Categories
Economics

[2756] Press on with economic reforms

I do have complaints about various government policies but I do see improvement on this front at the federal level in the past few years. Two policies I am largely in agreement with and am advocating are the subsidy cuts and in its place, the cash transfer program.

After all the progress made however, my fear is that the government is losing its focus and it is taking a step backward. I will take such reversal as a betrayal to the earlier promise of economic reforms.

I write so because the government plans to introduce a complicated quota system for subsidized petrol and diesel in place of the current blanket subsidy regime, which given the current global crude oil prices, is at the brink of elimination. The prospect of elimination is good news but now the government wants to maintain the subsidy instead. It just cannot make up its mind.

Under the new convoluted system, each person would get some quota of subsidized fuel based on his or her income in the name of targeted policy: the higher your income, the fewer quotas you would get. Any consumption above the quota would be charged at market price. Full details have not been released yet but during the tabling of the federal government’s budget, the Prime Minister said he would announce the mechanism soon.

What makes the situation worse is that the government also plans to limit the cash transfer program we all know as Bantuan Rakyat 1Malaysia (BR1M) by restricting items that can be purchased by the program’s beneficiaries. The government is supposedly concerned that the recipients would abuse the cash from the program by buying luxury goods, like an iPhone 6 that a certain Minister is using now. After all the speech about the-days-of-government-knows-best-is-over by the Prime Minister when he first took power, here, the minister Ahmad Maslan is showing the government’s paternalistic side by attempting to dictate a person’s consumption pattern right up to the minute details.

I disagree with both proposals because they are bad policy. I would prefer the government to stick with a superior pure subsidy cut-cash transfer mix instead.

Quotas and coupons are inferior policies

The only way I can think of to make such consumption control as preferred by the minister possible is by converting the cash under BR1M into some kind of coupons. I am struggling to think of any other way to make such paternalistic policy possible. Maybe that is my imagination failure, but I would think any other way would be unnecessarily more complicated than the coupon setup, which is already complicated, risking abuse.

Why? The recipients can sell the coupons at a discounted price to get cash instead of buying items meant to be bought by the coupons. And what prevents them from using that cash to buy luxury goods? As you can see, it is a complicated system that reduces the potential amount received by the targeted person through leakage and does nothing to address the minister’s paternalism, assuming his paternalism is right in the first place.

By leakage, I mean the benefits meant for specific groups get leaked to the unqualified others through the discount. The coupon purchasers who are not meant to get the coupons get to enjoy the benefits of the coupons. How about a concrete example? It has happened with the 1Malaysia Book Voucher program where students did exactly that: they sold their vouchers at a discount for cash to a third party.

The same argument is also applicable to the quota system for subsidized fuel. What prevents a quota holder for selling his or her fuel to others at some price higher than the subsidized price but lower than market price? There is nothing ”targeted” about it.

Monitoring might be the key to the success of such system but with the government trying to balance its budget, does it make sense to create a whole new bureaucracy to police the effectiveness of the complicated regime?

Furthermore, the coupon system would require distributors. Just who will distribute the coupons, one might ask? The government would likely outsource it to someone else in private sector given that there are millions of households already benefiting from the cash transfer program BR1M. And with all the complicated supply chain of vouchers, who knows what would happen. Something can go wrong. Why creates an opportunity for corruption in the first place?

If  you want a clean targeted policy, then you would only need to wire in the necessary cash directly into the recipient’s account. It is precise, easy and clean. If the person has no account, establish one for him or her. This way, no third party gets to handle the cash, leaving little room for abuse. And we already have that system in place. Why change things that work?

A regression of policy

Subsidy cut and cash transfer work charmingly and that is enough. The proposed quota-coupon policy will instead undo the successes of the subsidy cut-cash transfer policy by complicating everything.

If indeed the quota-coupon policy mix will be implemented, then I would see it as a regression. It is a policy U-turn. The maintenance of the subsidy system will preserve the very inefficient system that the government wanted to get rid in the first place while the introduction of a coupon system introduces other kinds of new inefficiency.

We are already on the path to a superior policy mix compared to the one we had before. I would go further by arguing that the logical end of the current mix is the best one given the objectives of creating a more efficient market, lowering the fiscal deficit and at least preserving — it can even be enhancing — the welfare of Malaysian most affected by the cuts and elimination of subsidies.

Remember the cash transfer rationale

It must be remembered that both subsidy cuts and cash transfer should be seen side by side. They are not independent of each other. The cash transfer is meant to address the negative impacts of subsidy cuts, making the cuts more palatable to the low-income households. The cuts meanwhile finance the cash transfer.

If the government reduces the efficacy of the cash transfer by taking the cash element away, then whatever remains of it will be unable to play its role as a cushion at its greatest potential for the financially weakest households. At the same time, if the subsidy is being maintained, then we should not increase the cash transfer. I would even say that the maintenance of subsidies calls into question the existence of the cash transfer program in the first place.

The Prime Minister during the budget suggested that the revenue raised from the goods and services tax will finance BR1M in 2015. That is a really a dangerous statement that upends the ties between the subsidy cuts and the cash transfer. Maybe this is a sign that the government is getting itself confused about the rationale for the cash transfer, which can explain why we are starting to see economic reforms losing steam as various inferior policies proposed at the expense of superior ones.

Don’t fix it if it ain’t broken

My advice to the government is to press on with its earlier promised economic reforms. Ditch the inferior quota-coupon mix. Maintain the current policy. Press on by floating all fuel prices. We can move on to LPG subsidies once the business with petrol and diesel is done. Maintain and improve the cash transfer program. Do not change the cash nature of the program. Increase it whenever subsidy cuts save more.

Just no to quota. No to coupon. And no to Ahmad Maslan’s paternalism.

The government has all the political capital it needs to press on with the reforms. The general election is still so far away. All the political criticism against BR1M can easily be dismissed. And BR1M is a cheaper and better kind of populism backed by good economics compared to the old subsidies and all those complicated policies. What is not to like?

It would be a great shame if by 2017-2018, all the political capital the government has now is wasted on half-measures.

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 Malay Mail on October 21 2014.

Categories
Economics Politics & government

[2755] Federal grants to Malaysian states in 2013

There are a lot of discussions about federal-state relations, especially with respect to Sabah and Sarawak. But I find those discussions and the points stressed are really hard to pin down in terms of numbers. So, I am putting the following chart up, mostly for my own purpose, and perhaps, also for the make benefit for glorious people of the benefit of others interested in the debate.

Here is a chart presenting all the federal grants paid by the federal government to all the 13 states in Malaysia:


20141017FederalGrantToStates

I obtained them from the federal government’s Anggaran Perbelanjaan Persekutuan 2015 document that was released on Budget Day last week. If you are interested in it, the figures can be found in Annex E of the document.

I apologize for the colors.

I have to highlight that this chart contains only grants. Things like petroleum royalties are not included because those are paid by Petronas, not the federal government.

And this of course presents only one side of the story. It would be interesting to collate all of government spending as well as income that went to/came from each state. Then we can calculate the balance. By doing so, we can know which state is the net recipient or contributor in this federation of ours. That perhaps could back any argument with some kind of data rather than merely strong beliefs. The exercise may sound simple, as if it involves just going through the government accounts. But federal spending can be so distributed among ministries and various bodies that essentially are linked back to the government that tracking them can be a real challenge.

That said, the relationship we maintain in this federation goes beyond fiscal matters. Just do not be too fixed on the economics. I think it is safe to say that economics is not nearly everything there is in life.

Categories
Economics

[2754] A history of fiscal deficit

I am sure you have seen this before but just in case…

20141013MalaysiaDeficitNGDP

And the surplus was not because of Anwar Ibrahim. It was something bigger than him. It was the Roaring 90s.

Just a short remark: the recession of the late 1990s was the worst Malaysia has ever experienced, but it is interesting that in terms of government finance, it was the recession of the early 1980s.

Categories
Pop culture

[2753] Reviewing P. Ramlee the Musical

I love plays.

I am struggling to explain why but I think it is because in a stage play, nobody gets a chance for a cut. After all the practice sessions, there are still rooms for mistakes. So, I appreciate the courage needed for stage plays. There is also a direct connection between live play and the audience. You could hear the voices of the actors and actresses without any manipulation. Stage play is an exercise in exaggeration, but it feels more natural than those you watch on the TV, on the computer or in the cinema.

I have not watched a play for a long time and so when several friends suggested we spend our Friday night watching one, I said, “yes, let’s go.” This was a week ago, on the opening night of P. Ramlee the Musical.

First off, I think I want to say that I love the play.

But there were several issues that irked me.

I think the play started awkwardly, stressing to the audience that the play was our story and our identity. But I felt it should be about P. Ramlee, not our culture. Perhaps, that is just my libertarian sentiment battling society appropriating someone’s personal successes and failures (in many cases, just successes).

The opening song which stressed on ”our culture” was particularly weird with the lyrics noticeably struggling to rhyme everything with the word identity. Notwithstanding the forgettable song, and that what-on-earth-is-up-with-the-blind-man intro scene that could easily be cut, the group performance was entertaining. The song was awkward, but scene opened up rather well. I especially like the props but more on that later.

A bigger problem with the play was the uneven pacing. One example happened in the second half when P. Ramlee, played by Tony Eusoff (I love the accent, though it was maybe overdone to sound like P. Ramlee), was separating from his second wife Norizan. The argument and the divorce scenes were powerful. As Norizan — the awesome Tiara Jacquelina — exited the stage and accosted by paparazzi, she said “I give P. Ramlee back to the world.” That is a great line and it summarizes a huge part of the plot quite snappily. Most importantly, it was a great climax to build on the next part of the play. Disappointingly however, what followed next was an anti-climactic, sad, slow song about regrets that I found utterly unnecessary and wasting the momentum built. There were other scenes with the same problem and it did feel like those scenes were just there filling up time that needed to be filled for whatever reasons. So, I thought, those scenes could easily be cut off without affecting the play at all, making the play much punchier.

One big storyline that I found very distracting and irrelevant was the one where the play explored the fate of FMP employees, the Singaporean production studio which P. Ramlee made his name. The studio had to close down for financial reasons and people lost their jobs, including P. Ramlee. Maybe the director wanted to highlight the suffering of those behind P. Ramlee’s success, that P. Ramlee was not the only one who suffered. Maybe the director was trying to put in some kind of political-sociological nuance into the play, and to some extent, saying that it was disaster to the Malay film industry. But this play should be about P. Ramlee, not some academic papers about the film industry. So, I definitely think the play was biting more than it could chew and ended up with dissatisfying, digressing treatment of FMP employees as well as on P. Ramlee’s abrupt fall from fame. It would have been better if time was spent exploring P. Ramlee’s fall instead of the whole industry.

Moving on, I like the props. When the curtains, or really in this modern utilitarian world, the screens, were lifted up in the beginning, I felt impressed. The props were wonderful. The facade of colonial shophouses was done well enough that it immediately gave me a sense of the era the play was set in. Other props I thought deserve a mention were the train sets, which appeared in my best liked scenes.

But I dislike animation used in the play. There were scenes where the paparazzi/reporter characters were utilized to hasten the pace of the play. The animation projected on the screen was too distracting. It was overly flashy, changed rapidly but repetitively. It took my attention off the characters to the screen that was showing fluffy information that, for instance, you would get from reading newspaper columns where the author likes to use big words or ideas or some feel good slogan/cliche but ultimately fail to get to specifics and saying nothing new. I think it was better if the animation was less flashy, or probably replaced by a static picture instead.

I do not want to appear critical or hating the play. I do sincerely like the play except I do have issues with it, as I have made clear above, with the biggest ones involve the pacing, the FMP scene and the use of animation.

Other scenes that I like are the part when P. Ramlee was separating from Junaidah (or was it Junainah? I am confused). It was emotionally strong, although, like a friend of mine remarked, it was hard to hear what Lisa Surihani, who played the character, was saying amid all the sobbing. I do like how the crowd pulled P. Ramlee away from Lisa Surihani in that particular scene. I like the train scene from Penang to Singapore. I am not a theater man and I am not exposed to the “engineering” of props, but I was quite impressed with the movement of the train. There are a few others but I will not list all of them. I think I have forgotten some details a week after.

And that is the thing. When I came out of the play, I had trouble remembering the indigenous songs. I remembered the dollar for a dollar song. That was funny but almost nothing else. Given that this is a musical, I think the songs have to be memorable. Still, I think the audience loved it when they heard a hint of songs actually sang by the real P. Ramlee, like Gelora and Azizah.

At least I do. At home later that night, I went on Youtube and listened to old P. Ramlee songs before going to bed. Those songs are timeless that the play should have used more

Categories
Economics

[2752] Dude, where is my standard error?

When the economy grew 6.4% from a year ago, does it really mean it grew exactly at that rate?

Those kinds of statistics are supposed to give us the hard figures that we all can fall back as the one and only truth. Like the physical ones where a meter ruler is a meter long. But those with statistical learning would understand these macro numbers, from the GDP to industrial production to prices are not free from errors (even the ruler has an error but I would think that error here would be considerably smaller compared to that suffered by macro numbers, unless, it is an astonishingly bad ruler). The GDP for instance is not exactly an account of a small company that has in it all of the company’s expenditure. That macro figure is at best an estimation of what is happening in the economy. The fact that we keep restating (not rebasing) the GDP figures every now and then tells you that just as much.

Yet, after working in the financial sector, I am quite surprised to learn at how standard error/standard deviation plays a minuscule role in most analyses. I think this is a problem because without reference to errors, data providers in various government agencies as well as analysts and economists in the financial market give the illusion that their data and their analyses (strictly non-normative commentary of the data) come with absolute confidence (academic economists have better record at this). When the economy grew at 6.4% in a period, it is 6.4%.

But that confidence is overblown. It is not really 6.4% exactly. The truth is that it is possible the GDP had grown around that figure. What exactly, nobody knows. Maybe that is a technological question that would be solved some time in the future. In the meantime, there are some errors in the data.

Before we go on further, for the benefits of those without basic statistical training, I want to emphasize that these errors are not mistakes. They are simply uncertainty that comes along with the data. Uncertainties are there because we cannot know everything about the world. But we can know enough to know about the general situation. Hence the usefulness of these inexact macro figures. I call it inexact, because the true figures fall within a range and it is a stretch to suggest a point figure is the true figure with certainty.

I have no doubt that these economists, analysts and statisticians understand the meaning of errors and its importance. I am not overly worried about this group who work revolves around data. They know there are revisions and they know the numbers can change. They know there are errors. They know these macro numbers provide a useful guide to the happenings in the economy and these figures are not exact numbers. It is more of a sample — a good sample to generalize the population — rather than the actual universe. Whenever they refer to a number, they have the statistical caveat at the back of their mind.

I worry about the non-expert consumers of these data and analyses. These users do not understand this and they take the figures put down as the truth. Consider for example the discontent against the inflation rate in Malaysia, where there are critics who claim it is too low. I think the publication of standard errors of consumer prices would partly help address their concerns by telling them that there is uncertainty in the recorded prices. Still, this will not address the criticism against the CPI too much because the critics also appear fail to understand that the weight of the final CPI number is in such a way that it measures the middle Malaysians. But we have enough microdata that those weights can be reconstructed to fit more than the middle Malaysian. But I think this is a different issue which I have addressed in the past.

I am bringing up the non-reporting of standard error/standard deviation issue because I am bit peeved when I see news reports that goes something like ”Malaysian industrial production growth grew slower at 4.3% from 4.4% last month.” Or the GDP grew faster at 6.4% in 2Q versus 6.2% in 1Q. I mean really, is it truly a deceleration/acceleration? Are we not just sensationalizing it? I am particularly annoyed when economic-illiterate politicians start to sensationalize these figures, spreading uninformed views to the wider public.

(Another example is the idea that China is the largest economy in the world in PPP terms. But how about including the standard error inside too before making that pronouncement? I bet Chinese GDP has an outrageously big interval.)

Is it not enough just to say, ”hey, the economy is doing okay”?

When I see that kind of changes, I am more inclined to say it is stable. In fact, we can get more scientific about it. Calculate the index’s standard deviation and do hypothesis testing to see if the change is significant or not. It is very easy to do such testing these days.

I admit, it is less sexy and mouthful to say ”there is X% probability that the economy grew faster compared to the rate in previous period”, than to say ”the economy grew faster today versus yesterday.” But are we sacrificing truth for sexy, short, punchy, headlines?

I think yes.

I am guilty of not providing the standard deviation too, but I think we (can I use the pronoun we?) need to change our ways. Yes, I think we mainly write for each other, but we have to realize, these writings go out to the public as well. Our statistical caveat might not exist in others’ mind. We need to put those caveats explicitly in the open.

By sharing the standard deviation, I also think it shows others that we are being humble about our data. It says, “these are my best bets” instead of “this is it and there is no other way about it.”

Ideologically, from libertarian point of view, the humbleness is important. Libertarians believe in the superiority of the market over state actions. My belief (before I get banged up for being a blind market apostle, there are instances of market failure where the government needs to come in) in the superiority comes partly from the fact that we do not know everything about the world. I think the idea of standard error is part of that philosophy: the idea that we do not know everything. Again, there might be a time when technology will solve that and bring about a libertarian nightmare, but right now, there are enough cases out there to tell us to be humble.