Friday, March 29, 2013

Subsidy Rationalisation: Some Pointers From The IMF

(H/T Jason)

The cost of petrol and gas subsidies in Malaysia are likely to be in the region of RM45-50 billion this year, if not higher. Some of that comes directly from the government, while the rest are borne by Petronas or TNB.

Whether or not they appear on the government’s books, these subsidies simply have to go. First because of the actual fiscal costs of keeping the present subsidy system in place; second because of the opportunity costs for both the government and Petronas in terms of investment; and third because of the economic inefficiencies engendered by distorted prices. On top of that are the negative externalities arising from hydrocarbon use and the fact that the primary beneficiaries are corporations and the higher income households.

Thursday, March 28, 2013

Taking Part In The Brain Drain

I’ve always thought of the “brain drain” in primarily economic terms. Because of national and social barriers to labour mobility as well as search frictions for both employers and employees, earnings across countries vary widely even within the same industries.

Wages depend more on national level demand and supply, and international arbitrage of wages is at best imperfect. It’s easier for some companies to pull up sticks than to shift labour around the globe to where its needed.

Tuesday, March 26, 2013

Labour Bargaining And Wages

If you had a choice between two jobs with equal compensation, but one has higher bonuses and allowances but the other has higher base pay, which should you choose?

Take the one with higher basic salary (excerpt):

The intercept is negotiable, the slope is fixed

A new hire only gets one chance to negotiate: a brief window between the time that an offer is made and the time when that offer is accepted. Those initial terms and conditions determine the employee's salary for years to come - possibly the entire the duration of his or her time at the institution.

What If Everyone Had A Car?

I’m on my hobby horse today. From the BBC:

What if everyone had a car?

Technology offers potential solutions to traffic congestion and pollution – but getting there will take time, R&D dollars, and an incentive for people to make the shift to smaller, more fuel efficient vehicles.

For starters, how about getting rid of subsidies and taxing petrol use?

Emmanuel Saez On Taxes And Inequality

This is more a conversation than an interview, and all the more interesting for it (excerpt; emphasis added):

Taxing Away Inequality
A Conversation with Emmanuel Saez

…DG: I’m prompted by your last point to suggest that another underappreciated feature of your work is that it delivers rather provocative hints about the causes of the increase in inequality. That is, it not only lays out the descriptive trajectory of income inequality, but also suggests what’s driving that descriptive trajectory. We participated in a Boston Review debate on one account of the sources of the recent takeoff, namely the expansion of rent, where rent is understood as sweetheart deals, corruption, backdating stock option contracts—all sorts of pay-setting practices that permit those at the top to secure more than they would in a competitive market. On the basis of your research, do you think that rent is an important source of the recent growth in income inequality?

ES: If we define rent in terms of situations where pay doesn’t correspond to what economists call ‘marginal productivity’—that is, the economic contribution a person is providing—I would say yes, because the evolution of income concentration over time and across countries has a number of features that are inconsistent with the story where pay is everywhere equal to productivity. The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes…

It’s a fairly long interview/conversation but basically looks at the pros and cons of using tax policy to address income inequality, specifically highly progressive income taxes.

At one stage, the top marginal income tax rate in the United States stood at 91%, and was above 70% from the end of WWII to the beginning of the Reagan era, when tax rates began a downward trajectory. The current top marginal income tax rate is a less mind-boggling 39.6%. Not surprisingly, income inequality was negatively correlated with the marginal income tax rate over the same periods.

I don’t know if we ever want to be that punitive, but low income tax rates definitely do have an impact in increasing income inequality, and by extension wealth inequality.

But do have a read – the interviewer’s a sociologist not a journalist, and it shows in the thoughtfulness of the questions and makes for an insightful (and very accessible) look at the issue.

(H/T: Mark Thoma)

Friday, March 22, 2013

Visualising Poverty

What does it mean to be poor?

Statistics only tell part of the story, and often miss the human dimension of poverty. Here’s two people’s unique take on the subject:

Shopping on the poverty line - what can you eat?

What happens when a photographer and an economist work together to document poverty around the world? When Stefen Chow and his wife, Hui-yi Lin, set out to answer that question, they came up with a photo project, The Poverty Line.

Ms Lin calculates how much money people living at the poverty line have to spend on food each day. In the US, that figure comes to $4.91 (£3.24) a day, while in Madagascar, it amounts to 64 cents.

Mr Chow then documents how much food that money buys in each country, placing the food against a local newspaper.

The award-winning project's website has just been relaunched, making it more interactive for users to learn what it means to be poor and hungry from Tokyo to Rio de Janeiro.

The project website can be accessed here. Malaysia’s visuals are here.

Each separate photo shows what food can be bought for the daily maximum outlay (USD1.36) implied by our official poverty line and you can drill down by food type through the menus on the left.

It doesn’t look that bad unless you happen to know that Malaysia’s poverty line is based on household income and not individual income.

A note on international comparison however – in Malaysia as in much of the developing world, poverty lines typically measure absolute poverty. In advanced economies relative poverty measurements are used instead, so incidences of poverty (and thus the photos on the project website) aren’t directly comparable.

BNM Watch: The Nature Of Money

Some of this discussion may be pretty esoteric to the layman, even if on the face of it the changes BNM are implementing look pretty simple and straightforward. I don’t know if I can fully understand all the ramifications myself, and this whole post is probably sheer speculation.

Nevertheless, the changes in forex administration rules for instance are pretty easy to absorb (full list available here). Basically, the measures liberalise the depth and scope of forex services and products that can be offered to both residents and non-residents via the onshore market, including by FIs based in Labuan (something IIRC not previously allowed).

Network Externalities In Action

From the Beeb (excerpt):

The sweet sound of success

It is an amazing story of survival - a parable of how small businesses can use the old ways to make money, but then adapt and prosper down the generations.

Today, the quiet town of Markneukirchen, nestling in the mountains of eastern Germany near the Czech border, would be called an "economic cluster", a place where different companies combine in a close-knit single industry.

But when tradesman started making musical instruments in the town nearly four centuries ago, there was no fancy term for the way they were organised.

It was just the way they did things: violin-makers set up near manufacturers of bows, while the trombone workshop relied on the mouthpiece maker just up the street.

Today, the town and the valley around it have 113 different enterprises, all involved in making musical instruments. They rely on traditional methods, but utilise all the modern ways of connecting with far-away markets.

Thursday, March 21, 2013

February 2013 Consumer Prices: Here Comes The Pain Again

It looks like December 2012 will be the lowest point for inflation for some time, as February prices have continued where January’s increases have left off (log annual and monthly changes):

01_cpi

BNM Watch: 2012 Annual Report

[UPDATE: Links to box articles are now available]

You can get the news summary here. My own notes focus less on the economic outlook and more on the financial stability part, as well as the liberalisation of forex and changes in the payment system that were  announced concurrently:

Wednesday, March 20, 2013

Facebook Problems

Facebook is giving me a headache – apparently none of my posts from the last five months have been posted to the Econsmalaysia wall.

It’s fixed now, so you should see all new posts coming through in the future. Unfortunately, if you’re following me only through Facebook, that’s five months worth of posts arriving all at once. Don’t worry, you haven’t missed much!

The 2012 National Report Cards

I missed the live televised speech yesterday, and haven’t yet had a chance to review either document, but you can download the annual reports via the links below:

  1. Economic Transformation Programme
  2. Government Transformation Programme

Bank Negara will be issuing their annual report later this afternoon, so any analysis and commentary will have to wait.

As for the other bit of sensational news yesterday, you can view the original here (both film and commentary).

Just one thing to bear in mind however: Global Witness are quoting the GFI numbers on illicit capital flows from Malaysia, but fail to note that 80% of these flows arise from trade mispricing i.e. non-corruption related (unless you count MNC tax avoidance strategies as corruption).

Tuesday, March 19, 2013

2010 Environmental Compliance

This doesn’t make comfortable reading (excerpt):

Economic Census 2011 – Environmental Compliance

Environmental compliance expenditure is one of the inputs for sustainable development in the economic, social and environmental protection pillar. Accordingly, the Department publishes this report as an initiative to support the National Environmental Policy to provide guidance to the industry to ensure clean and safe environment. Sectors involved are agriculture, mining & quarrying, manufacturing, construction and services...

…In 2010, a total of 9,552 establishments reported having environmental compliance expenditure from 364,900 active establishments (2.6%). The services sector recorded the highest number of establishments which was 59.5 per cent from 9,552 establishments, followed by manufacturing (25.4%), construction (8.6%), agriculture (5.0%) and mining & quarrying (1.5%)

Monopsony In Labour Markets

I once characterised employer hiring as similar to a monopsonistic market – I’m somewhat chuffed that I’m hardly alone in thinking that way (excerpt):

Where's the monopsony?

...There is in economic theory a set of circumstances, however, under which an increase in the minimum wage might raise employment. If an employer has a market largely to itself--if it has monopsony power--then it will both pay its workers less than their productivity warrants and not hire enough workers to be at the most efficient level of employment. Raising the minimum wage would then both increase pay and induce more workers into the labor market, hence increasing employment. If government could nail the minimum wage to the marginal revenue product of the least productive workers, the minimum wage could produce a first-best outcome--one where pay and employment levels were efficient.

For the argument to work, the demand for labor needn't be perfectly monopsonistic, but rather less than perfectly competitive. The fact that wages and labor productivity seem to have less and less to do with each other is evidence that the demand for labor is not competitive, but it would be nice to have further, detailed evidence of the industrial organization of labor demand.

Monday, March 18, 2013

Growth And The Distribution Of Incomes

Pemandu CEO Idris Jala on inclusive growth (excerpt):

Transformation is not all about income only

TRANSFORMATION is not all about income. Yes, income is the key part and we put a lot of emphasis on and look at ways and means to increase that, but we are equally aware that income must reach everyone.

There must be inclusiveness in development that is, the drive towards achieving developed status by getting a per capita income of US$15,000 (RM46,795) a year by 2020 must include as many people as possible in that process.

Funding Tertiary Education

From the East Asia Forum, Bruce Chapman on the future of student loans (excerpt):

Funding tertiary education in Southeast Asia and beyond

In recent decades Southeast Asian countries have simultaneously enjoyed rapid economic growth and a significant expansion of the higher education sector. But many countries in the region are finding it difficult to pay for this expansion of their universities.

This obstacle can be traced directly to problems with student loan systems, which in many countries either do not exist or have high default rates and/or major implicit interest rate subsidies...

Wednesday, March 13, 2013

Cheaper Cars Makes Economic Sense; Cheaper Gas Doesn’t

An acquaintance asked me the other week when I was going to bash Pakatan Rakyat’s Manifesto. I don’t know that bashing would be the right word – I’d prefer “constructive criticism” – but I suppose this post will come close.

One of the hotter topics to arise in the last six months has been the price of cars. In Malaysia, of course, the national car industry has been protected by an excise duty on imports and non-“national” cars, even those assembled locally.

Wherever you stand on the desirability of industrial policy, this has had the obvious effect on car prices – cars in Malaysia retail for more than in other countries. For example, the Honda Civic in Malaysia ranges from about MYR120k to over MYR130k, but goes for between USD18k to USD28k in the United States.

At today’s exchange rates, that amounts to a difference of between about 50% to 110% higher. Even allowing for differences in on-the-road pricing (engine variations, insurance, accessories, trim level etc), the difference still amounts to a hefty chunk of change. In this region, only Singapore has higher prices.

Tuesday, March 12, 2013

January 2013 External Trade

Released along with the IPI yesterday, the trade numbers are a little more satisfying, at least in terms of having something to talk about (log annual and monthly changes; seasonally adjusted):

01_exim

Growth in exports continued to remain anaemic at just 3.1% in log terms, though at least there’s some positive movement on the month. Imports on the other hand showed something more interesting – a 14.4% spike compared to last year. The monthly change was an even more massive 18.9%.

January 2013 Industrial Production

Yesterday’s industrial production numbers had some good, some bad (log annual and monthly changes; seasonally adjusted; 2000=100):

01_gr

02_grc

The good news is that in annual terms, industrial production is looking up a bit; the bad news is that the monthly numbers are flat to negative except in electricity production.

Monday, March 11, 2013

Profit-Shifting and Transfer Pricing

Mr Kang is diplomatic in not pointing out Malaysia’s own situation, but this article in today’s paper takes a highly educational look into the mechanics of profit shifting and transfer pricing, and a potential solution to the problem (excerpt; emphasis added):

Reining in cross-border profit shifting

A RECENT statement by George Osborne, the British Chancellor of the Exchequer, was given wide media coverage in the United Kingdom and elsewhere when he said that he wanted to see “international action” taken against multinational companies which engaged in “profit shifting”...

...The case of Amazon highlights how profits are “shifted” and the international tax rules that are in play.

Friday, March 8, 2013

BNM Watch: No Change…Again

The language has shifted a little, and a bit more cautiously optimistic on the external front:

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global economy continues to be confronted with some uncertainties. While there have been improvements in the advanced economies, risks to sustained recovery remain…

Monday, March 4, 2013

IMF Country Report On Malaysia: Reading Between The Lines

The latest Article IV Consultation between the IMF and Malaysia has some rather flattering language (excerpt):

IMF Executive Board Concludes 2012 Article IV Consultation with Malaysia

…Executive Directors commended the authorities for their skillful policies, which have underpinned Malaysia’s strong macroeconomic performance despite a weak external environment…Looking ahead, Directors considered that Malaysia’s medium term prospects are favorable, as the authorities continue to focus on safeguarding financial stability, strengthening fiscal sustainability, and securing high and inclusive growth.

Directors endorsed the current settings for monetary policy and the mildly contractionary fiscal stance in the 2013 budget. They nonetheless encouraged the authorities to further develop their medium­ term [sic] plans to restore a prudent level of federal government debt and rebuild fiscal space…

BNM On Illicit Money Flows

It’s a fairly long explanation and directly targets the Global Financial Integrity reports with respect to Malaysia (I’ve taken the liberty of copying it in full):

Update on Measures to Address Unrecorded Financial Flows

Bank Negara Malaysia would like to provide an update on measures that have been undertaken by members of a High Level Multi-Agency Special Task Force (Task Force) to reduce illicit financial flows. The Task Force comprises of the Attorney General’s Chambers of Malaysia, Royal Malaysian Customs Department, Royal Malaysia Police, Malaysian Anti-Corruption Commission, Inland Revenue Board of Malaysia, Immigration Department of Malaysia and Bank Negara Malaysia. The Task Force’s role is to spearhead more effective coordination and collaboration among key law enforcement authorities in the country as well as between local and international enforcement agencies to mitigate illicit activity and financial flows.