Categories
Economics

[2643] Price ceiling on foreigners’ purchase will be ineffective at controlling home prices

In the news recently, the state of Johor plans to raise the floor price at which foreigners are allowed to purchase a house. The floor is now set at half a million ringgit. The proposed new floor is RM1 million (The news report in The Star wrote ceiling but if you know your microeconomics, you will know that raising the ceiling instead of the floor does not make sense and in fact, will bring in a very different outcome inconsistent with the overall theme of the article).[1]

The state government wants to control home prices and by raising the floor, the idea is that there will be more homes for locals while foreigners are only allowed the more luxurious home to purchase. More specifically, it is to curb price increase through demand control.

I am unconvinced how this will help, especially if the policy is unaccompanied with supply-related policy. The government does grant home permits but I think that is pretty much given out without much restrictions (Not that I am advocating controls. I am just describing the situation).

The ceiling alone may apply in the short run and only for pre-existing homes. In a slightly longer time frame when new supply of homes are available in the market, the ceiling will be rendered ineffective as market agents adapt to the new rules and regulations. This could be in the time frame of several years and maybe, even less than two. It does not take that long to build homes.

Suppliers of home will adapt to rules and regulations so that their endeavor is a profitable one. It is quite possible that at the current floor, home suppliers are already taking domestic and foreign demand into account.

If you take foreign demand out, these suppliers of home may decide to reduce supply in the appropriate home segment and increase supply in others accordingly so that prices stabilize in the longer time frame.

As I have mentioned, in the short run, it may be effective because home suppliers may have trouble to adjust. It takes time to construct home.

Then again, if the new regulations give suppliers enough time to adapt, i.e. the suppliers are given a grace period, then there will be no short term effect. Suppliers will adapt in time and price trend remains as they are.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — NUSAJAYA: Johor is looking at raising the present RM500,000 ceiling to RM1mil for foreign house buyers to check the spiralling price of houses. Local Government, Housing, Arts, Culture and Heritage Committee chairman Datuk Ahmad Zahri Jamil said the state Economic Planning Unit (UPEN) was studying ways to tighten the rules on foreign ownership and a decision would be made this year. “If there is going to be an increase, then foreigners will only be able to purchase homes above RM1mil,” he told reporters here. [Nelson Benjamin Johor looking to raise foreign house ownership ceiling to RM1mil. The Star. January 10 2013]

Categories
Economics Politics & government

[2642] They should have auctioned it

The state — or in common parlance, the government — is the guardian of public resource. These resources are ones that we own collectively, like petroleum, or of interest in the past few weeks in Malaysia, telecommunication spectrum. It is the responsibility of the government to manage and use the resources efficiently. If it cannot, then there is a case to privatize those resources to those who can.

In privatizing these resources, one would expect the government to raise some money it can use to improve the general welfare of the public. One of the best ways to raise money from such privatization is by auctioning the public resource.

Economists typically love auctions because it is efficient. In everyday English, it means an auction can extract the most benefit out of a transaction for the seller. In an auction that focuses purely on maximizing sale prices, the government will benefit enormously from the outcomes of the auctions.

In the Netherlands recently, the government raised nearly EUR4 billion by auctioning the 4G spectrum to the private sector. Initially, the government had expected to raise half a billion euro only. The large difference came as a pleasant surprise to the government. In time when the Dutch government is tightening their belt as a reaction to the economic crisis that Europe as a whole is facing, the EUR4 billion will help in maintaining the quality of public service in the Netherlands.

If one is concerned whether such privatization and auctioning would create a monopoly, there are types of auction that can address exactly that. Restrictions can be imposed so that nobody can buy everything, or buys too much. While total receipts out of those auctions may suffer, the government will still enjoy considerable revenue out of it that can put to good use.

One example will bring us to the United States in 2008 when the Federal Communications Commission (FCC) conducted a controversial spectrum auction. Restrictions were imposed to prevent telecommunication firms from gaining too much market power. Google, worried that these telecommunication firms would restrict access to various content and applications on the internet, even decided to participate in the auction despite not being a telecommunication firm per se. After all had been said and done, the FCC still raised nearly USD20 billion from that particular auction while addressing the issue of market power.

In contrast in Malaysia, 4G spectrum was transferred from the public domain to private firms for free. There was no sale at all, and much less an auction.

For the public, the privatization is an outright welfare loss. An asset that could have been worth billions of ringgit of public money ended up as being nothing.  There is no new revenue for the government and so, the public cannot benefit from the privatization exercise as much as it should. And this comes at a time when the government recognizes that it needs to broaden its taxpayer base, which is narrow at the moment. So, the privatization will not be popular to discerning taxpayers.

Even libertarians, who would typically support privatization exercise, will find this particular Malaysian privatization as very disappointing.

Despite the fact that the privatization came at the expense of potential revenue for the public, some would no doubt defend the flawed privatization. Several defenses have been presented so far.

One argument suggests that with the free award, the recipients would be able to provide cheaper services with the same level of quality than they otherwise could. This is not a given unfortunately and right now, it is a mere speculation.

The reason is that these recipients can effectively form a cartel. This has happened in the past, even with the new Competition Act is in place. In fact, Maxis and Redtone International, two of the 4G spectrum recipients, are already collaborating in rolling out their 4G network. How far this particular collaboration will go is for all of us to see.

Worse, some could even essentially resell the spectrum to other more serious telecommunication companies instead of utilizing the spectrum for themselves. In doing so, they would realize the economic rent that should belong to the public in the first place. If there was an auction or even just a sale instead earlier, there would have been less opportunity for such rent-seeking activities. An auction especially would have squeezed the incentive for rent-seeking out into public pocket and force firms to try to create new wealth rather than engage in unproductive rent-seeking.

Unfortunately, now that everything is done, we are left with the possibility of collusion in the market and a whole lot of room for rent-seeking activities by private firms at the expense of the public. This is not an ideal market scenario.

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 Sun on December 25 2012.

Categories
Economics

[2641] Will fewer zeroes do something positive to the rupiah?

I learned a few things in Indonesia. One of them involved the discussion of cutting down the zeroes in the Indonesian bills. Prices of goods and services will be adjusted accordingly as well.

Right now, the Indonesian currency the rupiah is denominated in the thousands and it is quite common to round up any price to the nearest 500 even when there are 200 rupiah coins circulating. And sometimes, even to the nearest thousands. As a foreigner unfamiliar with the rupiah, I almost protested each time that happened to me at the store in the three weeks I was there. Had I protested, I would have looked silly.

But what is the point of cutting down the zeroes?

There are several popular arguments for that and the biggest of among those is inflation. There is a belief that by cutting down the zeroes, inflation will happen at a more comfortable pace.

I do have trouble with that. Yes, I sat down on Kuta beach and thought of the problem, drawing chart in the sand under the Balinese sun. The water was cheery, the wind was nice and the sun was warm. The trees were swaying gently and the sand was fine.

Before I digress too much, the cutting down exercise essentially shifts the price level down. It does not specifically change the factors that cause inflation, like demand and supply. However the currency is denominated, if demand is strong and supply is short, inflation will be there.

A 4% to 5% inflation, the band which the Indonesia inflation has hovered in recent times, will still be 4% to 5% inflation whether the rupiah is denominated in the thousands, millions or tens. The absolute value will be big at the higher level but then again, the right denomination can address that painlessly: it makes inflation independent of the denomination.

Then, I started to think about the possibility of heteroskedasticity. That mouthful word describes a situation where there is more volatility at greater level. For example, at the level of 1, the data may fluctuate by 5% around the number 1. At the level of 1 million, it may fluctuate by 10% of around the number 1 million. This is known to happen with a lot of financial data. I am unsure if it is true for inflation as well and I have not checked it. I did a search on it and… things that came up are not stuff I want to read at the moment. All I want to do right now is blog and not mess up my head by too much.

Theoretically, it is hard for me to see how the level may affect inflation. The empiric may have something else to say.

The theoretically respectable way to have a change in level to affect inflation is to use the expectations channel. Consumers must somehow believe that a change in level affect inflation so that post-change, inflation will be lower. But there is a problem with this: like I said, the factors that affect inflation does not change (given the denomination is optimal, which is easy to achieve) and the issuer of the new money, Bank Indonesia, will still be as credible as the issuer of the old money. So, how exactly will a new denomination affect expectations?

I do not know.

So, the realistic way is to follow the empirical route and see if there is heteroskedasticity. But I am abusing the term a bit here. I am not thinking specifically about heteroskedasticity. I am just thinking that inflationary pressure or expectations might be greater at higher levels.

If that is the case, then the exercise may help fight inflation. If it does not, then I think the exercise is not ideal.

The next big point of it is really cumbersomeness of big bills. But during the weeks I was in Java and Bali, I found that the rupiah was easy to use. Indonesians and others have adapted to the denomination and the price level quite well. I would think given the prevailing price level in Indonesia, everybody would carry big bills around like during the disastrous era of the Weimar Republic or Japanese Malaya. But inflation in Indonesia is respectably okay at the moment. So while Indonesian denomination is big compared to Malaysia, stable prices mean these Indonesian bills will not lose its value quickly. The big numbers on the bills mean something, unlike in the Weimar Republic in the 1930s.

When I was there, I typically brought along 50,000 bills mostly because that is the lowest denomination the ATM spits out. Apparently, the optimal bills to carry around are 5,000 and 10,000. And it is not really cumbersome. I had 2 million rupiah in the wallet and the wallet looked thin.

Given the price level, the denomination of the Indonesian currency and the current inflation rate, the society is adapting extremely well to the situation. So, there is no need to cut down the zero. It is, after all, just zeroes on pieces of papers that appears to exact negligible cost to economic activities. Things are going fine as it is. So, I do not think the one-off adjustment cost associated with the cutting exercise is worth the effort, if cumbersomeness is the concern.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s – in fact, Bank Indonesia plans to re-denominate the rupiah beginning from 2014. The exercise may be completed by 2016. The current denomination will be slashed by the thousands i.e. 1,000,000 will become be 1,000 once the exercise is complete.

Categories
Economics Politics & government

[2640] Welcome back, LDP

I do not understand the intricacies of Japanese politics. I simply do not follow it closely. But I do know that Japan can play a significant role in Asia, if it finally decides to take up that role, which it has not under the uncertain leadership of the Democratic Party of Japan.

The DPJ wanted a closer relationship with Asia and less of the US. Contrary to what it hoped to achieve, a DPJ-led Japan has not successfully engage China and Japan now needs to forge a strong relationship with the United States in time when China is rising and growing more assertive against its neighbors. DPJ’s economic management itself has not been stellar but I think there it is unfair to blame to DPJ for that.

Unhappy with China, I welcome the reelection of the more conservative Liberal Democratic Party and a Japan with a backbone. That is so because it is almost certain that the LDP will strengthen its relationship with the US. With a stronger relationship with the US and a strong US presence in East Asia (and Southeast Asia), hopefully China will think twice in asserting its weight around the region. China has been an irresponsible giant so far, escalating crisis when a mature power would have handled it with care instead. For instance, is it really necessary to send a plane over the Senkaku islands?

A more hawkish (not too much I hope) Japan will tell China that it cannot bully its way through the region any longer. Rather than a hawk-dove strategy, now China faces a hawk-hawk scenario, which is more complicated and may force China to rethink its assertive, bullying regional policy into something more cooperative and amiable.

A hawkish Japan does have its own problem but at the moment, I do want a Japan that is willing to stand up in the region. China needs to learn that its bully tactics does have consequences and an LDP Japan can push back and say, no, play nice.

One big issue with LDP is its economic policy of Japan. First is the government interference in monetary policy. The Bank of Japan is losing its independence with the government trying to force the central bank to target for higher inflation rate. While I do think Japan needs a bit of more inflation, I am unsure how the interference will pan out. Lack of independence can be a recipe for too much inflation. There is some nuance in the interference in the sense that LDP government wants a stricter (but higher inflation) rule for the BOJ to follow but it does create a precedent of interference nonetheless.

On the same track, the LDP government will embark on a massive stimulus program to revive the economy. I prefer monetary to fiscal stimulus. The preference presents me with a problem: BOJ itself is too conservative to my liking and that probably makes the executive infringement into monetary policy somewhat palatable. Nevertheless, with expansive and coordinated fiscal and monetary policies, I suppose you will get inflation.

Finally, while I welcome the return of the LDP, I do not think the election of DPJ was a mistake. The Japanese system needs a shake-up and the DPJ did just that, even if it did not fulfill its promise. Being in power for too long can be dangerous to a political culture because it implants the party into the state apparatus. For a healthy democracy to prevail, the state has to be ultimately separate from the party. In the case of Japan, there is an additional dimension: the civil service is too influential. From my readings, the DPJ did have some successes in reigning the influence of the Japanese civil service, and that is good.

Categories
Economics

[2639] Calculate your personalized inflation rate, the French edition

Remember that one post where I outlined how you can calculate your personalized inflation rate?

Well, it is a bit long-winded and doing math in English is always painful. Words do not have the power to concisely deliver a message like how algebra can. But not everybody works well with algebra unfortunately.

But do you know what is better at delivering the same message than algebra? An application.

The French National Institute for Statistics and Economic Studies (the equivalent of Malaysia’s Department of Statistics, I think) has produced an application to calculate personalized inflation rate. It is here if you want to play around with it.

The only downside with it is that it is in French… and it only works if you live in France.

I think if somebody with great coding knowledge can replicate the same thing for Malaysia, I can supply the data easily.