Thursday, July 26, 2012

Mythbusting: Government Debt Edition

Teh Chi-Chang of Refsa was on BFM radio the other day promoting his new book:

The Dark Side of Budgets

I sometimes feel like I’m banging my head against a wall.

Tuesday, July 24, 2012

Illicit Outflows: Here We Go Again

Another report to add on to the GFI report on global illicit fund flows a year or so back:

Malaysia lost RM893b in illicit outflows, research shows

KUALA LUMPUR, July 22 ― A colossal RM893 billion was siphoned out of Malaysia’s economy into tax havens abroad between 1970 and 2010, a London-based research has revealed, placing the country among the top 20 nation in the developing world labelled as “losers” of capital flight.

The sum is more than triple that of Malaysia’s national debt total, which amounted to RM257.2 billion in 2011, according to previous media reports.

Monday, July 23, 2012

Dissension In The Ranks

Reuters gets the scoop (excerpt, H/T BBC):

IMF economist accuses Fund of suppressing information

WASHINGTON, July 20 (Reuters) - A veteran economist at the International Monetary Fund has accused the global lender of suppressing information on difficulties in dealing with the global financial meltdown and euro zone crisis.

In a resignation letter to the IMF's board and senior staff, dated June 18, Peter Doyle said the IMF's failures in issuing timely warnings for both the 2007-2009 global financial crisis and the euro zone crisis were a "failing in the first order" and "are, if anything, becoming more deeply entrenched."

His letter, a copy of which was seen by Reuters, has brought to light simmering tensions within the IMF over the Fund's credibility, which many worry is threatened by its role in the euro zone crisis.

Friday, July 20, 2012

A Singaporean Mystery

I was alerted to something quite interesting a few days ago by warrior 231 – there appears to be hole in the Singapore government accounts, a fairly substantial one.

The one man crusader pursuing this issue is Christopher Balding, Associate Professor at Peking University’s HSBC Business School. Here’s a sampling from his blog:

The Importance of Economic Capture and Government Surpluses

…However, if we add in GIC numbers, everything begins to fall apart. As I have already covered in previous posts, we actually know pretty closely how much GIC manages. In March 2011, with Temasek declaring its holding at $193 billion SGD and the government holding cash of $125 billion SGD, the balance sheet reveals a GIC upper bound estimate of $387 billion SGD, pretty close to outside estimates…

Thursday, July 19, 2012

Fixed Exchange Rates: Better Close That Capital Account

In the latest round of research from the NBER, this paper describes some “surprising” results (abstract):

Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure
Stephanie Schmitt-Grohé, Martín Uribe

This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. The paper presents two surprising results. First, a pegging economy might be better off with a closed than with an open capital account. Second, the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be larger in financially open economies than in financially closed ones.

June 2012 CPI: Prices Ticking Up Again

After a four month hiatus, consumer prices are on the upswing again (log annual and monthly changes; 2000=100):


Wednesday, July 18, 2012

The Optimal Rate Of Inflation

We’re on a optimisation binge today. After the last post on international reserves, here’s a piece on the optimal level of inflation (abstract; emphasis added):

How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation
Quamrul Ashraf, Boris Gershman, Peter Howitt

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

The Optimal Level Of International Reserves

East Asia over the years have been variously accused of currency manipulation and neo-merchantilist policies. Massive reserve holdings in the region – e.g. China’s USD3.2 trillion, Japan’s USD1.3 trillion; nine of the top twenty reserve holdings are in East Asia  - can be pointed to as proof of this assertion.

A new research paper in this month’s NBER circulation disputes this view however (abstract; emphasis added):

Optimal Holdings of International Reserves: Self-Insurance against Sudden Stop
Guillermo A. Calvo, Alejandro Izquierdo, Rudy Loo-Kung

This paper addresses the issue of the optimal stock of international reserves in terms of a statistical model in which reserves affect both the probability of a Sudden Stop–as well as associated output costs–by reducing the balance-sheet effects of liability dollarization. Optimal reserves are derived under the assumption that central bankers conservatively choose reserves by balancing the expected cost of a Sudden Stop against the opportunity cost of holding reserves. Results are obtained without using calibration to match observed reserves levels, providing no a priori reason for our concept of optimal reserves to be in line with observed holdings. Remarkably, however, observed reserves on the eve of the global financial crisis were–on average–not distant from optimal reserves as derived in this model, indicating that reserve over-accumulation in Emerging Markets was not obvious. However, heterogeneity prevailed across regions: from a precautionary standpoint, Latin America was closest to model-based optimal levels, while reserves in Eastern Europe lay below optimal levels, and those in Asia lay above. Nonetheless, there are other motives for reserve accumulation: we find that differences between observed reserves and precautionary-motive optimal reserves are partly explained by the perceived presence of a lender of last resort, or characteristics such as being a large oil producer. However, to a first approximation, there is no clear evidence supporting the so-called neo-mercantilist motive for reserve accumulation.

Monday, July 16, 2012

What Happens When Public Debt Gets Too High

It doesn’t always result in a Greek tragedy, but high public debt (defined as exceeding 90% of GDP) results in a lower growth trajectory for, in most cases, over a decade (abstract, emphasis added):

Debt Overhangs: Past and Present
Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff

We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

Shadow Education

Via the Edge, the Asian Development Bank has issued a new report on shadow education (excerpt):

Shadow Education: Private Supplementary Tutoring and Its Implications for Policy Makers in Asia

In all parts of Asia, households devote considerable expenditures to private supplementary tutoring. This tutoring may contribute to students’ achievement, but it also maintains and exacerbates social inequalities, diverts resources from other uses, and can contribute to inefficiencies in education systems.

Such tutoring is widely called shadow education, because it mimics school systems. As the curriculum in the school system changes, so does the shadow.

This study documents the scale and nature of shadow education in different parts of the region. For many decades, shadow education has been a major phenomenon in East Asia. Now it has spread throughout the region, and it has far-reaching economic and social implications.

Friday, July 13, 2012

The Policy Relevance Of Economics

My old boss, Radzuan Halim, on why economics remains relevant (The Edge; excerpt):

Re-appreciating economics

THE economics profession has been much criticised, maligned and parodied in recent years over its failure to predict the US mortgage-cum-economic crisis of 2008/09 and the ongoing Greek-euro crisis. Two reasons have been suggested for the failure. First is the economics methodology itself, which is based on the "rationality of man" assumption and its over-mathematisation — the takeover by quantitative-types not grounded in empirical reality and historical perspective.

Second, the profession has become so riddled with ideology that it determines an economist's findings and prescriptions…

…Of course, economics is by no means the only profession to be caught up in ideological partisanship and posturing…

…With respect to methodology, many economists do acknowledge the weakness of excessively quantitative approaches and have sought improved methods…

…Given the controversies and perceived weaknesses in the profession and methodology, my view is that present-day economics still offers good and sometimes, extremely good, approaches to the study of man's economic, social and political problems. Basic economic concepts and tools provide powerful, insightful analysis of situations, causes and policy prescriptions. By the same token, the absence or neglect of basic economic tools in analysing economic situations could lead to stagnation, deterioration and crisis, such as the situation found in present-day Greece and many other countries…

It’s a fairly long essay, with some good points and a few (from my point of view) bad ones – governments are not like households. But on the whole it offers a defense for using economic concepts and ideas to evaluate policy and in public discourse. Not a bad read, considering he’s not an economist.

Talking About Crime: Why Are We Focusing On Enforcement?

I was listening to BFM radio this morning with some bemusement – there was a fairly long discussion regarding the latest crime statistics report from Pemandu (excerpt):

Pemandu: Crime index down by 10.1% from January to May

KUALA LUMPUR: Malaysia's crime index fell by 10.1% between January and May this year, Pemandu said on Thursday.

According to figures released by Pemandu's Reducing Crime NKRA director Eugene Teh, there were 63,221 cases between January and May this year compared to 70,343 cases recorded in the corresponding period last year.

“The NKRA's focus on bringing down the crime rate in the last three years has achieved big wins yearly since we first began the Government Transformation Programme and the trend seems to be continuing,” he said.

Teh added that Index Crime dropped by 11.1% from 177,520 in 2010 to 157,891 in 2011. Index Crime are classified as Property Crimes which include theft, snatch theft, vehicle theft, machinery theft and house break-ins and Violent Crimes which are robbery, assault, rape and murder.

Street Crimes have also seen a noticeable drop with 38,030 in 2009 dropping by 39.7% to 22,929 in 2011...

Thursday, July 12, 2012

May 2012 Industrial Production

The latest IPI numbers posted a pleasant surprise (log annual and monthly changes; seasonally adjusted):



Wednesday, July 11, 2012

Estimating Government Waste

Oh boy, I know a lot of people are going to have a field day with this one (abstract):

Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending
Grigoli, Francesco ; Ley, Eduardo

Summary: It is generally acknowledged that the government’s output is difficult to define and its value is hard to measure. The practical solution, adopted by national accounts systems, is to equate output to input costs. However, several studies estimate significant inefficiencies in government activities (i.e., same output could be achieved with less inputs), implying that inputs are not a good approximation for outputs. If taken seriously, the next logical step is to purge from GDP the fraction of government inputs that is wasted. As differences in the quality of the public sector have a direct impact on citizens’ effective consumption of public and private goods and services, we must take them into account when computing a measure of living standards. We illustrate such a correction computing corrected per capita GDPs on the basis of two studies that estimate efficiency scores for several dimensions of government activities. We show that the correction could be significant, and rankings of living standards could be re-ordered as a result.

Tuesday, July 10, 2012

Joe Stiglitz And The Price Of Inequality

Nobel Prize laureate Joe Stiglitz is on Econtalk this week:

Stiglitz on Inequality

Nobel Laureate Joseph Stiglitz of Columbia University talks with EconTalk host Russ Roberts about the ideas in his recent book, The Price of Inequality. Stiglitz argues that the American economy is dysfunctional, benefitting only those at the very top while the bulk of the workforce sees little or no gain in their standard of living over recent decades. Stiglitz blames this result on deregulation and the political power of the financial sector and others at the top. He wants an increase in regulation and the role of government in the economy and a more transparent Federal Reserve Bank that he blames for coddling the financial sector. The conversation also includes a discussion of the Keynesian multiplier.

A fascinating discussion, made more so since the host of the show (Russ Roberts) holds substantially different views from Stiglitz, yet doesn’t turn the show into a Keynesian/Neo-Classical showdown. The site allows for both streaming and downloading the podcast (the interview’s over an hour long), and if you have even less time, a transcript of the highlights is also available at the bottom of the page.

Personally, I think Stiglitz is a little too quick to dismiss the capabilities of monetary policy, though he makes a relevant point about regulatory “capture”.

The book is currently available at Kinokuniya in KLCC (sorry, MPH doesn’t appear to carry it). Alternatively, you might want to try Amazon.

The Cost Of Buku Jingga

I’ve been asked by a friend to look at the numbers being bandied about regarding the cost of the proposals that a Pakatan Rakyat government would implement if it came into power, for example, as brought up in the recent debate between DAP’s Lim Guan Eng and MCA’s Chua Soi Lek (excerpt):

Pakatan’s call for change will bring uncertainty to the country, warns Soi Lek

…Dr Chua said the country would be bankrupt within two years of Pakatan's five-year tenure if it implemented all its pledges.

Even if the Pakatan could achieve 100% no-corruption and no-leakages, it might only save RM26bil; while its total pledges amounted to between RM200bil and RM230bil which is the country's total revenue in a year, he said.

Giving the breakdown of the figures, Dr Chua said this comprised between RM50bil and RM100bil for free toll, RM43bil for the abolition of PTPTN loans and RM93bil for the promise of the minimum monthly household income of RM4,000…

[If you click through the link, just ignore the very obvious spin in the article]

Since I don’t know the basis of the calculations on each side, and because Buku Jingga itself is rather short on details, an objective assessment is really out of the question.

Friday, July 6, 2012

Gold And Central Bank Fiscal Stimulus

I don’t know about you, but I don’t think I’d want to be taking investment advice from someone who doesn’t appear to know what he’s talking about (excerpt; emphasis added):

Is it time to buy gold?

PETALING JAYA: Now is the time to invest in gold as its price is consolidating and likely to climb over the next few years, according to one expert of the commodity.

“Gold reached US$1,900 (RM6,042) last year but has fallen to US$1,600 now. This is a purely periodic correction,” said Dar Wong, a trader and veteran financial consultant who was the guest speaker at Tomei Consolidated Bhd's seminar…

…Gold, considered a safe haven in times of economic upheaval, has slipped some 15% since peaking at US$1,900.20 last September at the height of the eurozone crisis, but is up 2.7% for the year at yesterday's spot prices…

…He opined that this would come from two sources: inflation, which would force the hand of central banks to ease interest rates, and US monetary policy.

“Gold is traded in US dollars. Should the Federal Reserve decide on more fiscal stimulus, the weaker US dollar will push gold to new heights.

“From my studies, when the United States elects a new president after the third quarter, whoever gets the job will most likely put in a quantitative easing policy to consolidate his position. That will result in higher gold prices.”

Central banks, he added, had little choice in the current global scenario other than to loosen the reigns on fiscal policy.

BNM Watch: MPC Keeps OPR On Hold

As expected, the OPR was kept at 3.00% at yesterday’s Monetary Policy Committee meeting (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.

The pace of the global recovery has moderated in the recent months. The latest data pointed to slower economic activity and more challenging growth prospects in several regions around the world…

In the domestic economy, recent data and surveys of business conditions suggest that consumption and investment activity remains resilient…The strong investment activity is mainly led by the domestic-oriented industries, the oil and gas sector and the steady progress in the construction of infrastructure projects.

Headline inflation is expected to remain moderate for the remainder of 2012. With some excess capacity in the economy, the strength of domestic demand is not expected to result in inflationary conditions…

That sums it up pretty well. If you want more brevity, it roughly translates to: the rest of the world is in trouble, but we’re doing ok.

Next meeting’s scheduled for September 6th, a little over two weeks after Aidil Fitri. Given the Ramadhan effect, the data’s going to be hard to figure out. Nevertheless, I don’t think there’s going to be significant enough changes in the economic outlook to warrant a move then either.

Thursday, July 5, 2012

Wages and GNI

From the latest round of NBER working papers (abstract):

Declining Labor Shares and the Global Rise of Corporate Savings
Loukas Karabarbounis, Brent Neiman

We document a 5 percentage point decline in the share of global corporate income paid to labor from the mid-1970s to the late 2000s. Increased dividend payments did not absorb all of the resulting increase in profits, and therefore, the supply of corporate savings increased by over 20 percentage points as a share of total global savings. These trends were stronger in countries experiencing greater declines in the relative price of investment goods. We develop a model featuring CES production and imperfections in the flow of funds between households and corporations. These two departures from the standard neoclassical model imply that the labor share fluctuates and the sectoral composition of savings affects macroeconomic allocations. We calibrate the shape of the production function and the capital market imperfections to match the cross-sectional variation in the two trends. In response to the observed global decline in investment prices, our model generates more than half of the observed changes in labor shares and corporate savings. The non-unitary elasticity of substitution between capital and labor interacts with imperfections in the capital market to jointly shape the economy’s dynamics.

BNM Watch: No Change Expected

Nobody is expecting a change in the Overnight Policy Rate today, and its likely to remain at 3.00%. With the somewhat encouraging trade numbers, solid credit growth, full employment (and then some), and effectively full capacity utilisation in the manufacturing sector, there’s simply no cause to pull the trigger. Nor do I think there will be, barring a European catastrophe.

Some of the other regional central banks have already made a move, notably China, but others like Korea and Taiwan have not despite posting far lower growth and export numbers than Malaysia. My personal inclination is for a tightening of monetary conditions – I think the economy is perhaps doing a little too well under the circumstances.

There’s room to cut with inflation falling to 1.7% in May – put another way, monetary conditions are effectively tightening already, although the depreciation of the Ringgit in recent months offsets this somewhat.

Another consideration is that a 25bp cut effectively signals a path towards loosening rather than an almost-never-done-by-central-banks one-off change, and I simply don’t see BNM thinking things are that far gone yet.

May 2012 External Trade

Yesterday’s trade report from Matrade indicates that export growth jumped in May, but not as much as my models say they should have (log annual and monthly changes; seasonally adjusted):


Exports hit 7.0% on the year in log terms (6.7% in percentage terms) and 2.0% higher than last month’s level. Crude oil exports fell, but this was offset by higher LNG and CPO exports.

Tuesday, July 3, 2012

Inequality, taxes and government debt

More from VoxEU, this time on the relationship between income inequality and fiscal sobriety (excerpt; emphasis added):

Income inequality, tax base, and sovereign spreads
Joshua Aizenman & Yothin Jinjarak

Might income inequality make structural adjustments more difficult? This column presents data from 50 countries in 2007, in 2009, and in 2011, and finds that higher income inequality in the country is associated with a lower tax base, less fiscal space, and higher sovereign spreads.

The Gold Standard: Pros and Cons

No, I’m not writing about it, but BBC 4 Radio yesterday aired a program examining the arguments for and against the gold standard. You can listen to it here, or read the accompanying article.

Modern Money Creation

A fascinating article on VoxEU yesterday about what I’d consider to be shadow banking, and its a fairly clear exposition (excerpt):

The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh & Peter Stella

The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.

Monday, July 2, 2012

May 2012 Monetary Conditions

Local monetary conditions in May appeared to be a little tighter, though growth in M2 looks to be within a “normal” pace of activity (log annual and monthly changes; seasonally adjusted):


M1 growth crashed however on a monthly basis, largely from a drop-off in demand deposits. Broad money growth was better, but only due to higher savings deposits offsetting falls in other money substitutes, but particularly in forex deposits.

The Asian Financial Crisis…15 Years Ago Today

On July 2 1997, the Bank of Thailand gave up the struggle to maintain their currency peg and let the Thai Baht devalue against the US dollar. Thus began one of the worst regional crises in the post-WWII era.

The reasons were complex and continue to be the subject of controversy, but the popular and official notion that the AFC was the result of foreign currency speculators alone is in my view very far off the mark. While hedge funds are known for taking risky bets, in this case it was a virtually no-risk bet. Pegged currencies that were over valued, current account deficits, unsustainable real estate bubbles (both residential and commercial), out-of-control bank lending, runaway money supply growth, and high external corporate borrowing provided ample grounds for a sell-down of Asian currencies.

It was a once-in-a-lifetime opportunity.

I’d also like to point out that with the exception of the Indonesian Rupiah, the three major currencies affected by the crisis – the Malaysian Ringgit, the Korean Won and the Thai Baht – all ended up post-crisis at close to the same levels against the Yuan as they had been before China’s 1993 devaluation. Now isn’t that suggestive (cross rates against the Yuan; higher values indicate appreciation):


But whether you believe the crisis was a result of a foreign conspiracy, external pressures and hot money flows, or the cumulative results of policy mistakes, this was a seminal event in the economic and financial development of East Asia.

May we never forget that it happened or the lessons that we’ve from it.