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Economics History & heritage

[1146] Of globalization is not new

Globalization is loved and loathed by so many people for so many reasons. Too many people however seem to talk as if globalization is a modern phenomenon. This is understandable given that it is only around the 1990s that many started to recognize the forces of globalization. The Battle of Seattle in 1999 especially brought aspects of globalization into public consciousness. On the contrary, globalization is not a recent invention; only the word is. The phenomenon itself could be observed from dawn of time right here in Southeast Asia, and everywhere else around the world.

The late 20th century has been characterized as a century of trade. So many Asian countries had, and still are, directly benefiting from trade. The Asian tigers built their economies around trade and that later became a template for economic growth. From this perspective, globalization is increased economic connectivity, perhaps, synonymous to free trade. While we as a species have never been closer to each other, globalization has been true even before we, the current generation, came into being.

The previous era of intense globalization was during the Pax Britannica in the 19th century and to a certain extent, the early 20th century. Trade within and without the British empire was so impressive in volume. Goods flowed so freely between nations that it is possible that those decades were the closest point in history we had ever come close to true free trade. Goods crisscrossed nations with great ease; the only restriction then was technology. The speed at which trade was conducted nevertheless amazed those of that era, with goods as far as Malaya could reach London through the Suez Canal in just a few months when previously, it had taken almost eternity. Despite that, no, the 19th century is not the origin of globalization.

The 17th and the 18th century were another, earlier, bout of globalization. The formation of the Dutch and the British East India Company connected Europe with the world in a greater way. More remarkable is that this century marked the rise of free trade as an ideology, pushing mercantilism out of the deck and to the bottom of the sea. After tearing down the wall of protectionism in Europe, free trade continued its march to the east in search of prosperity, albeit violently, initially.

Back in Southeast Asia in the 15th and the early 16th, the Sultanate of Malacca acted as a broker between the east and the west. So famous was it that Barbarosa said “Whoever is Lord in Malacca has his hand on the throat of Venice“. The wealth Malacca gained from trade, specifically, spice trade, attracted the Portuguese to this part of the world. The fall of Malacca to the Portuguese somewhat halted trade for a moment but it did not take long for trade to reorganize itself to take Malacca out of the equation; others like Aceh took over Malacca’s role as Christianity and Islam brought over their rivalry in the west to the east.

Just as Malacca and Aceh, many kingdoms of Southeast Asia rose and fell with elements of globalization. During its golden age, not only Srivijaya controlled the important Malacca and Sunda Straits as well as land bridge up in the Malay Peninsula — Langkasuka-Kedah and Pan Pan — to monopolize trade while the Silk Road faded into ancient history, it was also the center of Buddhism. In other words, it was an agent of cultural globalization. The great Srivijaya — with Sailendra, the builders of the wonderful Borobudur — only started to experience decline and eventually extinction not because of internal strive but instead, by external forces. The restriction of trade in China and harsh raids conducted by Chola from southern India, Srivijaya had its fate sealed by those that lived thousands of miles away from the Malay Archipelago.

Even before Srivijaya — it existence was only noticed by modern historians more than five centuries after its fall — even before Brutus stabbed Caesar in Rome in 44 BCE, the globalization was apparent. How else would one explain the presence of Chinese silk and Persian rug in Rome and Roman vases in the far east? Or the Moluccas spices on the steps of Genoa? And surely, the introduction of paper-making technology from China to Europe by the Muslims is another proof of globalization.

When the safe passage across the Silk Road was threatened, first by the advancing Persian armies, later the Greeks, then the Mongols and finally, the Chinese struggle during the period of the Romance of the Three Kingdoms, globalization refused to die. Trade diverted itself from land to sea. Mushrooming across the Malay Archipelago, along the coast of eastern Indochina and the banks of Mekong were small kingdoms that suddenly saw the influx of traders and the wealth that come with it. That sudden increase in trade created an economic boom in the region. Each one of them took advantage of the change. That prosperity only ended when China under the Sui dynasty practiced isolationist policy in the 6th and the 7th century. It was a good run for the kingdoms of Southeast Asia regardless, lasting long enough to enrich our history.

We are currently riding another wave of globalization. Our ancestors rode theirs and carved their names in history. If we carefully embrace our wave and not succumb to the fear-mongering protectionists, just as we recall Malacca, Srivijaya, etc as great trading nations, our children would remember, that we lived during an era of unprecedented prosperity.

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Economics

[1124] Of moderating the FTA-related drug prices increase

It is March and the deadline to forge a free trade agreement between Malaysia and the United States is looming closer. Here, I want to share a solution that could lay a middle ground between the supporters and the opponents of the FTA as far as drug prices are concerned.

Firstly, it is good to recognize why the prices of drugs could go up if the free trade agreement is signed. The increase is exclusively due to stronger intellectual copyrights law and not due to the principles of free trade. Though a majority of us, including me, does not know the exact detail of the FTA, there is enough information flying out in the public to be sure of that. With stronger copyrights law, cheap generic drugs would not be allowed to be sold as widely as it is available at the moment, in favor of patented drugs. Makers of patented drugs would be able to enjoy higher sales for longer period without the risk of competing with cheaper generic drugs.

While I generally support freer trade, I do sympathize for individuals that would be adversely affected by higher drug prices. Nevertheless, it is imperative for us to respect private property and directly, incentive for innovation. Between the two factors, a dilemma. The dilemma must be solved if the Malaysia-US FTA is to become acceptable to as many Malaysian as possible.

Here is what I propose to solve the dilemma: there is a role for the government. The Malaysian government could buy drugs from pharmaceutical companies and then resell it to the public through public health infrastructure at cost.

I know, I know. Anybody that is familiar with this blog would not expect me to propose a statist solution. Before you bang in the head however, please read on.

The program that I am thinking of might be distantly similar to what is practiced in Australia while stopping short at down right subsidy. The Malaysian government could buy drugs through auction and I am thinking reversed modified Dutch auction.

I am unsure if reversed Dutch auction is a common economic term for the kind of auction I have in mind but a Dutch auction works like this: there are a seller and many buyers. For simplicity and clarity reason, I shall call the seller as the auctioneer while the buyers as bidders. The auctioneer begins the auction by placing a high ask price. The price will be lowered by the auctioneer if there is no buyer. The auctioneer will continue to lower the price until there is a willing buyer. A variation of this auction was practiced during the initial public offering of Google back in 2004.

A reversed modified Dutch auction, as I call it, is a scenario which there are a buyer and many sellers. The buyer is the auctioneer while the sellers are the bidders. In a sense, reversed Dutch auction is the opposite of Dutch auction in the way monopoly is the opposite of monopsony.

Within Malaysian context, the Malaysian government is the auctioneer while various pharmaceutical companies of patented drugs are the bidders. The government starts by placing a low ask price in the free market. If there is no willing seller at such a low price, the government will increase its offer price and will continue to do so until there is a willing seller. The government could continue to do so until all of its demands are met. An example might help illustrate what I am trying to get at. Say the Malaysia government is demanding 1000 tons of drugs. At the same time, there are five sellers which I shall call A, B, C, D E and F.

Company A is able to supply 300 tons at RM1.00 per kg.

Company B is able to supply 300 tons at RM1.50 per kg.

Company C is able to supply 200 tons at RM2.00 per kg.

Company D is able to supply 100 tons at RM2.50 per kg.

Company E is able to supply 100 tons at RM3.00 per kg.

Company F is able to supply 100 tons at RM3.50 per kg.

The first 300 tons will be fulfilled by Company A and the government will pay RM1.00 per kg for drugs. This leaves 700 tons of unfulfilled demand. Realizing that nobody is willing to see any drug at RM1.00 anymore, the government raises it ask price and eventually will hit RM1.50 per kg. At that moment, Company B will step in and supply the government will 300 tons of drugs at such price. This leaves 400 tons of unfulfilled demand. The process will continue until the demand is exhausted. In this particular scenario, the government will pay at RM3.00 per kg at most; the government will not buy from Company F.

While prices could still increase vis-à-vis prices without the FTA, the increase would not be as much as that without this model with the FTA. If the drug prices are not low enough, perhaps the government could add in some sort of subsidy into the equation by selling the drugs bought at a loss. I however would only agree to such arrangement if other subsidies see some sort of quid pro quo reduction. Yes, I am looking at the Malaysian fuel subsidy. Essentially, the fuel subsidy reduction would finance the new drug subsidy, making this system neutral.

Whether or not we subsidize the drugs in the end, I do think this arrangement could solve the dilemma.

One major problem with this model is the possibility of the sellers colluding with each other to jack the price up. Nevertheless, such problem is not unique to or the exclusive weakness of this system. Therefore, I do not think it deserves to be addressed here. A discussion on collusion would take away the focus of this entry.

Another way to approach the problem is by having the government purchases the drugs in huge quantity, get bulk discount and resell the drugs at cost, possibly, exactly like the Australian model. Or, on top of that, with subsidy, with method explained earlier.

I am unsure which method would provide cheaper drugs but the latter certainly have less red tape to worry about.

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 Liberty Politics & government

[1077] Of Malaysia-US FTA is under threat

With respect to the current negotiation on Malaysia-US FTA, chairman of the House Committee on Foreign Affairs, the Democrat Tom Lantos made the most unhelpful comment:

The recently-announced oil and gas deal between Iran and Malaysia is equally abhorrent. That is why today I am sending a letter to our trade representative, Susan Schwab, requesting that all negotiations between the United States and Malaysia on a free trade agreement be suspended until Malaysia renounces this proposed deal.

According to Bernama, “abhorrent” deal refers to this:

Abdullah was reacting to a statement made by US House of Representatives Foreign Affairs Committee chairman Tom Lantos who demanded that US President George W. Bush suspend all FTA negotiations with Malaysia, in protest over the US$16 billion (RM57.6 billion) deal signed last month between Malaysia’s SKS Group and the state-owned National Iranian Oil Company.

All this is on top the fact that negotiation is tough:

A proposed Malaysia-U.S. free trade pact may falter if negotiators fail to make firm progress in bridging differences at a fifth round of talks next week, a U.S. official warned on Wednesday.

Negotiators will meet again for a week starting Monday in Malaysia’s Sabah state on Borneo island, where they will seek a compromise over opening up of Malaysia’s services and government contracts – two key hurdles to a deal – said Deputy U.S. Trade Representative Karan Bhatia.

Labor and environmental issues are also holding up talks, he said.

Further at Forbes by Associated Press :

Malaysia has warned it will drop free trade talks with the United States if it is asked to scrap a multi-billion-dollar gas deal with Iran, a news report said Friday.

[…]

In an angry reaction, Trade Minister Rafidah Aziz told Washington to stay out of Malaysia’s affairs and warned the government will not bow to any threats, the Malay-language Utusan Malaysia reported

While I am very keen of the Malaysia-US FTA, I have to agree with Rafidah Aziz. No one shall dictate Malaysian relationship with Iran. Besides, that oil and gas cooperation is not a government-to-government dealing.

Malaysia must have the liberty to forge relationship with anybody. It is our liberty and in my priority list, liberty sits higher than an FTA.

Despite that, I urge both the Malaysian and the American negotiators to ignore Lantos and realize a closer relationship between the two countries. It is only through trade could we guarantee our prosperity. In Kant’s words, “the spirit of trade cannot coexist with war.

Further, what better way for Malaysia to get back at Lantos other than having a successful fair FTA?

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Books & printed materials Conflict & disaster Economics Liberty

[1054] Of Immanuel Kant, free trade and peace

By virtue of their mutual interest does nature unite people against violence and war… the spirit of trade cannot coexist with war, and sooner or later this spirit dominates every people. For among all those powers… that belong to a nation, financial power may be the most reliable in forcing nations to pursue the noble cause of peace… and wherever in the world war threatens to break out, they will try to head it off through mediation, just as if they were permanently leagued for this purpose

— Immanuel Kant, Perpetual Peace, 1795.