Categories
Economics Politics & government

[2951] Politics of prices is counter-productive

There has been a global supply constraint of various kinds for at least a year now. The supply chain disruption was expected by many—I quickly noted the post-war Malayan supply-side crisis as a parallel. Nevertheless, few people expected the constraints would be this tight for so long. I certainly did not.

The tightness has slipped over into the Malaysian consumer market. Chicken, beef, vegetables are the usual suspects.

The waitlists for cars are long due to a persistent global chip shortage: I test drove a Peugeot several weeks back and that experience to me underscores how modern ground vehicles these days are more and more an electronic device than a mechanical one. I knew vehicles had an ever increasing electronics (and electrical) components to them. Several months earlier, I read a report showing how the share of electronic cost relative to total car manufacturing cost has gone up drastically in the past 20 years, from less than 1% to maybe 40%-60%. But there is a difference between reading it, and riding the thing. The dashboard is a computer screen popping more information any older car could show. When I say dashboard, I mean a dashboard full of dynamic data, with customizable menu. The air-conditioning controls are only accessible through a separate central LCD screen, which also controls other aspects of the car. Even the brakes can be controlled by the computer, along with so many other things.

It is not just chip and electronic components are in short supply. Somebody on Twitter jokingly said “oh, this is the chip shortages they were talking about” in reference to shortages of fries at McDonald’s in Malaysia and Japan.

Consumer prices are rising, and it would have risen higher if it was not for price control mechanism and subsidies in place in Malaysia. This is readily observed from the following chart, where consumer prices are not rising as fast as producer prices. The latter is a proxy to global prices.

PPI vs CPI

Nevertheless, despite enjoying the shield, consumers have been complaining about rising living costs. They demand actions. More than a few activists and politicians have demanded the same.

All governments are sensitive to such criticisms and this government, especially as weak, incompetent and clueless as it is, is doubly so. The opposition has been relentless in their criticism. Some Pakatan Harapan supporters have highlighted how their government played a better and proactive role in addressing prices, and go on to claim a Pakatan Harapan government would have been far more effective in managing cost of living problem. And when Pakatan Harapan was in power, Barisan Nasional and Pas, on top of their usual racist rhetoric, also attacked the government for rising living costs regardless of whether prices was actually rising (prices then were actually very stable due to the imposition of an overly generous blanket fuel subsidy).

I dislike politics of prices. While it has its uses in cases when there are monopoly abuses and regulatory hurdles (the drop in broadband prices are a great exception), in the current climate prices are largely out of the government hands. The truth is, if Pakatan Harapan was in power, they too would not be able to do much about it either.

But that does not matter. Such is the politics of prices.

The problem is with the supply itself and the players of politics of prices simply ignore the cause of the problem. Some even go has far as misdiagnosing it as unhelpfully as greed.

A supply-driven crisis like this requires investment to loosen up the supply chain: expansion of ports, new technology to hasten production and delivery, new plants, more workers, etc. Yet, the aversion for price hikes have led to large government subsidies (think fuel), which takes fund away from productive investment purposes that are needed to address the supply chain disruption.

Politics of prices not only ignore the source of price pressures Malaysian consumers are experiencing. They ignore wages. Prices and wages are part of the same coin: wages are prices of labor. Notwithstanding issues relating to income distribution between employees and employers, and technology-driven price cuts among others, the politics of prices suppresses price growth, and through it, risk of suppressing wage growth.

More than once, the politics of prices have led to calls for wage cuts. The targets have been high-paying professionals and ministers (and their unqualified advisors), but too often, it has gone a little bit too far. Mahathir as the 7th Prime Minister for instance, is a fan of pay cuts and that unfortunately set the tone for the whole economy when he was in power. Coupled with his obsession with government debt (government debt and transparency were a problem), and his history with the gold dinar movement, it felt like he wanted a deflationary environment.

All that set the tone for austerity. There was really no austerity in place—government spending went up and the economy expanded—but the narrative set by the PM made it difficult to convince many out there that that was no austerity. And the economy, even as it expanded, took heed of the deflationary sentiment.

Categories
Liberty Politics & government Society

[2950] Too tame for our own good

Many things could describe the past two separate years that merged into one. Here, I would describe it as the taming of our society. The fire that powered many before was doused by shocks and disappointments of February 2020 along with all the political development that followed. This broke the heart of many.

And if there were still beating heart fighting on the political front, the pandemic that flared up soon after broke the body of many. The crisis and its mismanagement brought debilitating economic effects that forced many to switch attention away politics (politics here is not the narrowly defined partisan-party politics, but one about governance and the overall organization of society) to that of personal livelihood. Many died along the way.

Malaysian society as it was before the pandemic was mostly too polite for our own good, but the bludgeons needed to fight the pandemic turned that politeness into utter submission. There were noise and protests against the manner government regulation was applied incompetently. Some went to the streets. But those noise and protests were nothing compared to the years before. During the pandemic, far too few could, or willing to go to the ground, divided out of fear of getting infected, or the need to work at a time when unemployment was soaring, furloughing was the talks of the town, and wages were cut down significantly.

The foundation which the Muhyiddin government stood on was shaky soon after its undemocratic formation, but it stood for so long because any anger was contained by fear, or deference of power. But the ember-like anger burnt further and when it appeared a fire was about to lit—even patience among the polite has its limits—the irresponsible government played poker: they raised the stakes by declaring emergency. The stakes were raised to the point the polite did not dare challenge it too fiercely. Or they were too tired, and hapless.

The subsequent government under Ismail Sabri lowered the temperature for a while but the incompetence remained. That same incompetence was for all to see during the recent great floods across the peninsula. The further loss of life and property raised the political temperature yet again. The politics of race and religion showed it was all meaningless in the face of incompetence, so much so that this administration that largely has the same Cabinet members who previously prided itself as a Malay-Muslim government, has stopped marketing itself as one.

Amid the troubles faced by the general public, yet another scandal is erupting in the public first involving the Malaysian Anti-Corruption Commission, and as national crisis tends to pull other public institutions into the ditch (1MDB was one such case but on a grander scale), later the Securities Commission. A good institutional set-up would have contained it. This government prefers to drag everything down, for their benefits, at the expense of the country. All that highlights how institutional reforms achieved due to the 2018 General Election was fragile and needed nurturing, and how the events of February 2020 undid the good work. The message before had always been reforms took time, but few imagined there would be so big a digression happening so soon.

The digression is happening because we have been too polite, too tame amid assaults over our democratic institutions. It is time to be not so tame and fight.

I would like to end this post by reproducing Usman Awang’s Sepatah Kata:

Sebuah perkataan yang paling ditakuti
Yang tradisional sekali
Untuk bangsa kita yang pemalu.
Sekarang kata ini kuajarkan pada anakku:
Kau harus jadi manusia kurangajar
Untuk tidak mewarisi malu ayahmu.
Lihat petani-petani yang kurangajar
Memiliki tanah dengan caranya
Sebelumnya mereka tak punya apa
Kerana ajaran malu dari bangsanya.
Suatu bangsa tidak menjadi besar
Tanpa memiliki sifat kurangajar.

Categories
Conflict & disaster Economics

[2949] Misaligned powers, incentives between the federal regulator and state authorities contributed to the 2021 great Malaysian flooding

The government has blamed the recent flooding on once-in-a-hundred-years rainfall. Blames have been assigned to climate change too.

I have never experienced such prolonged rainfall before, and it was an extraordinary experience. Thankfully I did not have to suffer the flooding. Unfortunately, many others did and they were cursed with an incompetent government at the helm that was slow to realize the problem, and slow to act upon it. For a government so used to living the crisis-mode, one would expect they would have some kind of preparedness, or seasoned enough to lead a proper competent response. But no, it was a disastrous handing. Old clueless men and women, they are.

The Environment Minister himself back in October dismissed the talks of big floods, despite the prevailing La Nina phenomenon that brought increased rainfall across the Asia-Pacific region. His dismissal played a deplorable role of lowering down the greater population’s guard. There are several persons in government should be fired for incompetence and negligence—lives were lost, properties damaged—and that particular minister is high in the long list.

But the severe floods across Malaysia has happened much more often than once in a century. Kuala Lumpur alone has had its share of several bad floods. The big one in Kelantan that happened less than 10 years ago. Clearly, there is more to it than just once-in-a-hundred-years rainfall.

And excessive logging is one of those several contributing factors.

Specifically, here, I would like to highlight the regulatory environment relating to logging. The system is flawed and provides excessive incentives leading to widespread environmental disasters that makes the big flooding possible. Instead of remedying the problem of misaligned incentives, the system makes the tragedy of the commons worse.

The two-part systemic flaw

There are two major parts of the systemic flaw: the state controls the issuance of logging permit, while the federal authority leads the environmental policing part. To further complicates matter, the federal regulator regulates peninsular matters only.

The approving authority trumps federal authority due to the current constitutional arrangement, as provided under the Ninth Schedule of the Constitution of Malaysia. The extensive power of the state governments over the forest is further clarified in the National Forestry Act 1984. In short, the federal regulatory body is powerless in the face of state governments.

Furthermore, the state governments, particularly the poorer ones like Pahang, suffers from adverse incentives arising out of the lack of revenue. In Malaysia, tax revenue (income tax and consumption tax are the major ones) is mainly the purview of the federal government and not enough has been returned to the states from the federal level. This insufficient sharing is also a reflection of the low-tax regime Malaysia has: you cannot share if you do not have enough in the first place. It is also a reflection of partisan politics, as Kelantan and Terengganu suffered before.

Given the state’s lack of tax revenue, and insufficient revenue support from the federal government, the states have to resort to other means of generating revenue: among them include monetizing land and the forest. With the goal of supporting state government operations, excessive logging permits are issued.

(In Sabah and Sarawak where the regulator comes under state authority unlike in the 11 states in the Peninsular, arguably the pressure for revenue forces the government to prioritize harvesting over protection. For instance, Sabah recently lifted its state-wide ban on timber exports that was imposed in 2018).

Additionally, many of these states come under the influence of the royal houses, which demand a share of the forest resources. The state government more often than not, would comply. I have a short family history to share here to illustrate the problem of toothless regulation in the face of state rights. An uncle of mine decades ago used to be a forestry officer in a certain large state. He stopped a logging operation linked to the royal house of the state. He ended up being transferred out of the state. The logging operation continued.

Managing the commons

One way to address the flaw and manage the commons better is to take away the states authority over the forest, and have the federal government compensates the state government through large institutional sharing of tax revenue beyond what is provided currently through items like capitation grants. The downside is that, as you can guess it, higher tax burden for everybody on average.

Through this realignment of powers and incentives, the pressures of deforestation through logging could be removed, and the regulatory authority would have stronger powers to preserve the jungle. That will help lessen the chances of big floods recurring (with all else the same).

Categories
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.