Tag: The Malaysian Insider

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Economics

[1798] Of a case against pegging the ringgit

Any policy which pays too much attention to the symptoms of an issue while ignoring its root cause only deserves outright rejection. The Malaysian government’s typical response to shortage of goods is one such policy. The shortage is unambiguously caused by a price and supply control mechanism, which prevents prices from adjusting according to prevailing supply and demand, as well as incorporating other relevant information. Yet, time and again, the authorities blame smugglers for the problem. Not that smugglers deserve any defending, but they are but a mere symptom of a control regime. Addressing a symptom is an ineffective way of solving a problem. Another policy which conflates symptoms with root cause is the pegging of the Malaysian ringgit to some currencies.

The rationale of the proposed policy is simple: It is aimed to stop the ringgit from weakening further vis-à-vis other currencies.

The root cause of a weakening ringgit is the economy itself. Although I am unable to exactly pinpoint the causes, I do have a list of suspects and three of them are political uncertainty, fiscal deficit and windfall tax.

The political uncertainty which we are experiencing so far has a lot to do with it. After all, Credit Suisse did advise investors to stay clear of Malaysia due to the political turmoil. Apart from Pakatan Rakyat’s increasingly tiring poker face with respect to their claim of entering Putrajaya, the recent use of ISA continues to send unhelpful signals to local and foreign investors. As a result, money flows out.

The fiscal deficit of the Malaysian government is yet another factor which may encourage capital outflow. Several economists, among them Salant and Krugman, did suggest that persistent deficit may cause capital flight.

This happened to the Indonesian rupiah several years ago as the size of the fuel subsidy ballooned into the Indonesian fiscal deficit. The rupiah dropped to a frightening level and it only recovered after the Indonesian government decided to dramatically cut the size of the fuel subsidy. Unrest ensued, but in the eyes of advocates of the peg, the rupiah was saved.

Another reason for the lackluster performance of the ringgit might be the imposition of the windfall tax. Earlier, the government imposed significant windfall tax on independent power producers. The imposition is no laughing matter because approximately a fifth of the local bond market is made up of papers issued by the power producers.

Such a tax naturally spooked the bond market, shooing investors away together with their money. In the typical fashion of the current administration, however, the windfall tax was scrapped and replaced with something else. While the U-turn was celebrated, the damage had already been done.

Indeed, Malaysia is not the only destination for investment. Once the money is out, there is little reason for it to come back, especially when there are far better options out there. The financial fortresses of Singapore and Hong Kong are not too far away, if distance is an issue at all in this age of light speed communication.

All of the factors need to be addressed if the strength of the ringgit is an issue. A peg, however, does little to address these issues.

A peg basically acts like a wall. Unless the push factors are addressed, pressure against the wall would build up and it would depend on the strength of the wall to prevent a terrible flood. That wall is the reserve of the central bank.

In the case of the peg, the central bank would have to maintain a position with respect to the currencies which the ringgit is pegged against. In times of a weakening ringgit, the bank would need to shore the ringgit up to the predetermined level by reducing the quantity of money circulated in the market. In effect, this would raise interest rates.

During a period of economic crisis, it is typical for a central bank to lower the interest rates by providing liquidity to promote growth in general, or at least to cushion the effect of a downturn. A peg, however, does exactly the opposite.

Borrowing will become more expensive and create an environment not conducive for greater economic activities, with all else being equal. Whereas consumption is required to fuel a flattering economy, a signal for greater savings and delayed investment is sent instead.

Increased savings will, of course, bring the interest rates back down if it gets to the necessary level, but by the time that happens, the economy would probably find itself in better health, removing the urgency for greater consumption.

Besides, a peg assumes that a particular level or band of ringgit vis-à-vis some currencies is more favorable than any other for everybody on average. Though mainstream economics has been accused of simplifying the world through its models, this assumption goes frighteningly further by committing a hasty generalization.

An economy does not comprise of homogeneous members. A strong currency is not necessarily good for everybody just as a weak currency is not necessarily good at all. Exporters for instance would love a relatively weak currency while importers would love a strong currency. It really depends on which side one is on.

The best way to balance the competing demands of various players within the economy is to allow the market to consider all variables to churn out the right answer. Within this context, Governor Zeti Akhtar Aziz rightly dismissed the call to peg the ringgit to the dollar or any other currencies.

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

A version of this article was published in The Malaysian Insider.

Categories
Economics

[1787] Of do not blame free market capitalism too fast

Unlike in the realm of physical sciences, one of the most frustrating aspects of economics is its dependency on natural experiments. Far too many hypotheses cannot be tested in sleek laboratories. As a direct result, it may take some time before anyone can comfortably pinpoint the causes of the unraveling financial crisis across the Pacific Ocean.

Yet, hunting season for a scapegoat has begun as the US government unveils the largest plan to intervene in the market since the Great Depression of the 1930s. Sweeping premature conclusions are fast becoming the preferred way of answering questions while scientific methods are thrown out of the window at a terrifying rate; centuries of scientific progress has come to naught.

As some observe the crisis with the valiant intention of pushing the boundary of ignorance outwards to populate the libraries of the world, statists have wasted no time in scapegoating and making sweeping premature conclusions. Their scapegoat: free market capitalism. Their conclusion: greater government intervention in the market.

An honest observer would recognize the fact that candidates for the cause or causes of the crisis cut beyond the rigidity of ideologies and this is where statists find themselves in trouble. While the story revolving the sub-prime mortgage crisis and the current financial crisis may have to do with lack of regulation in the proper place, two major potential causes of the crisis originated from government interventions. The two are bailouts of the past and low interest rates set by the state.

In comprehending how the two factors contributed to the whole fiasco, context is essential and it requires us to go as far back in time as the 1980s, back when another crisis was haunting the US economy.

It was the savings and loan crisis.

It is absolutely crucial to note that crises have happened in the past. Booms and busts are part of business cycles and there is really no reason to say your prayers for free market capitalism. Adherents of the Austrian school of economics may wish for a different path to be followed but the fact remains that such a business cycle is essentially the characteristic of the current setup of the system.

As proven in the past, each time the symbols of capitalism are burned to the ground, the whole system will rise up even stronger. Free market capitalism is a phoenix in the truest sense of the legend.

This is untrue for socialism or most of its variants. Once it is burned, it stays down and is forever maimed. Statists will do well to commit this to memory.

The most important aspect of the 1980s crisis is the action taken in its aftermath. The US government bailed out a number of troubled companies on the pretext that these companies were too big to fail. The idea was that these companies were too entangled in the economy and their failure would send destructive ripples throughout the system. And just before the beginning of the decade, there was the bailout of Chrysler rationalized by the same thinking.

The benefits of bailouts are immediately apparent but the side effect will pop up only later down the line: while bailouts tend to compensate downsides of the business cycle, they adversely affect the structure of the economy. It is a seed for yet another crisis in the future.

Any bailout essentially creates a problem called moral hazard. In a situation when profits are made private and losses are socialized, participants of the market have the incentive to undertake large risks incomparable to its rewards. In the case of the sub-prime mortgage crisis, the manner in which lenders of money swam in the sea of fire was indicative — no, instructive — of an awfully misaligned carrot and stick model.

Statists have called for more regulations to mitigate the effects of moral hazard but it must be highlighted that without the state-created moral hazard, there will be less requirement for regulation; the only regulation required in a situation which the state refrains from interfering in the market, with all else being equal, will be the rule of market Darwinism.

In true free market capitalism, profits and losses are internalized and thus eliminate the source for the explained moral hazard. With a more balanced risk-reward model, the severity of the crisis could have been reduced.

While moral hazard may have a role in the whole mess, an even bigger potential culprit is the low interest rates, courtesy of the state. This is so because the prevalent low interest rates environment in the early 2000s provided cheap financing which in turn fueled demand for, among others, homes. The environment was made possible as the Federal Reserve tried to maneuver the economy to a soft landing after the bust of the dotcom bubble. Needless to say, the Federal Reserve is an arm of the state and therefore, the tweaking of the interest rates is an act of intervention by the state.

If the setting of interest rates was left to the means of the market, it would have gone up and not down as lenders seek to compensate the prevailing risk.

With demand built-up fueled by cheap sources of funds, as well as several other factors which are mostly irrelevant to the issue at hand, the housing bubble grew and grew until the exuberance caused by the state was met with the cold logic of the free market. Slowly but surely the market overcame the interventions of the state, and brought about unintended consequences. The bubble burst and along with it the inability of borrowers to repay their mortgage loans.

The sub-prime borrowers were the first to suffer and as the borrowers defaulted on their loans, the lenders who suffered from moral hazard — no thanks to the actions by the state — began to realize the gravity of the crisis.

With the two factors considered, would it be fair to make free market capitalism a scapegoat and call for greater government intervention in the market?

In any case, it is unlikely that Malaysia will suffer the full brunt of the crisis. That, however, does not mean that there is nothing to learn from land of the free.

First, it is that past interventions have the potential of adversely affecting the future. Malaysia has had its fair share of bailouts and the fact that a majority of large companies in Malaysia are owned by state-sponsored enterprises offers many with an exciting if not scary natural experiment in a case of system-wide crisis. It would definitely be interesting to measure the moral hazard co-efficient in this country.

Secondly is the independence of Bank Negara. It is unclear how independent the technocrats on Jalan Dato’ Onn are from the politicians in Putrajaya. If Putrajaya has considerable influence over the central bank, the pressure to lower interest rates when it should be high would be present. With that possibility comes the possibility of a bubble.

Even more important is the requirement for Bank Negara to refrain from tweaking various interest rates and instead to let those rates float to their free market levels. Only the market has the processing capability to calculate the right interest rates for a particular environment while considering all variables.

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

A version of this article was published in The Malaysian Insider.

Categories
Politics & government

[1782] Of clowns and doomsayers

Were we in a crisis? Were race relations as bad as the Prime Minister had implied? Did the specter of May 13 loom just beyond the horizon?

I find myself at the top of a hill and ahead I see only green fields as far as the eyes could see. The sky is blue and the breeze is soft. There wais s no wolf and the sheep are safely grazing.

Yet, behind me there is a commotion of the grandest scale. On their soapboxes, the doomsayers preached of an impending disaster that may tear down the towers which we have built. Amid the sordid apocalyptic tales, the doomsayers offered a panacea so conveniently held in their possession. Only they could save us all from the Leviathan.

“To me, to me, rally to me”, they shouted so rude and loudly. The future, according to them, would be haplessly bleak. Dare I ask why?

There beyond is an open plain and an open sky for all. Never was a day tailored so perfectly for victory and there is no better day than today to reach for the sky. It’s perfect and if we miss it now, the next time this moment comes again, we will be laying on our beds waiting for the end to our miserably lives. As the inevitability of death comes upon us, we will look back and wonder why we did not take the leap.

That will not be my fate. My fear of that worthless fate is greater than the stories spewed by the doomsayers. I fear not of the bogeyman outside my window and I fear not the monster under my bed. This is because there are none to fear.

Only fear is holding me — and us — back.

The doomsayers have nothing for us but this illusion of fear. Of disorder. Of death.

The fear, however, is theirs alone and not ours.

They need us to alleviate their fear. They need us to cower in the cold rain so they can live immorally in the warmth.

They want us to bend over and satisfy them. They take pleasure in doing so. We believed them once too many times, holding on to our false prophets’ promises.

No more. No more. Enough seeds of lies have been sowed and enough have been reaped. It is time to till the land, weed out the lies and begin anew for we know they need us and we know we do not need them.

All we need to do is to march forth and leave them behind on their rotten soapboxes half eaten by termites. Leave them be with their foolish blabbering but we shall march forth.

There are only limitless possibilities for us to explore. Or were.

Crisis only hit us when they imposed their crisis on us. Who was it that started shouting, ”Fire!” first?

Why has suddenly trouble in their own camps translated into our trouble?

How did the problematic internal relationship between parties within the Barisan Nasional translate into our problem?

The fate of the Barisan Nasional and the fate of Malaysia should never be the same. The fate of Malaysia must be independent of any political party, be it the Barisan Nasional, Pakatan Rakyat or any other. The fate of the country is far too important to be tied to a political party. For this reason alone, it is crucial to weed out any political party that embeds itself into the state.

Any conflation between the two fates requires urgent erasure and correction. Even the blind differentiate the day from night and why should there be a conflation?

There was a moment of cognitive dissonance for me when a mainstream newspaper paraphrased the Prime Minister: “Race relations not at healthy level.”

Dazed, my question was whose relations, really, are at an unhealthy level here?

I find it hard to believe such statements when I have no problems talking to friends of different backgrounds. I look around and I see no opportunity for a spontaneous riot to take place. People are sharing jokes and laughing and even going as far as ignoring the dull political clowns of this huge distasteful circus.

When the Prime Minister has so little credibility left in him, I prefer to trust my own faculties instead, and my faculties tell me that it is not relations between various races in Malaysia which are at stake. On the contrary, it is the relations between race-based parties of the Barisan Nasional instead. This whole fiasco began in the Barisan Nasional and the adverse effects are shaking its very foundations.

The clowns in the circus were too excited and cracked the tall pillars supporting their tent. When the tent threatened to come down, they wanted us to pay for the repair.

But why should we pay for it?

Let the clowns pay from their own pockets. Unable to humor us with their woefully inadequate sick jokes, they switched their profession and assumed the role of doomsayers, trying to impress upon others that their problem was ours too.

Sick and tired of these old clowns and doomsayers, I turned to Facebook to relieve myself from the filthy lies they tell incessantly. There, one of the status updates: it is high time the insecurities of our politicians be decoupled from the security of the country.

I have had enough of clowns and doomsayers. The green plain awaits me. And you too if you care to join me.

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

A version of this article was published in The Malaysian Insider.

Categories
Economics

[1771] Of they lack the moral authority to criticize the fiscal deficit

In the days after the tabling of the 2009 Budget in Parliament, the zeitgeist of the week for the economically and politically inclined was the fiscal deficit. Various quarters have leveled various criticisms against the deficit and many of these are on target while others are merely hyperboles. Amid the flying mud balls, the sincerity of two camps critical of the fiscal deficit is questionable.

With 2009 being the 12th consecutive year of a deficit budget, it is easy to understand why so many people are worried about how the government is spending its resources. A source at Bank Negara has stated that the ongoing deficit is the single biggest factor preventing the rating of Malaysian bonds from improving.

For those struggling for a freer market, the involvement of the government in the workings of the market is always of concern. The deficit in so many ways indicates the prevalent presence of the state in the market.

Lest there is a misunderstanding, I have to make it absolutely clear that I am not defending the deficit in any way. I am merely pointing out that certain groups have no moral authority to criticize the fiscal deficit.

The first camp comes from the proponents of subsidies for various items, especially fuel. They should be the last ones on this planet to complain about the fiscal deficit because the policy which they are advocating contributes massively to the deficit.

A huge chunk of the operating expenditure of the government is attributable to subsidies. As stated in a document prepared by the Treasury for the purpose of the 2009 Budget, the government is allocating RM33.8 billion to fund all subsidy programs. It is a challenge for a two-day worth of research over the weekend to find out how much of the RM33.8 billion is expected to be dedicated to fuel subsidies but according to a report by Forbes, the expected answer is RM21.0 billion.

With RM154.2 billion meant for the running of the federal government, 22 per cent of the operating expenditure is expected to fund all subsidy programs. Approximately 14 per cent of the operating expenditure is expected to be dedicated to fuel subsidies alone.

If the figures 22 per cent and 14 per cent fail to impress subsidy proponents the monstrosity of their policy, they must compare the size of the subsidy to the size of the much criticized fiscal deficit.

The revenue of the government is projected to be RM176.3 billion while its expenditure is expected to reach RM205.9 billion. Therefore, the people of Malaysia can expect to see our government borrowing RM29.6 billion in 2009 to fund the fiscal deficit. In other words, that is 3.6 per cent worth of the country’s expected 2009 gross domestic product.

Here is the killer: a total elimination of the subsidy would easily turn the deficit into a small surplus. A total elimination of subsidy, however, might sound too harsh and so, let us just concentrate on the fuel subsidy.

A near total elimination of fuel subsidy on the other hand may not sound too shocking since the Minister of Trade and Domestic Consumer Affairs has forwarded the idea earlier by virtue of his suggestion to float local retail fuel prices to free-market level earlier this year.

An elimination of the fuel subsidy could at most cut RM21 billion off the operating expenditure, assuming the figure from Forbes is right. This would directly reduce the fiscal deficit significantly, bring it down to approximately 1 per cent instead.

Here is another point that should shake the world of subsidy proponents: a larger fuel subsidy program or simply subsidies in general is very likely to worsen the deficit.

Therefore, how exactly can those who support increasing the size of subsidies back the criticism against the fiscal deficit, which in a large part is caused by the current size of subsidy? What exactly gives the proponents of subsidies the moral authority to criticize the fiscal deficit? Where is the sincerity in their criticism of the deficit?

Or, are they at all aware of the contradiction which stares at them?

Now, proponents of subsidies may insist that leakage and corruption is a major problem which contributes to the deficit. Nobody can really argue against that but removal of subsidies and reduction of leakage as well as corruption are not two mutually exclusive policies. Both policies can be run concurrently and indeed, the savings from the two policies will lower the fiscal deficit.

Hence, calls for a reduction of leakage and corruption do not adversely affect the arguments against subsidies. In fact, the removal of subsidies goes a long way in eliminating opportunities available for leakage and corruption to take place, do you not think so?

Finally, the members of the second group are the advocates of big government. They are better known as statists. While the first group is really a subset of statists, the former is not actually driven by an overarching philosophy unlike statists. The statists demand for larger government intervention in the market far beyond the issue of subsidies.

To the statists, I have only a couple of words: deficit smeficit, go fly a kite instead.

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

A version of this article was published in The Malaysian Insider.

Categories
Politics & government Society

[1761] Of liberation from flawed conflation

One late morning in early November 2004, the sun was well up but with an overcast sky, it was a dark day. At the lobby of a library in Ann Arbor, the United States, the television finally broke the news that John F. Kerry had lost to George W. Bush in the US presidential race; Bush would stay in the Oval Office for four more years. And in the lobby, there was a feeling that the Republicans and meteorology had worked hand in hand to make Ann Arbor a miserable place that day.

In the days that followed, there was a widespread sense of defeat and it just would not go away. In a bastion of American liberalism where it had been joked that the Republicans urgently require affirmative action to survive, the air was filled with major disappointment.

After fierce campaigning and just over a year after the controversial invasion of Iraq, it was not hard to imagine how bad the kind of depression felt across Ann Arbor was. Already many were talking, in jest, of migrating to Canada. Some others began to speak scornfully about the Land of the Free.

Why did these mostly Democrat sympathizers hate the United States so much when the source of their discontent was the Republicans’ victory?

Something was amiss.

It is not uncommon for a fraction of Malaysians to adopt the same tone and attitude against Malaysia. In return for the injustice done on them by the policies of the Barisan Nasional government, they are content to generalize Malaysia and throw the most unflattering names against the country.

Various criticisms directed at Malaysia by these groups of Malaysians are grossly off-target. It should be at the Barisan Nasional government that these criticisms be directed, not the country.

For foreigners, perhaps the distinction between the Barisan Nasional and Malaysia is not all too important since they have no say in our political process. They cannot vote and really, they are not responsible for the policies that Malaysia employs.

For Malaysian citizens, however, it is crucial to understand that the government can change while the country remains unmoved in times when international borders in the most sense are held sacred. If it is not too outrageous, the difference is analogous to a driver and a car; a political party is merely the driver of the car and the driver can change based on the collective decision of the passengers of the car which includes the driver. The car is the country. Mistakes made by the driver should not be attributed to the car.

The reason why the separation is important is due to the fact that the citizens have a say in the direction which Malaysia takes, especially when the democratic system which we have here works relatively well compared to other countries with dictatorial tendencies.

Unfortunately, there are challenges in separating the two entities from each other especially when the Barisan Nasional tries so hard to blur the lines that separate Barisan Nasional the political party and Malaysia the country.

Who can forget the so-called golden jubilee anniversary celebration — never mind the fact the federation was formed in 1963 and not 1957 — of Malaysia last year at Stadium Merdeka?

What was supposed to be a Malaysian celebration was turned into a political rally for Barisan Nasional. Flags of various kinds belonging to the component parties of Barisan Nasional flooded the whole stadium, possibly outnumbering the Jalur Gemilang, confusing neutral observers of the purpose of the celebration.

For those who can grasp the difference between political parties and the state, the shameful hijacking of the golden jubilee celebration was a distasteful political maneuver. It was turned into a divisive celebration. August 31 was supposed to be a day of unity but the way it was celebrated discouraged others who do not subscribe to the political ideas of the Barisan Nasional.

For those unaware of the important difference, that maneuvering suggested the idea that the Barisan Nasional is Malaysia and Malaysia is the Barisan Nasional. Such intentional conflation may well be what the Barisan Nasional is trying to achieve in its effort to embed its presence into voters’ consciousness. For those who bought the idea that the Barisan Nasional and Malaysia are inseparable, a Malaysia not led by the Barisan Nasional would be an unimaginable scenario. A Malaysia without the Barisan Nasional would mean the death of Malaysia.

Such conflation is bad for Malaysia. Just observe the 2007 by-elections of Ijok and Machap where public money was used to campaign for the Barisan Nasional whereas this money belonged to the people of Malaysia, the taxpayers and not the Barisan Nasional. The Barisan Nasional has no right to use public money amounting to millions of ringgit to fund its political campaigns.

Those who suffer from the conflation indirectly legitimize how the Barisan Nasional’s unscrupulous spending of public money because they see no wrong. Due to their ignorance of the difference between the Barisan Nasional and Malaysia, the politicians of the Barisan Nasional have no qualms about using state machinery for their own gains. Too little people consider such spending as wrong.

The fact that the Barisan Nasional has been in power since the very beginning of our country’s history makes the purposeful conflation of the political party and Malaysia an easy goal to achieve. After all, history is always kind to the victors because the victors get to write history.

Our official narrative is skewed to glorify the victor while the contributions of others are ignored, at best mentioned as an afterthought or at worse, vilified. This creates a perception that any threat to the Barisan Nasional is a threat to Malaysia.

Take, for instance, the aftermath of the March 8, 2008 general election. Why is it that our country is said to be in crisis when in fact, the one in crisis is the Barisan Nasional? Or, why is it when the ideas championed by the Barisan Nasional are challenged, the challengers would inevitably be accused of being traitors to the country?

Freedom has been defined in so many ways and here is yet another definition of freedom with respect to the Malaysian context: freedom from the conflating the Barisan Nasional and Malaysia.

This is why the effect of March 8, 2008 is so important. And this is why the promise of September 16, 2008 is so important. It has the potential to set many who are trapped in the flawed conflated idea free.

It has the potential of liberating the mind from ridiculous conflation.

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

A version of this article was published in The Malaysian Insider.