Categories
Economics

[2627] Does inflation hidden between the CPI and GDP deflator explain the CPI dissonance?

I have argued before that too many disbelieve the CPI inflation because they do not understand how inflation is measured. Some do not get the fact that CPI inflation is the change in price level and not the price level itself. Too many think that it is impossible that inflation is really that low in Malaysia when prices have jumped up so much over the years. They essentially compared prices to a different base than that used by the CPI and failed to take that difference into account. Others are just too stubborn that they express disbelief but they are unable to systematically justify their disbelief other than resorting to rhetoric. While this is a trivial macroeconomic issue, it does have real political implications in Malaysia unfortunately. This really highlights importance of communication between economists and the lay public in Malaysia.

Lars Christensen, an economist and a giant in the market monetarist circle, may have implicitly provided another explanation to describe the discrepancy between CPI inflation and the disbelieving sentiment on the ground.

He suggests that price controls are causing a wedge between CPI inflation and GDP deflator change.[1] If there were no controls, the CPI inflation and the GDP deflator change should have moved in tandem. So, price controls are suppressing the CPI inflation (because price controls target goods consumed locally and CPI measures good consumed domestically while GDP deflator is more descriptive of prices all of Malaysia because it measures prices of good produced locally regardless where it ends up). The claim on inflation suppression (by price controls and not the data itself) is completely uncontroversial.

So, as Christensen puts it, the difference between CPI inflation and GDP deflator change is hidden inflation. Would be it possible that despite the official CPI figures, the consumers feel the pain from the GDP deflator?

While this can be used to describe the dissonance between the official CPI inflation rate and disbelief on the ground, there is an obvious problem to the implicit explanation of the dissonance. Consumers do not face prices as measured by the GDP deflator. They face prices measured by the CPI instead.

Christensen does not explicit use the term hidden inflation in the same context that I am framing the issue. He uses it to describe the problem of shortage of controlled items, which does happen from time to time in Malaysia. I am just preempting any argument that may come out to explain the CPI dissonance that may originate from his points.

My view is that the CPI inflation is right and the reason for the disbelief has more to do with the fact that many do not understand the CPI. Furthermore, some components of the CPI are growing faster than the overall CPI and this might have contributed to the disbelief. In this sense, the pain index designed by Hisham of Economics Malaysia is helpful in addressing the disbelief.[2]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — The Christensen family arrived in Malaysia yesterday. It is vacation time! So since I am in Malaysia I was thinking I would write a small piece on Malaysian monetary policy, but frankly speaking I don’t know much about the Malaysian economy and I do not follow it on a daily basis. So my account of how the Malaysian economy is at best going to be a second hand account.

However, when I looked at the Malaysian data something nonetheless caught my eye. Looking at the monetary policy of a country I find it useful to compare the development in real GDP (RGDP) and nominal GDP (NGDP). I did the same thing for Malaysia. The RGDP numbers didn’t surprise me — I knew that from the research I from time to time would read on the Malaysian economy. However, most economists are still not writing much about the development in NGDP.

In my head trend RGDP growth is around 5% in Malaysia and from most of the research I have read on the Malaysian economy I have gotten the impression that inflation is pretty much under control and is around 2-3% — so I would have expected NGDP growth to have been around 7-8%. However, for most of the past decade NGDP growth in Malaysia has been much higher — 10-15%. The only exception is 2009 when NGDP growth contracted nearly 8%! [Lars Christensen. Malaysia should peg the renggit to the price of rubber and natural gas. The Market Monetarist. November 15 2012]

[2] — Inflation as measured by the CPI is up 1.6% in annual log terms, but my core inflation measure (CPI ex-food, ex-transport) decelerated to 1.1% from 1.2% from April’s reading. Price’s are up from the month before, but not by much — not so coincidentally, the Ringgit has been falling slightly against major currencies, so some pass through of inflation is to be expected. But the magnitude of price increases is still far below what people seem to feel is happening to their monthly household bills.

To get a feel for this, I’m going to invert the components of my core measure — instead of excluding the more volatile components to arrive at a stable long term inflation measure that’s useful for policy analysis, I’m going to exclude the non-volatile components instead i.e. measure inflation based exclusively on food and transport prices, which is more representative of what’s happening to people’s wallets.

You could call this the ”Pain” Index [Hishamh. May CPI: Measuring The Pain. Economics Malaysia. June 21 2010]

Categories
Economics

[2626] Income distribution of Malaysian households, 2009

Below is the income distribution of Malaysian household as published by the Department of Statistics in its 2009 Household Income Survey. Income is measured in ringgit Malaysia per month.

The red bar more or less describes the median Malaysian household in terms of income.

Categories
Economics Politics & government Society

[2625] AES, privacy and perverse incentive

The implementation of the Automatic Enforcement System (AES) is proving to be so controversial that even federal backbenchers are joining the federal opposition in criticizing the system.

For the uninitiated, the AES is a privately-financed and operated system of speed traps under the purview of the Road Transport Department (JPJ). It has two functions: catch those who drive above the speed limit and those who beat the red light. The overarching aim is to reduce road accidents.

There are strong opinions on the matter, and at times, it appears that there is no middle ground. As for me, I am of two minds about the matter.

I can be supportive of the AES because, frankly, there are assholes on the roads. They drive as if the roads are racetracks. Many of them disrespect the traffic lights. They, as some would say in Malay, think that their fathers owned the road.

These drivers endanger others’ life and there have been times when they caused me unnecessary distress. Though it is unbecoming of me, there were times when I wished they would meet with an accident. Pain is a great disincentive and these drivers need some serious disincentive. Maybe, like losing a limb. Or two.

But such pain can be barbaric and so, the next best thing is to hit them in their pockets. For those driving Ferraris, a Hummer financed by a tycoon and the likes, the AES is unlikely to be of any deterrent. If you think a maximum of RM300 fine can deter the elites from becoming a road menace, then I do have something to sell to you.

Philosophically, the libertarian in me is always skeptical of cameras in public space, either for crime fighting or as speed traps. It is a concern for privacy and in an environment when I distrust the government with my private data, especially with an illiberal government in power, having these cameras all over the public space allows the government, or even private entities, to track me. Whatever the guarantee of privacy, words are words and it is open to abuse. How do I know, for instance, that the AES cameras will be used purely for traffic purposes?

I just do not.

There is, of course, an argument that in this age of social media, the concern about privacy with respect to cameras in public spaces is really overblown. A large chunk of our lives is already available online. Nevertheless, there are things on social media, and there are things that are not. Cameras in public space have the capability of revealing things that are not on social media, among other things. There is such a thing called privacy, especially to a libertarian like me.

The other part that raises my opposition is economics. Specifically, the incentive structure of AES is flawed. There is a clear case of perverse incentive. It creates a conflict of interest among the companies.

The private companies operate the AES and they generate revenue from paid traffic tickets. There is a clear profit motive here. The profit motive itself is not the problem.

The problem comes when one considers the fact that the process of taking the pictures is managed by the companies.

With that, the AES operators face the incentive to tweak the violation benchmarks regardless of the speed limits sanctioned by the authorities. The operators can increase their revenue by dishonestly lowering the benchmark for fines. In other words, there is an incentive for the companies to cheat commuters. There is a risk that these companies will cheat us.

This basically negates a pro-AES argument out there that sounds like this: if you do not commit an offence, the companies get no money. As I have explained, there is a risk that the companies do make money even when there is no offence committed.

This can be addressed by having an independent, incorruptible body to oversee the system. This can be the government because the government (a clean one at that) can be a counterweight to the profit-motive. The independent overseer needs to ensure there is no cheating done by the operators of the AES.

This is already in place in a way. All cameras will be calibrated every eight months by SIRIM, which one assumes to be an independent party. Still, something can happen between two calibration sessions. After all, the two private companies do operate and maintain the cameras on behalf of JPJ. They have access to the cameras all the times.

The alternative which can make the AES more palatable incentive-wise is to change the incentive structure. In my humble opinion, the companies should not be paid according to the number of fines paid. The payoff should not be pegged to the number of motorists caught. Instead, these companies should be paid a fixed regular fee from the relevant authority. This will make the incentive to cheat go away.

The problem with this is that the government may have to go back on its word and break the contracts signed. But hey, what else is new?

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 November 8 2012.

Categories
Economics

[2624] The government dominates the skyline of Kuala Lumpur

Felda has a new building in downtown Kuala Lumpur. It is a pretty slick building. Whatever that says about the construction industry, I do not think it says anything too good enough private sector-led economy. Unscientific yes but the skyline of Kuala Lumpur says a lot about how supposedly private sector-led economy Malaysia is, given that Kuala Lumpur is the economic center of the country.

Take a look at the skyline of Kuala Lumpur from a far. Apart from Felda, there are PNB, Tabung Haji and the Petronas Twin Towers. From where I live, these four buildings dominate the skyline. And then you can have CIMB and Maybank too. How about Telekom Malaysia? KL Tower? These do not include non-business related buildings like City Hall, BNM and EPF (while non-business, the EPF does influence the Malaysian equity market in a big way). How about the most political of it all, the UMNO building?  Not government, but for better or for worse, UMNO has a hand in it.

Warisan Merdeka will take it place in some years to come, yet another building to dominate the skyline like how the Petronas Twin Towers do.

These buildings symbolize what the Malaysia economy really is: government-driven.

One might argue that there are many more private buildings that government and government-linked companies buildings around. True that but that does not mean the buildings of the latter do not dominate still.

The sense of a government-led economy would have been more profound if the federal government had not move to Putrajaya more than a decade ago. But that is all symbolism. It does not change the fact that the government has a considerable say in the economy. Too big a say.

Categories
Economics Politics & government

[2623] The death of politics of development

I was Sarawak for two weeks in early 2011. It was election time and the campaigning period was well underway.

From my observation, I think I can conclude that the politics of development is very much alive in Sarawak. It is not hard to understand why.

While the standard of living in Kuching, the state capital, was respectable, a number of communities just outside of the city limits still did not have access to the local electricity grid. They wanted electricity. On the road to Bau, the residents complained how dark it was at night along the road. They wanted streetlights. The journey to Sri Aman meanwhile felt like a mild rollercoaster ride. Users wanted a smoother and wider road.

The politics of development there is very much about physical infrastructure. It is about promises and execution of development. Incumbents make lavish promises for more and better infrastructures. Challengers harp on unfulfilled promises.

While there were other concerns lingering in the mind of Sarawakian voters I am sure (indeed, it would be a remiss if I did not mention that the Chief Minister of Sarawak, a popular brand of lightning rod among urban voters), the way the campaigns were sometimes framed was as if the primary concern was development. It was a matter of whether the electorates should reward the incumbents for a job well done, or punish them for not bringing in sufficient development.

To be sure, the politics of development is relevant not only to Sarawak, but also to other places throughout the country. Else, the authority would not have paved the roads just before a critical election.

In other places where road connections are respectable, with clean water supply and electricity taken for granted, the same brand of politics is less appealing to the electorates.

Voters in these places—likely urbanites—have expectations too sophisticated than anything the politics of development can cater to. Educated urbanites are no longer mostly concerned about physical infrastructure. They will shrug it off and they will probably return to say that mere development is no longer enough. There are other concerns.

That comes close to what economist Amartya Sen has articulated in one of his books, Freedom as Development. He argued that development should be understood in its widest sense. Economic development is not merely about paved road, tall buildings and everything that is concrete but it is also about the soft aspect of individual freedom. It is about individual empowerment. Institutions should be created and improved so that individual freedom is guaranteed.

With such freedom, individuals can take upon themselves to promote their own welfare. After all, the end of development is enhancement of individual welfare.

So, freedom is one of the necessary means of development and the focus on physical development alone is not enough.

And if one subscribes to something similar to Maslow’s hierarchy of needs where individuals prioritize economic well-being and other basic needs over political rights, then perhaps, for many Malaysians, the basic needs for brick and mortar development have been fulfilled. Any more of that kind of development returns less satisfaction than it did before. Now, the same Malaysians may want to fulfill other needs down the list that they have ignored previously.

So, faced with the widened definition of development, the old way of doing things becomes inadequate.

There are at least two major cases illustrating how the traditional development argument alone is insufficient and sometimes rejected altogether because it clashes so nakedly against other concerns. One will bring us to Pahang, where Lynas is building a rare earth processing plant. The other will bring us to Johor, where Petronas is investing in a massive petrochemical complex.

The proponents of the projects have highlighted the projects’ merits: foreign investment, jobs creation, technology transfer, tax revenue, etc. In a society that hungers for more old development, the projects would have gained popular support.

Yet the projects face popular opposition for a variety of reasons, the most notable perhaps being environmental and health concerns. In the past, not too many would oppose such development. Many needed it. Today, the acceptance of development comes with conditions. The conditionality is a sign of the end of the old politics of development.

The politics of development itself suffers from fatalism. Its appeals will end because development, whether the narrow definition or the more holistic one, is not an end by itself. It is a mean to an end. What is the appeal of the promises of more development, when we are nearing the very end that any development aimed for? What is the appeal, when we are at the end? We already have it.

The politics of development only lasts as long as development has not reached its stated end. The death of development politics is the natural ending for any successful development.

Only failure prolongs the life of old-style development politics.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in Selangor Times on October 26 2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
nb — I am disatifised with this particular essay. I initially had wanted to make the connection about how politicians who have engaged or engaging on the politics of development can no longer expect gratitute from voters because of the death of the politics of development. I also wanted to highlight that there are pockets where politics of development still work but I was running out of time and space to expand on the idea. I also suffered from writer’s block. Those are the reasons why the final part of the essay seems rushed. Verbosity is the death of me.