Categories
Economics

[2236] Of Kelantan gold dinar is bound to fail

The idea of the issuance of gold dinar and silver dirham as currency in Kelantan is not new but this week, the northern Malaysian state has decided to go ahead with it finally.[0] This will be a lesson demonstrating the superiority of  fiat currency to that which is backed by commodity: commodity-backed currency simply does not do well alongside fiat currency.

Never mind the legality of the whole thing.

First of all, the dinar and the dirham are pegged to the ringgit.[1] This option eliminates the need to use the new currency vis-a-vis the ringgit, notwithstanding the supposedly Islamic ideal. With wider circulation, why would a person not choose the ringgit over the new currency? Call it the status quo bias but that is the reality.

Furthermore,  the dinar is likely fail to fulfill the double coincidence of wants, which is necessary for any trade to happen between at least two parties. This is the reason why barter trading is not nearly as popular as trading done through a medium of exchange called money.

A far more threatening factor is the prices of metals. Sufficient increase in gold and silver prices vis-à-vis the exchange rate will make the money more valuable as metals than as a medium of exchange. That will create an incentive to sell the dinar and the dirham as metals, thus lowering the quantity of money in circulation. The next time metal prices go through the roof, one may expect the dinar and the dirham as a currency to collapse or at the very least becoming very, very unpopular. It will be hard to see the currency around and in use.

One possible solution to the circulation problem is that the Kelantan government may want to support the currency by printing more of them. That will prove to be a costly policy to carry out in the long run.

Alternatively, the Kelantan government may reevaluate exchange rate between the commodity-backed currency and the fiat ringgit to address rising gold prices. The higher value of the commodity-backed currency compared to the prices of the relevant metals, the more valuable it will be as currency and less as metals.

If reevaluation is the favored policy, it will be a race between the issuer and arbitrageurs: who can act first. There is an handsome profits to be made. Remember, for instance, the painful experience of the European Exchange Rate Mechanism.

Between a state government (along with the issuer) with no experience in monetary policy and countless arbitrageurs, I have a feeling the state government will not fare too well. I doubt Kelantan has sufficient reserve to support a currency, in case of a run. Somebody once said something to this effect in a different but entirely applicable scenario: the government has to win every time but the arbitrageurs need to win only once to induce a collapse of the currency.

Or, the Kelantan government can float the exchange rate. But if it does so, there is a feeling that that policy would make the dinar redundant as a currency to the ringgit, leading us back to the status quo bias.

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

[0] — KOTA BAHARU, Aug 12 (Bernama) — Kelantan paved the way to become the first state to introduce the gold dinar and silver dirham currency on Thursday.

Speaking when launching the Syariah currency, Menteri Besar Kelantan Datuk Nik Abdul Aziz Nik Mat said the state would strive to expand the use of gold dinar and silver dirham in all transactions, including paying civil servants’ remuneration. [Kelantan Launches Dinar Gold. Bernama. August 12 2010]

[1] — The exchange rate are RM589 to a dinar and RM13 to a dirham. See World Islamic Mint. Accessed August 13 2010.

Categories
Economics Liberty Politics & government

[2235] Of hitting the brakes of subsidy liberalization

I am generally in favor of subsidy cuts in Malaysia. Yet, I hesitate to support the recent liberalization.

The economic rationale for liberalization is clear. Public discourse on this front has seen enough progress that liberalization is a popular position to take in Malaysia.

Let us recap the most commonly cited arguments.

Firstly, the subsidy program has an opportunity cost, as with all policies. If a government spends on one particular program, it necessarily means not spending money on others. Moreover, blanket consumption subsidy is probably the worst of all policies in terms of opportunity cost.

Secondly, there are better policies — cash transfer or tradable quotas for the needy are two examples — compared to outright subsidy. These alternative policies can address welfare concerns more efficiently.

Thirdly, the subsidy program has to be financed. That means taxation. While taxation is required to maintain a government, the level of taxation can be controlled to accommodate other concerns. There are various reasons why a low-tax environment is favorable. A bloated subsidy program does not help in this aspect.

Finally, together with a subsidy program, multiple suffocating supply and demand control regimes typically exist to support the program. As a result, the market becomes inflexible as more and more controls are set in place. The inflexibility causes hardship to more individuals than necessary.

The subsidy cut appeals to these arguments. If these were the only concerns, I would wholly support the liberalization exercise.

But it is not.

Two pillars form the basis for my support for liberalization. One is economic concerns. The other involves concern for freedom. Specifically, it is the idea of small government.

The weight I put on these two factors changes from time to time according to situation and the situation has changed since the last time subsidy liberalization took place. The size of subsidies and the drag these place on government finance are less of an issue today compared to a year or two ago. That convinces me to place more weight for freedom vis-à-vis economic concern, although the two concerns are not mutually exclusive most of the time.

While liberalization satisfies the economic side of the balance, the desire to see a reduction in government size is unmet.

Take the Prime Minister’s Department, for instance. Member of Parliament for Bukit Bendera Liew Chin Tong shared recently that the size of the department has more than doubled in less than a decade. The statistics regarding the size of the civil service and the government as a whole are more harrowing. All this contributes to the structural fiscal deficit that Malaysia suffers from.

The deficit caused by rocketing expenditure is an indictment of a fat old man called the government. The current government has announced its intention to reduce it, presumably by reducing government expenditure. Whether the plan will be successful is another matter altogether.

Amid the liberalization and other government initiatives that include the formation of new government-linked companies, I have a disturbing narrative at the back of my mind: Effort to free up resources is aimed at merely funding government expansion in other areas.

It is hard to predict the net effect but experience does not encourage much hope. One possible outcome is a scenario where the areas of expansion require a more active government hand compared to the one where the government retreats.

Already, government supporters are using the opportunity cost argument eagerly to justify the recent cuts. They say the government will put the money in good use. Good use or not, they are setting the ground to use the retreat as a justification to expand the other sides of government.

The opportunity cost argument is not exclusively used by government supporters. Opposition sympathizers and others do have ideas on how to spend the money. Politics may create a trade-off between economic concern and freedom in the end.

I fear that, and that fear is holding me back from supporting the recent liberalization.

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 Malaysian Insider on August 4 2010.

Categories
Photography

[2234] Of light piercing through the Rocks

I have taken light trails at night before but it only last week when I really invested effort at it.

Some rights reserved. By Mohd Hafiz Noor Shams.

I along with three friends climbed up the Cahill Expressway and looked down the Rocks to shoot this. It is an amazing spot for pictures of the Rocks as well as Circular Quay.

Categories
Photography

[2233] Of catching a fine day

The end of July presented me with this.

Some rights reserved. By Mohd Hafiz Noor Shams.

It made me happy.

It was presented in the most magnificent style as well. Previous days saw endless dark clouds and rain. It was cold. It was gloomy and I hated it.

In the morning of the day I shot the photograph, rain threatened to pour. The city looked dull. But the wind blew the menacing clouds away to reveal the sun and the blue sky above. Oh my, I felt my spirit being lifted up just like that.

If there is transient heaven, this is it. I do not need further imagination and believe in a place where the unicorns gallop freely. This is real and I will focus on this one.

Categories
Economics

[2232] Of fiscal stimulus, timeliness and transparency

Although the debate on fiscal stimulus has died down in Malaysia, I am still very much amused, if not outright dismissive, of a number of arguments made by advocates of stimulus. One argument is related to transparency: stimulus has to be transparent. Although the argument for transparency is a generic one and many have voiced it, it was reiterated by somebody well-known in Malaysia recently. I am thinking of Nazir Razak of CIMB but at 3 o’clock in the cold Sydney, I have lost all desires to look for the article.

My criticism of having a timely stimulus and transparency is summarized in one word: naive.

Fiscal stimulus has to be timely, especially when there is no automatic stabilizers with arbitrary stimulus. If it takes too long to implement, or in other words, it takes the government too long to spend the money, there is a good chance that the stimulus will be obsolete by then. By the time the money is spent, the market situation has already improved that the stimulus is not required any more.

In fact, untimely implementation might disrupt recovery through, for instance, crowding out process by the government.

Unfortunately, transparency does not run parallel with the concern of timeliness.

Why transparency is inconsistent with timeliness?

Simple.

Transparency requires processes. Reporting is paramount. In other words, bureaucracy.

Red tapes have been derided as suffocating but it does play a huge role in rule of law. It is only through bureaucracy can controls be exerted on spending. Through those controls based on known clear rules and not through arbitrary acts which are susceptible to  abuse compared to rule-based system, transparency is achievable.

That rule-based system aimed at transparency is more convoluted than the paragraphs I have just written before this one. It take time to go through the bureaucracy. Hence, the issue of timeliness.

So, how useful is a stimulus if it is untimely done?

You know my answer.

I am for transparency but I am also a realist here. I understand that if one is concerned with transparency, it is hard to support a timely stimulus.

If you want a timely stimulus, something has to give. It is a dilemma.

Before I am accused of supporting corruption, leakage or anything of such, do note that I do consider those things negatively. Remember, I am arguing against fiscal stimulus, not transparency.

I do not have that dilemma. I am typically anti-stimulus; I cut through it.

Stimulus advocates cannot accuse me of giving nontransparent practices a blind eye. For those who like to moralize about transparency however, you my dear have a moral problem.