Tag: protectionism

Categories
Economics

[1484] Of it does not work like that, Fomca

This is a weird article, weird in a way that the economic rationale does not make sense at first glance:

THE Government will not increase the number of permits to import wheat flour, as there is enough supply of the commodity in the country, reported Mingguan Malaysia.

Deputy Domestic Trade and Consumer Affairs minister Datuk S.Veerasingam said the price was still fixed at RM1.35, but admitted that the price of wheat flour in the international market had shot up by 70%.

Veerasingam was commenting on a statement by the Federation of Malaysian Consumer Association (Fomca) president Datuk N. Marimuthu that the Government should increase the number of permits to curb price increases.

Veerasingam explained that it would not make a difference if the Government increased the number of permits, as the international market controlled the price of wheat flour. [No extra permits to import wheat flour. The Star. December 24 2007]

Let me summarize that. Fomca is suggesting the government to increase permits in order to reduce price. While that may be the case in typical economic model, given situation in the market, it simply does not work like that.

Even if countless permits are issued to the point that permits are made effectively useless policy-wise, price will not move unless the fixed price regime is done away with. Permits restrict the availability of goods in the market, if the number of permits is below that of equilibrium. The article does not make clear if international prices are higher than local counterparts but judging from the sentiment of the article and current trends, it is likely that that is the case.

What a permit quantity increase will do instead in the current Malaysian context is to widen the availability of wheat flour in the market assuming there is a shortage of wheat flour and by extension, permits, which again, seems the case here.

With higher international prices, there is a upward pressure on local prices. If the local price control mechanism is done away with, price will actually go up to equalize with international prices. Because of that and the fact that Malaysia is a small and relatively open market economy, I do not have a reason to believe the price could actually go down, unless it rains flour. There is no reason to believe that Malaysian prices will significantly affect international prices downward either, if Malaysian prices are forced to be artificially lower than international prices.

One of the few things that will go down is the frequency of wheat flour smuggling from the local to international market. Smaller prices differential between the local and the international markets erodes incentive for smuggling.

Despite that, if Malaysia was an autarky with no opportunity for smuggling activities at all, increase in permits would reduce equilibrium prices, in a market with flexible price regime. So, I think, Fomca might actually be thinking within this framework when the representative made the statement as reported in the article above. But the existence of fixed price regime and higher international price compared to local prices render Fomca’s rationale false.

Nevertheless, I am partial to Fomca calls to increase the permits. Their rationale maybe wrong but hey, when the goal is the same, I am bound not to care too much for the difference in methods in achieving that goal. Increase in permit quantity provides a more liberal atmosphere than the status quo. Of course, nothing beats a total liberalization where free market reigns supreme, providing allocative efficiency to the society.

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

p/s — After some more thought, I find the whole thing confusing. If international prices are higher than local prices, there will be an outflow of good from the local to international market. So, what is the point of import permits?

Categories
Economics Society

[1448] Of before you shut the door, wait

Kuala Lumpur is full of aliens, legal or otherwise. In the recent weeks, there has been a strong call from those in power to reduce dependency on foreign laborers. Xenophobes only happy to jump onto the bandwagon that appeals to protectionism and central planning. This is indeed not the first time xenophobes have spoken out their mind.

The Malaysian economy is highly dependent on foreign labor. The fact that 41% of construction sector workforce is made up of foreigner stresses the importance foreign workers to our economy. Estimate has it that there are 2.6 million foreign workers in the country, or approximately 10% of total population of Malaysia.[1]

There are a few reasons for that and one of them as well as the simplest explanation is cost. Under the same labor and environmental requirements, foreign labors are willing to work for less compared to the locals; of course, foreign labor here refers to mostly low-level talents who privy not to higher education. Given the cost, it makes absolute sense to hire foreigners instead of locals. If the locals are willing to match the wages of foreigners, I am sure the composition of workers in the industries such as construction that demand low-level talents will tip in favor of the locals.

It is true that influx of foreign labors Malaysia depresses wages, assuming demand for labor does not increase, under typical situation. Without these foreigners, wages would be higher and closer to the level that matches locals’ preference. Yet, I would argue, industries which experience such wages depression are those that the locals are uninterested to participate in. On top of that, if it had not been for the increased labor supply, cost of construction will be higher and thus, an obstacle to economic development. Besides, Malaysian workforce on average is more educated than most of these foreigners. Stretching the line of reasoning further, the availability of foreign labors free up local resources — local human capital — for other more productive, higher talent intensive industries.[2] Indeed, it is a high time for Malaysia to move from manufacturing to services, up the value chain. For this reason, Malaysia needs to pay special attention to its education system.

Another possible reason for such a high requirement for foreign labor is shortage of workers. Despite the discussion of high unemployment among college graduates, Malaysia has a low unemployment rate; for the second quarter, the rate stood at 3.4%.[3] Not all of the unemployed, especially college graduate with degree in IT, mass communication, engineering or any other sexy courses would even think of toiling under the merciless sun welding steel, smoothing out the cement surface in effort to build yet another skyscraper to fill the sky of Malaysia, or roofs for most of us to live under.

If the number of unemployed graduate is not enough to explain the 3.4% rate, do not forgot frictional unemployment, those leave their jobs voluntarily for another jobs, which may be better. How many of you have heard a friend said he was in between jobs? That is frictional unemployment. And then, there is cyclical unemployment, which rises and drops according to seasons. In other words, quantity-wise, the number of workers and the availability of jobs may match or more than demanded but talent-wise, there is likely a shortage in the market.

This economic preference for foreign labors over local ones have prompted allegation that these foreigners are stealing jobs from the locals. On the contrary, nobody is stealing anything from anybody. It is simply something called competition and there will be winners as well as losers in a competition. These laborers are sometimes just thankful to escape the kind of poverty that persists in certain countries like Bangladesh or Myanmar. Their determination to escape poverty drives them to work hard. In all fairness, they should at least be rewarded with employment opportunity. I am willing to go farther to say that the locals, me included, which are used to hand outs, have a thing or two to learn from these foreigners. They may reach our shore in rags, looked down upon, but they have the drive that many of us — whom unashamedly demand for subsidy year in year out, as if it is our god-given right — do not.

Objectors to the use, or some may contend as excessive use, of foreign labor, have alleged that the presence of foreign laborers increase the probability of crime. They insist that most crimes are committed by foreigners. This is far from the truth and in fact, it is the locals that contribute to the level of crime rate we Malaysians currently experience.

Others have proposed expanding the use of robotics to reduce dependency on foreign labor. Alas, without doubt, labor cost, at least for low level talents, is much lower than the capital cost associated with robotics. The use of such capital-intensive resources is only justified when the cost of labor is high; high labor cost is associated with high level of education.

One argument against the use of foreign labor however may stand up. It concerns clash of culture. For this reason, it is wise to not allow a sudden influx of immigrants into a community. The locals need time to accommodate their expectation and to build trust while the foreigners need time to learn local culture. Nevertheless, with the expected closer integration among ASEAN member states — relatively freer flow of capital and labor — a good foreign labor policy will be the one that encourages liberal local attitude towards foreigners, expounding the fact that these foreigners are as much as human as you and I, Malaysians.

The sooner we get use to ASEAN’s Schengen area, the easier we Malaysians could integrate with the rest of the people of Southeast Asia.

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

[1] — Malaysia is home to an estimated 2.6 million legal and illegal foreign workers. They are critical to the nation’s valuable manufacturing and agriculture sectors, and many householders rely on foreign domestic workers. [Malaysian law to curb foreign workers, illegal immigration. AFP via Google News. November 12 2007]

[2] — Kindly compare my rationale to that of the Prime Minister’s:

KUALA LUMPUR, Nov 9 (Bernama) — Prime Minister Datuk Seri Abdullah Ahmad Badawi today asked employers to stop the “craze” to hire foreign workers as the move will not contribute to human capital development but will instead have a negative impact on the nation.

He said hiring of foreign workers, be it legally or illegally, would not help to upgrade the technology in the country as the foreigners recruited are not highly skilled and have low productivity. [Stop The Craze To Hire Foreign Workers, Abdullah Tells Employers. Bernama. Retrieved November 9 2007]

[3] — Key statistics. Department of Statistics, Malaysia. Retrieved November 21 2007.

Categories
Economics Politics & government

[1122] Of lefties’ unconvicing argument against FTA

Opponents to the possible Malaysia-US FTA come from various backgrounds and some they have expressed legitimate concerns against the FTA. When I met Ronnie Liu of DAP several months ago, he expressed transparency as a reason to object the FTA. I could accept transparency as as reason but yet, I am convinced that transparency is not the main reason behind DAP’s objection to FTA. This is because transparency was only mentioned after I demonstrated an inconsistency in DAP’s stance in a wider context.

There are many arguments against the FTA that are simply based on simple misunderstanding of economic concepts. I will not touch on that simply however. What I am interested in discussing is the inconsistent.

DAP opposes the Bumiputra policy, in particular the NEP, because it is discriminatory. I myself am against the Bumiputra policy due to how it prevents the market from working freely. But this is not about me.

Proponents of the policy cite that the Bumiputra and really, the Malays, need time to build up its capacity to compete against other economically superior ethnic groups. Hence, the protection and privileges given to the Malays. It is common for the other side, not necessarily DAP but the lefties in general, to come back and say such protection and privileges do not build up the competency the Bumiputa needs to compete against others; it only encourages complacency among the Bumiputra.

Despite not buying into the argument for Bumiputra policy as well as stating how the policy is not helping, many of the same lefties employ the same argument used by the proponent of Bumiputra policy to support protectionism and oppose the FTA. This group argues that Malaysia needs time to build up its capacity to compete against other economically superior countries. When proponents of the FTA cites that protectionism does not encourage Malaysia to become competitive but instead, sowing complacency, they shrug it off, seemingly implying that such inconsistency as a minor inconvenient.

In the case of Ronnie Liu, he ran away from the subject and cited transparency instead.

Lefties will need to sort that out if they are to convince others to oppose the Malaysia-US FTA. Else, lefties that oppose both the Bumiputra policy and the FTA are giving the supporters of Bumiputra policy a leeway. Perhaps, stripping the lefties that moral authority to talk about one issue or the other.

Categories
Economics

[1117] Of Friday morning starts with free trade

Protectionists always argue that free trade hurts the poor. Professor Mankiw quotes the US Treasury Secretary Paulson as the US battles its own rising sentiment of protectionism:

Thus trade helps Americans provide for their families. When special interests seek protection in the name of low-wage workers, we should acknowledge that limitations on imports do not benefit the vast majority of Americans. They deny people the freedom to choose from a broader array of goods and services, and impose a cruel tax on people who rely on low prices to stretch their family budgets. The cost of protectionism falls most heavily on those who are least able to afford it — the poor and the elderly.

It should be noted that free trade means absence of trade-distorting policies which include tariffs and subsidies.

Categories
Economics

[1099] Of food sovereignty and comparative advantage

As a graduate of economics, I unreasonably assume that everybody knows basic economic ideas like supply and demand and comparative advantage. Perhaps, it is time for me to throw away that assumption and assume the opposite. Explanation on comparative advantage is crucial in effort to discredit the idea of food sovereignty; food sovereignty is merely another name for protectionism.

The idea of food sovereignty is well-stated in the Ninth Malaysia Plan. See Chapter 3 of the Plan if you prefer not to take my words for it. Given that the current administration is stressing on agriculture, perhaps it is not too astounding to see food sovereignty being part of the administration’s economic game plan.

The idea of food sovereignty basically states that a nation should be able to produce enough food for its population and not dependent on others. It should be self-sufficient in food production.

In order to do that, resources would need to be allocated in a way that prioritizes the food production sector. Such prioritization if done as rigidly as possible would deprive other sectors of resources. And indeed, the idea of food sovereignty might contradict the concept of comparative advantage and ignore the possibility of trade.

Comparative advantage is a basic economic principle first proposed by David Ricardo approximately two centuries ago. It states that an entity, be it a whole economy or a person, should concentrate on what it does best. In order word, the entity should specialize in what it could produce most efficiently. From there on, trade away in order to obtain other goods that the entity does not produce. Whenever trade is impossible, the idea does not apply for the obvious reason. There is more to gain from trade than autarky, nonetheless.

When it comes down to the issue of food sovereignty, the question that needs to be answered is this: does Malaysia have a comparative advantage in food production?

Even if Malaysia has comparative advantage in food production — which I think it does to some extent due to favorable climate — the concept of food sovereignty is not as helpful as comparative advantage in creating a more prosperous society.