Tag: The Malaysian Insider

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Economics Education

[2547] PTPTN debt a cost of affirmative action

Social mobility is crucial to the maintenance of a healthy liberal society. Inflexibility will have elites entrenched within the state apparatus and eventually becoming de facto dictators themselves, unless there is some sense of altruism among the elites. The monopoly of power itself is illiberal in so many ways.

There are ways to address the concern about social mobility and its illiberalness. The provision of education to the masses is one of them.

Education grants individuals the confidence to overcome haplessness. It provides the tools for individuals to rationalize the world and then encourage them to take fate into their own hands. With a good education, individuals will no longer be dependent on holy men’s words or beg the political elites for benevolence. Individuals will have their minds sharpened to make their own decisions. Education permanently grants individuals the motive for self-initiative for secular improvement and that is the engine of social mobility that will later help in creating a dynamic society that is liberal.

It is in this sense that equal access to education — basic education — is important.

The ability to read, write and count open up the doors of opportunity. Without these basic abilities, individuals will be disenfranchised from society. The disenfranchised will forever begin a race hundreds of steps behind, even before the race begins. They will likely form the underclass. Once one becomes an underclass, without intervention, it will be incredibly hard to break out from it. That calcifies social stratum and makes the journey towards an authoritarian society one step closer.

No self-respecting liberal will want to live a society with calcified social stratum. Permanent political monopoly is harmful to a free society. An intervention is required and justified and that intervention is the provision of mass education. That is the liberal rationale for basic education for all.

There is a limit to that rationale, however. Indeed, the rationale for education at the tertiary level changes. At the upper level, it is less about mass education than it is about meritocracy and specialization.

Not everybody has the aptitude for university education. That is why upper-level education has to be more meritocratic than primary- and secondary-level education. Even if it opened all without any filter, many would fail to make it to the end.

Under a meritocratic setup, those without the necessary aptitude must consider other tertiary options besides university education. The continuous pursuit of university education without the necessary aptitude will prove disastrous because there is heavy cost involved in terms of time and money.

To put it in another way, a meritocracy system will try to prevent a person from embarking on a costly journey that may end in failure anyway. It tries to save both time and money of the person and the society.

If one assesses the rationale for education at the individual level, it is mostly all about finance: one pursues university education with the expectation of earning higher wages in the future than he or she would without the same education.

Even without the explicit financial intention, it is generally true that the financial reward of having a degree is potentially tremendous. According to The Condition of Education 2011 published by the National Center for Education Statistics of the US Department of Education, those with a bachelor’s degree on average earn USD40,000 for the whole year in 2009. Those with high school diploma on average earn only USD25,000 for the year. The number will differ in Malaysia but the wage premium still exists.

The danger is that when one gets stuck in the system and fails to earn the degree. Another danger is that the degree earned does not give graduates a sufficient wage premium; not all degree commands the same wage premium. There are many reasons for that and one of them is quality of the degree.

In both cases, both the dropout and the graduate will learn that the cost of their university education will be too high compared to the returns of a university education. The education becomes less worthwhile.

The Malaysian problem is that there is or was a large-scale affirmative action with respect to university entrance. The proponents of affirmative action effectively and foolishly extended the rationale of mass education that is relevant to primary- and secondary-level education to the tertiary level, while ignoring the very different nature of tertiary education.

As a result, too many were encouraged to attend university and other higher education institutions without sufficient meritocratic consideration. Accommodation was made by rapid and significant expansion of places through the establishment of new education institutions. On the sideline, a state-backed mechanism—the PTPTN—was set up to help students to finance their education cheaply, and indirectly, to support private higher education service providers financially.

With the affirmative action and the disregard for meritocracy, quality eventually suffered. That affected the wage premium of those degrees.

This is probably what is happening to those who are unable to repay back their PTPTN loans. After having gone through university and other equivalent institutions and after having financed the cost through borrowing, they discovered the papers they earned did not command the wage premium necessary to make the education debt not a burden.

This can be linked directly to the issue of PTPTN and education debt. First of all, the financing option provided by PTPTN is cheap and it is effectively a subsidized financing option. On top of that, the cost of education at public universities is also cheap. The deputy prime minister was reported as stating that between 85 per cent and 95 per cent of tuition fees at public universities is borne by the government. The tuition fee itself is heavily subsidized.

Yet, graduates are having trouble repaying those cheap loans. When they are having trouble repaying, then it is likely that they are not earning enough. That in turn implies that their wage premium does not justify their investment in a university education. Further down the line, it suggests that those graduates should not have obtained their university education in the first place, if one assesses the issue strictly from a financial lens.

But they did obtain their university education, thanks to affirmative action. The graduates financed the cost of university by borrowing from PTPTN, an instrument of affirmative action. Now, what they have found is that the very instrument that enabled those graduates to become graduates is the very instrument that debased their papers, making the education debt a burden.

If that is still unclear, then let this be written: the debate about PTPTN debt in Malaysia is really a debate about the cost of affirmative action in the education system.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on May 7 2012.

Categories
Politics & government

[2532] The need to change the faceless men

A trend that is true on an individual level does not necessarily translate into a similar trend on a societal scale.

The most famous of all aggregation debates is probably the Keynesian paradox of thrift. Keynesians argue that too much saving by individuals could be unproductive. Too much saving eventually may make everybody poorer because there would be less demand for goods and services in the economy.

With less demand, there would be fewer economic transactions and thus, less wealth creation. In turn, the financial conservative act may later lower saving itself, contradicting the savers’ intentions.

This is not at all a defense of Keynesianism. Rather, it is to highlight the fallacy of composition regardless the tenability of the Keynesian position.

The fallacy of composition or simply the problem of aggregation has great importance in public discourse even outside of the discipline of economics. National policy can easily be so wrong simply because of innocent but difficult and costly aggregation process, with the subsequent interpretation suffering from composition fallacy.

The fallacy also has relevance in voting decision. This is particularly important as the next national and state elections loom closer.

There at least two groups of voters right now that are relevant to the topic at hand.

One group believes in the importance of power change at the federal level in bringing good. Power change enhances democracy. Power change forcefully uproots perverse interests from embedding itself further in the state.

To the group, change is institutionally desirable because it creates a precedent in a country where the same side has been in power from the very beginning. They believe power corrupts and to grant power to the same side for too long is folly. They think from the top and they intend to vote in terms of blocks.

Think of expressed party partisanship in terms of Barisan Nasional and Pakatan Rakyat. Think of the Anything But BN movement. Think of Haris Ibrahim. To them, power change is like tilling the land. The weeds will grow later but regular frequent tilling will prevent the weeds from growing too long.

The other group believes that change is overrated. Whichever the side power falls on, both sides are essentially the same as a whole. This is partly due to human nature: all of us respond to incentive for better or for worse.

There are ways to bring in change and the best to way to do that according to the latter group is by thinking from the bottom up instead of simply power change in terms of blocks. That means, ignore the political affiliation. Focus on the individual candidates instead. Evaluate the candidate on his or her own terms and then compare the candidate to his competitor. The ultimate question is who is the better candidate?

I appreciate the bottom-up approach but I fear the risk of composition fallacy. There is no guarantee that the bottom-up approach will lead to an outcome better than the wholesale power change approach.

The reason is that power resides not only with the elected ones, but also with the unelected persons and power brokers who sit in the shadows behind the curtains. While official faces may change with the bottom-up approach, it ignores entirely the crucial roles of unelected persons and their influence on elected officials and more importantly, their influence on the state.

These unelected persons are those whom the former Australian Prime Minister and more recently, the former Foreign Minister Kevin Rudd would call the ”faceless men” as he struggled to hold on to power, and appealed directly to Australian voters instead of to party officials of the Australian Labor Party. These faceless men are unelected, unaccountable and they have no direct responsibility to voters.

In this sense, the bottom-up approach tills the land but not deep enough. The bottom-up approach does not present enough threats to the faceless Malaysian men and women.

In contrast, the wholesale power change approach tills the land deeper still to threaten these faceless men. Remember that the only reason the established powers were shaken to the core in the aftermath of the last Malaysian general election was the threat of wholesale power change.

Notice how poor candidates were elected; while these poor candidates posed problems, they themselves were not the reason the incumbents were shaken to the core. They themselves were not the reason for new policies that the Najib administration has introduced so far.

Of course, just like weeds, the faceless men will come in other forms and each side has its own faceless men. Yet, the point is that at least, these will be different faceless men. The point is that these faceless men will not able to spread their tentacles deep and wide enough with frequent and regular power change.

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 April 15 2012.

Categories
Economics

[2526] Improve real wages by liberalizing the auto industry

The articulation of concern for stagnating wages is well-rehearsed among Malaysians who are just entering the labor force as well as those earning low wages. For most fresh graduates especially, life in the city would be far more painful than it is without the support of their parents.

Regardless of justification, many have complained about rising prices and their disappointing wage levels and growth. While from a strict economic perspective it is arguable that the complaints about inflation are largely exaggerated, based on cherry-picking reasoning and frequently are based on conceptual misunderstanding of inflation, real wages is still an issue. The issue is that it has not been growing as fast as many would like it to, nor do they match their qualifications and capability. The brain-drain phenomenon is partly caused by the concern for wages as well.

PEMANDU targets to double the per capita income of Malaysians in a certain timeframe. Notwithstanding the argument that the target will be achieved even without PEMANDU and that the doubling of income per capita is really more inflationary than real, the target and the relevant plans highlight how wage growth is a pillar of the Najib administration’s policy.

What truly matters is real income. The series of criticism and counter-criticism between REFSA and PEMANDU at least suggests that beyond technicalities that will get policy wonks excited, hostile political maneuvering and a superficial public relations exercise, both organizations are concerned with real income. That is good. That means the mainstream debate is on the right track and the competitive public political sphere to some extent is working.

But even taking the target by PEMANDU in good faith, the plan is overly intricate. For a grand plan that is supposed to be driven by the private sector, it should not be too complicated. If it were privately driven, then the planning should be left to the market’s thousands of private planners working in the go-go economic center that is Kuala Lumpur, not left to central planners working in government complexes in the desolated, isolated and pretentious Putrajaya.

Granted, the PEMANDU plans are a set of national economic policies. Some complexity is inevitable but the truth is that this is a government-driven plan. And it overlooks simple and quick market-based solutions.

One of those policies is the liberalization of the automotive industry.

Prices of cars are amazingly high in Malaysia. This reality is amazing given that fact that cars are easily tradable and Malaysia has one of the most open and trade-dependent economies in the world. The characteristic of tradability and open market should make motor vehicles reasonably affordable. Yet, most cars in Malaysia are overly expensive in general. It takes so much out of a person’s income to own what is a considered a necessity.

The reason for this is protectionism. The industry suffers from punitive taxes and duties all aimed at giving domestic car producers a leg up. Competitive pressure is prevented from pushing prices of both local and foreign cars down to more reasonable and affordable levels. The same competitive pressure has the potential of pushing the prices of even the cheapest cars in Malaysia down.

While this particular liberalization policy does not increase wages, it does improve real wages significantly because the servicing of a car loan can be a major household expenditure. With less restrictive taxes and duties, this particular chunk of household expenditure will decrease, hence improving the household’s real income. More importantly, instead of dedicating a large fraction of income to servicing car loans, newly freed income can be used to purchase other goods, services or simply saved. To put it simply, they can do more with less.

The attractiveness of the liberalization is not just about improved real income. It is also about improving real income almost immediately. Contrast this to the intricate plan to double the headline wages of Malaysians by year 2020 by propping up small inefficient sundry shops when large retailers can do the job much better due to their economies of scale. This begs the question, why should Malaysia do this the hard, expensive, incentive-twisting way when there are quicker, simpler and more organic solutions?

There are other considerations of course, like the fate of those employed in that particular inefficient local industry.

It is true that there will always be winners and losers but the comeback point is that there will be more winners than losers: the losers are concentrated in a particular industry which is small relative to the whole economy to start with, and the winners are widely dispersed throughout the economy on a much larger scale. On top of that, the newly unused income will create new permanent demand that will likely be able to absorb the temporary disruption in the labor market and redirect resources, both labor and capital, to better use, all without too much overbearing government intervention.

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 23 2012.

Categories
Economics

[2521] Subsidizing wages and business incompetence

In any kind of policy debate, there are always two elementary opposing opinions at work. One side subscribes to the ability of the state to produce outcomes better than society can if society is left to itself. The other is not so sure of that and prefers to err on the side of caution, ever mindful human fallibility. One is confident. The other is humble. Beyond opportunistic politics, that has always been the background behind the minimum wage debate in Malaysia. This tug of war in fact has been on the forefront of any general modern economic debate.

The side preferring the organic solution fears that the initial government intervention in the workings of natural everyday life will lead to unintended consequences that in turn will lead to further government intervention. From one preferred outcome supposedly guaranteed by the intervention, a very different reality will emerge to contrast our overconfidence in our ability to control everything that even the gods appear to struggle at times. From there on, more and more unexpected expensive tweaks are a must not only to push towards the preferred outcome, but also to make sure the post-intervention scenario is not worse than the status quo.

The unintended consequence of minimum wage is always higher unemployment among the general public compared to an economy sans minimum wage, whether one does not know of it, or one decides to consciously swallow up the trade-off wholly.

Call this a tired argument from a free-market advocate, but it is true no matter how old the statement is.

The nuance is that unemployment effect depends on the level of minimum wage. At the proposed minimum wage level in Malaysia which The Star has reported to be between RM800 and RM1,000 however, that qualification is academic. If it was low enough to have negligible effect on unemployment (or the cost of doing business, which is the other side of the coin), there would have been no real complaints to be made.

Now that government intervention is imminent, the trade-off is taking the limelight while previously it was ignored. There are calls to grant businesses some flexibility to adhere to the fiat from both sides of the aisle in the national Parliament.

Of particular note is a suggestion from three prominent members of Pakatan Rakyat — Rafizi Ramli of PKR, Liew Chin Tong of DAP and Dzulkefly Ahmad of PAS. They suggest that the government subsidizes businesses so that transition will be smooth. The Malaysian Insider quoted DAP lawmaker Liew Chin Tong suggesting, ”Funds from the federal budget should be allocated to a special facilitation fund to help entrepreneurs, SMEs and small firms retool, mechanize and adjust their operations to create new job. This is to address concerns of most SMEs that the minimum wage will make these businesses close down.”

Although the next step from here is unclear, the mood from both sides of the divide creates a suspicion that the government will intervene once again after the introduction of minimum wage on the pretext of a smooth transition.

In the context that the Najib administration has been copying policies advocated by Pakatan Rakyat quietly while publicly deriding the same set of policies as the height of irresponsibility, the suggestion from Pakatan Rakyat in particular is disconcerting. One has to remember the federal government only began to champion the minimum wage policy seriously after Pakatan Rakyat successfully placed the issue under the spotlight. Given the popularity of Pakatan Rakyat on this front, it is not too farfetched that the government will play the copycat yet again.

Already businesses, big and small, are heavily subsidized no thanks to various industrial plans put into effect by the federal government. Now Pakatan Rakyat wants a policy that will exacerbate the expensive incentive-twisting policy in time when what Malaysia requires is improvement in its efficiency. That efficiency, among others, requires businesses to stand on their own two feet without financial support from the government.

If this subsidy goes through, the next round of unintended consequence will be the creation of mostly incompetent businesses utterly dependent on government handouts. Look at some of the loss-making government-linked companies which are dependent on government largess and protection.

Now, imagine that economy-wide.

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 18 2012.

Categories
Politics & government

[2506] Is that a water pistol in your pocket?

The anti-Lynas camp organized a public forum at the Malaysian Parliament some time ago last year. There was a panel of several men and women highlighting the cost of allowing Lynas to operate its rare earth metals refinery plant in Pahang.

An expert took his turn to speak. He patiently explained the inverse-square law in the context of public health. The danger of harmful radioactive substance to a person correlates inversely to the distance between the two.

The shorter the distance, the more detrimental it is to the person’s health. It is not a linear relationship where a unit of distance closer means a unit increase of harm. Rather, the danger increases exponentially with each unit of distance shaved.

He went on to explain that the Lynas plant would be processing fine radioactive substance. If handled carelessly or by some unfortunate accident, the substance would be exposed to the air and permeated to the surrounding areas.

If inhaled, the distance between the radioactive material and human body would effectively be zero. Under the inverse-square law, the danger would be infinite. Radiation poisoning would be inevitable.

The person may be an expert in his field, but he spoke without the eloquence of a seasoned orator. There were short pauses as he thought through his next point slowly. As much as his thoughtfulness demanded respect, those pauses were distracting and even annoying. He lost the audience, if the mostly boring jargon-laced scientific presentation had not yet.

The next two speakers had sharper presentation styles and spoke in plain Malaysian English. The presentation slides were more colorful than the expert’s. One had a video running. They immediately took hold of the crowd, demanding attention with their exuberant confidence.

Yet, their field of expertise was unclear. The only obvious thing was that their speeches were a series of emotional appeals, and a series of exaggerations. One of them asserted that radioactive material from Lynas plant could pollute all palm oil produced in Malaysia, hence making it dangerous for consumption.

He talked as if the whole palm oil industry would be in danger of collapse. Others outside of the hall in the public sphere have equated the risks of running the plant to the meltdowns of Chernobyl and Fukushima.

They exaggerated either willfully or out of ignorance to garner support for their cause. Maybe out of desperation too because they care about the issue and they need support. They are the advocates. They may have succeeded judging by the reaction of the audience but not all were moved by the exaggeration. But most of the audience already had their minds made up before the presentations. The two were preaching to the choir.

For the unmoved minority with their minds yet to be made, the exaggeration discredited the speakers.

To be fair, the debates surrounding Lynas are full of exaggerations. Both the opposition and the proponents have exaggerated the benefits and the cost of the project.

The Lynas debate is obviously not the only one that suffers from exaggeration. The debate on the goods and services tax is another. As the exaggeration goes, inflation would go up through the roof and everybody’s tax bill would balloon.

The fact that the GST would only cause transient inflation was uninteresting to the anti-GST side. The fact that the GST can mimic the existing tax system without increasing a person’s total tax burden was discounted by the anti-GST camp.

On the proponent side, they exaggerated that Malaysia would go the Greek way if the GST was not implemented. The truth is that while it helps, the introduction of the GST is neither the only way nor the crucial piece to balance public finance up.

We know the Greek argument is exaggerated when the sides that use it are undisturbed by handouts given by the government that directly contribute to the current state of government finance. Even they are unworried.

When a side runs out of bullets, exaggeration is the water pistol masquerading as a real gun. An exaggerator armed with a water pistol may fool some people sometimes. But when it is time to pull the trigger, the exaggerator better prepare for a backlash or two.

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 27 2012.