Friday, May 27, 2011

Labour Markets and the Distribution of Income

People are starting to see one of the weaknesses in the ETP:

A lesson from brain drain’s gain and pain

SUPPLY and demand is the foundation of any market economy. If people want more of a certain goods or service than what is available, then prices will rise.

The opposite happens when there is too much supply, as that will lead to a fall in price.

The same thing is also happening in the labour market. Supply and demand mechanics work the same in that market and like how prices fluctuate according to the pull and push of demand and supply, wages react in the same way.

The thing with brain drain is that people say it is hurting the economy. Yes, it is, but the migration of labour is also a good thing that has happened for workers in the country.

Without it, the supply of skilled workers will be more than it is now. And when there is a lot of something, prices remain sticky to the upside...

Brain Drain Issue Overblown?

I didn’t comment on the World Bank report on the issue of Brain Drain in Malaysia because it didn’t seem necessary. Apart from the weaknesses in the methodology used, it really didn’t say anything more than what most all know or suspect. That brain drain can be a problem everyone knows or think they know, and the causes aren’t all that hard to figure out anyway.

Now here comes a dissenting view from, of all people, a World Bank economist:

Worrying Too Much about Brain Drain?

Brain drain worries policymakers around the world. For example, a search today in Google News gives a host of stories in the past month alone concerning efforts by universities in Vietnam to stop brain drain, demands for wage increases to stop the brain drain of doctors in Pakistan, claims that Malaysia’s brain drain hinders its economic progress, efforts to stem brain drain in Jamaica, a plea to “stop the brain drain” in Cyprus, and even fears of massive brain drain from the state of New York.

But does high-skilled emigration really pose such a threat? The last five years has seen a surge in empirical research on the subject, which John Gibson and I use to answer eight key questions about brain drain in a paper forthcoming in the Journal of Economic Perspectives and now out in the World Bank working paper series...

...Recent evidence should counteract many of the myths and common concerns about brain drain. Brain drain rates are not skyrocketing. Africa is not the most affected region for brain drain; small island states are. Skilled migrants enjoy massive increases in their living standards as a result of emigrating, and skilled migrants end up remitting back as much as the fiscal cost of their absence.

Ultimately then, given the massive individual gains from migration, any belief that brain drain is detrimental for development must rely on large externalities of high-skilled individuals. This is the area where the existing empirical literature is weakest, but the estimates that do exist suggest that the production externalities of brain drain (at the margin at least) are quite small.

The paper suggests then that worries about brain drain are likely to be overblown, but also that there are still large knowledge gaps on certain impacts, and almost no rigorous evidence as to the impacts of policy actions in this area. Given how prevalent brain drain concerns are, there seems to be plenty of fruitful avenues for future research and policy experimentation going forward – with the paper ending with some ideas on directions for these.

So, on the face of it, the loss from brain drain appears small – which is really counterintuitive. Maybe its the global perspective of the paper, which averages over losses to individual countries. The paper does point out some cool data trends that are worth noting – like the ratio of skilled immigration globally hasn’t increased at all, and in fact may have fallen in the past decade.

Technical Notes:

Gibson, John & David McKenzie, "Eight questions about brain drain", The World Bank, Policy Research working paper no. WPS 5668, May 2011

Thursday, May 26, 2011

A Pause In Subsidy Rationalisation

The cabinet’s turned chicken:

RON95, diesel and LPG will not cost more

PUTRAJAYA: Prices of RON95 petrol, diesel and liquefied petroleum gas (LPG) will remain at the present rates for now.

Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Ismail Sabri Yaakob said the decision to maintain the prices was in the interest of the people.

He, however, could not specify how long the current prices would be maintained...

...The decision to keep the current prices would mean that the subsidies borne by the Government will rise from RM8bil to RM18bil this year.

Ismail Sabri said the decision to maintain the prices was reached at a Cabinet meeting…

Wednesday, May 25, 2011

Global Low Wage Growth: Some Evidence

I don’t think I’ll take this as proof positive that labour compensation has lagged productivity globally but Dani Rodrik sends us to an interesting paper from (excerpts from the introduction):

In the three decades after World War II, a central feature of the American economy was a mass upward mobility in which each generation lived better than the last, and workers experienced earnings gains through much of their careers…The central drivers of mass upward mobility were real wages for most workers that grew in line with overall labor productivity…

…The alignment of wage growth and productivity growth resulted from two main factors: labor markets for most groups of workers in which demand matched supply, and the post-World War II Social Compact that emerged from the Great Depression helped to propogate [sic]wage norms throughout the economy, norms that were enforced in part through collective bargaining and professional personnel/human resource management practices.

By the 1980s, both of these factors had reversed. Labor demand increasingly shifted toward more educated workers – particularly well-educated women. At the same time, the post-war Social Compact was challenged by the inflationary 1970s and collapsed in the 1980s. Nothing has emerged to replace it.

Now, in the absence of a labor market boom like that of 1996-2000, increased labor productivity no longer translates into rising real wages for many groups of workers…

Tuesday, May 24, 2011

March 2011 Employment Report

Well this month, I finally got something right on employment – the higher number of jobs created in the last couple of months has been sustained:


In total, the economy added about 200k jobs in March, which just about matches new entrants into the labour force. Since the trough in the recession, Malaysia has added about 1.5 million jobs, with about half of them in the last quarter of 2010:

Thursday, May 19, 2011

BNM Liberalises Forex Again: Go Forth And Multiply

Along with yesterday’s GDP report, BNM has also reduced the already low barriers for overseas investment:

Liberalisation on direct investment abroad, inter-company loans and trade financing

As part of the efforts to continuously increase business efficiency and enhance competitiveness of the economy, Bank Negara Malaysia wishes to announce with effect from June 1, 2011 the following liberalisations on direct investment abroad, inter-company loans and trade financing facilities obtained by residents:

1Q 2011 GDP: Disappointing

I admit I expected better. So did the consensus opinion, which was looking at between 4.7%-5.0%. But we’re still looking at a somewhat respectable 4.6% GDP growth for 1Q 2011 (log annual changes; seasonally adjusted log quarterly changes, annualised; 2000=100):


The SAAR figure is an even more respectable 7.0%, which compares well with growth throughout most of the past decade.

April 2011 CPI: Inching Up

Yesterday’s report showed annual inflation accelerating to 3.2% (log annual and monthly changes; 2000=100):


Y-o-Y Core inflation has climbed pass the 2.0% level, and the Pain Index is nearing 5.0%. If there’s any comfort to be gained, it’s from the monthly growth numbers, which were barely above last month’s.

Monday, May 16, 2011

Caught With His Pants Down: IMF Chief Suffers Brain Fart

What is it with the heads of the Bretton Wood Institutions? First Paul Wolfowitz of the World Bank got the hook a few years back after abusing his position to arrange a promotion and pay rise for his girlfriend, also working for the World Bank. Now Dominique Strauss-Kahn of the IMF is alleged to have attempted rape on a hotel maid:

IMF Chief Strauss-Kahn Charged With Attempted Rape in New York

May 15 (Bloomberg) -- Dominique Strauss-Kahn, the head of the International Monetary Fund and a potential candidate for the French presidency next year, was charged with attempted rape and a criminal sex act in New York, the police said today.

The charges stem from an incident that allegedly occurred yesterday against a 32-year-old woman at a Sofitel hotel in midtown Manhattan, the New York Police Department said in an e- mailed statement early today. Strauss-Kahn was arrested on an Air France flight at John F. Kennedy airport, the police said. He also has been charged with unlawful imprisonment.

Sunday, May 15, 2011

Working In The Shadows II

In my recent post on GST, one commentator suggested that it would be a fairer tax simply because it would bring in all those who aren’t part of the “official” economy, the so-called shadow economy. I didn’t realise at the time just how perceptive this comment was – at least in terms of the potential impact.

For looking back, I’d actually made the same point in a post about half a year ago, based on a recent Policy Research Working Paper from the World Bank. I’ve been blogging so much, I can’t keep track of half the posts I’ve made:

Saturday, May 14, 2011

Productivity Includes Doing Things The Right Way

I swear I’m not an English grammar nazi – really, I’m not!

But you’d expect a government report (even if it comes from an ostensibly independent body) that’s meant to inform the public, to at least be reasonably edited and proofread.

Sadly, the Productivity Report 2010/2011 issued on Thursday by the Malaysia Productivity Corporation is littered with grammatical errors. For example:

Malaysia’s journey towards achieving high income economy was gaining momentum as reflected by a remarkable leap in its competitiveness ranking from 18th position in 2009 to 10th position in 2010. The impetus to achieve developed nation aspiration was further supported with the launching of several national programmes in 2010.

…and these are just the first two sentences of the report proper. And the punctuation!?! Or rather, the almost complete lack of it.

I got through maybe half of it before giving up from sheer annoyance.

Blogger Outage

If you noticed some posts missing, had some maintenance issues on Friday – posts from Wednesday onwards were temporarily pulled across the whole site, and blogs have been read only until just now.

Hopefully, everything will be smoother from today.

Thursday, May 12, 2011

March 2011 Industrial Production

The consensus appears to have expected more IPI growth from yesterday’s IPI report, but it’s really not that bad. Growth numbers on their own don’t appear to be too encouraging (log annual and monthly changes; seasonally adjusted; 2000=100):


Debating the ETP

Last night there was a debate hosted by the LSE Alumni Association, on the key challenges for the Economic Transformation Program (ETP). Moderated by Tan Sri Dr Munir Majid, the panel speakers were YB Tony Pua (MP for PJ Utara), Tan Sri Dr Ramon Navaratnam (former senior civil servant and noted economist), and Datuk Ahmad Zaki  Zaid, (Executive Director of MRCB). Also present were representatives of PEMANDU, the organisation tasked with leading the implementation of the ETP.

As you can imagine, there was a lot of scepticism regarding the ETP and Malaysia’s achievement of high income status by 2020. Questions and comments from the floor were pretty numerous and I think out of the norm for a Malaysian audience – perhaps a reflection of the participants.

Wednesday, May 11, 2011

Malaysia’s Population Pyramid

I don’t know how long its been there, but the Department of Statistics now has graphical representations of Malaysia’s population pyramid. The data is from 1970 onwards, and includes estimates up to 2030.

Interesting things to note:  total population should reach 41.2 million by 2030, but the total dependency ratio will still be very high at 59.5% (youth dependency ratio at 46.6%). The sex ratio will also be fairly high at 103 males to 100 females – combine that with a high proportion of the population still in the 20-30 age bracket, we should expect the absolute level of crime to continue to climb, the crime NKRA notwithstanding.

You can access the DOS data here.

Talking Inequality

Alan Wheatley, Reuter’s China Economics Editor, says more attention should be paid to inequality (excerpts, H/T The Star):

Mind the gap: Asian income gulf shows economic model's flaws
By Alan Wheatley, Global Economics Correspondent

...policy makers are drawing increasing attention to another shortcoming of Asia's export-oriented growth model: inequality.

Disquiet over a widening gap between the haves and the have-nots was a factor in Singapore's election on Saturday, which resulted in unprecedented gains for the opposition.

And the urban-rural fault line running through Thai politics is in good part a rich-poor divide...

Reserves, Capital Flows and the Ringgit

Confession time: ten years ago, I’d have probably made the same analysis…and I’d be just as wrong. But with age comes wisdom, I hope.

Two statements in yesterday’s paper caught my eye. First from RAM Holdings chief economist Dr Yeah Kim Leng:

Ringgit is getting stronger, US$ to continue decline

...“With the ringgit strengthening, our manufacturers will be forced to become more productive and innovative.

“This will help get us out of the industrialisation trap,” Yeah said...

…and then from CIMB Investment Bank head of economics Lee Heng Guie:

M'sian international reserves hit record level

…CIMB Research in a note yesterday said reserves were boosted by substantial inflows of short term money and that positive economic vibes had contributed to the fundamental reasons for such inflows…

It’s nice to note that there’s some corroboration for my interpretation of BNM’s intervention in the forex markets last month. But to deal with these statements:

  1. The Ringgit hasn’t actually strengthened much, if at all. This is USD weakness, not Ringgit strength. If our currency appreciates faster than that of our competitors, then there’s some basis for the opinion that producers would be forced to increase capital intensity (and thus worker productivity). But that’s simply not the case right now (index numbers; nominal and real effective exchange rates; 2000=100):
    On a trade weighted basis, the Ringgit has barely budged since April 2010. That means that from a competitive standpoint, there’s been no relative change in terms of the external pricing of Malaysia’s exports, and hence no pressure on exporters to change their ways.
  2. There’s no direct link between international reserves and capital flows (or any kind of external money flows) unless you’re operating a fixed exchange rate regime. With certain exceptions (most spectacularly last month), BNM has let the Ringgit float. Changes in international reserves requires active intervention by the central bank - there's no passive conduit directly from external inflows or outflows into BNM's foreign currency reserves. Maybe old habits of thinking die hard…but I expected better of CIMB.

GST On The Cards Again?

From yesterday’s Star:

PM: Income tax may be reduced once GST is in place

PUTRAJAYA: Corporate and personal income tax may be reduced with the implementation of the goods and services tax (GST), Prime Minister Datuk Seri Najib Tun Razak announced Tuesday.

He, however, said the government was still engaging with the Public Awareness Education Programme to educate the people on the advantage of the GST.

"As far as the people are concerned, there is a growing acceptance that the GST is good," said Najib, who is also Finance Minister, to reporters after attending the Budget 2012 Consultation here Tuesday.

Monday, May 9, 2011

1Q 2011 Forex Review: BNM Is In The Market

After months of relative quiescence, BNM has returned to the forex market with a vengeance. Something about approaching the RM3.00 to the USD level must have triggered alarm bells, because the scale of intervention is almost without precedent (change in international reserves; adjusted for forex valuation):


March 2011 External Trade

I missed last month’s trade post because of my trip to Korea, and it seems I missed a lot (log annual and monthly changes; seasonally adjusted):


Seasonally adjusted trade data for February and March have been really solid, which should give some support to my hypothesis that 1Q growth will be better than decent.

Friday, May 6, 2011

MPC Statement: BNM On The Warpath

As I thought might happen, BNM has begun its second round of normalisation of interest rates (excerpts; emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.75 percent and 3.25 percent respectively…

…Global inflation has, however, increased on account of rising energy and commodity prices…

In the domestic economy, the latest indicators point towards the continued strengthening of private investment and sustained private consumption expenditure in the first quarter. The export performance also improved, supported by regional demand. Going forward, the assessment is for the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually during the course of the year. Growth will be underpinned by the firm expansion of domestic demand. Sustained employment conditions and income growth is expected to provide support to private consumption, while private investment is projected to strengthen amidst the improved investment environment…

Wednesday, May 4, 2011

March 2011 Monetary Conditions Update

I’m increasingly leaning towards the view that we might see a rate hike tomorrow, when BNM’s Monetary Policy Committee is scheduled to meet. The reasons aren’t hard to figure out – inflation is rising, and credit creation is probably above BNM’s comfort zone (and mine). I’d also consider that 1Q 2011 growth will probably come in stronger than people expect.

But I’m getting ahead of myself. Money supply growth on its own isn’t too excessive (log annual and monthly changes; seasonally adjusted):