Categories
Economics

[2703] TPP neutralizes trade diversion caused by other existing trade agreements

Joseph Stigliz argues that the Trans-Pacific Partnership (TPP) will disrupt pre-existing efficient Asian supply chain.[1] That essentially suggests that the TPP creates trade diversion away from non-TPP Asian countries. While this argument is true if it stands in isolation, it is not applicable for Malaysia.

This is because Malaysia already maintains free trade deals with major Asian economies. Either through bilateral means or through Asean, Malaysia has free trade agreement with China, India, Korea and Japan among others (also, Australia), never mind that Malaysia is also a part of Asean Free Trade Area. Combined, they are Malaysia’s major Asian trade partners. Other Asian export destinations are small compared to the combined exports to the aforementioned countries. Major trading Asian countries also have multiple free trade agreements among themselves.

At the same time, Malaysia does not have an FTA with the US. With the TPP, Malaysia will.

So if anything, it is these Asian FTAs that Malaysia maintains which are creating trade diversion away from Malaysia-US trade, contrary to Stigliz’s assertion that the TPP will create diversion away from intra-Asian trade.

That means, if agreed upon and implemented later, the TPP will help in neutralizing some of the trade diversion Malaysia-US trade is suffering from. TPP makes diversion less of a factor and creation, more.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — In the case of the TPP, there is a further concern. Asia has developed an efficient supply chain, with goods flowing easily from one country to another in the process of producing finished goods. But the TPP could interfere with that if China remains outside of it. [The Free-Trade Charade. Project Syndicate. July 4 2013]

Categories
Economics

[2702] Tighter lending requirement has its cost

I am unsure what to think about the recent move by Bank Negara Malaysia (BNM) to tighten lending on the non-bank side of the lending system. While the statistics in that sector is scary when compared to the banks, the non-bank sector does provide financial services to the low-income earners. The financial services provided here are not the fancy derivative kinds but rather, it is pretty much bread and butter things: giving out vanilla loans for a lot of stuff.

Without these institutions, these low income groups would probably lack access to financial services that they are enjoying now. That in some way has to mean improved welfare because these loans have to be used for something, either investment or consumption. And investment is simply deferred consumption anyway, which improves welfare eventually.

I have to admit that there are some problems with lending in non-bank financial institutions (NBFI). There is an explosion of personal financing granted by NBFI but in the grand scheme of things, it is small compared to the safer banking sector. Still, in the personal financing sector, more than 50% of loans were granted by NBFI according to BNM in its 2012 Financial Stability and Payment Systems Report. What makes it more worrying is that NBFI has looser requirements compared to the banks. Also, average amount for personal financing given out by NBFIs in 2012 was RM68,000 per person while most of the borrowers are civil servants who do not make much. (Still, impaired loans ratio in 2012 was extraordinarily low in spite of looser requirements. That has to do with a government deduction program. While the program is useful in keeping the ratio low, one wonders what the disposable income level of these borrowers is given that the borrowers are mostly government servants who do not earn too much).

Nevertheless, what would happen if these finance services were restricted? Or tightened?

Some might not go to the banks because they would likely be unqualified to obtain loans. If you cannot qualify for loans from NBFIs, what are the chances of getting loans from a sector with tighter regulation?

Others might not borrow at all, which is probably the ideal outcome for advocates of tighter lending requirements. For those who used the loose requirement to buy unnecessary stuff like buying an iPhone, a widescreen television or an expensive laptop to show-off, then the non-borrowing outcome is good.

But if they borrowed money for education, for food or essentially for smoothing their basic consumption, tightening will make them worse off. In their case, those loans give them a chance to build their life. These loans give them a leg up. Making it costlier for them sounds exceedingly cruel.

The worst outcome is probably if they go to the shadowy part of the economy and that quite possibly means going to the loan sharks. Having borrowers migrating to the least regulated (or even unregulated) sector of the economy cannot be considered a success of regulation. Protection in the underground economy is not as robust in the ”upper ground” economy. There is no bankruptcy law there. Here, not only one increases the systemic risk rather than reducing it through regulation, there will like be human cost — that is costlier than being condemned to bankruptcy — by becoming victims of crime.

That said, the restrictions by BNM are not drastic and those regulations, while it may reduce lending by NBFI, it is unlikely to cause mass exodus from NBFI to elsewhere. So, it is hard to imagine if BNM’s move increases systemic risk at all.

Yet, a small group of individuals will probably do just that and this group may be worse off.

Here is the point I want to stress. There is human cost to the tightening and that has been ignored while the mass media praises the tightening.

Categories
Economics

[2701] The quantitative aspect of trade diversion; TPP may increase Malaysian GDP

I have previously highlighted the cost of Malaysia not participating in the Trans-Pacific Partnership, which is a proposed free trade agreement among 12 countries across the Pacific. The cost comes in the form of trade diversion. I have only mentioned the qualitative aspect however. While it is good to know that, having quantitative assessment of the TPP will provide a greater case for joining, or not joining for that matter. Indeed, Pakatan Rakyat as well as the anti-TPP camp are demanding the goverment to release a cost-benefit analysis of the TPP. I think that is fair.

Well, they and all of us are in luck.

Inkyo Cheong of Asian Development Bank Institute recently published a working paper that comes close to a CBA. In the paper, the author does provide the impact on GDP of various countries:[1]

TPP impact on GDP
As you can see, most countries that join the TPP, if the TPP is agreed upon, are expected to enjoy positive impact on their GDP. Most which do not are projected to suffer some reduction in its GDP. That reduction is caused by trade diversion.

For Malaysia in particular, the implementation of the TPP is projected to increase the GDP by 0.7% (see the TPP12 column). As you can see, Malaysia is expected to be one of the biggest winners of the TPP.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Comparing the Economic Impact of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Inkyo Cheong. Asian Development Bank Institute. July 2013]

Categories
Economics

[2700] It is not the end of the world, but that is a bad trade number

Malaysian exports continue to take a hit. This time, it contracted by close to 6% in May. Imports also decreased. Those domestic cylinders better get going.

Malaysian May 2013 Exports

Categories
Politics & government

[2699] If you fail the first time Egyptians, try and try again

As a liberal, Egypt offers horrible options. I am glad I am just a lay observer from across the continent where I am unlikely need to make such choices any time in the foreseeable future.

On one side, there is the democratically elected Islamist organization Muslim Brotherhood with Mohamed Morsi as the former President. While democratically elected, they are no democrats and while in government, they were ready to abuse state institutions to cement their power. Something had to be done to counter the influence of the Muslim Brotherhood and quite clearly, millions of Egyptians, majority or not, agreed that something needed to be done. So they protested more after the original protest turned into a revolution which pulled the dictator Hosni Mubarak down. The new protest brought the whole country to a standstill, which led us to the current situation.

In an attempt to break the deadlock, the military launched a bloodless, pre-announced, quick coup d’état. Some liberals have celebrated the move. Deep inside me, I am truly happy for what has happened in Cairo.

Nevertheless, it is hard to say having the unelected military in power instead of the elected Islamists a better option. Supporting a coup d’état itself is one of the most illiberal things to do. It would be very odd for a liberal to cheer on the military ousting the elected power, a power with repulsive outlook or otherwise.

But things are not that simple especially for Egypt which is emerging from Mubarak autocratic years. If Egypt was a normal democracy, than it would be easy to say a coup d’état by the military was outright wrong, But Egypt is in a revolution that has not concluded. The objective of the revolution is the creation of a sustainable democracy. The logic of revolution has its own rules.

The country is a state in flux and it is struggling to create such democracy. As a liberal, I am hoping that that democracy is a liberal one with individual rights sufficiently protected, and not merely a majoritarian democracy where the majority can do whatever it wants at the expense of others. After all, how many dictators have been elected to power? Winning an election is an insufficient condition for a person to have respect for democracy.

Given that Egypt is fresh at the start, it is important to get things right before everything calcifies.

With that in mind, having the Muslim Brotherhood with its wide tentacles unchecked can corrupt state institutions, leaving the opportunity to create independent institutions crucial to a liberal democracy smaller by the day. Already the new constitution gives too much power to the President, in the crucial early days of the Egyptian republic. Not only that, the constitution is inadequate to separate powers that exist in the state. That gives too much leeway for the Muslim Brotherhood to corrupt the state.

And the Islamists are no liberal and they have an Islamist vision that in the past months have shown intolerance to others, like the Christians. So, I see Egypt under the Muslim Brotherhood as an oppressive regime which believes a victory at the ballot boxes gives it a free ticket to do anything. The only thing that has prevented the Muslim Brotherhood from taking off has been the military.

Democracy, as in modern democracy which really liberal democracy, is not merely about the ballot boxes. It is about rights and institutions and a majority win during one election alone does not give the power to trample those rights and institutions. Those Islamists do not understand that.

So, letting the Muslim Brotherhood through Morsi shaping the early history of the Egyptian republic excessively without strong constitutional safeguard sounds like a bad plan to me.

What the military coup does is to till land again. That gives a chance for a democracy that is more than majoritarianism to flourish. That creation of democracy is the goal of the revolution. If you fail the first time, try and try again. To waste this revolution will be one of the worst of all outcomes. They are already there and so, let them try as hard as they can.

It is only regrettable that the till was done through military might. Ideally, it should have been done through democratic process. Or Morsi should have stepped down. But the land got tilled anyway and that is a great consolation prize. I now hope that the military is merely a caretaker for a very short period before Egypt has another run on its democratic experiment. Whether I am right to hope, whether that hope is realistic, only time will tell.