Categories
Economics

[1813] Of what is RM18 billion compared to RM100 billion?

In the Parliament, a Member of Parliament was concerned with the outflow of money due to foreign workers sending part of their wages back home. Finance Minister Najib Razak, in answering the MP, gave a piece of statistics which highlights the benefit of foreign workers.

PARLIAMENT, Oct 22 – Malaysia’s 2.1 million foreign workers repatriated RM9.11 billion for the first half of 2008 and Deputy Prime Minister Datuk Seri Najib Abdul Razak said the government expects it will total RM18.1 billion for the entire year.

“This averages out to RM720 per month sent home by each worker. However, the strong national reserve can withstand this as it amounts to just 4.7 per cent of our current reserve,” the Finance Minister told Parliament today.

He added that for every one per cent increase in foreign labour, Malaysia’s real Gross Domestic Product (GDP) grew by 0.19 per cent.

Datuk Halimah Sadique (BN-Tenggara) had asked if any action would be taken to address the outflow and whether the government intends to impose any levy or tax on it. [Foreign workers repatriate RM9 billion until June 2008. The Malaysian Insider. October 22 2008]

Let us see. It says 1.00% increase of foreign workers leads to 0.19% increase in GDP. With nominal GDP of Malaysia being approximately RM505 billion in 2007, that means an additional 21,000 foreign workers add almost RM1 billion to the GDP. Now, assuming there is a linear correlation, 2.1 million foreign workers add RM100 billion to the economy. That is about 1/5 of the GDP of Malaysia. Granted, a linear relationship is unlikely and I can begin to criticize myself for the careless use of statistics but it does give us an estimated benefit ceiling.

A slightly more accurate estimate which circumvents the validity of linear assumption is this: 21,000 foreign workers lead to an outflow of about RM180 million (RM720 per capita per month; 12 months; 21,000 workers). In comparison, these workers add roughly RM1,000 million (that is RM1 billion) to the GDP at this particular point of time.

So, what is RM180 million to RM1,000 million? What is RM18 billion compared to RM100 billion?

Assuming that outflow is a loss to the local economy, returns from wealth generation is, at most, 400% larger than the outflow.

As we all can see, support for the continuing usage of foreign workers is grounded on empirical data.

Categories
Economics

[1812] Of 2008 fiscal stimulus 2.0 may prevent a lemons market

Yet another fiscal stimulus is proposed and this time, Bernanke backs it.

Oct. 20 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus, saying the credit crunch is “hitting home” as Americans find it harder to get loans, threatening a prolonged economic slump.

Lawmakers “should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,” Bernanke said in testimony to the House Budget Committee. “Such actions might be particularly effective at promoting economic growth and job creation,” he said, calling consideration of a stimulus “appropriate.” [Bernanke Backs More Stimulus, Citing ‘Weak’ Outlook. Scott Lanman. Bloomberg. October 21 2008]

Earlier in the year, a fiscal stimulus in form of a one-time tax break was executed. The rationale behind the first stimulus was unconvincing and true enough, it did not work as the proposers had hoped for.[1]

There is however hope for the second stimulus to succeed, unlike the first which fell victim to the game of expectation from the outset.

Access to credit in the real economy is the crux of the current crisis. Acts to improve access will go a long way in making the stimulus matters.

While I opposed the first stimulus, I may be supportive of the second effort, especially if the plan seeks to untighten credits. It is becoming clear to me that the banks’ reluctance to lend money may be a form of market failure, similar to the idea of lemons in the used cars market where there is a lack of trust as well as a form of negative externality. Banks simply do not know who to trust and hence, hoard money at the expense of the economy.

In the used car market, market failure occurs when buyers simply do not know which used cars are bad (lemons) and which are good. Prices for good used cars are higher than lemons for the obvious reason. With information asymmetry faced by buyers and sellers enjoying complete information, sellers have the incentive to sell the lemons at the prices of good cars, thus gaining handsome profits. Buyers, realizing this, simply refuse to participate in the market to avoid from being cheated and losses. Hence, market failure as transactions do not occur.[1a]

This however is not to say that the whole crisis is caused by the market. The US government has blood on its hand. Government interference in the market has caused a cascading effect throughout the US economy, leading to a government-induced market failure.

As a green libertarian conscious of the fact that market can fail and government does have a role in combating market failure, I think I can support the second, more properly tailored fiscal stimulus.

I do wonder however how could a fiscal policy improves credit access? Could the government lends directly to the market? Would the government become a guarantor to various borrowers?

But hey, since the US government already owns some banks, why not just order those banks to lower down their rates… (sarcasm) What better way to untighten credit in the market than that?[3]

On a separate note, Mark Sunshine at the Economix writes that a tax-rebate might work because the US economy might have entered into a liquidity trap in which the economy becomes unresponsive to monetary policies.[2] While I do think fiscal stimulus might work, the effectiveness of one-time tax rebate is suspect for the same reason the first stimulus failed. A fiscal stimulus based on government spending might work better than a one-time tax cut.

Whoa. What am I talking about? Heresy!

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

[1] — Momentum for fresh measures built after an earlier stimulus package failed to prevent a jump in the unemployment rate to a six-year high and the longest slump in retail sales since at least 1992. [U.S. Moves Toward Stimulus as Bernanke, Bush Shift. Ryan J. Donmoyer. Scott Lanman. Bloomberg. October 21 2008]

[1a] — See The Market for Lemons on Wikipedia for more information on the subject.

[2] — Momentum for fresh measures built after an earlier stimulus package failed to prevent a jump in the unemployment rate to a six-year high and the longest slump in retail sales since at least 1992. [Will Paulson’s Two Plans Unplug the ‘Liquidity Trap’?. Mark Sunshine. Economix. October 4 2008]

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

[3]p/s — Apparently, there is a rumor about that flying around…

Categories
Photography

[1811] Of the photographer returns!

Enough economics and politics because now is a time to take a break.

Some rights reserved. By Mohd Hafiz Noor Shams.

This was on a tea farm in Cameron Highlands. This is the reason why this blog was quiet for three full days.

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

p/s — since Boris (not Boris the mayor. It’s this Boris instead) commented on my Flikr site and said he wanted to check my blog to find out more about the picture, I am only compelled to offer more description.

These are firewoods for the furnace. Waiting to be sacrificed to transform tea leaves into tea powder, this is just outside of the tea processing plant. Our tour began from the beginning of the process where fresh leaves are left to be dried before further processing. As we moved farther along the processes, the smell of fresh tea leaves began to succumb the smell of real tea.

Tea powder was everywhere inside and I was kind of concerned how that might affect my camera. The heat was also slightly unconfortable, despite the fact that Cameron Highlands has a cool environment and that it had rained just earlier.

You liked that Boris?

Man, you have to visit Malaysia while I am still here. And time is running out!

Categories
Economics

[1810] Of more government intervention

What?

KUALA LUMPUR: The government will invest an additional RM5 billion into Valuecap Sdn Bhd to double the latter’s funds to RM10 billion, Deputy Prime Minister Datuk Seri Najib Razak said today.

[…]

Established in 2002, Valuecap is a fund management company created to invest specifically in the Malaysia equities market. Jointly owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and Kumpulan Wang Persaraan Diperbadankan (or better known as KWAP), Valuecap’s key mandate is to undertake investments in equities listed on Bursa Malaysia on a portfolio basis. [Govt to pump extra RM5b into Valuecap. Surin Murugiah. The Edge Daily. October 20 2008]

Why?

KUALA LUMPUR, Oct 20 (Bernama) — The government will provide RM5 billion in additional funds to double the size of Valuecap Sdn Bhd to RM10 billion and to invest in undervalued stocks and protect investments in government-owned companies, Deputy Prime Minister Datuk Seri Najib Tun Razak said Monday. [Government Provides RM5 Billion In Additional Funds To Invest In Undervalued Stocks. Bernama. October 20 2008]

I am sure even honest Keynesians would raise their eyebrows upon reading this.

Categories
Economics

[1809] Of Anna Schwartz talks

Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current “credit market disturbance,” as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.” [Bernanke Is Fighting the Last War. Brian M. Carney. The Wall Street Journal. October 18 2008]