Tag: expectations

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Economics Politics & government Society

[2982] Insufficient law enforcement as a symptom of fiscal pressures

Rules and regulations would become non-credible if it is unenforced enough. Smoking ban at eateries. Running the red light. Private vehicles on bus lanes. Illegal parking by the roads. We all have seen these cases frequently that violations are expected to be the norm.

In frustration, a person recently publicly tweeted Health Minister Dzulkefly Ahmad to complain about zero enforcement of the smoking ban. The Minister replied that the Ministry indeed enforced the bans and shared some statistics of people caught violating the rules. He shared that more than 96,000 citations were given, and 42,000 alone were linked to violations at eateries. So, technically, the Minister is right. There has been a non-zero enforcement. Yet, a non-zero is not sufficient.[1]

After all, what is the percentage of 42,000 caught violators to total violations?

The actual answer might be difficult to get to without a proper survey. But we can run a guesstimate. One 2018 paper suggests there were 5 million smokers in Malaysia.[2] Let us assume several things:

  • The 2024 figure is the same as suggested by the paper.
  • 1% of the 5 million are regular violators.
  • These 1% visit a restaurant (mamak) at least once a month (12 times a year).
  • They violate the smoking ban during every visit.
  • There is no corruption.

If we agree these are reasonable assumptions (these assumptions all in all are very conservative, except maybe the no-corruption part), then the 42,000 citations (caught violations) would represent only 7% of total assumed violations (caught and uncaught). The 7% figure suggests a low rate of enforcement. The revealed preference suggests that if the 7% figure is right, then it is below the rate necessary to make the law credible.

But even if we reject these assumptions and reject that 7% guesstimate, there is also revealed preference at work here: the fact that violations keep happening suggests the actual ratio must be very low that many continue to ignore the regulation brazenly.

These smokers ignore the ban because they do not believe they would get caught. And if they do get caught at all, the cost they would suffer is low. This is true not for just the smoking violations, but other things as well.

The laws themselves are meaningless if people do not believe in it. It is the act of enforcing enough that make people believe certain laws are credible.

But enforcement is expensive. Enforcement has been funded and here is where there is a link between insufficient enforcement and the fiscal pressures the government faces. To put it differently, resources are scarce enough that funding has to be prioritized and not enough has been channeled to boost the ratio of citations/total violations.

I take this as yet another symptom of the government being underfunded, and a case of needing to raise taxation level in Malaysia from its current low levels.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Hi & Thanks Paul @paultantk Lest you missed these..lm attaching it here for you et al to peruse..for your ‘zero enforcement’ n ‘completely toothless’ law. [Dzulkefly Ahmad. X. Accessed March 31 2024]

[2] — Approximately 5 million Malaysian adults (22.8%), aged 15 years and over, were current smokers. The prevalence of current smokers was significantly higher in males (43.0, 95%CI: 42.0-44.6) compared to females (1.4%, 95%CI: 1.0-1.8), as a whole and across all socio-demographic groups. The Chinese (14.2%, 95%CI: 12.7-15.9) and Indians (16.5%, 95%CI: 13.9-19.4) had a significantly lower prevalence of smoking compared to other ethnic groups. Adults aged 25- 44 years (28.3%, 95%CI: 26.9-29.8) reported the highest prevalence of smoking, but those with tertiary educational attainment (14.9%, 95%CI: 13.5-16.3) and those with an income level at the lowest (16.5%, 95%CI: 14.6-18.6) or highest (19.3%, 95%CI: 17.7- 21.1) quintile had significantly lower prevalence of smokers. On the other hand, the smoking prevalence was significantly higher among the self-employed workers (35.4%, 95%CI: 33.2-37.6) and those who worked in the private sector (31.7%, 95%CI: 29.8-33.6), compared to government servants, retirees and homemakers [Prevalence and factors associated with smoking among adults in Malaysia: Findings from the National Health and Morbidity Survey (NHMS) 2015. National Center for Biotechnology Information. National Library of Medicine. Accessed March 31 2024]

Categories
Economics

[2906] Stimulus during a period of intense social distancing/partial lockdown

How do you stimulate an economy during a period of intense social distancing or partial lockdown, with many workers not working, a majority of productions offline and most movements restricted?

It is the ultimate supply-side disruption.

Malaysia has just announced a movement restriction order, which is an eventuality especially given the 3-week the government came to a grinding halt that led to a significant loss in lead response time.

With the restriction in place, I think the earlier stimulus announced by the government may have lost some of its meanings. Its objectives have changed.

The social distancing like this is a severe form of supply-side disruption, with effective labor supply dwindling, except perhaps those with automated processes. No stimulus could stimulate growth, because the space for improved demand is limited by supply capability. There is no demand to be had beyond whatever provided by the supply-side frontier. Or perhaps the best we could do is to lower inflation once we hit that supply frontier.

And so, the priority of a stimulus would be transformed from stimulating demand to:

  1. partial income replacement
  2. cost saving assistance
  3. facilitating restriction
  4. perhaps more importantly, preserving output potential

For Point 1 and 2, it is about ensuring the population would meet the minimum level of wellbeing. In fact we should try as much as possible to maintain the welfare of the people. We clearly do not want people and businesses to die during a period intense social distancing or a lockdown. This is where cash transfer is helpful, and perhaps more liberal employment insurance too.

Point 3 is employing methods that make restrictions more palatable. Like encouraging delivery services and the use of cashless payments.

Point 4 is the ultimate objective. When things become normal, we want the economy to jumpstart and hit its pre-crisis mode as soon as possible. Here, we try to avoid having permanent, or prolonged potential loss. Permanent losses could happen as workers become out of work for too long, and losing their momentum to work or even their skills. So, the relevant policy is labor hoarding and incentives to keep firms in business. Both will need convincing expectation-setting by the government.

In other economies like in the US and Europe after the financial crisis, we know that recovery happened long after the crisis ended. In Greece for instance, the economy took a very long time to reach pre-crisis output, even after the crisis is over. So, it is a very possible scenario and that is something we should avoid.

We may need a “demand-side” stimulus later, but for now, our stimulus has very a different objective altogether.

Categories
Economics

[2905] Stimulus is about expectation setting too

There are criticisms that some of elements of the stimulus announced by former Prime Minister Mahathir Mohamad do not have immediate impacts, and so it should be replaced with more immediate responses. Responses like bigger cash transfer and bigger spending now. And the new Cabinet seems on course to enlarge the stimulus.

I am here to say, this stimulus needs to address several time horizons. The present as well as the near future. And this is why medium run elements are crucial.

One aspect why it is important is the need to encourage the hoarding of labor in order to minimize job losses. It is about building expectation justifying that hoarding.

I have a simple chart to explain how that is possible:

The chart shows the level of employed labor for 3 types of period. There are two lines signifying a stimulus without medium term expectation setting (blue) and a stimulus with one (red).

A stimulus without medium term expectation setting: companies faced with an negative economic shock will shed labor. This will increase the national unemployment rate. Increased unemployment will affect income negatively and that in turn will adversely affect consumption growth, and inevitably the GDP growth. Companies will shed labor because they do not have a clear view of the medium-term horizon and will optimize their labor size now given current situation.

In constrast, a stimulus with medium term expectation setting will provide these companies with clearer view of the medium-term. It tells them they will need the labor soon, but not now. So, rather than shedding labor, they would try to conserve it and in doing so, not reduce their capacity (by too much). In effect, it will help cushion the unemployment rate from rising as fast as it would under a stimulus without medium term expectation.

So in theory, a stimulus with medium term elements will shed fewer workers than a stimulus without.

Here is the thing: we can do both immediate and medium term elements in a stimulus. There is little reason to decide which one should come in and which one should go out. Both time horizons can be addressed. Both need to be addressed.

There is also another element in play to justify medium term plans: while we are facing both demand and supply disruptions, stimulus is not good at handling the latter. Pumping more money will not solve the supply-side. This gap can be addressed by expectations.

Categories
Politics & government

[2817] Dr Pangloss wants to keep Najib as PM

Who will replace Najib Razak if he goes away?

Those skeptical of attempts to legally push him out of office raise the question out of fear nothing will change. They are afraid it would achieve nothing and switch for yet another Prime Minister from Najib’s camp.

As a result, the alternative they seem to be fighting for is to do nothing and wait for a miracle. Somehow, a righteous Superman would descend down from the stars and make everything right. Perhaps, a just god would finally take a concrete form and change our fate for the better.

It seems to me, those who ask who will replace him, are embracing the Dr Pangloss character wholly. To them, we are living in the best of all possible worlds and any change would lead to a worse outcome.

Well, I am no Panglossian.

I believe keeping Najib in power risks damaging our institutions further. Pushing him out would slow the erosion, even if the next Prime Minister is less than a desirable character.

One institution now at risk because of Najib remaining in power is the central bank. The Governor is set to retire end of April and there are concerns Najib will nominate someone new who will toe the line and stop digging down the 1MDB hole. This is damaging the independence of the central bank, which will hurt the bank’s credibility to run monetary policy. In other words, if indeed the next Governor is a Najib’s man, then it would spread the trust deficit from Putrajaya to Jalan Dato Onn. The situation has gotten so bad that, believe it or not, there is something bigger at stake here than 1MDB.

Changing the Prime Minister would minimize that risk. Keeping him does nothing at addressing the risk.

As for the question, who will replace him, and if indeed it would be yet another corruptible person, so be it and the attempt to build a better Malaysia continues on. But there is a small chance the change will be for the better. Why not take it?

Have courage.

There is also another dimension people forget: expectations. Booting Najib out creates the expectations wrongdoing will be punished and so discourages, however little, the future Prime Minister from being blatantly corrupt doing as he pleases like an absolute ruler with no democratic checks and balances. In contrast, keeping Najib creates the expectations anybody can get away with murder.

Before anybody forgets, expectations are also part of institution-building. Forging the right expectations help builds trust in our institutions.

Yet, many want to do nothing about Najib and say, we need to reform our institutions for the better first. How do we reform when our expectation is Panglossian, that we live in the best of all possible worlds?

Categories
Economics

[2385] A case of MPs subverting the independence of the Bank Negara?

The importance of central bank independence has a lot to do with inflationary concerns. By independence, it typically means independence from political pressure. That entails strict separation between the central bank and the government. The central bank is not answerable to the government in general and the government does not represent the central bank. These two different entities are of two different minds. If they ever agree with each other, then it is necessarily a coincidence, or a conclusion achieved independently of each other. In its strong form, it is not achieved through any kind of discussion between the two parties.

It is feared that without independence and with exposure to political pressure, the central bank would embark on a populist policy, just as a democratic government that is susceptible to popular sentiment would. In times of crisis and without independence, the bank could run a loose monetary policy to appease the masses, eventually causing unacceptably high inflation simply by the operation of expectations.

The relationship between inflation and the independence of the central bank is widely known and is largely accepted within the field of economics: independence is correlated is an environment of low inflation. There are ample evidence for this.[1]

This is probably not subscribed by some Members of Parliament in Malaysia. Or they are unaware of it. Or that they define it very differently from what it is unusually understood. Whatever it is, three MPs are heading in the direction of subverting the idea.

According to The Malaysian Insider, MP for Kuala Selangor, Dzulkefly Ahmad of PAS wanted the Prime Minister to justify the recent rate hike by the Bank Negara. MP for Lembah Pantai Nurul Izzah said in the same report, despite stating she “was not asking the government to intervene”, she effectively blamed the government for the rate hike.[2] In the Parliament today, MP for Rembau Khairy Jamaluddin asked the Finance Minister to explain whether the Bank Negara would change the base interest rate and the reserve requirement between now till the end of the year.[3]

Truly, the concern for the rate especially is not for the Prime Minister, the Finance Minister or any person of their choosing to explain. These questions should be directed to the Bank Negara itself.

If these elected officials do try to explain it, then it will create a perception that the government and the Bank Negara are in cahoot in managing monetary policy. A mere hint of relationship as far as monetary policy is concerned is damaging to the idea of independence. The relationship suggests that the central bank in some ways is responsive to popular demand; popular demand is a code word for loose monetary policy.

What will make it worse is the possibility of the government flip-flopping, which is not rare at all in Malaysia. For a central bank that is not independent, any u-turn is especially damaging to the the credibility of the bank. Without credibility, the bank can say goodbye to its ability to manage inflation expectations.

Because of the possible implications, the Prime Minister and his Cabinet members should be careful in answering any of such questions.

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

[1] — The degree of central bank independence varies considerably across countries. Several authors including Bade and Parkin (1982), Alesina (1988, 1989), and Grilli, Masciandaro, and Tabellini (1991) found that more independent central banks are associated with lower levels of inflation. This note investigates whether one can find a correlation between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. Our conclusion is that while central bank independence promotes price stability, it has no measureable impact on real economic performance. [Alberto Alesina. Lawrence H. Summers. Central Bank Independence and Macroeconomics Performance: Some Comparative Evidence. Journal of Money, Credit, and Banking. May 1993]

[2] — PAS MP for Kuala Selangor Dr Dzulkefly Ahmad said that the prime minister, who also holds the finance portfolio in cabinet, should explain the move, which surprised economists who were expecting Bank Negara to maintain the benchmark lending rate to preserve the country’s growth momentum in the face of dimming global economic prospects.

…

PKR MP Nurul Izzah Anwar also stressed that they are not asking the government to intervene in Bank Negara’s policies but said that it was important for the finance minister to clarify what she claimed were ”very inconsistent justifications.”

Nurul said that while the government could be trying to cool down the investment climate with an eye on keeping a lid on inflation, she was unconvinced that an interest rate hike could also drive the growth of the local domestic economy at the same time. [Melissa Chi. Justify May interest rate hike, PR MPs tell Najib. Journal of Money, Credit, and Banking. June 21 2001]

[3] — Tuan Khairy Jamaluddin [ Rembau ] minta MENTERI KEWANGAN menyatakan apakah Bank Negara Malaysia berhasrat untuk menyemak atau meminda Kadar Dasar Semalaman (Overnight Policy Rate) dan Keperluan Rizab Berkanun (Statutory Reserve Requirement) bagi bank-bank tempatan sehingga akhir tahun ini. Sila jelaskan sebab-sebabnya sekiranya ya mahupun tidak. [Order Paper. Dewan Rakyat. June 21 2001]