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Economics Politics & government

[2948] Government money is best used for actual spending and investing, not replenishing EPF savings

National Union of Bank Employees (Nube), the banking union in Malaysia, wants the government to “return monies withdrawn by B40 and M40 members under the Covid-19 relief package.”[1] I take that as demanding the government to directly replenish EPF contributors’ savings that were depleted by government Covid-19 withdrawal programs. The news report does not mention when the union spokesperson wants the replenishing to happen, but I assume as soon as possible.

For the uninitiated, the Employees Provident Fund (EPF) is a compulsory retirement scheme for private sector workers.

I disagree with the withdrawal EPF schemes, and along with many others, instead have advocated for the government to raise its borrowing and commit to greater spending instead in order to provide greater assistance.[2] But the government was too worried about its fiscal deficit, too fresh to learn all the economic levers it had, and too desperate to find ways to relieve the spending pressures they felt. Among the chaos, they heard Najib Razak’s bad advice and took it.

But it is done now. A mistake has been made. While too many EPF contributors find their account depleted as a result, the overall economic circumstances have changed. During the pandemic, we needed economic programs guaranteeing everybody a certain level of welfare, particularly when a significant part of the economy was shutdown. With the private sector disabled so thoroughly, it was the responsibility of the government to secure everybody’s basic needs. It was a hibernation policy: lockdown and government assistance.

Now that the economy is back operating albeit weakly, priorities have changed. We need to strengthen the economy. Instead of hibernating, we need more spending and investing by the both the public and the private sectors.

This of course assumes we will not make any more mistake on the health front. While there is a real room for optimism going forward, with vaccination rate running high, and that we know more about the virus, after the government’s naïve V-shape recovery blunder, we can never be too careful.

Having the government replenishing EPF savings, especially if immediately or the near future, runs contrary to current priority of economic recovery: pushing for greater spending, investing in capacity building, and simultaneously creating jobs.

Why?

Because putting government revenue (or borrowing or both, since the government unlikely to enjoy any kind of fiscal surplus) into EPF savings would store the money into passive activity for an extended period of time (due to the nature of the scheme, which savings could only be withdrawn at retirement age under normal circumstances; for the macro-inclined, you would remember S=I, but here I would argue S=aI where a<1 since EPF typically invest in equities and debt, and not directly, and if directly definitely in the very minority, into new productive assets like factories and infrastructure). It would go into the financial market, but that is not the most productive of all options available out there. In other words, the act of replenishing will take a lot of steam needed to power the recovery.

And it is worth remembering that economy in 2021 will be smaller than it was in 2019: recovery is not complete. This is an important point because it has long-term repercussion on the economy.

To illustrate the point, it is good to go back to the 1998 during the Asian Financial Crisis. The Malaysian economy only truly recovered from the 1990s crisis by mid-2010s: actual GDP only surpassed the what-if-there-was-no-1990s-crisis GDP around 2015-2016. To put it differently, actual GDP level only surpassed the pre-crisis level around 2014. That is close to 20 years of lost potential.

Actual GDP vs hypothetical pre-AFC growth trend

For 2021, we are still both below pre-crisis level and trend.

For fear of losing more potential, we need to focus on spending and investing. Having the government correcting their EPF mistake by replenishing the accounts will heighten the risk of us losing potential.

The replenishing size, and in turn, potential loss from the replenishing policy, is not small. A report from the Finance Ministry shows the cumulative EPF withdrawal under the 3 programs (i-Lestari, i-Sinar and i-Citra) was RM90.3 billion as of early October 2021. More has been approved but yet to be withdrawn. Replenishing it as soon as possible would take at least RM90.3 billion off the economy in terms of spending and investment, ignoring any multiplier effect.[3] To put the number in perspective, that is nearly 30% of what the government plans to spend in 2022 and in fact, RM15 billion bigger than the government’s development allocation. Even by spreading the replenishment over 2 or 3 years, such policy would take so much money from most parts of the economy, and into the finance industry that will eventually manage those money.

But that does not mean there is no other way of replenishing it. Two ways I can think of are:

  • Tiering the dividend, which those with the least savings getting the highest rate. I have suggested tiering because, but it was primarily made out of realization the wrong people are given the incentive to save, and so, disincentive to spend and invest.
  • Increasing employers’ mandatory contribution. This will increase cost of doing business, but the government, while not doing enough, did a lot for businesses. Perhaps, it is time for businesses to play their role here.

Both however will be a slow replenishing process. Furthermore, increased mandatory contribution, for instance, might reduce take home pay as employers recalibrate their wage structure.

Another way by way of indirect replenishing is to make something like a senior citizen cash transfer bonus, payable by the government upon a person’s retirement, on top of existing cash transfer programs. But done together with dividend tiering, increased contribution and perhaps other ways too, this could reduce the size of the program, while pushing it far enough into the future.

Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR (Nov 22): The National Union of Bank Employees (NUBE) had on Monday (Nov 22) urged the Employees Provident Fund (EPF) to demand that the government return monies withdrawn by bottom 40% (B40) and middle 40% (M40) segment EPF members to protect their retirement savings at a time when EPF members’ retirement savings have depleted due to Covid-19 pandemic-driven economic challenges. [Shazni Ong. EPF asked by NUBE to demand govt to return monies withdrawn by B40, M40 members during Covid-19. The Edge Markets. November 22 2021.]

[2] — Two experts Malaysiakini spoke to had concerns about allowing such a large number of people to dig into their retirement savings. Instead of tapping into EPF, both opined that the government could have spent more to provide assistance to households amidst the Covid-19 pandemic. Economist Hafiz Noor Shams previously analysed that the government was not spending enough in Budget 2021 to support the economy, by virtue of what he regarded as an overly conservative deficit estimate. [Annabelle Lee. Economists: Why let 8m tap EPF when govt can afford cash assistance?. Malaysiakini. November 27 2020.]

[3] — Laporan LAKSANA ke–76. Page 11. Ministry of Finance, Malaysia. November 17 2020.]

Categories
Economics

[2947] Without carbon pricing, we are left with adaptive measures

Carbon pricing, and specifically carbon tax, has been criticized as false panacea to the emission problem. Overrated, Jomo wrote last week.[1] In the Financial Times, an opinion piece warns pricing carbon is a shock therapy doing more harm than good, recalling the hardship experienced by many in the former Soviet Union during Russia and eastern European countries’ sudden and forced transition from communism to free-market.[2]

A brief rationale for carbon tax

Carbon tax treats carbon emissions (and other greenhouse gases, which we tend to forget) as a negative externality. That means the emission costs are unaccounted for, and because polluting is free, too much is being emitted much to the detriment of the overall society. Carbon tax (there are other mechanism as well) is designed to price the emissions, put ownership on the emissions and make somebody pays for it. Once somebody pays for it, then that somebody would be more mindful about emitting carbon, thus reducing emissions to a more reasonable level, with respect to average global temperature rise. That is the theory at least.

Carbon inequity argument

But since emissions and human-induced climate change is a global problem—an example of the tragedy of the commons—carbon tax requires global coverage and cooperation. And this goes to the root of the problem: Who should reduce emissions? Who should pay what?

The question gets complicated when we understand emission reduction scheme, in this case carbon tax, affects rich countries differently from poorer ones. A growing country seeking economic prosperity will need to emit more and more emissions, unlike an industrialized economy that has already emitted a lot to reach its current affluence. Pricing ongoing emissions while ignoring past emissions is clearly unfair to the former set of countries.

Yet, the humanity does not have the luxury to take much more emissions. Emissions from non-rich countries like China, India, Indonesia and Nigeria cannot be ignored. Emissions from these big developing countries have to be addressed.

Cap and trade, and failure

There is a way to do this without resorting to carbon tax: set emission quotas and allow trading. For every cap and trade scheme, there is an equivalent carbon tax. Since there is an equivalence, theoretically, a cap and trade scheme should be able to reproduce carbon tax outcome.

The old Kyoto Protocol (and subsequent treaties) provides exactly such a cap and trade mechanism, which countries (and companies) with excess emission quotas could sell it to those who need it. However, it does not seem to be working 20+ years on. Most of the times, it feels more of a greenwashing, or virtue signaling at the corporate-level (Look! We are an environmentally-friendly company!) than a real attempt at reducing emissions economy-wide.

In Malaysia, the government wants to replicate the cap and trade system through a voluntary mechanism, which makes the system more flawed than what envisioned at Kyoto (see the Ministry of Environment and Water document here). The problem is, if it voluntary at the national level, the worst emitters would likely avoid entering the market. This will leave the market with inconsequential companies. Of course, the government can possibly force big carbon emitting companies like Petronas and Tenaga Nasional through their shareholding influence. But what about the more private companies like YTL Cement, Press Metal and the likes? Why would they participate voluntary and raise their cost? Maybe their greenwashing investors would apply pressures, but who knows. The bottom line is, a cap and trade system cannot be voluntary, else the worst emitters would avoid it.

A voluntary system, I would think, would have a very, very low carbon tax equivalence. And that will hardly incentivize companies and individuals to reduce emissions.

I would go as far as say carbon trading has been a failure globally, while carbon tax has not been introduced as widely as it should to be effective.

Cash transfer

One tool to address the emission inequity is for richer countries to pay off developing countries for reducing the latter’s emissions. Income from industrialization could partly replaced by income transferred from industrialized economies. It is a way to address historical emissions and ongoing emissions simultaneously.

But from the recent Conference of the Parties in Glasgow, and from years before, the approach is unpopular among the would be payers. Without enough such transfers happening, a globally carbon pricing will be hard to achieve.

Technological progress and transfer

Technological transfer comes in the same spirit of cash transfer. In-kind, instead of in cash.

The good news on this front is that all kinds of technology have improved significantly over the past two decades. I have an example: solar power.

During my undergraduate years in the early 2000s, I joined the school’s solar car team. The price tag of the vehicle then was roughly a million dollar if I remember it correctly. Most of it was due to high-grade solar panels used. Today’s car costs around a million still, but with better battery technology, better motor, better design and higher panel efficiency. I remember, the old early 2000s car had panels with efficiency in the teens or low twenties. By 2017, the newer generation of panels had an efficiency of 35%.[3] Efficiency here means the ability to convert light into electricity. In fact, top of the line panels have an efficiency close to 50% now.[4]

That better technology has become cheaper as well. Panel prices have come down significantly, from USD106/watt in the 1970s to about USD4-USD5/watt in the 2000s to USD0.2/watt in 2020.[5]  This is only solar, and not yet other sources of energy like wind. Or efficiency of internal combustion engine. Or the proliferation of electric or hybrid cars. All of which have improved.

Yet, the fact remains, the world even with impressive technological progress is not cutting emissions fast enough. This includes progress on tech transfer between rich countries and the rest of the world.

Green investment

There are green investments happening, that is possibly a proof of tech transfer happening. In Vietnam, the rise of solar power in a short few years through aggressive government incentives have been the country as the largest producer in Southeast Asia. Unfortunately, solar represents just 5% of their generation mix, with approximately half coming from coal.

Yet, not enough investments are being done as well (if it was enough, we would not have the current emission problem). That shows the problem that we have: green investment is helpful, but it has become a bit of a sloganeering MMT-style.

Other tech

There are other stuff going on: carbon capture. Some of the crazier ones including launching the captured carbon into space. Or burying it underground. But those do not seem realistic at the moment.

Adaptive measures

Bottom line is, all this will require global cooperation, but it seems that cooperation is not happening as big as it should. And I think, any credible cooperation with respect to emission reduction needs to include carbon tax, and along with transfers to lessen the shocks. Other measures seem… half-measure and will not cut emission fast enough.

But perhaps what is left are adaptive, and perhaps a little of mitigate, measures. When we resort to adaptive measures, it signals that we have given up.

That is a shame. We had and still have global cooperation when it comes to the ozone hole through the Montreal Protocol, which, in many ways a precursor to the Kyoto ways of doing things. It was and is successful. Maybe, the ozone hole above Antarctica is an easier problem to deal with.Hafiz Noor Shams. Some rights reserved[1] — Jomo Kwame Sundaram. Carbon tax over-rated. Jomo. November 9 2021.

[2] — Daniela Gabor. Isabella Weber. COP26 should distance itself from carbon shock therapy. Financial Times. November 8 2021

[3] — Top U.S. solar car team goes small to win big in 2017. Michigan News. July 8 2017.

[4] — Nikos Kopidakis. Reported timeline of research solar cell energy conversion efficiencies since 1976 (National Renewable Energy Laboratory). National Renewable Energy Laboratory. Wikipedia.

[5] — Evolution of solar PV module cost by data source, 1970-2020. International Energy Agency. June 30 2020.

Categories
Economics WDYT

[2946] Guess the 3Q21 Malaysian GDP growth

Let us go straight to it:

How fast do you think did the Malaysian economy expand in 3Q21 from a year ago?

  • Faster than 5.0% (0%, 0 Votes)
  • 2.5%-5.0% (29%, 2 Votes)
  • 0.1%-2.5% (29%, 2 Votes)
  • -2.5 to 0.0% (29%, 2 Votes)
  • Slower than -2.5% (14%, 1 Votes)

Total Voters: 7

Loading ... Loading ...

With lockdown imposed throughout the third quarter and more—done to address the government’s mismanagement of the pandemic—economic growth is unlikely to be strong, if there is growth at all. Reuters’s poll has GDP falling 1.3% year-on-year. Bloomberg’s panel is more pessimistic by putting it at 1.9% contraction.

Supporting statistics are out there. Industrial production contracted in the quarter. Unemploment is still significantly high versus prior to the pandemic. More people are joining the job market and getting employed, but the rate that is happening is just not fast enough.

I do not know what to read from the inflation data anymore. It is mixed with supply-driven issues. Along with massive base effect, it makes the whole measurement less useful for assessing demand. There is core yes, but I don’t know.

One good news is the import growth, particularly retained imports were okay, signalling recovery momentum for private consumption during the quarter and going forward. In contrast, exports did not grow as fast, don’t expect much support from the trade front. Still trade issues with all its supply chain complication might not reflect the health of demand in the first place. That is yet another complication in assessing demand.

But the more important thing is, most relevant to people on the streets, the worst is probably behind us. Vaccination rates are high and further lockdown seems unlikely, unless somehow the vaccines suddenly stop working, or the Malacca election gets mismanaged like how Sabah was. That means, the fourth quarter would likely be much stronger (fingers crossed).

Yet another important point is that, we are very unlikely to return to pre-pandemic peak of 2019 this year. 2022, almost certainly but we are definitely behind the pre-pandemic growth trend. I blame Budget 2021 for that, due to the government’s misplaced priorities.

Categories
Books & printed materials Pop culture Sci-fi

[2945] Watching Foundation

Amid the Dune hype, it is easy to miss the other classic sci-fi hitting the screen. A different screen in a different format, but screen nonetheless. Isaac Asimov’s Foundation has been adapted for Apple TV+ streaming service with 8 of 10 episodes aired. I myself found out about it after browsing Facebook.

I read Foundation a long time ago as a teenager, and the idea of psychohistory was so attractive that I was bought into its universe so deeply. I know Star Wars before Foundation, but I understand Trantor, the capital planet of the Empire in Foundation, first before Coruscant, the capital of the Empire in Star Wars.

I was not the only one loving Foundation obviously. I could not. I remember reading in an interview where Paul Krugman said he went into economics because of Foundation; the predictive power of psychohistory does have a hint of economics in it. Lots of probabilities, and possibly econometrics.

But that was a long time ago, and I admit, I do not remember all the details. My reading list meanwhile has moved on from science fiction to stuff grounded more on reality. There is only one unread sci-fi on my shelf waiting to be opened: Cixin Liu’s The Three Body Problem (okay, there is also Forward the Foundation, but I was told, it is an unjust prequel to the original trilogy).

So, I thought I must be getting old and utterly forgetful when I watched the first episode of Apple’s Foundation. While Hari Seldon was there, the details did not feel right. The Genetic Dynasty? Could I have missed something that big? The pace of the series, as I kept on watching the rest of the series, felt too fast to what I remembered it. In the novels, hundreds of years would pass. In the series, less than a human lifetime.

As it turns out, my memory is fully intact. A little internet refresher reminds me of the Foundation I know. Further research reveals that the series diverges away from the novel, adding new elements and throwing away some.

I know people who are angry at this. The deviation from the novel feels blasphemous. Foundation feels like a holy book, and the series defiles it.

At first, I felt the same way, but really, at risk of being cancelled, I enjoy the series. I really do (and I really like Jared Harris, the man playing Hari Seldon, from his Sherlock Holmes days).

And clearly this is not the first time an original work has been reimagined. Star Wars, under Disney, did that when they threw out of the window all of original storylines told by the Thrawn Trilogy and more. Marvel, under Disney too, definitely changed the background to some of its major characters. Star Trek rebooted its whole universe, rather unsuccessfully if I might add.

So, as blasphemous as it might be, the act of fiddling the original story, I have been desensitized to the idea. A retelling could be as fulfilling as the reading the original.

After all, we are living in an age where actual history is being reassessed and retold in different lights. Old understandings are being overturned. Revisionism aplenty.

Not be quite a parallel, but it seems like a zeitgeist of our time.

Categories
Economics

[2944] Run higher deficit, let the economy recover first

We are not out of the woods yet.

Yet, already there are individuals wanting to shift attention away from the economy towards government finance. The latest of these individuals are Najib Razak, who has the guts to talk about new taxes in the next two years when he is not paying his, with amount that would rival some of the taxes he proposes:

“I propose a temporary Covid-19 recovery tax package for two years. This, for example, will include a windfall tax, luxury condominiums development tax, stamp duty on transactions, inheritance tax, stock market trading tax, and higher personal income tax on high-income individuals.

“After two years, we can end this temporary tax.”

He also suggested that the government tax tech giants that have a presence in Malaysia, such as Amazon, Netflix, YouTube, Google, and Facebook, which have raked in a lot of profit, but have never been taxed here.

He said this should not impact consumers, and instead be levied on the companies’ profit margin. [Azril Annuar. Tax the rich: Najib proposes 2-year temporary recovery tax. The Vibes. September 15 2021]

While taxes in general will have to come, we cannot impose it as soon as possible and then pretend it will not jeopardize recovery the Malaysian economy is experiencing. Recovery so far has been weak. It has been so bad that the government are now celebrating base effect. Such is the quality of our leaders today.

From the look of it, 2021 GDP will likely still be smaller than the one in 2019. This just shows the incompleteness of our ongoing recovery. Unemployment is another measure to worry about, with the latest rate (July 2021) remains stubbornly high at 4.8%, well above of the 3.2%-3.4% range recorded during the pre-pandemic year of 2019. The incoherent management of the pandemic has exerted additional costs to the economy.

Here, we still need to prioritize the overall economy over government finance. While both are important and both are linked, the government has more room to run a loose fiscal policy more than families as well as small and medium-sized businesses. As I have mentioned before, the only barriers to greater borrowing are legal restrictions and there is nothing ‘economics’ about those legal restrictions. Furthermore, borrowing costs are low, with yields on 10-year MGS at 3.30%.

For this reason, it is better for the government to keep their hands off those onerous tax levers and instead run higher deficit ratio (or stay at the current ratio). Allow the economy to grow first. Let the economy recover properly before pushing of any kind of taxes. Once the economy comes, the taxes will also come too.

Only once the economy has returned to its pre-crisis level and trend can we begin to introduce new taxes. In the meantime, while the economy is still below pre-crisis conditions, other non-punitive measures should be introduced first.

Tin identification number (TIN) is one of those measures that will improve transparency in the market without imposing new tax burden to the economy. TIN would require all persons and entities be assigned a unique identifier, which must be appended to any transaction (like the opening of account, transfer of money, purchase of large assets like homes and cars). This will allow the tracing of money better. A little bit like the VAT/GST, but without the tax. Once the system is stabilized, data from TIN could be used to better design new taxes that are needed, including some of the taxes Najib mentioned. Things like wealth tax for instance need data on data on wealth in Malaysia is horrible. TIN can improve data collection by leaps and bounds, which will assist in designing a good tax.

TIN was in the works under Pakatan Harapan as part of their reform program (unfortunately, it was opposed by Muhyiddin in 2019 over concern the opposition would attack the move as a new tax. That was not the only reform that was sabotage by multiple people, which hobbled the overall institution reform efforts). One good news is that there is a good chance the TIN would finally be instituted beginning next year, based on signals given out by the Ministry of Finance.

I would like to reiterate that sequencing is important, and Najib ignores that factor.

The timing and sequencing inappropriateness are not the only concerns here. The other is its temporary nature of the proposal. Najib wants those taxes to last only two years. This is detrimental to longer term attempt at reforming the taxation regime.

Unlike Najib, I am in favor of having a 10-year or 15-year tax reform program, which makes permanent some of the taxes Najib mentions. Easy measure like TIN would happen within 2-3 years. Making the income tax more progressive is another easy move that could happen within 5 years, for instance. This longer-term plan solves several problems (underfunding of public sector, the need for off-budget financing, low taxbase, unfair treatment between labor and capital income, the growing digital economy relative to brick-and-mortar model, etc) more permanently while taking into account the state of the economy.

Having temporary tax measures as soon as possible ignores the state of the economy, and does not address some of the fiscal (and economic) challenges faced by the government.