

That is not fair.

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

[1] — I have blogged earlier that after reviewing the agreement of several toll concessions, including Lebuhraya Damansara-Puchong (LDP), Cheras Grand Saga Highway, KESAS and Butterworth Outer Ring Road (BORR), the Government is able to ‘expropriate’ these highways by giving between 3 to 6 months’ notice at ‘reasonable’ prices. [Cheaper to expropriate LDP. Philosophy Politics Economics. January 7 2009]

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 first published in The Malaysian Insider on January 9 2009.

Categories
Conflict & disaster

[1871] Of there is no angel or demon

Relationship between Israel and Palestine has to be one of the most enduring conflicts of our time. Not one year has passed since I first learned of the conflict without the announcement of a death linked to it. The countless deaths and the dead end of this vicious cycle of hostility repeats itself over and over again, and I am numb. As I read of others taking sides in the conflict, I can only sigh and question, ”Where is the wisdom in all of this?”

There is something almost juvenile about this whole business of taking sides. Many are more interested in pointing out who started the quarrel first when in fact, who started what first is a matter lost in time.

Those supportive of the Israeli attack and invasion on Gaza insist that Hamas had been hammering Israel with rockets, hence threatening the lives of Israelis. Sympathizers of Hamas in return point out that Israel had closed the border surrounding the Gaza Strip to create a humanitarian crisis as supplies ranging from food to medicine run short. In a counterpoint of a counterpoint, the Israeli government stated that Hamas was smuggling weapons into Gaza to strengthen itself.

There is yet another counterpoint to the counterpoint of a counterpoint. In the effort to reach the ultimate counterpoint, I would not be surprised if the argument went beyond the time when Nebuchadnezzar II of Babylon first sacked Jerusalem more than two and a half millennia ago, just to prove who first owned that piece of coveted land.

While all the points raised are useful in understanding the conflict better, those who participate in the debate surrounding the Israeli-Palestinian conflict are so engrossed in searching other’s faults that they fail to realize that there are faults on both sides. The saddest part of all, neither side is willing to admit their side’s capability of atrocity and the other side’s capability of goodness.

Sympathizers of Hamas or perhaps Palestine as whole are quick to highlight the unfairness of the current conflict by stating Israel has suffered only one-digit casualties altogether while the Palestinian count lies in the three-digit range. Some juxtapose Hamas’s rudimentary equipment like Qassam rockets against Israel’s modern arsenal which includes the Merkava armored vehicles, F-16 jet fighters and Apache helicopters.

If it escapes anybody, Qassams, Merkavas, F-16 and Apaches all kill. Would it comfort you to be killed by a Qassam rocket instead of a shell fired by a Merkava?

Death is still death. What’s in a name?

The truth is, who is more wrong is a hopeless debate which does nothing to solve the conflict. The solution lies not in playing the game of war of attrition. On the contrary, both sides need to refrain from provoking each other. Both sides need to become more trustful of each other.

I do not pretend that this is easy to do especially when history builds reputation and the reputations of both sides in the past have proven to be far from being impeccable. Shakespeare wrote in The Merchant of Venice, ”If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us, shall we not revenge?”

Yet, there is hope in building that elusive bridge.

Hamas, for instance, managed to largely kept its word in maintaining a six-month truce. Israel meanwhile unilaterally withdrew from Gaza and evicted Israelis from settlements deemed illegal. There are other examples.

Then again, this is an easy thing to say for a person sitting behind a desk typing on his laptop with little risk of bullets finding their way to him. If I were standing in a street in Gaza right now, I would sooner be shot dead than be heard there. The desperate shout for peace could easily be drowned by the sounds of flying bullets and missiles and falling bombs.

Whatever happens in Gaza today, I am here and the least I can do is not to compound the problem. The least I can do is to realize both are at fault. The least I can do is to show how there is no angel or demon here. There are only us humans.

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

This article was first published in The Malaysian Insider on January 6 2009.

Categories
Liberty Society

[1868] Of they want to divide us, rule over us and steal from us

It is common for advocates of a greater role for Islam in the public sphere in Malaysia to hold the position that any such expansion concerns only Muslims and no one else. Since it concerns only Muslims and hence internal matters, others identified as outsiders need not be concerned or participate in any discussion about the expansion.

While it is an attractive take on the issue — especially in a country like Malaysia where racial and religious issues are a powder keg — because it minimizes the potential for inter-communal exchange, it insidiously threatens individual liberty.

When the religious edicts on tomboys and yoga were issued, ABIM expressed its dissatisfaction against adherents of other beliefs criticizing the rulings. In the matter of implementation of hudud, PAS tried to coax the non-Muslims from opposing the party by stating only Muslims would come under the jurisdiction of such a law. Others who share a religious conservative outlook but have little or no association with ABIM or PAS have aired similar views.

The underlying rationale that outsiders need not worry is the idea that a community is presumed to be homogenous and specific rules apply to the community. Those outside of the community have no locus standi in expressing their opinion on the internal matters of the community.

In the case of those sympathizing with the argument of ABIM and PAS, the homogeneity is based on being Muslims. Or rather, more accurately, the prerequisite for membership into the community is for one to be recorded as a Muslim by the state. Actual personal belief itself is mostly irrelevant since the Constitution of Malaysia establishes Malays as automatically Muslims. Sincere conscience is only a childish concern belonging to the Wonderland where Alice lives.

Upon the clear demarcation of this imaginary boundary, it sets the stage for them to impose religious rules over the community. What the limitation does is that it shuts out considerable opposition to the agenda of expansion from participating in the debate on the roles of religion in the public sphere. In doing so, it weakens the group of individuals deemed as insiders opposing the expansion, which erodes individual liberty through legitimization of coercion to create uniformity. It separates the liberty-conscious individuals from their allies, forcing those who guard their liberty jealously to stand alone against tyranny. After all, the best way to transgress individual rights is to use majority power to bully the minority.

The creation of an insider-outsider dichotomy and exclusion of outsiders from participating in the supposedly internal discussion is also a sign of intolerance of criticism. Rather than deal with the criticism through frank discussion, voices other than theirs are suppressed.

This division is a classic case of divide and rule. It was applied by the colonial administrators of the 19th- and 20th-century Malaya in order to keep the locals easier to manage. Barisan Nasional with its racial-based political parties continued to practice the same policy to much success until recently. Now, here we are witnessing yet another group trying to do the same thing all over again.

It is through divide and rule that those pushing for greater roles of religion in public space insist that a community — the Muslim community in Malaysia — has a right to manage its own affairs without intervention from outsiders. Following the same track, these advocates would like to have the community be regulated by a standard which they would like to see imposed on all individuals unlucky enough to be deemed by them as members of the community.

These advocates may seem to fight for their community’s interest. There is nothing wrong in promoting the interest of a community in itself however but the danger here is when that interest flagrantly infringes on individual rights. It is worse when the promoters claim to fight for the community when a significant fraction within the community itself vehemently disagrees with the agenda of the promoters.

When the interest of any group seeks to submit individuals to the group’s desire, the interest has just turned into a form of oppression.

Oppression is not an exclusive concern of those labeled as Muslims and it certainly is not a concept exclusive to this issue. It could happen anywhere and anytime. It could happen in any community.

There are various diverse communities in this country but when there is threat against individual liberty in any community, then there is only one big community and that community is Malaysian society. Niemöller’s “First They Came”¦” poem succinctly describes why that is true.

Besides, those recognized as Muslims by the state undoubtedly make up the majority of the population. How is it possible for anybody to honestly believe that the minority groups would be left unaffected when something happens to the majority? Have we forgotten the controversy revolving around religious conversion or morals?

Most disappointingly, the argument set forth by the advocates is trapped in a communal worldview. Everything must be viewed in terms of community. This narrow worldview generalizes the individuals as drones, incapable of individuality. This is perhaps the legacy of years of the implementation of the divide and rule policy either by the British colonialist or Barisan Nasional.

The greatest victims are the individuals, and individuals must transcend the self-limiting communal thinking. The so-called internal matter ceases to be internal when it threatens individual liberty.

The transcendence, if it has not begun yet, begins by rejecting the rationale that outsiders have no standing to comment on the supposedly internally matters of the local Muslim community. It is imperative for the argument be rejected for its naive flaws, thrown out of the window for its frightening implications and into the fire for its insidious intents, especially when it adversely affects individual liberty.

And here is where the irony sets in. While the advocates seek to shut what they consider as outsiders out from discussions, they themselves are busy trying to regulate the moral and beliefs of private individuals. These advocates need to take a hard look into the mirror before labeling others as outsiders. The reason is that the only insider is the individual and everything else is the outsider, especially the busybody.

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

This article was first published in The Malaysian Insider on December 29 2009.

Categories
Economics

[1865] Of Malaysia should capitalize on others’ spending

President-elect Barack Obama promises greater government spending to ward off the ongoing economic crisis in the United States. More than 1,000 miles to the southwest of the Aleutian Islands, the Japanese government proposes its largest ever budget. In it, Prime Minister Taro Aro incorporates record breaking government spending to ease the faltering Japanese economy. On the Asian mainland, China prepares to spend close to US$600 billion on public works to prevent its economy from cooling too fast.

These countries are important export destinations for Malaysian goods. In 2007, the US, Japan and China were the first, third and fourth most important export partners of Malaysia respectively. Combined, approximately 35.1% of Malaysian goods went directly to these three countries. This does not include items which find its way to third-party countries before reaching the three countries.

In discussing the global economic downturn, it is fashionable to cite the interconnectedness of the world where recession is contagious. Reduced economic activities in some foreign countries, especially in these three countries, adversely affects demand for Malaysian goods. In fact, Malaysian exports have been negatively impacted. As the cliché goes, when the US sneezes, the world catches cold. Malaysia, as proven, is no exception.

Less discussed is the reverse relationship, which is also true. Improved economic conditions of the major consumers of Malaysian goods will encourage exports. This realization is yet another important argument against greater government spending as fiscal stimulus in Malaysia.

It is important because the slowdown of the Malaysian economy is likely principally caused by the softening of external demand. The Malaysian economy only began to take a hit when the health of our trading partners went down south. With exports contributing to almost half of our gross domestic product, it is hard to imagine how the Malaysian economy could escape unscathed. Nevertheless, our internal demand remains resilient, as proven by the local retail and the automotive sector. Therefore, the problem plaguing our economy as with many export-oriented countries revolves around external factors and not domestic demand.

As much as I hate to say this, government spending may help in cushioning the impact of reduced exports in Malaysia. Given the current condition of the Malaysian fiscal deficit as well as the inherent policy lag of government spending as fiscal stimulus though, it may not be the best path to tread on. I continue to prefer long term tax cuts and tweaking the monetary policy as the way forward over government spending. The effects from these two policies could be felt relatively quicker than increased government spending. More importantly, it avoids the long term repercussions of Keynesianism, or, in all likelihoods, half-hearted countercyclical policies.

The Malaysian context notwithstanding, government spending may help the economy of China, Japan and the US. While these countries would suffer the side-effects of government spending as fiscal stimulus, they could experience shallower downturn and quicker recovery. This could prove to be beneficial to Malaysia.

This is where government spending of the three countries, the importance of the three countries to Malaysian exports and the cause of weakening Malaysian economic growth converge to petition against greater government spending as fiscal stimulus in Malaysia.

Malaysia could and should capitalize from increased government spending of its major exports trading partners while refraining from doing the same thing. It allows Malaysia to enjoy the benefits of the policy while evading the cost associated with the expensive solution. It circumvents the question of trade-off associated with greater government spending altogether.

Admittedly, this proposal is slightly guilty of free riding on others’ policies. Being a small economy compared to the three however, it is unlikely how a Malaysian policy to free ride would affect their policies. How can a matchbox toy car significantly affect a speeding prime mover is beyond the imagination of the sane. It is unlikely for these countries to complain about a Malaysian policy based on refrain and prudence.

The World Bank probably would not like this after issuing a statement to encourage governments all around the world to spend and spend till they drop. Ever since Paul Krugman won the Nobel Prize in economics not too long ago, almost everybody is a Keynesian nowadays.

Well, Keynesians love to flaunt the multiplier effect of government spending. What better time to test the magnitude of the multiplier effects other than right now? What better way to test the multiplier effect other than free riding?

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

This article was first published in The Malaysian Insider.

Categories
Economics

[1856] Of government spending as fiscal stimulus is not the only option

Pictures of resignation are all over the wall. It is a resignation among local policymakers that the government will spend amidst the current economic environment. The World Bank recently encouraged governments around the world to spend in order to cushion the impact of the economic slowdown while noting that East Asian economies will not suffer as badly as the rest of the world.

I, however, fear that this might cause panic spending by the government in its eagerness to re-read The General Theory. It is important to note that the expected downturn is primarily caused by the softening of external demand while the export component is almost as large as the Malaysian GDP. As reported earlier, exports for the month of October fell by 2.6 per cent on year-on-year basis. In absolute terms, it means a nominal drop of approximately RM1.4 billion.

The concurrent drop in imports is likely influenced by the drop in exports given that a considerable percentage of imported items are intermediate goods meant for the manufacturing of final goods for export. It is possible that the associated weakening of industrial output is also chiefly due to the trend of weakening external demand. What this means is that internal demand is holding largely steady amid the economic storm.

Proof of resilient internal demand is all around. The retail sector — supposedly the early warning sector of any trouble in internal demand — showed over 25 per cent growth in the third quarter compared to the same period a year ago. The sales of motor vehicles — yet another indicator of internal demand — also registered growth on year-on-year basis. Admittedly, this is likely to fall but as indicated in previous data, seasonal effects due to Eid ul-Adha, Christmas and New Year are likely to prevent any large decrease in growth in these sectors and, in general, internal demand.

Finally, the unemployment rate is still doing fine through it is reasonable to expect it will increase since the export sector is taking a bashing. Increase it might but I do not see how it would increase to an overly alarming rate.

This however is not to say that internal demand will be unaffected at all while the waves are rocking the ship. Not at all. On the contrary, this is to show that the cause of the problem revolves around external demand, not internal.

The differentiation between external and internal demand is important because before any action is taken, the problem needs to be identified first. To move forward without comprehending what is going on is simply a recipe for waste and possibly disaster.

Implication from the identification of the source of economic turbulence in the local economy may indicate the possible ineffectiveness of government spending as fiscal stimulus.

First of all, the emerging trend in the export component of the GDP is likely to continue into the future. How long the trend will persist is anybody’s guess but the magnitude in the drop in exports is likely to be beyond the capability of the government to match in terms of government spending.

In comparison, the 2.6 per cent year-on-year drop for the month of October 2008 is as large as 20 per cent of the RM7 billion fiscal stimulus announced earlier by the Finance Minister. That alone indicates that any serious fiscal stimulus would have to be much larger than the current RM7 billion, simply just to close the gap between the two scenarios of business-as-usual and reduced export. This has yet to even consider the spillover effect on internal demand due to reduced exports.

Consider also the fact that the budgeted government expenditure for 2009 is slightly over RM200 billion with fiscal deficit running at about RM30 billion. Any expansion of the fiscal stimulus will require the government to borrow more extensively. With the current level of fiscal deficit and the health of the global financial sector, any borrowing will come at a great cost.

If somehow the government manages to increase the size of the stimulus, a significantly enlarged government spending will only save the day unsatisfactorily when internal demand is not the issue. An enlarged government spending is likely to increase supply when demand is not there. The act of spending for the sake of spending itself is the path of waste.

How is it wasteful?

During the Great Depression in the 1930s in the United States, in the name of increasing government spending as recommended by the School of early Keynesianism, it was not unusual for anybody to witness a perfectly fine stretch of road being undone and reconstructed.

Already in the RM7 billion fiscal stimulus, RM2.1 billion of the money is being earmarked for refurbishment of police stations, army camps, government quarters, repair of roads, construction of community halls, small bridges and preservation of public amenities, on top of existing budgeted expenditure for the same purpose. Needless to say, the suspicion of this being the act of spending for the sake of spending is there.

Spending for the sake of spending alone could be the sign of panic spending as policymakers come to their wit’s end.

Wit’s end or not though, government spending is not the only option available on the table. Permanent tax cuts have the potential of improving internal demand. Moreover, unlike in the United States and the European Union, Malaysia still has room to maneuver with respect to its monetary policy. With lower interest rates, Malaysia could effectively address its falling exports by indirectly weakening the ringgit.

Others come in form of discouraging savings to encourage investment and spending. And just three weeks ago, economist John Taylor wrote in The Wall Street Journal of the need to have a permanent pervasive mechanism that predictably automatically reacts to changes in the economy. Admittedly, Taylor’s recommendation requires a slightly longer time to execute since it is a structural issue but the point is that the resignation to discretionary government spending is really an overly pessimistic stance to take. The policymakers clearly need a little dose of optimism and creativity to move forward.

Panic spending and other options notwithstanding, government spending does have a role to play in enhancing prosperity. It is important for the government to invest in public goods with a positive spillover effect which rarely attracts the interest of the private sector. Yet, forward-looking spending, or rather investment, in soft and hard infrastructures is not really something suitable for the purpose of fiscal stimulus which almost always concentrates on short-term solutions.

Such investments are supposed to be a continuous effort and not done at a moment’s notice which is typical of any fiscal stimulus with government spending as its pillar. Furthermore, we do not have to wait idle for an economic downturn before spending on among others the education system and communication infrastructures required for long-term growth. These expenditures need to be carefully thought through.

These kinds of carefully thought through investments which bring about returns in the future are the ones Malaysia needs. Government spending must be done with an eye for the future and not simply for the sake of spending.

Another factor which makes such spending unsuitable as fiscal stimulus is the length of time required to begin and complete them. There is a good chance that by the time that government expenditure on these items begins to positively affect the economy, the end of the downturn is already near and thus makes the spending irrelevant.

It is because of this, the need to hasten the effect of government spending in the economy will compel policymakers to divulge in instant gratification by spending on superficial items which could be initiated and completed with a snap of a finger. Spending on these items no doubt will smoothen out the trough but it is meaningless in building a brighter future.

What it does is instead to impose a burden on future generations. Not only will they have to bear the debt due to panic, their cost of borrowing will also be high.

In A Farewell to Alms by Gregory Clark, the author demonstrates how successful societies discount the future only by a small margin. The question is, how much do we discount our future?

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

This article was first published in The Malaysian Insider.