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Economics Politics & government

[2991] Malaysia’s 5G network: the search for the second-best solution has gone awry

Malaysia’s 5G policy is rife with unnecessary controversies. We could have a plain vanilla rollout plan but the power that be likes it complicated and here we are now. Perhaps, this is the hallmark of the Pakatan Harapan government: the more complicated it is, the better.

That vanilla rollout plan—very likely the best solution available—was this: auction the 5G spectrum to the highest telco bidders with the sufficient competencies and then let the winners carry out the necessary investment needed to roll out the 5G service. Malaysia has done this before with its 4G technology and that model worked reasonably well.

The ‘best’ here is qualified: it is from the government’s point of view. And the vanilla plan is a simple, transparent and a proven process. It provides the government with billions of additional revenue that Putrajaya needs for various pressing public purposes. While consumers will bear this cost in the form of high telecommunication fees, the market-based approach will allow the government to reallocate resources from high profitability private sector to the public sector (like healthcare, education and/or even defense that are in dire need of funding).

However, the market-based approach ignores a number of concerns that might be valid. Some concerns are redundant infrastructure/investment, slow rural rollout, vertical integration among the telcos, and higher cost to the consumers. Expanding these points briefly:

  • Redundant infrastructure: there is an argument that 5G and overall telco infrastructure are a natural monopoly: it is cheaper (and more efficient) to build a comprehensive infrastructure instead of multiple redundant networks with holes in the coverage (yes, there are cases when competition is inefficient). This argument goes hand-in-hand with economies of scale to be had with one giant infrastructure instead of having multiple networks.
  • Slow rural rollout: telcos had rolled out 4G technology slowly in the past by focusing on urban areas and delaying investment in the countryside. This is understandable because telcos have to get their returns fast and the cities are the gold mines. Investing on the countryside came much later because the returns here lower compared to the cities. I personally find this unconvincing because 5G technology (as far as I understand it… but I am happy to be corrected) is not meant for industrial and commercial uses. 4G should be able to cater to typical consumer usage.
  • Vertical integration: Here, the concern is telcos will enjoy vertical integration (the public is used to the idea of horizontal monopoly, but different kinds of monopoly exist), which is a control over a swath of telco value chain. This kind of control will allow telcos to enjoy much higher pricing/market power (basically, higher profit margin) versus a model without such integration.
  • Higher cost to end-consumers: The auction cost borne by telcos, their redundant investment cost and the effects of vertical integration will be passed to consumers. A telco price war could mitigate some of these problems but after controlling for that and other pricing regulations, telecommunication fees here will likely the highest compared to other models that exist out there.

I have summarized these points (and more) in a table below, taking into account how it affects 3 relevant parties: the government, the telcos and consumers.

Summary of 3 5G models in Malaysia with 3-party evaluation

These concerns are among the top reasons behind the search for the second-best solution in the late 2010s. That second-best solution in the end morphed into the single wholesale network that Digital Nasional Berhad is. Under the SWN setup, there are no auction while infrastructure investment cost are pooled by all (participating) telcos. Meanwhile, the government via DNB will regulate a 5G rollout plan more tightly so that rural locations do not get left behind. In summary, we have a single infrastructure, theoretically faster rural rollout and lower cost to consumers relative to the market-based option. Given this setup, it is appropriate to call this as a consumer welfare-maximizing model (line #2 in the table above).

Not everybody is happy with the best solution (hence, the search for the second-best): consumers and politicians who regularly play the political of living costs do not like it because it is costly. And Pakatan Harapan tends to play the politics of living costs by too much, as I have argued before. That politics affected the government of the day.

And yes, not everybody is happy with the second-best solution: telcos do not like it because they do not get vertical integration—to put it differently, they do not get to control the infrastructure. Instead, they get is a shared infrastructure with the government having a stake in it. All this points to lower profitability relative to the market-based approach.

However, awkwardly, the government is unhappy with the best and the second-best solution (for reasons I will not go into but which highlights the fact that there are more than 3 parties involved). And they have decided to deviate away from the two models. But instead of instituting improvements, the government appears to be taking the worst aspects of the first two models (see line #3 in the table). For the government, they get no auction revenue and weaker control over 5G infrastructure. The only real winners in the deviated model are the telcos since they do not face auction cost, they get full control over their networks and eventually, consumers will have cough out money for all that. This is ironic given how close the politics of living cost is to Pakatan Harapan.

Another point behind the deviation is the undermining of the second-best approach. The current policy adopted by the government effectively is dismantling the SWN and encouraging telcos to do individual and redundant networks. Because of the way the SWN/DNB works, telcos can pull out of it and join the second network. There are even talks for the third network and it is not hard to imagine almost telcos will have their own network if things go as it is. The fragmentation will present a challenge to profitability (or even viability) of the SWN model: individual telcos will only invest in profitable (largely urban) areas while DNB will be forced to invest in non-profitable (largely rural) locations, which will guarantee the failure of the SWN model.

The logical end to the current policy is as outlined in the line #3 in the table: the negative effects of market-based approach but without its benefits for the government and consumers, together with the negative effects of the second-best solution without its benefits for the government and consumers. To reiterate, the winners will be the telcos.

Winners and losers of the current Malaysia 5G policy.

Looking back, the search for the second-best approach was unwise, especially when the best approach was simple, transparent and a proven successful process. Opening the door to the next best solution has now led us to the worst of solutions. That search has now gone awry, leaving a complicated inefficient set of telecommunication policies.

Categories
Economics

[2990] Malaysia’s GDP advance estimates: outdated consensus, errors and institutional transparency

The Department of Statistics has been releasing GDP advance estimates publicly since the middle of last year. The next advance quarterly release is set for next week on October 21 and that will mark one year since the practice began. The actual Q3 GDP numbers themselves will only be made available publicly in mid-November.

I want to highlight that advance releases do three things in the market.

First, it messes up almost everybody’s forecast rounds and their plan for press exposure. I know more than a few economists are still gearing their forecast process around actual GDP release date instead of that of advance estimate. While this is understandable as many are waiting for various data to come out before making their final quarterly GDP forecast, this leaves consensus numbers being gathered after advance estimates are out, which in turn makes consensus outdated and less informative than it used to. After all, who would be impressed when a forecast is released after the advance estimates?

Second, maybe there is still a room to be had to keep existing forecast processes since there are errors to the advance releases. But here so far, average error has been minimal. Mean absolute error for the past three quarters were only 0.25 percentage point, although the largest error is quite big. Currently, the absolute error for individual quarter that we have are:

  • Q3 2023: 0.17 percentage point (ppt)
  • Q4 2023: 0.43 ppt
  • Q1 2024: 0.28 ppt
  • Q2 2024: 0.10 ppt

But the two points I think are minor concerns. The first is a mere inconvenience and easily rectifiable, although it necessarily leads to more work. For the second point, I have some confidence the MAE will get smaller in the future.

The third point is more important: advance releases increase transparency in data and therefore confidence in public institutions. As much as there is science behind the GDP data collection and processing, there are still subjective decisions need to be made in finalizing the numbers. These decisions however subjective are mostly innocent but it does leave space for abuse in some circumstances. Advance releases limit that room for subjectivity by anchoring the final numbers to the former numbers.

Categories
Economics Politics & government Society

[2989] Eroding our commons will erode our togetherness

The Malaysian government faces tight fiscal space and the runway to keep going on as we do now is not too long or wide.

The population is still young but it will not be so much longer. This suggests growing needs for healthcare services. In the meantime, education is somewhat underfunded judging by less-than-favorable learning outcomes, compounded or caused by pandemic disruption. Defense is underfunded at a time when the world is becoming a more dangerous place; previous wasteful spending on this front does not help. Climate change requires new kinds of public infrastructure investment. Petroleum revenue is highly like to go down permanently due to rising provincialism, while an aging society means income and consumption tax revenue will struggle to rise in the next 10-20 year period. This has yet to take into account pension liability that the government faces in the same period, which is also underfunded. And, a lot of Malaysians do not have enough savings and in their old age, they will depend on public services more.

The list goes on and on to tell us that under business-as-usual, public spending requirement is rising while there is every reason to suspect that the pace of government revenue growth will not match the former.

The current government understands this and there are efforts to move away from the current business-as-usual scenario. Diesel subsidies has been partly removed (but not in Sabah and Sarawak). There are plans to abolish or at least lower petrol subsidies but that has not happened yet. Recently, the Health Ministry announced it would expand its full-paying patient scheme.[1] This is largely in line with a high-level suggestion made last year that public healthcare should be more targeted to relief fiscal pressures caused by the public health services.

And even more recently, the Prime Minister said education subsidies enjoyed by the rich is to be cut.[2] It is unclear what the actual policy is but that is for us to find out soon when the government tables its 2025 Budget later this month.

But as the government seeks to improve its fiscal conditions, it is crucial to remind Putrajaya that not all fiscal consolidation actions are of equal measures. While fiscal pressures are important and must be addressed urgently, it is not the only things that matter to this country. When it comes to cut or rationalization of public service, it is good to take a step back and reassess what we would lose in return for what we would gain not just in the short Parliament terms, but also in the long-term. After all, most of us save the unfortunate ones, live beyond the 5-year parliament term.

What we would lose from reduced access to public education and health services (and other similar services provided by the government) is the commons. It is the space where we Malaysians theoretically—really, actually for many people—come together regardless of our origins in terms of geography, class, gender, ethnicity, etc. That togetherness allows for the creation of shared lived experience or even shared identity. In an age where technology and quirks of history are leading us to live in our little bubbles, it is our public service that attempts to connect these bubbles into a larger common.

Without these commons, we Malaysians will lose connection to each other, losing whatever left of our shared values and shared identity. Erosion of these commons necessarily lead to the erosion of our togetherness.

I do not think these commons should be eroded by concerns over fiscal pressures, especially when these pressures could be alleviated through other more effective means. Instead of applying the knives to public education and public healthcare systems, other policies could be jettisoned first, like outdated incentives and reliefs provided to private healthcare service providers or private insurance, or outdated subsidies for electric vehicles. And of course, cutting petrol subsidies would go a long way too (although with crude oil prices are low these days, one wonders how long it would go).

And really, Malaysians are able to pay much more taxes. But we refuse to do so.

Our refusal points to another problem: our reluctance to make short-term sacrifices to ensure larger long-term gains and sustainability. It seems that we rather avoid the short-term pain and instead lose something valuable in the future.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Health Minister Dzulkefly Ahmad is standing by the government’s proposal to expand private wings at public hospitals as part of a hybrid model termed “Rakan KKM” (Health Ministry Friends). [Health minister defends private wings at public hospitals plan. Malaysiakini. September 24 2024]

[2] — Menjelang pembentangan Belanjawan 2025 tidak lama lagi, Anwar Ibrahim menghantar ‘isyarat’ yang menunjukkan kerajaan sedang meneliti pengagihan subsidi pendidikan kepada rakyat negara ini. Berucap di Putrajaya hari ini, perdana menteri berkata, kerajaan mahu memastikan subsidi sebegitu disalurkan kepada golongan yang benar-benar layak saja.[Golongan kaya mungkin tak lagi dapat subsidi pendidikan. Malaysiakini. Accessed March 31 2024]

Categories
Economics

[2988] Malaysia’s 2024 sweet spot for growth

After years of economic disruptions and wild growth swings, the Malaysian economy is now in a sweet spot. Strong GDP expansion rates in the past two quarters show us as much: 4.2% year-over-year in the first quarter and then 5.9% yoy in next. Lest somebody points to base effect playing a role (indeed the large variability is still a problem), adjusted quarter-over-quarter numbers are robust as well: 1.5% qoq during first and then 2.9% qoq in the second quarter. These qoq figures are respectable because the post-Covid-19 2021-2024 median qoq rate so far is 1.4%-1.5%.

The government is quick to claim credit. To some extent, it is deserving. The Malaysian government of all colors (2018-2020 PH, 2020-2021 PN-BN, 2021-2022 BN-PN and the current PH-BN-GPS) has been trying to capitalize on fraying global supply chain. Malaysia understood of the need to move quickly as early as 2019 (or possibly earlier). But political crisis (coupled with a health and economic crises) led to policy paralysis and that crisis only ended in 2022 with PH returning to power with unlikely partners. The stability plays an important role in sharpening the minds beyond domestic partisan survival, which allows us to pursue new tech investment opportunities and boost Malaysia’s role in the global manufacturing and technological services (it is not without concerns, especially with the influx of data centers which create little jobs and consume tremendous amount of water and electricity which could push out other manufacturing industries that are not necessarily low-tech).

But in some other ways, it is also about the stars aligning involving sectoral syncing and growth normalization. To understand this, we need to go back to 2020 when many parts of the world hunkered and locked down in response to the pandemic. Yes, the pandemic remains relevant four years after it spread.

The year 2020 was the ground zero, which everything in free fall. By 2021, the pandemic was still a concern but things were improving. Yet many could not move around freely. Services—a labor-intensive sector—had a weak growth and an incomplete recovery. In contrast, the goods sector experienced a surge and production surpassed pre-pandemic levels: XBox, IPhone and a whole lot of electronics were bought and sold to keep everybody sane at home. Afterwards when the economy opened up in 2022 with all the tangible stuff that could be bought were bought (notwithstanding orders unfulfilled due to the then supply chain disruption which kept the goods sector going), goods demand growth took a break in return for heightened services: tourism, restaurants and other related sectors boomed. That is more or less the story for Malaysia, as can be seen from the goods-services growth chart below:

Some rights reserved. Hafiz Noor Shams

The Malaysian cycle for goods and services almost synchronized at the top in 2022, which in return led to the synchronized whiplash a year later. From 8.9% growth in 2022 thanks to complete reopening of the economy, 2023 GDP rose by only 3.6%. The 2023 goods market was so bad and that was reflected in Malaysian industrial production and export figures. Only the almost complete tourism recovery helped the overall 2023 economy from doing worse.

What makes 2024 a sweet spot is that it is likely a proper normalization amid further synchronization. Normalization because the gyration of growth since 2020 is finally stabilizing for both sectors. Additionally, that normalization and stabilization are bringing balanced growth since both goods and services are expanding faster at the same time (so far).

Normalization, synchronization and balanced expansion. The government under Anwar Ibrahim has done well in adapting to changing global environment and lucky at the same time. Not only has growth been firm. Global prices have been kind to Malaysia as well, leaving inflation benign. Job creations are going well. In short, economic conditions are good. I would argue this leaves the government with a lot of leeway to commit to reforms.

The question now is if the great conditions brought by the cycles would persist. There is some hope (and bad news too) for that but we cannot run on hope that much this time around. With cyclical normalization from here on and definitely in 2025, the government would have to depend less on luck and more on its own initiatives.

Categories
Books & printed materials Pop culture Society

[2987] Outsiders, disruptions and mainstreaming

The central theme of Michiko Kakutani’s The Great Wave is simple. It is written on the cover: outsiders drive innovation and they have been the cause of various disruptions in human history. It is not a groundbreaking argument to make.

The unremarkable observation would have made the book an uninteresting read for me, except she manages to pull me back in with her comment on arts and culture, an area where she is clearly an authority. Kakutani formerly worked as a book critic at the New York Times.

She tells how those living on the margin of US society—blacks especially but also immigrant communities generally—were cultural innovators who eventually dictated mainstream tastes in music, movies, literature and comedy. They were innovators because they were less bounded by orthodoxy of the (white) majority and that the dual nature of their identity (that as a member of a minority community and as an American) allowed them to reach out to multiple sources for inspiration.

Kukatani cites a long list of authors and artists to show just how prevalent the outsider-turned-insider phenomenon is in the US. The list feels like a long must read recommendation that reminds me of another book of hers, Ex Libris, which is a list of 100 or so modern-time books that she believes worth reading.

While going through that cultural section of The Great Wave, my mind wanders to another book I read earlier this year. Chuck Klosterman’s The Nineties also has the outsider-insider theme, although it appears more implicitly within the context of the 1990s. Klosterman’s discussion is specific to the the evolution of the rock genre, which began as the favored noise among youth with marginal taste in music (in the 1950s if I recall correctly) and then turned into billion-dollar megabusiness that Kurt Cobain’s Nirvana rebelled against.

So, I find The Great Wave interesting in the sense that it is a companion to The Nineties. Kakutani provides a generalized theory that explains Klosterman’s specific cases.