Categories
Economics Environment

[2131] Of compensation yes but there are concerns

It appears that Malaysia and other similar countries with significant forest cover may end up as winners out of the ongoing 15th Conference of the Parties to the United Nations Framework Convention on Climate Change in Copenhagen. Whether these set of countries will be net winners are another matter altogether but as far as compensation for maintaining forest cover, or within the context of COP15, carbon sink goes, reports are coming out that this is one aspect that is going pretty well.[1]

The economics behind such compensation is as sound as the economics behind carbon tax or cap and trade. It is about pricing externality.

The difference between such compensation and carbon tax or cap and trade is that the former addresses positive externality while the latter addresses negative externality. That is in econolese. In English, it means paying someone for doing something that affects others in a good way and penalizing someone for doing something that affects others in a bad way. It is about accounting for spillover effect. In a way, it is a full cost accounting.

While I am excited at seeing an economic theory being put into practice, I am curious at how exactly will it be implemented. The biggest issue here is related to opportunity cost. The compensation will have to be big enough to address the problem of opportunity cost faced by owners of forest.

Some forested land may not be opened even without compensation. That put the opportunity cost of such land very low. I would imagine, some countries would not admit to that and instead, would overestimate their opportunity cost. It is not hard to come up with a plan to open up new land, project its economic value to some monstrous value that could be outrageous compared to actual situation and have that as the opportunity cost.

I know, forest has its inherent value. I am sympathetic to that argument. Inherent value however is hard to measure, and no one will pay for it despite all the sound moral argument defending it. The best way to price forest by its concrete opportunity cost: what other alternatives are possible to have a covered land and what is the value of that alternatives?

While I do support such compensation, these concerns must be resolved conclusively. Else, the arrangement will be a farce that only redistribute wealth unfairly.

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

[1] — COPENHAGEN — Negotiators have all but completed a sweeping deal that would compensate countries for preserving forests, and in some cases, other natural landscapes like peat soils, swamps and fields that play a crucial role in curbing climate change. [Climate Talks Near Deal to Save Forests. Elisabeth Rosenthal. New York Times. December 15 2009]

Categories
Economics

[2130] Of sugar prices today and 20 years ago

Sugar price per kilogram in Malaysia in 1989 was RM1.20, according to the Food and Agriculture Organization of the United Nations (FAO).

Sugar price per kilogram in Malaysia today is RM1.45.

If sugar were the only commodity in the world for Malaysia, it would suggest that average annual inflation rate for the past 20 years was no more than 1%.

Based on consumer price index obtained from the International Monetary Fund (IMF), average annual inflation rate for Malaysia within the same time period was slightly above 3%. It is probably safe to assume that salary, over the same period grew at the same rate, with mobility of a person with respect to the so-called corporate ladder fixed.

If every assumption stands, it is clear that sugar has been growing cheaper in real price terms. Since it is subsidized, it has been growing artificially cheaper in real price terms.

I wonder what is the total size of sugar subsidy bill for the past 20 years. According to various articles in The Star, last year’s bill stood at RM720 million. It has to be in the realm of billions. How about in present value? In terms of opportunity cost?

It should be a mind-busting figure.

What a wasteful policy.

Categories
Economics

[2129] Of dedication to Paul Samuelson

One of the greatest economists of this century, and perhaps of all times too, died yesterday.

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world’s great centers of graduate education in economics.

In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity. [Paul A. Samuelson, Economist, Dies at 94. Michael M. Weinstein. New York Times. December 13 2009]

I would say, his contributions to economics are as great as Leon and Walras’, who, back in the 19th century, together with other marginalists, first used mathematics in a big way to advance the field of economics.

Categories
Economics

[2128] Of is manufacturing out of the woods?

The Department of Statistics releases the Industrial Production Index today:

Sectors

Index October 2009

% Changes
Year-on-Year

% Changes
Month-on-Month

IPI

106.5

0.7

5.7

Mining index

96.4

-2.7

2.3

Manufacturing index

109.9

1.0

7.0

Electricity index

123.1

13.4

7.7

The important column is the year-on-year one.

The Industrial Production Index (IPI) in October 2009 posted a marginal growth of 0.7% year-on-year for the first time since September 2008. Meanwhile, the IPI in September 2009 was revised negative 6.0% year-on-year. The increase in October 2009 was due to the increases in the two indices: Manufacturing (1.0%) and Electricity (13.4%). However, the index of Mining posted a decrease of 2.7%.

Month-on-month, the IPI increased 5.7%. The cumulative index for the period of January-October 2009 declined 9.7% as against the same period in 2008. [Index of Industrial Production Malaysia October 2009. Department of Statistics of Malaysia. December 10 2009]

The manufacturing sector may finally be out of the woods. This is dependent on any revision to the figure that may occur next month however.

Notwithstanding the revision, given the centrality of the manufacturing sector to Malaysian economy, this improvement is hugely important. It provides a strong pragmatic, instead of ideological, case against the need for a third stimulus package.

The electricity is particularly indicative of possible future trend. Electricity can be argued as a leading indicator because one, it is a crucial input across a great many sectors, two, there is likely a lag between electricity consumption and completion of a goods and three, because it is an lagging input with respect to goods completion, any increase in production will be preceded by increase in electricity consumption, holding all else constant. That is why I was excited as early as July this year, as far as the IPI is concerned, when year-on-year electricity consumption first grew after it fell for an extended period.

What I would like answering is this: is the cause of the improvement in the IPI due mostly to foreign demand for domestic goods or domestic demand for domestic goods?

If it is the former, then it is likely that economic recovery, at least as far as manufacturing is concerned, has been driven largely by external demand, not Malaysian stimulus spending that is aimed at increasing domestic demand. In other words, it answer the effectiveness of the two stimulus spending. Given the huge size of external demand for domestic goods compared to domestic demand for domestic good, you know where my money is.

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

p/s — Elanor commented and brought up a factor that I regretfully missed. Accounting for that factor, it is becomes tenuous to claim that the increase in October is due to non-seasonal factor and therefore, due to underlying trend. This is so because year-on-year fails to remove seasonal effect as it typically does.

Nevertheless, being a stubborn person that I am, there is a good reason to think that the economy is improving, especially since the IPI has been improving (okay, performing less bad rather than improving) since January this year.

Categories
Society

[2127] Of Chin Peng, sympathy, injustice and sanctity of contract

The day I had a lunch appointment with a friend at the central business district in Sydney was one of those pleasant summer days. With blue sky and time aplenty, I walked the distance, which was about a mile or two from my home. As I approached the restaurant, my cell phone beeped. It was a message from the friend. She requested for an hour worth of postponement. With me already among streams of people crisscrossing the city centre minding their own business, I switched direction and headed toward Hyde Park to visit a prominent war memorial. Inside, on the wall carved the word Malaysia, along with other places where Australian forces had fought long ago. My mind immediately raced toward a period when communist insurgency was running high in Malaysia. Years have gone and sympathy for communism should be dead by now but it is has not.

The dishonorable path the Malaysian government takes with respect to former communist militants may unnecessarily fuel the fire of communism and the general political left in the country.

Communism is a disagreeable idea that restricts liberty. Its goals are arguably dreamingly nobly utopian. Its means are not however; its opposition to private property right is enough to demonstrate how communism is anti-liberty. Furthermore, good intentions and goals are never enough. History has shown how communism failed in all four corners of the world.

Wherever it still exists, it is a façade supported by capitalism, it exists side by side a ruined economy, its promises unfulfilled, or it only exists within the framework of democracy that communists in the real world — not mere theoreticians who failed to account for reality — long ago considered as an anathema. Communism simply fails to confront real world problems.

In great contrast, capitalism in one form or another continues to be the best system to ensure prosperity despite all criticism that have been lobbed at it and despite painful crashes that we see every now and then. It has been performing better at delivering prosperity than any form of communist solutions that any communist can realistically hoped for, so far. A stronger statement is possible: it has been performing better at delivering prosperity than any other system, so far. In the face of this observation, those who still cling to the promises of communism are being hopelessly romantic, bathed in stubborn denial and doomed for ideological failure.

The truth is self-evident yet, former communist militants — more so its former head Chin Peng who is unrepentant of past transgressions and his failed ideology — continue to receive sympathy from far too many individuals in the country.

For all the pain communism had caused all around the world and especially in Malaysia, only those on the political margin should be expressing sympathy to either communism or former communist militants, and not those near the centre. Yet, many close to the political centre do so. When those near the centre do that, then something is definitely amiss. It is worrisome for such sympathy to blossom in the mainstreams section of our society because such sympathy can sow the seed for future growth of communism.

At the very least, it creates a groundswell for strong support for the general political left in the country. Communism may be a weak movement here in Malaysia but in the future, especially with the proliferation of greater democratic culture, that statement does not have to be true, even if we are living in the age of Fukuyama’s end of history.

It can be the seed because a short-term factor may override dire long-term consequences of communism when individuals consider the issue. That factor is a linchpin for the sympathy former communist militants currently enjoy. That linchpin is injustice. A sense of injustice is the reason why there is sympathy for Chin Peng and other former communist militants.

It is a short-term factor because some time in the near future, the issue will be academic since nobody lives forever. Nevertheless, the refusal of Malaysian government to allow for the former leader of a defunct militant — some would say terrorist — movement to return to the land of his youth will no doubt be an example of injustices communists and communist sympathizers may highlight as part of their populist rhetoric to attract new acolytes for the hive.

It is an injustice because by refusing Chin Peng the right to return, the government is reneging on its obligations arising from the peace treaty signed between it and the communist. That treaty specifically calls upon the government to allow former communist militants to return to the country if the application is made before a deadline, which Chin Peng met.

That turns the matter into an issue of sanctity of contract. As much as communism is an enemy of liberty, the idea of sanctity of contract is a cornerstone of liberal societies. Indeed, one of the reasons for the establishment of a state in liberal tradition is the need to enforce contracts entered voluntarily, as long as those contracts do not violate individual liberty. When the state goes back on its words with impunity, it inevitably raises a very serious question regarding the legitimacy of a state. In a more concrete term, it undermines public trust in the Barisan Nasional federal government, which does not have a sterling reputation to start with.

One does not need a lecture on the importance of sanctity of contract in liberal tradition. One does not need to be a liberal to understand the idea of sanctity of contract in wider traditions. Surely, at some point in time, our parents or our teachers have impressed on us on the importance of keeping to our promises. Being true to our words, generally, is good ethics.

Opponents to the act of honoring the agreement among others cite that Chin Peng deserves no forgiveness for all the heinous crimes he committed. Furthermore, Malaysia would have been a very different place if the communists had succeeded. We might as well have been another North Korea. For that and more, Chin Peng may indeed deserve no forgiveness and in fact, continuous denunciations.

Nonetheless, in the words of Tunku ”˜Abidin Muhriz of the Malaysia Think Tank in an email exchange regarding this very matter among several libertarians, ”the issue of forgiveness and honoring a contract are separate.” Our refusal to forgive a person should not be the basis of us refusing to fulfill our obligation to the other person as stated in a contract. Therefore, there is a liberal case for allowing Chin Peng to return, unless there is proof that he has violated the 1989 Hatyai Peace Accord.

More importantly, by allowing the former militant leader to return and hence, fulfilling the obligation imposed on the Malaysian government, it removes injustice from the equation. Without injustice as a factor, there is little reason for those close to the political centre to sympathize with Chin Peng and thus, killing the seed for greater support — however small the increase is — for communism and the general political left in Malaysia.

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 December 8 2009.