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[3002] Reading George Orwell’s Homage to Catalonia or… “Nak PN ke?”

I suppose if we are intent on finding similarities between two events however different they are, we would find it one way or another. Some of us are wired to find patterns or connections, even where none exists. A cat in the clouds that sort of things. Apophenia.

I kept telling myself that while reading George Orwell’s Homage to Catalonia recently. However I tried adjusting down my pattern-finding bias, my mind kept on returning to contemporary Malaysian politics each time Orwell describes the republican politics of the late 1930s Spanish Civil War. As I opened Wikipedia to understand the war through a wider lens, I thought, indeed, there was a lesson, or two, from Spain for Malaysia.By Hafiz Noor Shams. Some rights reserved.

The differences between the 1920s/1930s Spain and the 2010/2020s Malaysia are aplenty. Spain experienced multiple military coups during those decades that makes Thailand a more appropriate comparison instead of Malaysia. And the Spanish conflict was bloodier than what Malaysia underwent in the 2010s and 2020s: our currently political conflicts are more boring when compared to the Spanish passion of the interwar period.

But if the Spanish Civil war was to be stripped of its details and the conflict made general, there are parallels to the today’s Malaysian reality. And the parallel is this: by the 1920s, support for the traditional powers—that is the monarchy along with the religious Christian class—was in rapid decline (within Malaysian context, throughout the 2000s and the 2010s, traditional power holders in the form of Umno suffered sustained severe erosion of support). So much so that by 1931, the king fled country over rising republican influence. Soon, the Second Spanish Republic was established (again here within Malaysian context, that runs parallel to the election of Pakatan Harapan as the federal government in 2018).

The Republic went through some difficulties right from the beginning. The traditionalists were feeling the heat of radical reforms. Land redistribution and restrictions imposed on the Church from owning properties were proceeding rapidly and pushing the traditionalists out of power further. Meanwhile, weak official responses to certain events that favored the traditionalists left republican supporters thinking the government was betraying them. All this took place with the Great Depression happening in the background. Times were just tough for almost everybody. This feels all too familiar for the 2020 Malaysia.

For the 1930s Spain, the political tensions eventually boxed everybody into an armed conflict. One on side was the republican government supported by the communists, the anarchists and the liberals, who are largely urban dwellers supported by the Soviet Union and Mexico. On the other side were the nationalist rebels comprising the monarchists, Christian conservatives and a group of fascists. By and large, the nationalists were rural folks backed by Nazi Germany and Fascist Italy.

Of interest is here the divisions within the republican ranks, which is one of two main subjects of Homage to Catalonia (the other being war conditions experienced by Orwell). By 1937, a year after the civil war officially began, republican politics was becoming immensely complex but it could be generalized as a competition between the anarchists and the communists. While there was a republican government at the national level, various institutions and cities were controlled by different factions of the republican supporters, with the anarchists and the communists being the more influential factions.

The anarchists wanted a revolution in the sense that workers would control the means of production. The communists wanted those means controlled by the state. The rivalry created a civil war within a civil war, which the communists won and purged the anarchists from government (while I am in no way stating that Rafizi Ramli is an anarchist, the leading-PH party PKR did push Rafizi aside). That communist victory was irrelevant however. So weak was the government from infighting that they eventually succumbed to the fascist rebellion led by Francisco Franco, who would hold on to power for the next 40 years.

Orwell, who was fighting for the Spanish republic with the anarchists, saw the purging as a betrayal, which is perhaps the same feeling many Pakatan Harapan supporters currently feel of the current government. In fact, Orwell writes several pages about being disillusioned, which again, a feeling that appears to be widespread about Pakatan Harapan supporters.

Yes, he felt betrayed but the realist him wrote something for the disillusioned:

As for the newspaper talk about this being a ‘war for democracy’, it was plain eyewash. No one in his senses supposed that there was any hope for democracy, even as we understand it in England or France, in a country so divided and exhausted as Spain would be when the war was over. It would have to be a dictatorship, and it was clear that the chance of a working-class dictatorship had passed. That meant that the general movement would be in the direction of some kind of Fascism. Fascism called, no doubt, by some politer name, and—because this was Spain—more human and less efficient than the German or Italian varieties. The only alternatives were an infinitely worse dictatorship by Franco…

Whichever way you took it it was a depressing outlook. But it did not follow that the Government was not worth fighting for as against the more naked and developed Fascism of Franco and Hitler. Whatever faults the post-war Government might have, Franco’s regime would certainly be worse. [George Orwell. Homage to Catalonia. 1938]

In other words, “Nak PN ke?”

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Economics Politics & government

[2970] Politics of living costs and the inevitable language of austerity

Extraordinarily, the Economy Minister has been holding press conference for every consumer price index release in the past few months. Extraordinary, because in the past, CPI releases were treated with silence by the government, and from time to time, cited in largely unread government press statements. But the new Minister, Rafizi Ramli, is focused on cost of living issues. He sees CPI statistics as a way to regularly talk about it.

He is not alone in focusing on living costs. Information Minister, Fahmi Fadzil in an interview recently said:

“The people don’t really care about the slogan, they care about the cost of living, prices of goods and internet access. Therefore, it is essential for every minister and ministry to act immediately to resolve issues of concern to the people.” [Fahmi: ‘Govt to solve people’s issues through Malaysia Madani concept’. Bernama. New Straits Times. January 25 2023]

A very, very short history of living costs politics

Component parties of Pakatan Harapan (and previously Pakatan Rakyat) have a long history of stressing on living costs politics. When energy prices were high in the late 2000s, DAP, Pas and PKR were pressing on the cost-of-living buttons furiously, and that played well to popular anger at that time.

Furthermore, the focus on living costs is a way to shift attention away from race and religion, towards more welfare-based issues. That shift is something to be welcomed, definitely.

Regression in policy

But as I have written earlier, while living costs deserve attention, the the politics of living costs is counterproductive in many ways. Such politics is the reason why policy progress Malaysia made in the past 10-15 years with respect to welfare policy has been partially reversed. Specifically, I am referring to the shift from subsidies to cash transfers. Cash transfers in many ways superior to subsidies in terms of welfare enhancing. Therefore, blanket subsidies and cash transfers are meant to be competing policies.

Yet, now, we have both and the government for the past 5 years have taken the two as complementary. The confused policy mix is proving to be expansive. And it does not help that the government is scared of new taxes, and prefer hard-to-implement-but-low/unstable-revenue taxes to easier-and-high/stable-revenue ones, which causes a severe fiscal constraint.

Rafizi, who previously was a strong believer in blanket petrol subsidies, appears to have walked back, perhaps after realizing the state of government finance, He, along with Prime Minister-Finance Minister Anwar Ibrahim, are now talking about targeted subsidies instead, which has been discussed since at least 2019, not long after blanket subsidies were reintroduced. But having both targeted subsidies and cash transfers are still a confused policy mix. The ideal would be to move to cash transfers fully.

Politics of living costs almost always means large subsidies

The politics of living costs is counterproductive because, with its logical framework, the easiest way to address it is through subsidies and price controls. Other ways—wage hikes for one, or competition regulations—are much harder to implement and takes longer to be realized. The thing with subsidies is (in some ways cash transfers too, but at least cash transfers is much, much more efficient in enhancing welfare while it can always be clawed back via taxes if the wrong persons received it), it tends to take resources away from other things, like funding healthcare, investing and maintenance infrastructure or building defense capabilities in a region has been taking peace too much for granted.

You cannot solve these structural long-term things, if politics of living costs that is always in the now, is the ultimate priority.

The language of austerity

Since such politics takes resources away from many things, it sets the tone of belt-tightening: pay cuts, no pay, RM1.5 trillion government debt (and liabilities), etc. When there is so little left for anything else, usually, a lot of people would be scared and pull back what they could, except subsidies.

Anwar Ibrahim, at a forum in Jakarta, quipped that Malaysia was no longer the country of the 1990s in response to a request by an Indonesia luminary for more Malaysian scholarship for Indonesian students.

Rafizi, just this week, said:

“It is like an overweight person. You know your ideal weight and you constantly remind yourself that you are getting worse,” he said at a forum titled ‘Resetting the Malaysian economy’ organised by Parliament.

“The solution is simple. You need to eat less. If you want to eat a lot, you need to run more. Doctors, gyms will tell you that. Most struggle despite the diagnosis.

“That’s where we are as a country. With the current fiscal trajectory, things will get worse. It takes a lot of courage, political will and cohesion with all stakeholders (to carry out changes).”

[Fixing economy like fat person trying to lose weight, says Rafizi. Joel Shasitiran. FMT. January 27 2023]

Fat. Diet. Those are words one typically associates with austerity. We do not have austerity, but using this kind of language, it would impress many that there is one.

And the source of this language, and the wider fiscal problem the government faces is the politics of living costs.

This second Pakatan Harapan government appears to be repeating some of the mistakes of the first Pakatan Harapan government: too much focus on government financial burden that it was accused of running austerity policies, despite the fact, clearly, there was no austerity at play.

Categories
Economics

[2737] Tiered fuel subsidy regime won’t work. Cash transfer is better

I rarely agree with Rafizi Ramli on policy matters. His advocacy for free tertiary education is an example; I think there has to be cost to education and if help is required, it has to be selective based on needs, not through blanket means which can have disastrous effect on public finances. His suggestion for the auctioning of approved permits for imported vehicle is another; auctions it will make things more transparent but it will not cut car prices down. But I do agree with him on some other issues and his position on the tiered vehicle-fuel subsidy regime as proposed by the government is reasonable.

He does not think well of it and I think the proposed system is horrible.

As reported in the papers, low-income consumers will enjoy full subsidy, mid-income consumers will get a quota of subsidized fuel and those in the high-income brackets will have to pay the unsubsidized price.[1]

Rafizi argues those enjoying full subsidy can resell their fuel to other groups at a price higher than the subsidized level but below market price. I think so too. The government can make such transfers illegal but being illegal does not mean it will not happen. And I cannot imagine the authority spending considerable resources to hunt down on a whole lot of Malaysians trying to benefit from such loophole in the tiered system. Rafizi has explained it rather well and so, if you want more explanation I suggest you give his blog a read.[2]

Because of the major loophole, I am not so convinced there will be any savings from the restructuring at all. In an efficient market faced with such tiered regime, people will buy subsidized fuel through the low income group (the new middle man) only. So, the cost of the government maintaining the proposed much-more-complicated system can be as expensive as, if not more than, the current simplistic blanket subsidy system. It can be as expensive because the quantity of subsidized fuel purchased will not go down in an efficient market. It can be more because you have to keep a more complex control system for the system to really work. If you want to fight post-sale transactions, then you will have to consider enforcement cost, on top of the actual fuel subsidy cost itself.

We do not live in an efficient market but I can easily imagine a lot of people doing it, if not all. This is already happening for subsidized diesel that companies enjoy from the government. The smuggling of fuel to outside of Malaysia is another proof that it is already happening. These two examples are example of tiered markets.

And remember, the beneficiary of the proposed tiered system is the lower-income households. They need the money. They have a strong incentive to resell their subsidized fuel to others who do not have access to it. Others in the mid-income brackets can be as saving-driven as others. There is an uncaptured producer (or is it consumer?) surplus there and it makes sense to internalize that surplus. The only who will not care are the super-rich who cannot be bothered with the hassle (unless they organize a smuggling business themselves, eh?).

It helps the low-income households, but that is such an expensive and a complex way to do it.

I prefer the plain old subsidy cut to the tiered subsidy (though I think Rafizi disagrees with this). Plain old subsidy cuts guarantees savings.

And if we want to help the low-income households, I prefer cash transfer, like I have always for the longest time. We already have the BR1M program. Just improve on the infrastructure. Cash it directly into the bank accounts of these low-income households. If they do not have an account, create one for them. Address the abuse and corruption instead. No need to get overly creative on this matter.

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

[1] — KUALA LUMPUR: Only those with a monthly income of below RM5,000 and cars with an engine capacity below 2,000cc will be entitled to unrestricted purchase of subsidised petrol under the new petrol subsidy system, according to a report by Sin Chew Daily yesterday. The report said the target is to launch the new system in the third quarter of this year. Those who earn between RM5,000 and RM10,000 per month will only be able to purchase 300 litres of subsidised diesel and RON95 petrol per month, the Chinese daily said in the report. Those with a monthly income of RM10,000 and above will have to purchase RON97 petrol, which will be based on market prices and without any subsidy. [Fuel subsidies to be means tested, says Sin Chew. The Edge. June 3 2014]

[2] — Berdasarkan maklumat yang dilaporkan setakat ini, saya khuatir sistem subsidi baru petrol dan diesel ini akan mewujudkan pasaran gelap yang menjual petrol dan diesel seperti berikut:

1. Kumpulan yang dibenarkan membeli petrol dan diesel pada harga subsidi boleh membeli secara kerap dan menyimpan petrol dan diesel ini;

2. Mereka kemudian menjual kepada ejen pasaran gelap yang membeli petrol dan diesel ini pada harga yang lebih tinggi;

3. Ejen pasaran gelap kemudian menjual petrol dan diesel ini pada harga yang lebih rendah dari harga pasaran kepada syarikat, pengusaha atau pun orang persendirian yang mahu mendapatkan harga petrol dan diesel pada harga yang lebih rendah. [Sistem Subsidi Baru Petrol & Diesel: Risiko Penyelewengan Dan Kesan Berganda Kenaikan Harga Barang. Rafizi Ramli. June 3 2014]

Categories
Economics

[2599] Don’t auction it. Abolish it

Let me begin by stating that I support a significant cut in in duties and taxes on cars.

There are at least two reasons for that. One, the cut will allow market forces to work better so that we can have a more efficient environment. A simpler market arrangement will free up resources dedicated to an elaborate system that was initially designed to protect the domestic car industry at the expense of Malaysian consumers. Two, the cut will enhance consumer welfare, which is in some ways a restatement of the first rationale. It improves welfare because with cheaper cars, the same personal resources used to purchase cars can be used for something else.

Along the same vein, I also support the abolition of approved permits.

Theoretically, permits can make the market more efficient but only in the cases of market failure. Permits help redistribute resources better when the market cannot self-organize due to cost being individually unaccounted. When there is no market failure, a permit system causes inefficiency. Indeed in the domestic car market, the permit system adds to the cost of a car, adding inefficiency to the system. I do not see any market failure in the car market and so, in the name of efficiency, approved permits should go the way of the Proton Juara.

I am not the first to say this because the issue is not new. It has always been talked about in the background but it is only recently that it gained very public attention and it is all because of Parti Keadilan Rakyat’s Rafizi Ramli. He has been consistently raising it in the way that it forces the government to reply. The fact that the national election is around the corner, somewhere out there, helps too.

Putting the issue to the middle of the table is good. It is good because it raises the profile of a real and significant issue that affects welfare of Malaysians. Now we have one more policy debate and it is something concrete to talk about, away from the typically unfulfilling issues of race and religion that most times are superficial. That alone gets the thumbs up from me.

Rafizi proposes to make passenger cars in the country more affordable by eliminating or reducing the high duties and taxes imposed on cars. I do support that.

The latest turn in the debate revolves around the approved permits for cars. It is here where I find his position on the matter disagreeable.

He proposes to auction the permits and sell it to the highest bidders. That has caused him to be criticized by those supporting the status quo, others are against it as it is inconsistent. If the permits are auctioned to the highest bidders, then car prices will go up. This will be contrary to the aim of making cars more affordable.

He defends his proposal by stating that the abolition of duties and taxes on cars will ensure that the total price of car will be lower even with auctioned permits. How is that so? He asserts that the permits at the moment fetch prices between RM40,000 and RM60,000 and so, he expects that the same price levels will prevail in an open bidding system as well. This is the assumption that allows him to mount a defense against the criticism. He assumes every cost component as constant except for duties and taxes, which are significantly reduced or eliminated.

In my opinion, the criticism against Rafizi is justified and his defense is no defense. The reason is that his assumption of everything being constant but duties and taxes cannot hold. The reason is that there is no guarantee that the permit price must be in the range he stated.

An auction is a very efficient method at ensuring that the seller gets to sell his goods or services at the highest price possible. And if there is enough demand for permits while supply is limited, then ceiling price can be as high as the sky.

We do not know how high the bid price for permits can go right now. We can only assume and Rafizi assumes that the price range he cites is the benchmark.

Unfortunately, his assumption depends on one question: is the price range cited the result of open bidding among many auction participants, or a negotiated outcome within a small circle?

It is very possible that it is the latter. In the latter case, there is every reason to suspect that the price range cited is too low. Have an open tender instead and microeconomics will work its magic to push that range up to the appropriate level. I do not know how far up it can go. For all I know, the permit price can go up high enough that it may undo any reduction in car price resulting from the abolition of car duties and taxes. The only way to find know is to actually run an auction for the permits. Now, there is context to the auction debate. Those against the effort to cut duties and taxes on cars are worried about government revenue loss. Rafizi counters that that concern can be addressed by auctioning the permits. He is right about how an auction can address the worry, given how the current distribution system of permits is at best inefficient (since the government does not get the full value of the permit), and at worst corrupt.

There are other ways to address the concern about government revenue loss while being consistent with the objective of making cars more affordable. Auctioning the permits is just not one of those consistent solutions.

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 September 21 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
n/b — for economic literates, this was written with quota quantity (or its relative quantity to total cars in Malaysia) unchanged. With significant increase in the number of quota, it’s possible for prices to fall even with auctioned permits under perfect competition and perfect pricing. If the quota remains unchanged and auctioned, no cut in taxes and duties will reduce prices. In fact, prices will remain the same in theory.