This Is NOT How You Calculate Inflation (UPDATED)

I wrote about DS Anwar’s speech regarding the ETP a week ago, but my comments were based entirely on the coverage by the Malaysian Insider, and not the speech itself. I stumbled on that via JMD’s blog.

Just so you know, PEMANDU have issued a rebuttal (without naming names).

But what caught my eye in the original speech was this paragraph that wasn’t mentioned in the news coverage:

The average inflation between 2001 and 2005 is 4.8%, reflecting the first energy price shock of 2003 that saw average crude oil prices moving beyond the psychological US$30 per barrel mark. The average inflation between 2005 and 2009 is even higher at 6.6% as a result of the 2008 crude oil price rally that saw the energy prices sky-rocketing throughout the world.

November 2011 CPI: Prices Sticking

Some nice news for once – prices in November barely budged over October (log annual and monthly changes; 2000=100):

Increases in core prices remained uncomfortably high, both on annual and monthly measures, but overall increases in prices decelerated, mainly as aggregate food prices didn’t increase at all (log annual and monthly changes; 2000=100):

Someone Talking Sense About Exchange Rates, For Once

Nobel Laureate Michael Spence on CNYUSD:

The Exchange-Rate Delusion

MILAN – If one looks at the trade patterns of the global economy’s two biggest players, two facts leap out. One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China. If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China.

October 2011 Employment

Maybe someone at DOS is reading this blog – this month’s report on October 2011 employment is much better written than the last.

In any case, the economy added another 53,400 jobs in October (‘000):

Illicit, Illegal, Not Quite Right

Ok, second speech, this time from Lim Guan Eng:

Pakatan blames BN for turning Malaysia into ‘king of black money’

KUALA LUMPUR, Dec 16 — Pakatan Rakyat (PR) leaders faulted the Barisan Nasional (BN) government today for bleeding the country’s coffers through corruption, saying its mismanagement of the economy had turned Malaysia into the “king of black money”.

Pointing to the Global Financial Integrity’s (GFI) findings that Malaysia had lost RM150 billion in 2009 through the siphoning of illicit money, the leaders warned of a bleak future for the country should the ruling pact be allowed to continue its reign.

The ETP And The Distribution Of Income

My apologies for the long silence over the past week – I’ve been on holiday, and haven’t checked my mail for a while, or been too bothered about blogging. The next couple of weeks won’t see much in the way of posting either, as I’m going through some major changes in my life. I might (or might not!) write about it, depending on how circumstances develop. In any case, I’ll be returning to a more regular blogging schedule in January, God willing.

In the meantime, I’ve been asked to comment on a couple of speeches made by the opposition Pakatan Rakyat over the past week.

First is a dinner talk given by Datuk Seri Anwar Ibrahim:

ETP will widen income gap by 2020, warns Anwar

KUALA LUMPUR, Dec 15 — Datuk Seri Anwar Ibrahim sounded warning bells today, saying the government’s Economic Transformation Programme (ETP) will worsen income disparity and force some 1.7 million Malaysians into poverty by 2020.

On the flip side, he said, corporate giants and government cronies would be enjoying a larger slice of the economic pie even as the common Malaysian struggle with hardship.

Malaysia’s European Sensitivity

What would be the impact on Malaysia of a recession in Europe? To look at this question, I’ve come up with a few equations.

First a single equation approach, taking just Malaysia and Europe. I’m using the annual GDP numbers from the IMF’s September 2011 World Economic Outlook database (available here), transformed into logs to translate the results into elasticities, with the following results:

The relationship is statistically significant, and suggests that a 1% increase (decrease) in Eurozone GDP would result in a 1.62% increase (decrease) in Malaysian GDP. Based on this, Malaysia has a high degree of sensitivity to European growth.

October 2011 External Trade

Friday’s trade numbers underscore the resilience of the economy as shown by industrial production. Not quite out of the forecast band, but about 1 standard deviation away from the predicted value (RM millions):

Reforming Education: It’s Not Just the Teachers Or The Schools

Interesting nugget from the World Bank blog (excerpt):

Should developing countries shift from focusing on improving schools to improving parents?

I travel to many developing countries in the context of my work for The World Bank. I visit schools that receive financial support and technical assistance from the Bank to improve the learning experiences and outcomes of students. Each time, I ask teachers in these schools what they think would make the biggest difference in the learning outcomes of their students. The most common answer is “better parents.” I often wonder if this response is, in some conscious or unconscious way, an excuse to help teachers explain the poor outcomes of their students (especially those from the poorest households) and their low expectations of what their students can achieve. However, both common sense and solid research indicate that parents matter.

October 2011 Industrial Production

Why is everyone so pessimistic? I understand the concern over Europe, but that’s primarily a financial problem and not yet a real economy problem. It hasn’t come to the point that we need to jump the gun and declare the Malaysian economy is going down the tubes (excerpt):

Slower IPI, export growth expected

PETALING JAYA: There will be further indications of a slowdown in factory output when the Statistics Department releases data on October's industrial production index (IPI) today while export growth is seen slowing when the data on external trade is out tomorrow.

Economists in a Bloomberg survey expect the IPI to grow a median 1.6% on a year-on-year basis versus the 2.5% expansion in September. This would mean manufacturing production would be expanding at the slowest pace since March.

They expect exports to grow by a median 7.3% in October from a year ago after the unexpected 16.6% jump in exports in September.

Luckily, the economy’s not listening to the analysts (log annual and monthly changes; seasonally adjusted; 2000=100):

3Q 2011 Government Debt Update

Net government borrowing in 3Q 2011 fell to its lowest level in 3 years (RM millions):

3Q 2011 Federal Government Budget

After last quarter’s uncharacteristic surplus, things are now a bit more normal (RM millions):

Selling Gold

The price of gold has been defying gravity for years now. There’s no doubt that some of it is due to fundamental factors, as before this run-up, it had been stuck in a 20 year bear market and was probably undervalued: new supply has been declining for years, and the rapid economic development of India and China brought millions of new buyers. It also helped to have a massive financial crisis, which bolsters gold’s attraction as a safe haven.

But what shouldn’t be lost is the role and activities of the World Gold Council, which played a key role in making gold easier to invest in and has been unceasingly promoting gold as an alternative investment.

October 2011 Monetary Conditions

Money supply in October was a little schizophrenic – M1 growth rose sharply from higher demand deposits, but M2 growth dropped from lower FDs (log annual and monthly changes; seasonally adjusted):

The Pros And Cons Of Privitisation

In the latest issue of the IMF’s Finance and Development magazine, John Quiggan (author of Zombie Economics) takes through the arguments for and against privitisation (excerpt):

To Sell or Not

...Although the push for privatization took different forms in different parts of the world, it was part of a broader movement aimed at reducing the role of government in the economy and at increasing reliance on markets and prices. In particular, the movement toward privatization reflected the presumed superiority of financial markets over governments in allocating capital...

Taxing The 1%

One of the stylised facts of the past quarter of a century is that there has been a general increase in the share of the income going to the top 1% of the population globally. Part of that has been blamed on a move towards lower top marginal income tax rates. The political rationale, exemplified by the Laffer curve, has been that lower tax rates stimulates economic activity and investment, thus raising economic growth and tax revenues.

That this didn’t quite happen should be quite evident.

Anatomy Of A Recession

What causes a recession? Sometimes it’s overinvestment, other times its debt burdened households.

And sometimes, it’s just simple uncertainty (excerpt; emphasis added):

Insight: In euro zone crisis, companies plan for the unthinkable

(Reuters) - When Novo Nordisk's chief financial officer met marketing colleagues last Friday the conversation moved far beyond the usual discussion of sales and performance. Jesper Brandgaard asked a simple, far-reaching question: how would the firm set prices for two pivotal new insulin products if the euro collapsed?...

BNM and MAS: The Ties That Bind

Bank Negara and the Monetary Authority of Singapore have just signed an agreement:

Memorandum of Understanding between Bank Negara Malaysia and the Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) and Bank Negara Malaysia (BNM) jointly announced today the signing of a Memorandum of Understanding (MoU) to establish a cross-border collateral arrangement aimed at enhancing liquidity facilities to financial institutions in both countries...

Analysing The ECB: The Costs And Benefits Of Inaction

Watching the slow-motion train wreck that is the Eurozone debt crisis, it’s hard for anybody trained in finance or economics to grasp just why the ECB is refusing to act more decisively.

As the Eurozone’s central bank and the only one with the authority to print Euros, only the ECB has the ability to offer unlimited support for indebted governments. Granted that there is a huge pitfall in engendering future moral hazard, but that’s already being handled on the political front via stronger debt rules. The tail risk of inaction is a collapse of the Euro itself.

But the ECB appears to discount that risk:

ECB stance on bond buys to pay off

TOKYO: The European Central Bank's (ECB) refusal to engage in large-scale purchases of the region's sovereign debt will eventually be rewarded as this will preserve price stability and protect the value of the euro over the long term, governing council member Christian Noyer said yesterday.

The Inflation Fallacy: Nick Rowe Explains What I Couldn’t

I’ve been bothered for years by my inability to understand just why inflation is bad. You’re now going to say, “it’s easy you dunce, inflation reduces your purchasing power!!”

But that’s not quite true – in aggregate, that simply doesn’t happen. In accounting terms, income always equals consumption and savings. There’s an element of wealth and income transfer involved between individual agents certainly, but add it all up and inflation only raises the money value of both sides of that equality.

Economic Analysis That Doesn’t Add Up

I don’t know who Baradan Kuppusamy is and I don’t want to give him any more exposure than necessary, but this article he wrote had me laughing (excerpt):

Economic policies that do not add up
Analysis
By Baradan Kuppusamy

The lack of economic expertise in Pakatan Rakyat underlines the many difficulties the Opposition would encounter if it captures Putrajaya.

WHILE Pakatan Rakyat has been quick to capitalise on Barisan Nasional's political setbacks like the current controversy over the National Feedlot Corporation, it is weak in its economic policy formulation, and one reason is the lack of qualified economists.

This shortcoming would weigh heavily on the coalition if it were ever to capture Putrajaya.

October 2011 CPI: Mixed Bag

Wednesday’s CPI report shows core inflation finally – finally! – pulling back (log annual and monthly changes; 2000=100):

It’s still at a dangerously high rate of increase though at 2.4% in log annual terms, but month on month, prices dropped slightly.

September 2011 Employment: Unemployment Ticking Up

After the employment losses of August, the labour market rebounded slightly in September, adding a marginal 7k jobs (‘000):

Crime, Income Inequality, And The Economy: It’s All Related

In the mailbox today (abstract):

Skill-biased Technological Change, Earnings of Unskilled Workers, and Crime
Naci H. Mocan, Bulent Unel

This paper investigates the impact of unskilled workers' earnings on crime. Following the literature on wage inequality and skill-biased technological change, we employ CPS data to create state-year as well as state-year-and (broad) industry specific measures of skill-biased technological change, which are then used as instruments for unskilled workers' earnings in crime regressions. Regressions that employ state panels reveal that technology-induced variations in unskilled workers' earnings impact property crime with an elasticity of -1, but that wages have no impact on violent crime. The paper also estimates, for the first time in this literature, structural crime equations using micro panel data from NLSY97 and instrumenting real wages of young workers. Using state-year-industry specific technology shocks as instruments yields elasticities that are in the neighborhood of -2 for most types of crime, which is markedly larger than previous estimates. In both data sets there is evidence for asymmetric impact of unskilled workers' earnings on crime. A decline in earnings has a larger effect on crime in comparison to an increase in earnings by the same absolute value.

It’s A Woman’s World

From this weekend’s news (excerpt):

Why it pays to invest like a woman

DID you ever think testosterone could be a setback in successful investing, risk taking and trading among other aspects? According to a recent research, apparently too much of it is detrimental.

A man with an inlfated [sic] ego who asserts his alpha male dominance isn't a fantastic trader or investor.

The Motley Fool's Louann Lofton who authored the book: Warren Buffett Invests Like A Girl And Why You Should, Too, pointed out that psychologists and scientists concurred that women have the right temperament to help them achieve long-term success in the market.

BNM Clampdown

I've just had an accident with my laptop - involving a full mug of tea - so I might be offline for a while until I can resolve the problem.
In the meantime, along with the GDP report last week, BNM made two announcements. The first one deals with regional financial integration (excerpt):

Broadening Regional Financial Collaboration

Bank Negara Malaysia will be expanding the list of eligible collateral following greater regional financial integration. This is aimed at enhancing the liquidity management framework. This is in line with the growing significance of regionally active financial institutions which have intensified the financial inter-linkages between economies, particularly in trade, investment and financial services.

In essence, what it means is that BNM is laying the groundwork for financial settlement of cross-border transactions in anything other than US dollars, to go along with the existing swap line arrangements between the region's central banks. Since this means that intraregional trade need not be denominated in US dollars (which requires US dollar liquidity domestically), it also lessens the necessity for keeping excessive US dollar reserves. Malaysia's direct trade with the US is just 10% of total trade, whereas regional trade ex-Japan is at nearly 60%. Recall that the recession of 2008-2009 in Malaysia wasn't really a factor of a drop in real external demand, but a serious drop in US dollar liquidity from flight to safety and a sharp drop in trust within correspondant banking networks.

3Q 2011 GDP: Beating Estimates

Despite a lot of evidence, seems nobody could quite believe that Malaysia’s economy could keep growing – the consensus growth forecast for 3Q2011 was just 4.8%. Consider this some proof that there’s some fire with that smoke (log annual changes; log quarterly changes, seasonally adjusted and annualised):

The Law Of Unintended Consequences

Stephen Gordon talks about fighting inequality in Canada (excerpt):

No, we really don't want to reduce inequality

A few weeks ago, Mike Moffatt wrote an op-ed that ran in the Ottawa Citizen and several other PostMedia papers to the effect that there simply isn't the will on the part of 99% of the population to do much about inequality: if there were, there'd be more popular support for the sort of tax-and-redistribution measures that would actually be effective in reducing inequality. Instead, we get stuff like this:

Ontario’s two opposition parties appear ready to unite to hand the McGuinty Liberals an embarrassing blow just days into a new session.

Progressive Conservative leader Tim Hudak said his party will support an NDP proposal to take 8% off the harmonized sales tax (HST) on home heating bills.

A FAQ On Malaysian Government Debt: Part III

[Since there’s a request for a simpler, more understandable version of the last two posts, this is the condensed version, with answers in two paragraphs or less. The full FAQ can be accessed here]

A FAQ On Malaysian Government Debt: Part II

[Click here for Part I, here for the full FAQ, and here for the condensed version]

Q4. All this increase in debt will be a burden on our children and our children’s children

A. This is based on the idea that debt has to be repaid eventually, and the main source of government income is taxation – basically a corollary of the idea that a government is similar to a household. Hence, in this view, the greater the debt build-up the greater the expected future level of taxation. The popular notion is thus that of the current generation borrowing from future generations.

There’s a problem with this conception. First, since governments are collective enterprises on behalf of the governed, there’s no natural lifespan involved. There’s no necessity for debt to be fully paid off and it can be effectively carried in perpetuity. Some governments have actually taken advantage of this fact to issue perpetual bonds that never mature, and at least one major government has issued a 999 year bond.

A FAQ On Malaysian Government Debt: Part I

[Click here for Part II, here for the full FAQ, and here for the condensed version]

There’s a lot of misconceptions and misunderstandings regarding the level and sustainability of government debt, which has been seriously skewing the public discourse not just about Europe and the US but here as well. [For examples, here, here, here, here and here].

Rather than arguing the points one by one, I’m putting up this FAQ as a central reference point, with some faint hopes that we might move on to a better informed debate about the issue. It’ll be available as a permanent page (see the menu on the top right of every page on this blog), and I’ll update it from time to time. The focus will be on the Malaysian situation, but some of the general principles are applicable elsewhere as well.

Mundell-Fleming In Action: The Trilemma Facing China And India

In two seminal papers, Nobel Laureate Robert Mundell and Marcus Fleming extended the basic Hicks IS-LM model to incorporate an external sector. The most interesting finding is what’s called the Trilemma – a country cannot simultaneously have exchange rate stability, free capital mobility and an independent monetary policy. You can at best target two of these variables, with the third left to market forces. Trying to achieve all three is effectively impossible, as it sets up inconsistencies in the economy that can and will be exploited by economic agents (read: financial markets).

That’s the real basis for the 1997-98 Asian Financial Crisis a decade ago – you can’t have your cake and eat it too. Most of the crisis victims opted for dropping exchange rate stability; Malaysia famously choose to drop capital mobility, then in 2005 followed the others towards exchange rate flexibility as well.

However, there’s nuances to the stark choices implied by Mundell-Fleming. In this new paper highlighted at VoxEU, the Trilemma choices are evaluated for China and India (excerpt; emphasis added):

The financial trilemma in China and a comparative analysis with India
Joshua Aizenman Rajeswari Sengupta

Emerging markets face what some economists are calling a trilemma. They cannot simultaneously target exchange-rate stability, conduct an independent monetary policy, and have full financial integration. So what to do? This column looks at how Asia’s giants are responding – and in different ways...

Credit Card Woes?

Beginning next year, those earning less than RM3000 a month will have their access to easy credit card debt cut (excerpt):

Bank Negara to enforce limit on credit cards starting Jan 1

KUALA LUMPUR: Bank Negara has issued a new ruling to control and manage the debt of credit cardholders earning RM36,000 and below per annum.

The maximum credit limit extended to a principal cardholder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer.

To further restrict their spending, they will only be allowed to be a principal cardholder from a maximum of two credit card issuers.

Mark Thoma On Economists and The Future Of Economic Models

He’s responding to a Roger Martin essay (which you can read here) (excerpt):

Should economists be “imagineers” of our future?
By Mark Thoma

...I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem...

...This year’s Nobel prize award to Thomas Sargent and the previous award to Robert Lucas were partly in recognition of their development of the tools and techniques that economists need to go beyond simply trying to extrapolate the future from the past, a procedure that can lead forecasters astray…

…people change their behavior in response to changes in the conditions they face. And this is one of the things that separate what researchers in the hard sciences do from the work of economists…

We Are The 1%

Two different perspectives on income inequality – from the other side. First Greg Mankiw:

The Rich Get Poorer
Greg Mankiw

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

The Determinants of Saving

In my inbox today, from the NBER (abstract):

The Determinants and Long-term Projections of Saving Rates in Developing Asia
Charles Yuji Horioka, Akiko Terada-Hagiwara

In this paper, we present data on trends over time in domestic saving rates in twelve economies in developing Asia during the 1966-2007 period and analyze the determinants of these trends. We find that domestic saving rates in developing Asia have, in general, been high and rising but that there have been substantial differences from economy to economy and that the main determinants of these trends appear to have been the age structure of the population (especially the aged dependency ratio), income levels, and the level of financial sector development. We then project future trends in domestic saving rates in developing Asia for the 2011-2030 period based on our estimation results and find that the domestic saving rate in developing Asia as a whole will remain roughly constant during the next two decades despite rapid population aging in some economies in developing Asia because population aging will occur much later in other economies and because the negative impact of population aging on the domestic saving rate will be largely offset by the positive impact of higher income levels.

Productivity and Capital Intensity

I’m almost all the way back – I spent very nearly the whole weekend redoing my whole computer setup, and its very nearly done. It’ll still be a while before I’m posting regularly though, and there’s a lot to catch up on.

In the meantime, here’s a graph to chew on – capital intensity in Malaysia (RM millions per worker):

One of the concerns continually raised over the years has been the level of productivity and value added in Malaysian industry. The above graph is derived from the new capital stock estimates released by the Department of Statistics and labour force data.

Monetary Policy On Hold: No Surprise

The Committee’s looking forward, not back (excerpt):

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.

Latest indicators suggest that the global growth momentum has moderated in recent months…

…The domestic economy improved in the third quarter, due primarily to stronger domestic demand…Looking ahead, the weaker external environment could, however, impact the overall growth prospects…

BNM Watch: Last MPC Meeting Of The Year

I don’t think anybody’s thinking will have changed with the stronger numbers coming out in the last couple of months. The almost unanimous consensus is that the Monetary Policy Committee will maintain the Official Policy Rate at 3.00% in their meeting today, and I can’t really disagree, even if I think core inflation is too high and credit expansion a little too frothy.

The main consideration will continue to be sustaining economic growth, and the deteriorating outlook for Europe and slowing growth in China and India may weigh down any hawks on the committee. The US and Malaysia’s other trading partners look better, but output expansion in these regions aren’t going to break any records soon.

Nor do I think there will be much chance for a rate cut either, as the outlook isn’t that bad yet and the selldown in the Ringgit over the past three months with little central bank intervention represents a de facto policy easing all on its own, even if BNM sticks to its interest rate target.

So I’m not looking for any surprises today.

September 2011 Industrial Production: Turning Up

Yesterday’s IPI report shows some momentum building in the Malaysian economy as growth carried over from August (log annual and monthly changes; seasonally adjusted; 2000=100):

Europe In Crisis

I'm back from my trip to Singapore, but I'll be mostly offline today as I'm breaking in a new laptop.

In the meantime, just some quick impressions from yesterday: I attended a briefing by Capital Economics, a private economic research house on the topic of the global sovereign debt crisis - very appropriate under the circumstances. No really big surprises in their presentation, though they've been notably more pessimistic than the consensus. They don't believe the Euro will survive in its present form for much longer, and while the US looks better, the long term liabilities from a dysfunctional healthcare system presents a long term threat to fiscal stability. Emerging markets are in a much better position, with any fallout from a disorderly disintegration of the Eurozone falling mainly on Emerging Europe.

Selamat Hari Raya Eid el Adha

For all Muslims and Muslimah, Eid Mubarak. And for everyone else, have a safe holiday.

I’ll be travelling until Wednesday, so there won’t be any posts until after that.

September 2011 External Trade

September is one of those rare months when the numbers hit my forecast almost exactly, so forgive me for crowing a bit (log annual and monthly changes; seasonally adjusted):

Not that its much comfort – export growth was as flat as an iPad2. If there is anything more to be positive about, it’s that E&E exports might be turning the corner (log annual and monthly changes; seasonally adjusted):

Weekend Reading: Dani Rodrik On The Influence Of Milton Friedman

Harvard professor, free market sceptic and mixed economy evangelist Dani Rodrik on Uncle Milt (excerpt):

Milton Friedman’s Magical Thinking
Dani Rodrik

CAMBRIDGE – Next year will mark the 100th anniversary of Milton Friedman’s birth. Friedman was one of the twentieth century’s leading economists, a Nobel Prize winner who made notable contributions to monetary policy and consumption theory. But he will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century, and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980...

...But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.

Morgan Stanley On China and India

This commentary’s unusually long, but if you’re interested in the short to medium term economic prospects for both countries, it’s a must read (excerpt):

Asia Insight: Why China Needs Consumption and India Needs Investment

In the immediate aftermath of the 2008-09 credit crisis, China and India adopted an easy approach of aggressively boosting domestic demand largely via credit and fiscal expansion. China's policy measures were biased towards boosting investment, which lifted investment/GDP from 41.7% of GDP in 2007 to 48.6% in 2010. India's measures were biased towards boosting consumption and did not focus on generating new productive capacity.

The aggressive policy push to domestic demand in the region, particularly in China and India, lacked the productivity dynamic of private sector-led growth, leading to a swift return of the inflation problem and questions over asset quality in the banking system. As we enter another phase of global growth slowdown, we believe the time has come for policy-makers to accelerate policy measures to make the transition towards boosting growth on a sustainable basis…

There's acknowledgement of demographic pressures - something often lacking in other economic commentary - as well as policy challenges in restructuring China's and India's economies. Both are suffering from moderately high inflation, with somewhat higher inflation in India. Both economies also have huge potential, with large populations and economies still transitioning towards full industrialisation. The future of Asia will revolve around developments in these two giants.

One Step Back, One Step Forward

The European Central Bank has institutional schizophrenia (excerpt):

ECB Unexpectedly Cuts Rate as Draghi Rules Out Debt Backstop

Nov. 3 (Bloomberg) -- The European Central Bank unexpectedly cut interest rates at Mario Draghi’s first meeting in charge even as the new president signaled no plans to backstop the region’s most vulnerable nations as the escalating debt crisis threatens to splinter the euro region.

“What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?” Draghi asked reporters in Frankfurt today. “That is not really in the remit of the ECB. The remit of the ECB is maintaining price stability in the medium term.”

The Future of Banking

VoxEU has a new compilation of the latest European thinking on  reforming finance. While a lot of it is in EconoEnglish, I think many will find some sympathy with the ideas and issues being addressed. For example, since in a crisis the importance of finance to the economy means that banks will be bailed out or at least debt will be worked out, there is a socialisation of losses but gains will be private in more normal times. In other words, there is a negative externality involved in banking, which is not fully reflected in its pricing, the pursuit of gain or risk taking, or in its distribution of profits.

These and more issues are discussed, so if you’re willing to wade through some of the jargon, the e-book is still a worthwhile read.

Technical Notes:

Beck, Thorsten ed., “The Future of Banking”, Centre for Economic Policy Research, October 2011

National Bankruptcy In The News Again

I’m somewhat bemused by the how this whole thing got brought up again. It started with an innocent question from the floor about last year’s imbroglio over Idris Jala’s prediction that the government would go bankrupt if subsidies were not rolled back. Of course, given the subject matter, it’s no surprise the media went with the story.

Now whole thing has just reared its ugly head again (here’s bro satD’s reaction). Quite frankly it was a dumb idea to sell the public on subsidy rationalisation on the basis of public finances – because all it did was focus the attention on public finances (e.g. this reaction from the FM2), and not on the desirability of reducing subsidies as an argument on its own. Admittedly that’s a tougher sell, but still the correct one.

Honestly, the government’s finances are just fine, thank you. Now can we get back to discussing more important matters, such as what they’re spending the money on?

Economic Transformation Programme: One Year On

So, I was sitting in the audience yesterday, with some mixed feelings. On the one hand I’m troubled by the flaws in the worldview presented as its raison d'etre. And on the other, I’m truly fascinated in this experiment in public policy implementation – perhaps the best example of its kind in the world, or even the only one of its kind. It serves a big purpose in terms of changing the psychology of citizens, businesses and consumers regarding Malaysia’s prospects. All that investment is nice, too, and Idris Jala is as ever an engaging speaker.

September 2011 Monetary Conditions

Malaysian money supply growth accelerated through the quarter ended September, helped by a nice dose of extra fixed deposits and forex deposits (log annual and monthly changes; seasonally adjusted):

DeLong On The ECB

J Bradford DeLong on Project Syndicate (excerpt):

The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

ETP Is One Year Old

Pemandu will be commemorating the 1st anniversary of the launching of the Economic Transformation Plan today at the Sime Darby Convention Centre in Bukit Kiara:

There will be a live feed of the proceedings, which can be viewed on the ETP blog from 3.00pm onwards.

Income Inequality and Economic Mobility

Mark Thoma of Economist’s View writes in the Fiscal Times (excerpt):

Income Inequality Is Hobbling the Middle Class

Income inequality in the U.S. has been rising for the last several decades, and with it concern about the consequences. For example, to what extent does the large flow of income into the hands of financial executives give them the power to influence Congress through campaign donations? How does this have an impact on the willingness of legislators to impose regulations that would stabilize the financial system but inhibit the ability of the financial industry to make the huge profits that fund political campaigns?

If economic mobility increased along with the increase in inequality, then this would at least partially offset the worries associated with the rising concentration of income...

Happy Deepavali

There might not be any posts until next week as I’ll be teaching on Thursday and Friday.

In the meantime, have a Happy Deepavali, and a safe holiday.

Income Inequality Globally

This Bloomberg/Businessweek  article points to a site I’d never come across before – but it’s going to be bookmarked permanently! Malaysia’s not included yet, but the work is in progress.

Click the link to find out what I mean.

Things Are Not As Bad As They Seem

I’m fairly certain that things picked up in Malaysia during the third quarter of this year – we’ll know better in about three weeks time, when the GDP data comes out.

In the meantime, despite Congressional paralysis and the simmering crisis in Europe, it looks like the US won’t be at risk of recession anytime soon (excerpt):

GDP Probably Picked Up in Third Quarter: U.S. Economy Preview

Oct. 23 (Bloomberg) -- The U.S. economy probably grew in the third quarter at the fastest pace this year, easing anxiety that the recovery was on the verge of stalling, economists said before a report this week.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of 68 economists surveyed by Bloomberg News before the Commerce Department’s Oct. 27 release. Orders for business equipment rose in September and new-home sales stabilized, other data may show.

Homeownership: Good Or Bad?

Hafiz Noor Shams on the government’s drive for greater homeownership (excerpt):

Homeownership isn’t the only way

OCT 24 — It is not a crime to dream of a place to call one’s own. It is hard to beat having a roof none can take away in the worst of times. If anything happens, at least there is a home to run to. It is a comforting feeling to have a haven. That is the sort of sentiment fuelling the dream of homeownership. So pervasive is the thought that the inability to own one is seen as a problem by many.

…It is no different in Malaysia. Homeownership occupies the collective mind. The high prices of ordinary homes stand as a barrier. That barrier is stirring up discontent among the middle class and down.

The Malaysian government knows this and it has introduced various incentives to make homeownership a cheaper endeavour for Malaysians.

Good Analysis: Lousy Recommendation

Kapil Sethi on Budget 2012 (excerpt):

A fool’s paradise?

OCT 24 — Spot on! Screamed out page after page in The Star the day after the Budget 2012 announcement by the prime minister. Barisan Nasional was at pains to paint it as a caring budget which emphasised its concern for the underprivileged through a number of cash handouts and maintenance of subsidies across the board.

But how quickly times change. Within a week, even The Star was forced to concede that a number of economists thought the growth forecast of 5 per cent to 5.5 per cent for 2012 was somewhat optimistic, without which premise the entire fiscal deficit reduction claim would appear to be a pipe dream…

The Chicken Is Coming Home To Roost: Healthcare Costs

This isn’t going to be part of the social consciousness for a good few years yet, but credit where its due, the government is already thinking about it:

A strain on the pocket

Healthcare cost is expected to escalate in line with the rising cost of living and the Health Ministry is taking steps to raise public awareness on non-communicable diseases.

OF late, the Health Ministry has been raising public awareness on non-communicable diseases (NCD) chronic respiratory diseases, heart diseases, cancer and diabetes…

…Recent statistics already show that 60% of premature deaths (below 60 years) in Malaysia were caused by NCD, he has said.

The focus is warranted not only because of the need to keep the population healthy and productive but also to keep healthcare cost, which is expected to escalate in line with the rising cost of living, manageable…

A Critique Of Modern Central Banking

Manoj Pradhan of Morgan Stanley muses over monetary policy strategy in the developed world (excerpt):

Is Modern Central Banking Ancient History?
By Manoj Pradhan | London

Two of the three principles of modern central banking were designed for a regime that developed economies will not see for the foreseeable future. The principles - (i) inflation targeting improves growth prospects in the medium run; (ii) inflation targeting effectively means inflation forecast targeting; and (iii) a ‘conservative' central banker (i.e., one who dislikes inflation more than the average economic agent) can deliver lower and less volatile inflation - are almost unquestioned among the central banking orthodoxy. However, these principles were espoused in an era of low debt when monetary policy was the dominant force. In the era we now live in, where debt, deficits and deleveraging (a DDD regime) are the dominant drivers of the economy and policy - an era of so-called ‘fiscal dominance' - the first and the last tenets can cause more harm than good. Inflation targeting and an aggressive approach to taming inflation in such times can create more volatile inflation and higher sovereign risks.

August 2011 Employment Report:

The employment report issued yesterday show the economy losing about 87k jobs in August:

That’s ok, because according to the report, 75k people left the labour force at the same time. It should be understood that we’re looking at a pretty strong seasonal effect here, due to Ramadhan – the same pattern consistently repeats over the past 2 years that we have data for.

September 2011 CPI: No Relief

Yesterday’s inflation report from the Department of Statistics shows inflation remaining at an elevated level (log annual and monthly changes; 2000=100):

Explaining Europe

Ryan Avent of The Economist magazine manages to explain the whole Eurozone problem in one paragraph, and the solutions in the next:

Why not blame Germany?

...The crisis in the euro zone is not mysterious. People are proposing lots of different solutions to the problems because they're trying to hit on the magical combination of policies that will win political support from key players—notably the German government. But we know what the matter is. Many members have too much debt. Prior to the crisis, all euro-zone countries were able to borrow on terms which suggested that markets believed the full faith of the euro zone as a whole to be behind individual members, and some governments borrowed too much. After the crisis, markets weren't so sure about what the full faith of the euro zone meant, and spreads between the bonds of different euro-zone governments diverged. For the past year and a half, some euro-zone economies have struggled to make their way out of trouble within the confines of the union: without the ability to depreciate their currencies or set an independent monetary policy. The austerity adopted to try and balance budgets gutted internal demand, leaving those struggling economies dependent on external demand for growth. But where an independent currency would have fallen to help markets clear, euro-zone members were forced to make their adjustment through declines in nominal wages—a difficult and painful process even in countries like Ireland, which have very flexible labour markets. Other euro-zone governments have offered enough help to prevent an implosion of the financial system, but not enough to do much about massive unemployment problems in places like Spain and Greece. Without growth, closing budgets through austerity is like trying to climb a falling ladder...

The Argument For Taxing Energy

N. Gregory Mankiw points us to this article by Yale Professor William Nordhaus:

Energy: Friend or Enemy?
William D. Nordhaus

...The two faces of energy are the primary reason why energy policy is so controversial and tangled. We need national policies that address the enemies of pollution and global warming. But because energy is such a large part of consumer budgets and so central to our advanced economies, people are reluctant to allow energy prices to reflect the true social costs of energy consumption. We see this tradeoff play out in energy and environmental policy year in and year out...

...An externality is an activity that imposes uncompensated costs on other people. Externalities from energy use include the deadly air pollution emitted by cars and power plants, oil spills, radioactive emissions from nuclear power plants, sludge from coal mines, and congestion from overloaded streets and highways. More recently, scientists have focused on greenhouse gas emissions, such as the carbon dioxide that comes from burning fossil fuels, as a particularly dangerous externality...

The Lifetime Value Of Education: The Argument Against Vocational Education

As much as I try to be objective in what I write and in what I cover, that’s obviously impossible – we’re all human, and we all have our own particular philosophical and ideological blinders. But the effort is worth making consciously, if only to measure your own opinions against other potentially valid perspectives.

In this vein, here’s a solid piece of work that provides evidence that vocational education actually reduces individual lifetime incomes (from the introduction; emphasis added):

General Education, Vocational Education, And Labor-Market Outcomes Over The Life-Cycle
Eric A. Hanushek Ludger Woessmann Lei Zhang

...This study takes a broader perspective on vocational education programs. In contrast to previous research that has focused almost entirely on the school-to-work transition of youth, this paper studies the difference in life-cycle work experience – employment, wages, and career-related training – between individuals receiving vocational and general education.

These differing perspectives suggest a possible trade-off between short-term and long- term costs and benefits for both individuals and the entire society: The skills generated by vocational education may facilitate the transition into the labor market but may later on become obsolete at a faster rate. Our main hypothesis is thus that any initial labor-market advantage of vocational relative to general education decreases with age...If there is rapid technological and structural change, what does this mean for hiring workers with vocational and general education?

Expected Versus Actual Democracy

Greg, you’re going love this. From VoxEU (excerpt):

The Democratic Transition
Fabrice Murtin Romain Wacziarg

As witnessed during this year’s Arab Spring, democracy doesn’t always emerge smoothly. This column examines the long march toward political freedom since 1800. It argues that while both income and education affect democracy, the rise in primary education has been the main driver of democratisation over 1870-2000.

Throughout history the march toward political freedom has not been a smooth process. It has happened in fits and starts, in waves, and was often reversed or interrupted. The collapse of several Middle Eastern authoritarian regimes in the wake of this year’s Arab Spring illustrates the point clearly...

...Whether democracy affects education and income or whether the causality runs the other way is the key source of disagreement in this debate. Studies examining the consequences of democratisation uncovered mixed results...

Productivity Growing; Wages, Not So Much

From yesterday’s news (excerpt):

M'sia on track for 4.7% labour productivity growth

PETALING JAYA: Malaysia is on track to achieve the target of 4.7 per cent growth in labour productivity this year, said International Trade and Industry Deputy Minister Datuk Mukhriz Mahathir.

He said Malaysia's productivity level or output per employee last year at US$13,577 was 3.3 times higher than China's and 4.7 times higher than Indonesia's.

"However, comparisons with the productivity levels of more advanced countries in the region such as Korea at US$33,628 and Singapore at US$54,556 confirm that there is still room for improvement," he told reporters today after officiating the Productivity & Innovation

Conference and Exposition 2011 here today. Mukhriz said Malaysia needs to benchmark its productivity level against countries like Korea and Singapore which are doing better, adding this is where the focus on productivity and innovation comes to play…

Doing Business Malaysian Style

The World Bank and the International Finance Corporation released their 2012 Doing Business Index yesterday. Malaysia climbed five spots to 18th (excerpt; emphasis added):

Malaysia up five notches in World Bank ranking

PETALING JAYA: Malaysia has jumped five notches to 18th place in the World Bank's Doing Business 2012 Report, placing it ahead of the economies of developed countries like Germany, Japan, Switzerland and Belgium.

The report highlighted Malaysia's steps in introducing electronic filing in courts, setting up specialised civil and commercial courts in Kuala Lumpur and creating a one-stop centre for business start-ups by merging company, tax, social security and employment fund registrations.

Beyond GDP: Part III

I wrote a couple of posts a year ago on this subject (here and here) that you might want to read first. Now a year later, the whole idea of what constitutes human happiness and what economics and governments can do about it are in the news again. This from The Economist magazine (excerpt):

The joyless or the jobless
Should governments pursue happiness rather than economic growth?

IN 2006 Richard Layard, an economist at the London School of Economics, argued that unhappiness was a bigger social problem in Britain than unemployment. In the “Depression Report”, which he co-wrote, Lord Layard pointed out that more people were claiming incapacity benefits because of depression and other mental disorders than were on the dole…

…This month David Cameron, Britain’s prime minister, asked the Office of National Statistics to measure the country’s “general well-being”, as part of his promise to focus on GWB not just GDP.

Education Reform: Warning, Patience Required

*Sigh*:

DPM: First report on education system review by year-end

PUTRAJAYA: The first report on the review process of Malaysia's existing education system is expected to be ready by year-end, said Deputy Prime Minister Tan Sri Muhyiddin Yassin.

He said the report will be submitted to the Cabinet, which will study and endorse a special team to look into the whole process, including implementation of the country's education policies.

"We will look at what we have been doing so far in terms of implementing our education policies and what needs to be done looking forward for the next 10 to 20 years. But this will take time," Muhyiddin said.

Let me get this straight: this will be the report that will then be used to form a new team to prepare another report on what should be done.

Jeff Frankel On The Renminbi’s Prospects As A Reserve Currency

He doesn’t think the conditions are there yet (excerpt):

The Rise of the Renminbi as International Currency: Historical Precedents

…Some are now claiming that the renminbi could overtake the dollar for the number one slot in the international currency rankings within a decade (especially Subramanian 2011a, p.19; 2011b). The basis of this prediction is, first, the likelihood that the Chinese economy will surpass the US economy in size and, second, the historical precedent when the dollar overtook the pound sterling as the number one international currency during the period after World War I...

Women Teachers = Dropout Male Students?

I love American Football. There I’ve said it. And one of my favourite columnists covering the game is Gregg Easterbrook, who’s main identity is as a serious journalist and political commentator. During the season though, he covers the NFL in a highly unusual style, mixing football commentary with mostly tongue-in-cheek observations on politics, economics, arts and sciences.

The reason I’m bringing this up is last week’s “digression” involved a familiar issue to Malaysians – the gender imbalance in tertiary universities. Gregg’s half-serious suggestion was that the increasing popularity of football in the United States was increasing long term brain damage among young males. The emailed replies to that suggestion are worth repeating here (excerpt; emphasis added):

State By State GDP: 2010 [Updated]

[UPDATE: The original charts didn’t come out as large as they should have. I’ve amended the pics so they’ll come out bigger now. Just click on the pics to get the larger chart.]

The numbers for state GDP for 2008-2010 have been released by the Department of Statistics. We’ve now got about 6 years worth of data (2005-2010), which gives you a better sense of where each state stands.

I’ve summarised the data in three charts (click on the charts to look at a bigger version). The following are the levels (real GDP; RM millions; 2000=100):

PR1MA: This Isn’t Optimal Policy

I have a feeling I’m going to get a few brickbats for this post. From this weekend’s news:

Over 7,000 hopefuls apply for homes under PR1MA project

PUTRAJAYA: More than 7,000 people have applied for the 560 units of affordable homes under the first phase of the 1Malaysia Housing Programme (PR1MA) project.

With the demand 13 times more than the supply, the corporation will select the successful applicants through balloting.

The balloting will be carried out tomorrow, witnessed by Prime Minister Datuk Seri Najib Tun Razak and audited by KPMG Business Advisory Sdn Bhd.

PR1MA chief executive officer Datuk Abdul Mutalib Alias said more than 5,900 of the applicants – or 84% – are first-time house buyers...

IMF Talks Inequality Again

It’s not really their role, but the IMF is shadowing the World Bank’s renewed emphasis on “inclusive growth”:

The Other Rebalancing: Asia’s Quest for Inclusive Growth
By Anoop Singh

For the past two or three decades, rising inequality—inequality of incomes, of economic outcomes and of economic opportunities—has taken a back seat to the goal of boosting overall growth. But growing discontent with the fallout of the global financial crisis has put inequality back on top of the policy agenda. While the symptoms may be different, tackling inequality is no less an issue in Asia.

Indeed, research shows that inequality can be counterproductive to sustaining longer-term growth. So, in increasingly turbulent global economic times, this gives added importance to promoting shared—or inclusive—growth in Asia that is more likely to be sustained...

Budget 2012: Some Simple Debt Math

From a little mole:

Malaysia Is On Course To Breach The National Debt Limit
By Anwar Ibrahim

…Dato’ Seri Najib should also share the widespread sentiment of concerns over the rising level of national debt, instead of making a mockery of it through BN controlled media.

The national debt level is governed by various acts of parliament that impose a debt ceiling for the government. In accordance with Act 637 Loan (Local) Act 1959 (revised 2004) and Act 275 Government Investment Act 1983, the combined loans raised locally should not exceed a ceiling of 55% of the nation’s GDP. Act 403 External Loans Act 1963 (revised 1989) limits the external loans exposure to RM35 billion at any particular time.

Why Demographics Matter: Japan’s Lost Decade Was An Illusion

Via Lars Christensen, Daniel Gros points out Japan’s performance over the past two decades hasn’t been as bad as it looks (excerpt):

The Japan Myth

…How should one compare growth records among a group of similar, developed countries? The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita). This last element is important because only the working-age population represents an economy’s productive potential. If two countries achieve the same growth in average WAP income, one should conclude that both have been equally efficient in using their potential, even if their overall GDP growth rates differ.

When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

Budget 2012: Morgan Stanley On The Budget

All you need to know is in the last paragraph:

2012 Budget: Key Takeaways and Thoughts

…Policy measures to jump-start private investment have continued in the 2012 Budget. In our view, however, the key to engineering a sustainable structural inflexion point for Malaysia lies in raising the quality of the labour force either via education or the import of talent. Policy-makers have tried to address this to a certain extent in the 2012 Budget. However, such policy measures are by nature long-gestation and bear results only in the medium term, and we believe that policy-makers will need to sustainably and effectively implement a critical mass of such reforms before results can be reaped.

David Beckworth on Market Monetarism

The recently coined Market Monetarism movement is relatively new. It’s also an oddity because it didn’t come from the traditional way economic schools of thought have grown via research – though its major proponents are mainly academics – but rather from interaction across the economics blogosphere. You might be surprised at the list of prominent economics bloggers who are beginning to lean towards these views.

David Beckworth explains (excerpt):

My Journey Into Market Monetarism

…Now here we are in 2011 and the Fed has yet to, one, correct its passive tightening of the past three years and, two, properly shape aggregate demand expectations by adopting something like a nominal GDP level target. It has been incredibly frustrating to watch the incredible amount of human suffering caused by these monetary policy failures. Consequently, I have been blogging away at these issues along with like-minded folks such as Scott Sumner, Nick Rowe, Bill Woolsey, Josh Hendrickson, Marcus Nunes, Nicklas Blanchard, Kantoos, and David Glasner. We all have been making the case that the prolonged economic slump has been mostly due to passively tightened monetary policy that could easily be loosened, even at the interest rate zero bound.

Wages, Labour and Output

I’ll be off travelling for the next couple of days, so don’t expect any posts until next week at the earliest. I’ll do my best to at least note any newsworthy economic news, but I might be too busy to keep up.

In the meantime, this post should serve to keep people occupied (and probably upset) until I get back.

In economic theory, the production of goods is considered to require a number of inputs including labour, capital and raw materials. Land could be considered as well, but I’m going to lump it under capital, because that’s how the data is categorised.

Under perfect competition and assuming a Cobb-Douglas production function with constant returns to scale, each input “earns” the value of the effort/cost that goes into making something. In other words, if labour contributes some portion of the value that goes into each product, its share of the revenue earned should be in proportion to that contribution. In technical terms, labour is supposed to earn its marginal product, and capital and the other inputs their marginal product.

In English: if output per worker increases, wages per worker should increase by the same ratio.

2011 Nobel Prize in Economics

…goes to Thomas Sargent and Chris Sims (excerpt):

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2011

Press Release
10 October 2011

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to

Thomas J. Sargent
New York University, New York, NY, USA

and

Christopher A. Sims
Princeton University, Princeton, NJ, USA

"for their empirical research on cause and effect in the macroeconomy"

August 2011 Industrial Production: Did Najib Know Something We Didn’t?

Today’s industrial production numbers, unlike external trade, shows the economy picked up in August (log annual and monthly changes; seasonally adjusted; 2000=100):

The Effectiveness Of Innovation Policies

One more from today’s mail from the NBER (abstract):

Aggregate Implications of Innovation Policy
Andrew Atkeson, Ariel T. Burstein

We present a tractable model of innovating firms and the aggregate economy that we use to assess the link between the responses of firms to changes in innovation policy and the impact of those policy changes on aggregate output and welfare. We argue that the key theoretical determinant of the relative long-run aggregate impact of alternative policies is their impact on the expected profitability of entering firms. We show that, to a first-order approximation, a wide range of policy changes have a long-run aggregate impact in direct proportion to the fiscal expenditures on those policies, and that to evaluate the aggregate impact of such policy changes, there is no need to calculate changes in firms' decisions in response to these policy changes.

Occupy Wall Street: Mark Thoma Boils It Down

He’s actually commenting on Robert Reich’s commentary (a comm-commentary?), but I thought Prof Thoma’s remarks far more astute:

Reich: The Wall Street Occupiers and the Democratic Party

…Nothing will change until the interests of the powerful are threatened -- they won't give in until populist demands are the lesser of two evils. In the aftermath of the Great Depression, the fear that capitalism would be replaced by something much worse for business contributed to the acquiescence of the powerful to reform that stripped away some of their power and benefited the working class. But what threats do the powerful face now that would cause them to embrace reform as better than the alternative? Is there anything that makes reversing growing inequality, reducing the political power of the wealthy, and changing the view that the system is rigged in favor of the few the best political choice for those who have the most political influence? So far, I don't think there is -- we see pictures on the news of people on Wall Street sipping champagne and enjoying the show with no signs they feel threatened rather than amused -- and there is little sign so far that Democrats believe their reelection chances hinge on embracing this movement...

Revisiting The Dollar Hegemony: Alternative Reserve Currencies Over The Years

In yesterday’s mail from the National Bureau of Economic Research (abstract):

Reserves and Baskets
Michael D. Bordo, Harold James

We discuss three well known plans that were offered in the twentieth century to provide an artificial replacement for gold and key currencies as international reserves: Keynes’ Bancor, the SDR and the Ecu (predecessor to the euro).The latter two of these reserve substitutes were institutionalized but neither replaced the dollar as the principal medium of international reserve.

Despite the brief and dry abstract, the paper itself is a very readable and informative trip down memory lane, outlining the various attempts over the years to find a replacement for the US Dollar’s role as the primary reserve currency in the post-war international monetary system.

Budget 2012: By The Numbers

I’ve always found it useful to dig into the numbers and chart out the evolution of the various components of the budget. It helps enormously in cutting through the rhetoric – actions, after all, speak louder than words (RM billions):

3Q Forex Update

What a difference a few months make. With increasing uncertainty over global growth and the threat of defaults in the Euro area, there’s been a general retreat from emerging market currencies to “safe-haven” currencies such as the Yen, the Swiss Franc and especially the USD.

No surprise then that the trade-weighted indexes have both dropped (index numbers; 2000=100):

August 2011 External Trade: Flat

Almost lost in the shuffle due to the budget announcement on Friday, August’s trade numbers don’t provide much grounds for optimism that GDP growth in the second half would meet the government’s forecasts (log annual and monthly changes; seasonally adjusted):

Budget 2012: Lim Guan Eng Has A Point

The Chief Minister of Penang wants the Budget’s handouts made permanent (excerpt):

Make one-off payments an annual affair, says Lim

GEORGE TOWN: Penang Chief Minister Lim Guan Eng has called on Prime Minister Datuk Seri Najib Tun Razak to make eight “one-off payments” in Budget 2012 an annual affair.

“This is an election Budget. The payments should be given yearly and not once in every five years,” he said…

…Lim said the Budget would result in a higher deficit as the Government's revenue collection would drop by more than RM1bil.

“It is impossible for the deficit to be reduced with dropping commodity prices and lower revenue collection,” he said.

If the intention was truly to reduce the burden of the people because of the higher price level, then unless you expect the price level to fall in absolute terms, these windfalls payments are just a band-aid. The main impetus for inflation – as it has been since 2008 – is in food and in oil & gas. Both item groups have solid fundamental grounds for being higher, with the development of China and India being a primary cause – rising oil intensity and changing diets among a collective population 2.5 billion will do that for you. This would have been true even if peak oil doesn’t happen.

Quick Thoughts On Budget 2012

First – whatever they may say, this feels like an election budget. While it doesn’t feature some of the more desirable aspects of Pakatan’s Alternative Budget (e.g. review of IPP contracts, wider scope for the Competition Act), there’s an awful lot of “handouts”, if you want to call them that.

Book vouchers and abolishment of fees for national and national type schools, the assistance for taxi drivers, free medical care for the elderly, there’s a little bit of something for everyone – at least going by the measures announced in the speech proper. The one-off assistance to low income households is smaller than Pakatan’s proposal (RM500 versus RM1000), but the scope is far wider covering households earning RM3000 or less compared to RM1500 or less. Smokers and drinkers ought to be happy – no increase in sin taxes either.

Economic Report 2011/2012

It’s live here.

Live-blogging Budget 2012

If my internet connection holds up, I’ll be posting updates on the budget during the PM’s speech (yeah I know, I should be on twitter). So stay tuned to this page.

I’ll also be cross-posting to my Facebook page (the link’s on the right), so you might want to follow-up through there.

• 4.00pm Speech has begun
• FDI up 6x in 2010, fastest in ASEAN (but remember it’s coming off a low base)
• Investment expected to increase further in 2012
• GDP RM28,700 per capita income expected for this year
• Private consumption expected to be higher in the second half of the year
• Forecast of GDP growth for this year lowered to 5%-5.5%
• 2012 forecast 5%-6%
• RM232 billion expenditure for 2012
• That’s only a slight increase over this year’s
• Fiscal deficit at 4.4%?
• PFI’s mentioned again
• 5 main focus for this budget
• RM978million for the economic corridors
• Incentives for MNC treasury centres; 70% tax relief for 5 years; reduced withholding tax
• Incentives for KLFID; income tax free for ten years; capital allowances accelerated; 70% income tax relief for the developers
• ETFs to be introduced
• Felda Global Ventures to be listed next year
• Felda settlers to get windfall TBA
• Tax incentives for REITs extended 5 years to 2017
• Entrepreneurs: 2nd chance through SME revitalisation fund RM100 million
• Natural disaster fund for SMEs
• Green technology: full import and excise duty relief for hybrid cars extended to 2013
• tourism - RM472 million for developing Langkawi
• Investment in new 4 and 5 star hotels given pioneer status
• Healthcare Tourism Council to be set up
• RPGT raised 10% for 2 years, 5% for 2-5 years, none after that
• 2012 declared National Innovation Year?
• Various programs to encourage innovation. How effective will this be? Doesn’t sound like much
• RM500 million fund for commercialisation of innovation
• IF YOU WANT TO FOLLOW THE SPEECH LIVE TRY HERE
• RM50.2 billion in total for education
• RM100 million each for C, T, religious schools and MRSM
• Schools fees in the national system abolished!
• tax relief for donations to schools
• Also for all places of worship
• RM100 million fund for opening professional firms in rural areas (4% interest)
• Rural Transformation Program - funding for water electricity and roads
• RM500 million for rural water?
• exit program for underperforming civil servants
• New salary structure: up to 40% for certain grades
• Annual increments to be increased as well
• Pensioners to receive adjustment, and 2% increments to be started in 2013
• Cumpulsory retirement age raised to 60 from 58
• 5000 masters and 500 doctoral scholarships for civil servants taking part time postgraduate education
• One-off payment of RM3000 to 4,300 contract workers
• One-off payment of RM3000 to ex-members of special and auxiliary police, including widows and widowers, covering 62,000 people – ooooh handouts
• Various programs to encourage expansion in domestic food supply – someone thinking long term here
• Really rubbing it in about the level of subsidies RM2.3 billion for food, RM17 billion for petrol and gas, total at RM33.2 billion

Real apologies, but I have to sign off now. I’ve been called for a meeting. With luck I’ll be able to continue or provide a wrap up afterwards!

Thanks for stopping by!

• Woot! I’m back online.
• Housing - My First Home Scheme limit raised from RM220,000 to RM400,000 beginning next year, Pr!MA to construct homes for middle-income level; subsidies under RMR program for low cost housing
• Expats allowed to withdraw from EPF for housing loans
• SARA 1Malaysia program for households under RM3000 per month. Unit trust investment
• Lots of incentives and help for taxi drivers
• Amanah Ikhtiar to provide RM2.1 billion for microfinance; including RM100 million each for Malaysian Chinese and Malaysian Indian entrepreneurs
• Free HPV vaccination (US doesn’t even allow this)
• Senior citizens get free healthcare in public hospitals and 50% discount on monorail and LRT systems
• Employee EPF contribution raised from 12% to 13% (higher labour costs!) for employees earning under RM3000
• RM1 billion for flood mitigation
• Handout time! RM500 for households with monthly income under RM3000 (this is a lot more ambitious than Pakatan’s proposal)
• School assistance of RM100 and RM200 book vouchers
• Civil Service: Bonus of one month at a minimum of RM1000
• Allowances and benefits for MPs to be revised! Even got handouts for Parliament

And that's a wrap. Not too many surprises - seems quite a bit leaked beforehand (e.g. the civil service pay rise), RPGT was lower than expected, and of course, no tax cuts. No mention of GST either. Is this an election budget? Sure seems like one. I'll need to review the numbers first, but there's no breaking the bank here.

Technical Notes:

The budget speech and appendix are available for download.