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Economics WDYT

[2851] Guess the 1Q17 Malaysian GDP growth

The first quarter 2017 Malaysian GDP figures will be out on May 19. So…

Industrial production in 1Q17 did not grow as strongly as it did in the previous quarter. Nevertheless, manufacturing had swell of a time. Trade figures were very good, with both goods exports and imports grew double digits, which indicates both the external and the domestic demands are somewhat healthy. But in terms of net exports, I do not think it would contribute much to the GDP growth since import growth was stronger than export expansion.

Talking about the domestic market, the unemployment rate seems to have finally responded to the better economic environment. Eyeballing, the seasonally-adjusted UE for the quarter is about 0.2 percentage points lower than what seems to be the average for 2016. Core inflation is slightly up, also showing domestic demand is recovering, assuming this core inflation calculation by the Department of Statistics completely isolates cost-push inflation.

By the way, the 4Q16 GDP grew 4.5% YoY.

How fast do you think did the Malaysian economy expand in 1Q17 from a year ago?

  • 3.5% or slower (0%, 0 Votes)
  • 3.6%-4.0% (0%, 0 Votes)
  • 4.1%-4.5% (29%, 2 Votes)
  • 4.6%-5.0% (29%, 2 Votes)
  • 5.1%-5.5% (14%, 1 Votes)
  • Faster than 5.5% (29%, 2 Votes)

Total Voters: 7

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Categories
Economics

[2850] The arbitrariness and the superficiality of Malaysia’s $15,000 high-income nation benchmark

In the past week or so, there were several news reports stating that Malaysia was regressing backward relative to the high-income country GNI benchmark of $15,000 per person by 2020. The Economic Planning Unit showed the figure fell to $9,291 in 2015 and to $8,821 in 2016, from $10,677 in 2014.[1]

From the figures alone, it is plain to see that the gap between current level and the $15,000 per capita has increased. The 2020 target was set by the government as the benchmark Malaysia needed to hit to in order to declare the country as a “high-income nation.”[2] Pemandu’s whole reason for existence is predicated on this.

But such conclusion (and the target itself) is superficial and largely a non-issue as far as economic growth is concerned. What is more important in terms of development is the levels of welfare, which is better represented by the purchasing power parity calculation, instead of the Atlas method used to calculate the GNI per capita figures in the US dollar.

There are three reasons why I claim the conclusion is superficial.

First, the $15,000 GNI per capita by 2020 target is susceptible to foreign exchange rate fluctuation. This is despite the Atlas method is designed to minimize the same fluctuation. The ringgit depreciation relative to the US dollar in 2015 and 2016 was just too big for the method to handle. Its inability to control for the fluctuation makes its output less reliable that it normally is. You can see why it does a bad job within the context of 2015 and 2016: the Atlas method controls the forex rate variation by averaging the latest three years of the relevant rates (the method does include inflation differential between countries but it is not nearly as good as the PPP). But even under normal circumstance, the Atlas method is inferior to the purchasing power parity just because the former does not adjust for domestic living costs properly. The PPP may have its own failings but its failings are considerably less serious than the Atlas method.

To understand this point further, we have to realize that for most Malaysians, earning and spending are carried out in the local currency, the ringgit. Only a small minority earn in ringgit but spend in foreign currency, among them the US dollar. So for most Malaysians, it is unclear why the size of the economy translated through the Atlas method into the US dollar is meaningful in determining the state of a country’s development level or its population welfare, apart from the fact that the World Bank uses it and that Pemandu was just following suit.

The World Bank states it is using the Atlas method for operational purposes,[3] which makes sense because the organization lends money to national governments mostly in major currencies and that the repayments are susceptible to the forex fluctuation due to currency mismatch. They need to take the forex fluctuation into account.

Meanwhile, Pemandu and Malaysia use it as a target… because the World Bank uses it for its global lending purposes done largely in US dollar. You can see the problem here. The World Bank’s and Malaysia’s purposes for using the Atlas method are vastly different. It fits the World Bank’s goal better than Malaysia’s. PPP, on the underhand, fits Malaysia’s purpose better than the World Bank’s. It is a case of using the wrong tool.

Second, even if we accept the target and the Atlas method wholly, the actual benchmark for high-income is likely lower than the $15,000 barrier. The $15,000 benchmark itself did not come from the World Bank but projected into the future by Pemandu based on figures from the international body. The latest 2017 high-income benchmark actually used by the World Bank is $12,476.[4] Pemandu had projected the figure from 2010 (if I am not mistaken), assuming the 2010-2020 growth rate of high-income countries to average 2.0% yearly. The reality is that the 2010-2017 average is only 0.2% yearly so far. At the current actual growth rate, the benchmark will be $12,563 per capita by 2020 assuming everything else remains the same. It is still a widening gap, but not as bad as when the $15,000 per capita is the target.

Third, the implications of the conclusion are outrageous, if the Atlas method completely addresses concerns over forex fluctuation: either Malaysia had run into a two-year long recession, or we had an extraordinary population boom during the same period.

But we did not have a recession. We did have a growth slowdown however. The Malaysian economy grew by 5.0% in 2015 and 4.2% in 2016. But no recession, which is a contraction of the GDP by two consecutive quarters.

And we did not have a population boom either during the two years. The size of the Malaysian population in 2015 and 2016 grew 1.4%-1.6% yearly, lower than in the previous years.

Since both did not happen (with inflation was not big enough to matter: Malaysia’s 2%-3% and in the US, 0%-1%), we must question the validity of the Atlas method in measuring the well-being of Malaysians. And by extension, it questions the ability of the Atlas method to determine the status of Malaysia as a high-income nation. The one factor that changed was the forex rate.

But ultimately, the term high-income nation itself is fluffy. There are attempts to give it concrete meaning but would crossing the not too distance line suddenly transform Malaysia into a rich country? It is never as clear as that. While Malaysia has done well compared to a lot of countries in the world, entrance to “first world” is actually harder then merely cross the line defined by the World Bank or Pemandu. Just cross over to Singapore, or visit Japan, or Australia or any of the generally recognized high-income countries. Would Malaysia crossing the GNI per capita $12,475 line suddenly make the us like those countries? Maybe someday, but the barrier will be way above the World Bank’s line.

You know a high-income country when you see one: some classifications are looser than others and many of them are arbitrary. This is the limits of mathematics and economics. So, be careful of turning a soft arbitrary line in the sand as your true north. Managing a country’s development is not like running a business.

But coming back to the original point, no, we have not regressed in terms of economic development. We have regressed in other aspects, like our institutions, but the economy has grown, contrary to what the imperfect Atlas method tells us. If you really want to make an international comparison, the purchasing power parity model is far superior than the Atlas method, especially at a time when forex fluctuation is great.

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

[1] — Page 5.The Malaysian Economy in Figures 2016. Economic Planning Unit

[2] — Page 59. Economic Transformation Programme: A Roadmap for Malaysia. October 26 2010

[3] — The income groupings use GNI per capita (in U.S. dollars, converted from local currency using the Atlas method) since they follow the same methodology used by the World Bank when determining its operational lending policy. While it is understood that GNI per capita does not completely summarize a country’s level of development or measure welfare, it has proved to be a useful and easily available indicator that is closely correlated with other, nonmonetary measures of the quality of life, such as life expectancy at birth, mortality rates of children, and enrollment rates in school. [Why use GNI per capita to classify economies into income groupings? The World Bank. Accessed March 23 2017]

[4] — For the current 2017 fiscal year, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,025 or less in 2015; lower middle-income economies are those with a GNI per capita between $1,026 and $4,035; upper middle-income economies are those with a GNI per capita between $4,036 and $12,475; high-income economies are those with a GNI per capita of $12,476 or more. [World Bank Country and Lending Groups The World Bank. Accessed March 24 2017]

Categories
Economics

[2849] The next step: from cash transfer to negative income tax

One of the better things Malaysia experienced on the policy front is the abolition of fuel subsidy and the introduction of targeted/conditional cash transfer as a replacement.

While the mean-tested nature of the transfer has been less the ideal (due to loose conditions) and appears uncorrelated to what the subsidy would have been (its discretionary nature means the transfer policy is increasingly digressing from its original purpose), the policy is still better than the very costly and inefficient subsidy regime Malaysia had. I have advocated the shift from subsidy to cash transfer for a very long time now, and I still support it.

But cash transfer should not be the end of progress. Perhaps the next step is to push the conditional cash transfer towards a more rule-based approach. In that spirit, I think the next step is the introduction of negative income tax system to replace the cash transfer system that we have now.

A negative income tax system works like this: it pays a registered taxpayer money if the person earns below a certain income level determined by the government. One easy benchmark would be the minimum wage level (in doing so, it could make minimum wage policy obsolete). The size of the payment could be a portion of the difference between the determined level and the person’s income.

In short, if you earn below that benchmark, the government pays you some money. If you earn above it, you pay tax. A brief introduction to the policy is available at the Library of Economics and Liberty.[1]

The current cash transfer program Malaysia has, BR1M, has some resemblance to the negative income tax. Those earning below a certain income threshold get the cash transfer. Negative income tax does the same thing, but more.

It goes further by institutionalizing the cash transfer arrangement and eliminates the latter’s discretionary nature, which is susceptible to corruption in its widest sense. It guarantees the payment will be paid out every year based on transparent formula. There will be no grand announcement about the payments by ministers, party members, leeches and definitely no more mock-checks and unnecessary conflict of interest/suspicious handover ceremonies.

The institutionalization also brings about one thing: a real basic income for all Malaysians. It is also an automatic stabilizer for the economy, which means in case of economic troubles, the urge for discretionary fiscal stimulus can be reduced. That also means less corruption on the procurement side.

Payments itself can be done just like how tax returns are done every year. If cashflow is of concerned, the payments can be broken up in stages just like how BR1M is being paid this year.

I do not think the jump will be that big, unlike the previous shift from fuel subsidy to cash transfer. But I do think in terms of benefits, it might be bigger the cash transfer as it could make redundant other welfare policies while streamlining administration cost of supplying or enforcing these other policies.

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

[1] — The NIT would thus be a mirror image of the regular tax system. Instead of tax liabilities varying positively with income according to a tax rate schedule, benefits would vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. If, for example, the threshold for positive tax liability for a family of four was, say, $10,000, a family with only $8,000 of annual income would, given a negative tax rate of 25 percent, receive a check from the Treasury worth $500 (25 percent of the $2,000 difference between its $8,000 income and the $10,000 threshold). A family with zero income would receive $2,500. [Jodie T. Allen. Negative Income Tax. Library of Economics and Liberty. Accessed February 15 2017]

Categories
Economics WDYT

[2848] Guess the 4Q16 Malaysian GDP growth

The final quarterly GDP figures will out next week on February 16. The GDP grew 4.3% YoY in the third quarter, up from 4.0% YoY in 2Q16. In the first quarter of 2016, it was 4.2% YoY. So, as the game goes…

How fast do you think did the Malaysian economy expand in 4Q16 from a year ago?

  • 3.0% or slower (13%, 3 Votes)
  • 3.1%-3.5% (0%, 0 Votes)
  • 3.6%-4.0% (9%, 2 Votes)
  • 4.1%-4.5% (35%, 8 Votes)
  • 4.6%-5.0% (39%, 9 Votes)
  • 5.1%-5.5% (0%, 0 Votes)
  • Faster than 5.5% (4%, 1 Votes)

Total Voters: 23

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Judging from industrial and import figures, I would think the domestic demand part of the economy grew reasonably okay in the fourth quarter although other statistics like car sales remain depressed, suggesting not all is well.

The labor market says as much. Unemployment rate is relatively high at 3.6%. That suggests the recent economic growth recovery has not brightened up the labor market. It is not that there is no job creation, but the pace of job creation is not happening as fast as the growth of the labor force.

(Interestingly, the core inflation has been stable at about 2.0%-2.2% in annual terms. Nerdy stuff to note: core inflation fell as unemployment rate rose. This is cool, assuming the GST had minimal impact on the core inflation. Cool because unemployment rate and demand-pull inflation that the core is supposed to measure tell something about the output gap: it may suggest the gap has not changed by much despite 2015-2016 economic weakness. One would start to worry if unemployment rate goes up but core inflation remains unchanged, which suggests the output gap might be widening. A worse worry is when unemployment rate goes up together with core inflation: gap is shrinking but potential is decreasing)

The other good news is that exports did great. But with strong import growth, trade balance for the quarter will not help the GDP. Indeed, from the merchandize goods trade stats, 4Q16 net exports actually fell in the quarter by nearly 10% YoY.

So, in the end, I am thinking the 4Q16 GDP growth will be somewhere in the mid-4.0%, leaving the full year 2016 GDP growth at 4.2%-4.3%.

Categories
Politics & government Society

[2847] We care because we are capable of empathy

It’s a big, big interconnected world out there. And that interconnectedness, ironically, makes the world smaller is a non-physical sense. Economically, socially and politically. Our lives are no longer affected purely by domestic matters. To some, the foreign affairs segment in the newspapers is an abstraction but for some others, the lines demarcating domestic and foreign concerns are blurry.

These remain the days of globalization still, however the Trumps, the Le Pens, the Farages and all those who long for a smaller world are trying to rewind the clock. They may yet be successful but for now they have a lot to undo. In the meantime, many have multiple homes and multiple affiliations with friends traversing national boundaries, opposing such undoing and rewinding.

For Malaysians, the war in Ukraine so far away across the Asian continent painfully proves the fact foreign affairs are home affairs too. Many Malaysians could not find the country on the map, but it still has an impact on the Malaysian psyche. And Malaysians did care for development in Bosnia during the Balkan War and in Kosovo. They do care about the conflicts in Palestine, in Syria and in Iraq. And to take a trivial example, there are Malaysians who care about the fate of foreign, English Premier League teams, despite not being English themselves.

The refugee crisis in Myanmar is also a Malaysian concern, because these oppressed men, women and children are coming to or passing by Malaysia. Whether we like it or not, we have to act in one way or another. Pretending the imaginary lines on a 2-dimensional map as an impregnable wall ensuring that is not our problem will not help by one bit. And to turn back the boats is not just an illiberal policy, it is heartless.

In the several years after the 9/11 attack, I became a victim of profiling at US airports, just because of my nationality and my Arab-sounding name. Security personnel would put me under extra security measures and screening. That discouraged me from leaving the US for home for the next four years for fear I would face immigration troubles upon reentry at the airports. I knew of other international students who needed to report to the Homeland Security office regularly, and I feared being subjected to the same requirement as an entry condition.

And so, I spent my entire time as a student in Michigan travelling throughout the US, reaching New York, DC, Miami, San Francisco, St Louis, Chicago, Sioux Falls and more. I remember how it felt like to drive the car through the Great Plains from the Great Lakes, or how peaceful it was staring into the night sky from the bottom of the Tuolumne Canyon just north of Yosemite in California. I learned to love America for the wonders it brought to my young mind.

Indeed, my political beliefs to a large degree were shaped in the US. However flawed the US is with all of its hypocrisies, it is still the greatest liberal democracy that the world has. It is the Athens, the Rome, the Baghdad, the Cordoba and the Delhi of our time. Just because of that, I looked up to it. Because of this and because I spent a significant portion of my early adult life there, if I had a second home, the US would be it.

When Trump and his followers do what they do, and among others equating the US to Russia, I feel that is an undoing of what the United States of America is supposed to be in my eyes, a foreigner, who looks kindly to the east across the Pacific. Trump is killing the US that I know, and by that, threatening the idea of liberal democracy all around the world (even in Malaysia where our democracy is becoming increasingly flawed and more authoritarian). That makes me angry.

The Trump’s ban, now challenged in the courts, adds further to the anger. My alma mater, the University of Michigan, is celebrating its 200th anniversary this year. And I am entertaining thoughts of returning to Ann Arbor to catch the festivities and walk down the memory lane. Trump’s ban, could potentially affect me. I still remember my experiences at various US airports during the Bush era. I thoroughly dislike the discrimination and I do not wish on others what I went through.

So, I do care for things that if happening in the US. The world is interconnected enough that I have real attachments to the US. Needless to say, I have friends in the US too.

But one does not need to have personal ties to the US to be worried about development in the US. It is just like how some of us are concerned about the oppression in Xinjiang, or in Iran, or in Egypt, or in the Philippines or anywhere else without the need to have any personal connection.

Even if we cannot think of ways which a reclusive, protectionist US could affect Malaysia — it will by the way: HSBC economists think Malaysia will be one of the top four economies to be worst affected by a protectionist US — we can still care because we have empathy for other human beings. Injustice or discrimination anywhere is still wrong and we can take a position on the matter. We can make personal judging based on our values. We have enough room for empathy those near and far beyond our shores.

Because of our capacity of empathy and because of the interconnectedness of the world we live in, it is outrageous to think we have to choose between caring US-based or Malaysia-based issues. Both are causes for concerns. I care for the deplorable things happening in the US, and at the same time, I care about the 1MDB corruption scandal, or the blockade in Kelantan, along with other injustices in the Malaysian society I am living in.

Indeed, it is a false dichotomy having to choose the US or Malaysia. There is no reason why a Malaysian needs to choose between the two. We can be concerned for both, and more.

More importantly, there are liberal values and among them are that we all are created equal and all should have the same fundamental rights. This applies all around the world, not just in and around your small neighborhood.

In time when anti-liberal populists are turning national policies inward, it will be most disappointing to have liberals retreating to a small-world cocoon as well. Such inward retreat would be a betrayal of liberal belief, that liberal values are universal in nature and not provincial. We fight racism, discrimination and everything bad out there by staying true to our liberal values, not by abandoning it.