Categories
Economics

[2368] Subsidy is not the only thing

Subsidy reduction will allow market forces to allocate resources more efficiently. Prime Minister Najib Razak was reported saying so recently to justify his administration’s commitment to subsidy reduction in the long run. By doing so, the Najib administration claims to be an advocate of free market. A claim that is not necessarily true, however. At best, that claim reveals a selective belief in the free market.

The truth is that market forces are restricted not only through price mechanism. The restriction also comes in form of quantity control, among others. This is especially relevant in Malaysia where the government has introduced various regulations and institutions to control the price and supply of various items. Among those items are flour, diesel and sugar.

In fact, the government has wide discretionary power over this matter. Proof: the new Price Control and Anti-Profiteering Act grants the government the power to fix the price of any goods and services in the country. Yes, that is any goods and services. The net has been cast widely.

Despite the various channels where market forces are prevented from distributing resources efficiently, for some reason the price mechanism is receiving all the attention while the quantity side remains relatively untouched. As an example, look no further than the domestic sugar industry.

The government recently reduced sugar subsidy and effectively raised the retail price of sugar. All the liberal benefits of reduction have been thrown out in the open: fiscal deficit reduction, efficient resource allocation, investment over consumption, etc. You just need to name it.

At the same time and less discussed is the existence of the illiberal import quota system. The government through a quota system controls the importation of sugar. The government also grants the quotas only to several refineries ultimately owned by Felda and Tradewinds, which themselves are closely connected with each other.

It is not an understatement that the two companies control the sugar industry with a clear government sanction. As a side note, it will be interesting to see how the two companies will be subjected — if ever — to the new Competition Act, which has a highly questionable purpose.

If the government gets one point for liberalization due to subsidy reduction, then the government must lose a point from the import quota policy. Given how the import quota policy has created two related monopolistic companies — one being the favored entrepreneur of the government of the day and the other being a government-linked company — and that prices are controlled, the government must lose more than a point.

However one wants to keep the score, the inevitable conclusion is that this liberalization done through subsidy reduction is merely a half-hearted liberalization.

Whatever market forces are mentioned to justify the reduction in subsidy, it is stated insincerely. The liberal argument is just something convenient that the administration grabbed out of the air just because it fits its agenda of day. When one does not derive an argument from the first principle, one cannot expect anything less than inconsistency; the Gods of Inconsistency are staring straight into the eyes of the Najib administration.

The government can prove its credential as an honest advocate by deriving its policy from the first principle. That is, the whole industry must be liberalized. The removal of subsidy and price control must happen together with the loosening of the import quota system.

This goes not just for the sugar industry, but also for the relevant others.

It is only then that the prime minister can state that subsidy reduction will enable market forces to allocate resources more efficiently with a clear conscience.

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 May 23 2011.

Categories
ASEAN History & heritage

[2367] From Tanjong Pagar to Woodlands

I meant to write this more than a year ago when Prime Minister Najib Razak announced that the Malaysian government agreed to relocate Keretapi Tanah Melayu’s terminus from Tanjong Pagar to Woodlands. News that the Tanjong Pagar Station will finally close on July 1 encourages me to open up my archive of unfinished writings and finish this particular entry.

While the agreement has improved relations between Malaysia and Singapore, which is good, I was disappointed with the decision, and remains so today.

It is a disappointment because Tanjong Pagar is the last visible link that exists between the two countries, harking back to a time when Singapore was part of colonial Malaya and later modern Malaysia. It reminds Malaysians and Singaporeans alike that we share a common past. There was a dream unrealized; Singapore to Kuala Lumpur as New York to Washington D.C.

For regionalists who dream of a closer Southeast Asia, the link provides concrete infrastructure to that dream.

The dream will live on, even without Tanjong Pagar. And of course, the link is not severed at all. It is only shortened. Woodlands is still in Singapore after all.

Still, the link to Tanjong Pagar is special. It is special not just because of the past but also for what it can be. A high-speed train between Kuala Lumpur and Singapore will greatly enhance people-to-people interaction.

Even so, the KL-Singapore high-speed train link is only part of a bigger dream. Imagine a Penang-KL-Singapore link. Imagine a Bangkok-Penang-KL-Singapore link. Imagine bigger.

Of course. Of course. Of course there is still Woodlands. But the experience will be vastly different. Trains are not supposed to be like airports, detached from cities with all the associated hassle. Trains are supposed to be convenient. One embarks in a city only to disembark in another city.

Woodlands is nowhere. Like Changi. Like Sepang. Unlike Brickfields. Unlike Tanjong Pagar.

Categories
Economics

[2366] Does the rounding mechanism contribute to inflation?

Does the rounding mechanism in Malaysia contribute to inflation?

Malaysia implemented the rounding mechanism in 2008. All prices are now rounded to the nearest five sen. The mechanism makes the one sen coins redundant although the coins themselves are legal tenders still.[1]

To answer the question, I have an anecdote to tell.

Australia also employs the rounding mechanism. The only difference between the Australian and Malaysian systems is that the Down Under version applies to cash transactions only. In Malaysia, prices are rounded regardless of transaction types.

I am a stingy person. In the case with the Australian system, I was literally penny wise, pound foolish. Well, more penny wise and less pound foolish. Considerably less for the latter.

Really.

Anyway, whenever I went out shopping in Sydney, I would check up on the price and see if whether it would be rounded up or down. If rounded up, then I would use my card so that I would save a couple of pennies. If down, I would use cash to get penny discounts.

I did that because I thought these firms were getting too much of the good stuff. I also thought they might have purposely priced their items so that prices would always rounded up in their favor. Hey, if I were the shopkeepers, I would do that too. And some of these businesses are big. I am not anti-business or anything but I sure do think they can make do just fine by not squeezing another penny out of me. Not when I am still alive damnit!

So, I would do that. After awhile, I thought maybe, it did not matter in the end. The saving from this little exercise was really small that if the whole two years worth of saving were combined, I could probably get a candy. One candy. That would not have impressed the ex-girlfriend by much.

The point is that even if the rounding mechanism contributes to inflation, I doubt it is significant.

But that is an anecdote. Here is something more scientific.

Chande and Fisher in 2003 wrote about the effect of rounding mechanism in Canada. They concluded that the expected impact was small. In fact, the effect of rounding on inflation is expected to be zero. Why?

They assumed the last digit that matters in rounding is uniformly distributed from 0 to 9. Therefore, the probability of each digit occurring is 10%. Since four digits will be rounded up, four digits will be rounded down and another two do not need to be rounded, the expected extra cost or revenue incurred or earned from the mechanism is zero. In simpler terms, the mechanism’s expected contribution to inflation is zero. On average, the sellers and the purchasers do not enjoy or suffer extra revenue or cost due to the rounding mechanism.

The authors ran a simulation and concluded that for purchases more than two items, the last digit of the price did distribute uniformly across the natural number line.

For purchases of less than three items, the digits did not distribute evenly. This suggests that this kind of purchases does contribute to inflation but since it is one or two purchases, its impact is likely small as suspected by Chande and Fisher.

How about strategic pricing?

Let me quote the paper I mentioned:

Thus, in order to take advantage of rounding, a retailer would need to know how frequently different combinations of items are purchased. While retailers like Tim Horton’s would have access to such data, Table 2 suggests that even if prices were strategically adjusted by firms to squeeze extra revenue from their customers, the amount per transaction would be so trivially small as to have little impact on consumer behaviour or welfare. Moreover, we have focused on price-setting by a single firm and ignored the reaction of other firms selling in the same market. It is an open question whether an oligopolistic market would lead to equilibrium prices that exploited rounding to the detriment of consumers. Indeed, anecdotal evidence from New Zealand suggests that such fears maybe unwarranted. Correspondence with the Reserve Bank of New Zealand, which in 1990 removed its 1- and 2-cent coins from circulation, revealed that some supermarkets at the time advertised they would always round in favour of the customer. [Dinu Chande. Timothy C. G. Fisher. Have a Penny? Need a Penny? Eliminating the One-Cent Coin from Circulation. Canadian Public Policy. December 2003]

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

[1] — The Rounding Mechanism is a method whereby the total bill amount (including goods and services subject to tax) is rounded upwards or downwards to the nearest multiple of 5 sen. In this regard, total bill amount that ends in 1, 2, 6 and 7 sen will be rounded down while 3, 4, 8 and 9 sen will be rounded up to the nearest multiple of 5 sen. [Frequently Asked Questions on Rounding Mechanism. Bank Negara Malaysia. Accessed May 19 2011]

Categories
Liberty Politics & government Society

[2365] Should action be taken against Utusan Malaysia? A libertarian perspective

Utusan Malaysia recently alleged that Malaysian Christian heads were conspiring to make Christianity the official religion of Malaysia. The conservative Malay daily cited two blogs of questionable credibility to back its front-page report. For a society highly conscious of  ethnicity and religion issues, the report caused uproar and tension between various communities.

Assuming the allegation is false which is likely the case, should action be taken against Utusan Malaysia for reporting it and in effect, spreading falsehood?

Our incentive system is imperfect to say the least. It is not at all surprising to have somebody spreading falsehood, lying or deceiving someone else to get what he or she wants in general. To complicate the matter, those acts might not by wrong all the times. There are times when those acts might be necessary to protect the innocents.

Even when those acts are wrong, unilateral public action through state authority might be out of the question with the principle of free speech in place, along with other typical individual rights.

Individual rights do not include the legitimization of fraud. Any action based on lies and falsehood that adversely affects individual rights cannot be condoned by the state or any authority invested with the powers to protect individual rights. It just cannot be let go off the hook.

One example is this: in a transaction, one party lies about the state of a good for sale to a person. If the person bought the good while supplied with false information, then the lying seller has obtained the money wrongly, with money being a private property of the purchaser. The right to private property is an individual right and the transaction based on deceit violates that right. The lying seller has to be punished by the state — unilaterally — since the prime rationale of the establishment of the state is the protection of individual rights according. The punishment is important not just for the sake of principle, but also for a very pragmatic reason. It is imposes a cost on such act and so discourages such fraud from recurring in the future.

Within the context of Utusan Malaysia and its recent controversial report, was there any violation of rights?

I cannot answer it in the affirmative. Therefore, I cannot to support unilateral state action against Utusan Malaysia. The best I can come up with is that the falsehood affects reputation. Yet, individual rights do not include reputation.

This of course does not mean individuals involved in the reporting — meaning the one reported involved the conspiracy — cannot seek redress against the Malay daily. Conflicts between private parties have always happened and a trustworthy third party can and has always been appointed to resolve the conflicts. The third party here is usually the state. The third party’s judgment then is enforced to resolve the conflict as civil as possible.

In the case of interest, the group accused by the Malay daily can bring their grouse to the courts. If Utusan Malaysia did spread falsehood and that the falsehood adversely affected the reputation of the group, then the daily should be compelled to compensate the group or be fined. The fate of the two bloggers should be the same as the Malay daily.

I like this route the best because it is clean. It makes the issue as a conflict between two private parties and makes the concern of unilateral state action against Utusan Malaysia merely academic if indeed Utusan Malaysia did spread falsehood (which, again, I do not doubt that is the case).

By making it private, it does not mean that there is no public interest in the case. There is but it is hard if not impossible to account for that interest and its very public effect without resorting to discretion.

If unilateral state action has to be taken — which I will contest its legitimacy — there may be a mechanism for that. Robert Nozick’s Anarchy, State and Utopia may have a mechanism that can be modified to justify unilateral state action against Utusan Malaysia. Be warned that I am taking the idea in a very restricted sense. Nozick is concerned with a much larger issue than that which I am focusing on now.

Early in the book, Nozick demonstrates how various insurance and compensation arrangements will address threats and actual transgressions of rights. Insurance and compensation arrangements here are simply different terms used for protection provided by an entity, which can be the state, a private security firm, a gangster group or other entities capable of provide that service. Meanwhile, threat is not simply some kind of warning or a menacing declaration that something will be done if something else is not done. Rather, it is the possibility of something bad happening. The chances of a pedestrian being hit accidentally by a car is one of such threats. The chances of a person makes good of his threat to break your leg is another example of such threats.

Nozick describes how a general open threat creates fear among the threatened. Depending on the credibility of threats and the level as well as the spread of fear the threats create, it will disrupt day-to-day activities of the person or even the society. In order words, there are costs imposed on society by the threats, regardless of realization of the threats.

I think this parallels concerns regarding lies and falsehood. It gives the qualification why some lies and falsehood should be punished. When lies and falsehood creates widespread public anxiety, then there is a case for unilateral state punishment. Under this line of thinking, the priority is fear minimization, or in the parlance of Malaysian political discourse, sedition or incitation of hatred. In the end, Utusan Malaysia clearly must be punished, if this method is adopted.

The question is how widespread before punitive unilateral state action should be taken?

This may require some kind of discretionary powers, which like any discretionary powers, are open to abuse.

The need of discretion is one reason why I do not like this method, on top of the fact it does not follow from the first principle aimed at the protection of individual rights.

Discretion tends to create dissatisfactory judgment. It will inevitably be inconsistent and in the end, ruin the reputation of the third party wielding the power to punish. Discretionary powers will lead to abuse.

The wielding and the exercise of the discretionary powers have caused troubles in the past. Some newspapers have been punished for publishing controversial material while others have been let go. Indeed, Utusan Malaysia has been let go off the hook by the government despite its controversial report of unverified truth. If reported by other newspapers less friendly to the government, that newspapers would have been punished.

So, long story short, no to unilateral state action against Utusan Malaysia but yes to making the case a private conflict between two parties involved.

Categories
Economics

[2364] Subsidy reduction and inflation expectations have to be managed more prudently

The Najib administration is committed to long-term reduction of subsidy. The Prime Minister said so.

I do support reduction and even elimination of subsidy. There are exceptions, but I do support anti-subsidy policy generally. So, I do take comfort from the Prime Minister’s statement.

Yet that does not mean I would support however the reduction is done. This is due to my concern for inflation expectations.

The Najib administration’s commitment to gradual reduction of subsidy is something that should be inspected closely. Gradual is the key word because the rate will create sustained inflation expectations. Inflation expectations itself will affect actual inflation in a big way.

It is not at all a problem if the gradual liberalization involves only small yearly increases. Such small increases will create limited inflation expectations. And a low inflation rate — as the economic wisdom goes and what goldbugs failed to understand — greases the economy.

But as I have shown earlier, sugar prices have increased by about 28% per year in the past two years. Other subsidized items like fuel that contribute to the Consumer Price Index have yet to be accounted for.

A sustained inflation expectation at that rate can be disastrous to the economy. I do not think anybody would want to see the Bank Negara playing a catch-up game with its monetary policy.

To prevent the sustaining of high inflation expectations, the rate of liberalization just has to slow down.

Alternatively, the government can eliminate all subsidies once and for all. That will create a one-off inflation. Yes, this is a crazy policy option but at least the inflation expectations will not be as bad as it is developing into right now. A one-off inflation spike is better than a sustained high inflation expectation because it will not leave a mark on the economy in the long run.