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Economics Politics & government Society

[2895] Lim Teck Ghee is exaggerating, but Pakatan has no choice but to do better

It was a hobby of sort of mine to attend public forums (fora?) a long time ago when I had time to kill. The late 2000s was a period of flourishing of civil society, and there were plenty of forums going on all around KL, from the most mundane to the most seditious.

At one of them, I remember a lawmaker admitting to exaggerating while making political claims, though he claimed not by much. He reasoned such exaggeration was meant to jolt people into action. A dry statement of fact alone would not inspire, with many surrendering to nonchalance on big issues.

I do see many exaggerations out there today. One of them is about how Vietnam is overtaking Malaysia.

Such event is a possibility. After all, history is filled with instances of countries falling from grace. Myanmar was once among the richest colonial economies in Southeast Asia and today, it is far behind multiple other countries that used to do worse. Malaya used to be at par with South Korea in terms of economic wellbeing but now, Malaysia is far behind the East Asian country, though we are doing not so bad.

But reasonable projections based on existing economic growth, population growth and several other factors point towards how Vietnam-overtaking-Malaysia scenario is possible but unlikely. Already having one of the oldest demography in the region – specifically 31 years old versus Malaysia’s 29 – with nominal GDP per capita at a quarter that of Malaysia, it is highly likely Vietnam would take quite some time with great difficulty to converge with Malaysia’s level, much less pass it.

I think Vietnam belongs to the same group as Thailand (and China): countries that will grow old first before they grow rich. The situation in Thailand is far worse: median age is 39 years old with nominal GDP per capita about seven tenths of Malaysia. Both Vietnam and Thailand are handicapped by with a quickly ageing population, leaving them with not much time for hastened growth. This is orthodox growth economics of course. Behind many of the leading growth models, beyond capital accumulation, tech progress and human capital, is population growth. Unfavorable demography usually leads to slower growth.

But again, it is not impossible for Vietnam to overtake Malaysia. Low likelihood, but still possible. There could be one event or two disrupting Malaysia’s and Vietnam’s growth path. It is hard to predict those events from happening compared to growth projection based on current scenario. But this is where exaggeration can help: it brings up fresh possibilities to take us out of our boring model forming our reasonable basis. It spices things up, opening up room for creative scenario planning.

Lim Teck Ghee claimed that Pakatan Harapan was “an unmitigated disaster for reform from whichever aspect or way you look at” at a public forum. He listed down his disappointments to back it up. “Education, governance, race relations, religious relations, the debacles of Icerd, Zakir Naik, the Melayu Dignity Congress and more. The list of political disappointments and failures keeps growing.”

Yes, there have been disappointments and I share them too. But I am never that naïve to believe all changes will take place from Day One, especially given the way Pakatan Harapan achieved the mandate to rule in the last general election. It is inevitable for democratic compromises to take place frequently, no matter how much one wants to stand one’s ground. This is not a technocratic dictatorship. It is a democracy, and increasingly less flawed at that.

But calling Pakatan Harapan as an unmitigated disaster, I would argue strongly, is an exaggeration given the reforms that have been carried out so far.

I can list those reforms. My favorite is the wider implementation of open tender throughout the public sector: democratic compromise has led to even contracts reserved for Bumiputras being given out via open tender and no longer given out directly most of the times. There are exceptions, but I feel many of them can be explained well. Indeed, for a monster organization unused to open tender system, implementation problems were aplenty and starting totally afresh was not always possible. But by and large, there are more and more adoption of open tender, creating a new culture that makes everybody afraid of dishing out direct contracts. Remember, just less than two years ago, nobody in the public sector would bat an eyelid for giving out direct contract. Direct negotiation was the norm.

Other examples of executed reform include fairer broadband internet market, more independent Parliament with all of its new Select Committees, more independent anti-corruption commission, freer press and even in education, the move away from exams towards a more liberal education.

And there are many more coming our way with good progress made: greater transparency in the public sector in the form of the shift towards accrual accounting and the establishment of the Independent Police Complaints and Misconduct Commission (IPCMC) within the 5-year mandate.

Almost none of the reforms that have happened or expected to happen would take place under the previous administration riddled with corruption led by a shockingly and outrageously dishonest leader, trapping the country’s institutions in a sticky thick morass that would scare any institutionalist away. To me, a disaster would have been a complete no-change scenario.

There clearly has been substantial change since May 9 2018. Only a blind man would deny that.

I cannot know his true intention, but from the perspective I have shared, perhaps Lim Teck Ghee’s exaggeration is needed to jolt us out into action. There are disappointments. And that means we have to work harder to overcome all those barriers to change.

Pakatan Harapan voters had high hopes – they still have great hopes – that Pakatan Harapan would achieve great things and completely change Malaysia for the better. Pakatan Harapan is better than Barisan Nasional, but Pakatan has no choice but to do better to match those great expectations.

Categories
Economics Politics & government Science & technology

[2894] Free Breakfast Program: Welfare aid, targeting, social status and social stigma

As technology progresses with information becoming richer and more accessible, it is easier and easier to do targeted policy. Governments, especially those with conservative economic leanings compromising with democratic pressures, love targeting because in theory, it is cheaper and it avoids wastage. In fact, going back to basic microeconomics, it might even eliminate deadweight loss. I also love targeting, up to a point.

But just because we are able to do targeted policy does not mean we should do it. There are other considerations to be taken into account.

Targeting can create social stigma and that can be damaging in other ways. It does so through signaling, which means it lets other people know that a person is being targeted for some policy. This is something policymakers need to be mindful of, beyond the dollars and cents.

In a society where social status does matter, assistance could lower a person social status.

This is why government cash assistance program via automatic bank transfer is good, among other things. It keeps transactions private, and therefore gives no signaling to other people. So, it has minimal effect on social status if any.

But not all assistance policy can be private. Many do necessarily give out signaling affecting social status. The Free Breakfast Program for students to be introduced by the Ministry of Education in 2020 is one of such un-private assistance policy.

As a result, a program like the FBP cannot be targeted. This is especially so when it comes to kids who may take signaling from targeting wrongly, leading to bullying and social estrangement. At schools, we need to make learning as easy as possible, not harder for whatever reasons. Giving free breakfast for certain groups, which are the neediest, send signals to other better-off students that the beneficiaries are of a certain social class.

Schools at the elementary level are grounds for inculcating values. Some of the values we should inculcate is egalitarianism. And this makes signaling something to be thought of in designing policy relevant to the education system.

Our country is already divided in so many dimensions. We probably do not want to impress on our younglings of social divisions through yet another dimension. Targeting at this cost is not worth it.

In our specific FBP case, a blanket policy is better than a targeted policy. It muzzles the signalling, and fights the creation of social stigma that is the seed for future division in our society.

Categories
Politics & government Society

[2893] We are too eager fighting our culture war

There are hard positions in our society. It is the product of years of abuse and mistrust, and it will not go away anytime soon. One small issue that rekindles our prejudice in the smallest of ways would ignite a culture war sucking almost everybody in the most unproductive manner.

Some culture wars are worth the fight. Our society does need a can opener to open up its canned mind, especially so when too many of us are so coddled inside our small world to the point that wrongs go unchecked and eventually become a right. It has become so bad that many are beginning to be scared of doing the right thing, just because such action would hurt the feeling of immature persons on the internet armed with incomplete or even downright inaccurate information. Explicitly racist behavior should be called out. Some things just have to be done lest we slide to an equilibrium that is so unbearable that migration would be the only way out.

But a lot of the culture wars we are fighting today are unnecessary.

One example is the teaching of Malay calligraphy-Jawi in school. The Jawi controversy besetting us recently reveals what we have known for the longest time: we live in a sensitive society – sensitive is only a euphemism that would not take much to decipher. We do not need such controversy to tell us that. The whole episode came to surface through an oversight within the government. The course was set several years back. Too few people noticed it that it developed its own procedural momentum that in the end forced all of us into a situation where no one could paddle back, without incurring significant political cost.

This reminds me of a scene from the movie War Game where the artificial intelligence holding the trigger to a nuclear holocaust, after going through all simulations, concluded that the only way to win is not to play the game.

Too bad that we have no time machine to use, no restore point to return. To abuse slightly the meaning of the Malay idiom, terlajak perahu boleh diundur, terlajak kata buruk padahnya.

Another example is the conversion bill in Selangor. We know religion and child conversion are subjects our overall society unable to deal with coolly. So, we all should approach it with care. Yet, the Selangor state government thought pushing the controversial bill through was the wisest course of action. Not only that, once we were given the chance to pull the brake halting our vehicle resting dangerously close by the cliff, the state government instead insisted on playing the game that nobody would win. Has it got this bad that the game has to be played anyway?

Our society is damaged and this is not the most incisive observation of the day. The last election gives all of us a chance to repair it, and be better. This government is reforming our institutions that for so long abused have been for personal gains. The trust deficit is still there. That is a huge barrier to fight.

I truly believe for Malaysia to get to the next level of development, we need to improve our institutions. We do not need more big malls, more tall buildings.

And those institutions are not merely government institutions like the parliament, the police, the judiciary and anything of the like. It is also about our social capital, that is trust among ourselves.

Culture wars, especially the unnecessary and avoidable ones, do not build trust. Instead, it erodes it and makes bridge-building harder.

Yet, we all are too eager to fight it. And to one-up the others online (adversaries who we likely have never met in real life, or even human bots), we type the harshest words and switch on our scorched earth mode to burn everything that moves.

And god, there are so many other things to do. Yet, here we are with our culture. All heat, no light.

Categories
Economics WDYT

[2892] Guess the 2Q19 Malaysian GDP growth

It is that time of the quarter again. The second quarter 2019 GDP will be released by the Department of Statistics next week, on August 16 2019.

How fast do you think did the Malaysian economy expand in 2Q19 from a year ago?

  • Slower than 3.6% (14%, 3 Votes)
  • 3.6% - 4.0% (18%, 4 Votes)
  • 4.1% - 4.5% (32%, 7 Votes)
  • 4.6% - 5.0% (27%, 6 Votes)
  • 5.1% - 5.5% (9%, 2 Votes)
  • Faster than 5.5% (0%, 0 Votes)

Total Voters: 22

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Malaysia’s 2Q19 industrial production growth so far has been stronger than it was in the first quarter. For illustration, April and May factory output expanded 4.0% year-on-year each. In contrast, the 1Q19 industrial production grew by 2.7% year-on-year only. The June industrial production has not been released, but it would have to be really bad before it would bring the 2Q19 growth below 1Q19 rate. There is however a minor possibility given how bad June export growth was.

Yet even with the June exports, exports for the whole 2Q19 did better than in the previous quarter.

Meanwhile, Bank Negara’s public data shows government expenditure growth is stable, with 2Q19 spending growth being about the same as it was in the previous quarter.

Another data set from the central bank does not look pretty though. Loans growth is slow. In 2Q19, total loans in the banking system grew 4.4% year-on-year, versus 7.2% in 1Q19. But there is a noticeable base effect here, possibly due to companies rushing to get their loans prior to the election. Just to highlight the importance of base effect, in month-on-month terms, loans grew 2.4% in April 2018, when the average loans growth in the January 2017-March 2018 was only 0.6% month-on-month. Loans growth is a proxy of private consumption but given the base effect, it is a difficult proxy to use for this quarter.

This is especially so when other proxies of private consumption are doing well. For instance, 2Q19 consumption imports grew 8.0% year-on-year, versus only 1.0% in 1Q19. Retail and wholesale trade statistics are also doing reasonably okay. The rate cut in May 2019 would also boost demand. The labor market is also stable.

Talking about base effect, we also have to remember that in June 2018, consumers in Malaysia faced no consumption tax. That would be a negative to consumption growth from year-on-year perspective.

Nevertheless, I am expecting a high 4%. It could even surpass 5% if Malaysia is lucky enough. Yes, I am optimistic of the second quarter, unlike for the first quarter statistics.

Categories
Economics

[2891] SST did bring (core) prices down in September 2018

The shifts from SST to GST, and back to SST were controversial. There were debates on its effects on inflation and living costs. While the GST introduction led to a one-time rise in price level and that, I think, has not been widely disputed, the effect of SST reintroduction on price level has been more contentious. Pro-government camp would would claim that SST reintroduction did bring prices down, while the opposition would disagree, and citing various examples where prices went up (both real and made-up instances).

Did SST bring prices down?

The answer, on aggregate, is yes. Here is the main chart central to my argument. This chart shows core price level.

In April 2015 when the GST was introduced, prices went up by 1.19% month-on-month (after adjusting for seasonality). And in June-September 2018 when the SST was reintroduced, prices fell by 1.32% month-on-month (also after adjusting for seasonality).

Now, the long explanation.

Core prices instead headline prices

There are various factors affecting prices. It can be difficult to extract and isolate each factor out. But the official core inflation series does a relatively good job filtering out various factors, most notably items with volatile prices affected by seasonality. This cancels the noise (enough) that we can see price effects of tax regime changes.

Using core prices as our starting point, did the SST bring prices down?

Month-on-month versus year-on-year

The answer, again is yes… from month-on-month perspective.

This section is a bit dry and digresses into discussion on measurement. You might want to skip this as skipping it would not hurt the “yes” explanation by too much. If you are not skipping, let us move on with the agenda.

Month-on-month is a better way to observe things than year-on-year. This is because there are multiple significant supply-induced for the past few years. For instance, because of the SST which was reintroduced in September 2018, we would have to wait until September 2019 until its effects on prices disappear from year-on-year perspective. These changes make year-on-year unreliable as a change measurement. If we insist on using year-on-year as a measurement for policy purpose, we will risk making the wrong call based on a massive structural break, never mind the 12-month recognition lag.

Year-on-year does control for seasonality, unlike month-on-month and that is its strength. But it is not great at handling (structural) breaks in series. And as far as consumer prices are concerned, Malaysia has experienced too many breaks at least since 2015 when the GST was implemented. The last big break was in February 2019 when petrol and diesel prices were capped at its current ceiling. I expect one or two more major breaks in the next 12 months.

This is why there is a need to move from year-on-year to seasonally-adjusted month-on-month (or quarter-on-quarter whenever relevant) measurement. Seasonally-adjusted month-on-month addresses problems of structural breaks and seasonality, which makes it better than year-on-year by a mile.

Additionally, changes in a series could be seen immediately through month-on-month. This significantly removes the problem with recognition and policy lags.

Our familiarity with year-on-year and stubbornness to move away from it is part of the reason why too many people panicked over “deflation” earlier this year, when in fact, it was just a mathematical artefact arising from a massive structural break, or two, or three.

Effect of shift to GST in April 2015

Now that is out of the way, we can start directly discuss about how GST changed the price level.

The raw month-to-month price change in April 2015 was 1.28% (below is just the month-to-month change for the chart above).

But how do we know whether the 1.28% was fully due to GST?

That is a difficult question, really. But because it is core prices, significant amount of items susceptible to large volatile changes are out of the picture. Food items and fuel are out. Yet, there is still a problem. Our problem is that the core CPI is not seasonally-adjusted (as far as I understand it). In order to control for seasonality, we need to look at March-April change in other years and use that as a correction factor.

Here, we get into another problem, the official core series does not go to far back. Publicly, core series begins in 2015.

Nevertheless while keeping that in mind, April price change in 2016, 2018 and 2019 were either 0.08%, or 0.09% (in April 2017, prices rose 0.26%. I do not know why, and I am too tired to find out. So I am going to close my eyes and consider it as a outlier and pray hard. Please do not shoot me). To control for seasonality, we take the 1.28% and subtract 0.09% (the April average change in 2016, 2018 and 2019) from it. Through this, we can claim that the April price change due to GST—as far as core prices and the seasonality I have accounted for concerned—is 1.19%.

In short, GST quite possibly raised core price level by 1.19% month-on-month. Yes, GST did raise price level.

Effect of shift to SST in June-September 2018

Now, this part is not so straightforward because the transition from GST to SST lasted for 4 months. In 2015, there was an immediate transition from SST in March to GST in April. But in 2018, the GST was effectively abolished in June 2018 and was replaced with a 3-month tax-free period. The SST only came in September 2018.

As a result, direct comparison between the SST-GST shift (April 2015 core CPI), and GST-SST shift (September 2018 core CPI) could not be made. There are at least two reasons:

  1. First, in June 2018 when the GST was abolished, core price level dropped 1.43%. And it was a drop from GST regime to no tax period. This number does not help us answer our original question, which is whether SST brought prices down.
  2. Second, when the SST was reintroduced in September, core price level rose by 0.60%. This also does not help answer the question.

So, how could we make it comparable?

This chart shows the problem, and the adjustment required from price level perspective to make a fair comparison (blue is actual, red is adjusted).

The adjustment is: calculate the difference between May 2018 core price level (GST prices) with September price level (SST price level), while ignoring the free-tax period completely. Do this and we would get a price drop of 0.59%.

This is how it looks like in month-on-month changes (blue is actual, red is adjusted).

However, just like the SST-GST shift, we need to control for seasonality. And the average May-September change for 2015, 2016 and 2017 is 0.73%. The variance is not that big: for transparency, it was 0.72%, 0.79% and 0.68% rise for 2015, 2016 and 2017 respectively.

Controlling for seasonality, that means the GST to SST shirt brought core price level down 1.32% (that is -0.59% plus -0.73%).

Conclusion: SST brought core price level down

As a summary, after accounting from seasonality:

  1. SST-GST shift raised core price level by 1.19%
  2. GST-SST shift cut core price level by 1.32%

Some comment on the results: I had expected the SST-GST and the GST-SST shifts to bring prices up and down by about the percentage point. Right now, there is a difference because I think there are still some important factors that have not been controlled. It is possible that one of them could be forex rate.

Caveat and other business

There is a important clarification here. These results do not mean core prices in September 2018 when the SST was reintroduced were lower than core prices in May 2015. Between May 2015 and September 2018, headline and core prices rose for a variety of reasons. Rather, the two changes in 2015 and 2018 were one-time changes, or structural break in core price series. You could see this from the price level charts above.

This brings us to inflation. The remarkable thing is, at least from the naked eyes, inflation (in the sense of general rise in prices) remains largely the same throughout the changes. Another way to say is that, the slopes of the lines (GST and SST) are about the same. What happened was a shift in price level, which is what this whole post shows.

And finally, I want to show you this chart.

The black-shaded area was caused by GST (specifically, GST at 6% minus GST at 4% – GST at 4% has been cited as the equivalent of SST around 2014-2015). If GST were never introduced, core price level would likely have be lower by that shaded area.