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.

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"

Crime Rates Are Down, But It Isn’t All Due To Policy

Cutting subsidies isn’t the only thing the Government has been working on. One of the National Key Result Areas (NKRAs) that the administration of Dato’ Sri Najib has committed to is reducing street crime, and it seems that the fairly innovative approach (*cough*) of putting more policemen on the beat, and in identified crime hotspots is bearing fruit (excerpt):

Najib’s fight against crime showing good results

The hurdle was to get a large number of “men in blue” in a relatively short time, given the fact that recruitment and months of training was needed before a policeman could start duty.

Chief Secretary to the Government Tan Sri Sidek Hassan said Najib, who wanted to try new things using existing and available resources had suggested that desk-bound police personnel be reassigned to go to the ground and their place in offices be taken over by civilians.

The result: an additional 7,402 police personnel including officers on the ground today to fight crime. The move has seen some impressive results.

Home Minister Datuk Seri Hishammuddin Hussein recently revealed that the street crime index and the total crime index had fallen by 39% and 15% respectively in the first quarter of the year – well beyond the 20% and 5% target set for the end of the year.

More details on the reduction in crime are available here. I’m not intending here to belittle this achievement, but I have to ask: How much of this reduction is due to the changes in deployment of police personnel, and how much is due to the fact that the economy has improved?

I stumbled upon this unpublished working paper last year and have been meaning to post on it for quite a while (abstract, emphasis mine):

Crime and economic conditions in Malaysia: An ARDL Bounds Testing Approach

Economists recognized that economic conditions have an impact on crime activities. In this study we employed the Autoregressive Distributed Lag (ARDL) bounds testing procedure to analyze the impact of economic conditions on various categories of criminal activities in Malaysia for the period 1973-2003. Real gross national product was used as proxy for economic conditions in Malaysia. Our results indicate that murder, armed robbery, rape, assault, daylight burglary and motorcycle theft exhibit long-run relationships with economic conditions, and the causal effect in all cases runs from economic conditions to crime rates and not vice versa. In the long-run, strong economic performances have a positive impact on murder, rape, assault, daylight burglary and motorcycle theft, while on the other hand, economic conditions have negative impact on armed robbery.

Causality has a very specific meaning in econometrics, so don’t take this to mean that poor economic conditions literally “cause” crime in the dictionary sense of the word. Nevertheless, you can construct a fairly common sense rationale for why crime goes up when the economy goes down – higher unemployment and reduced income in economic downturns means that individuals on the margin have an incentive to resort to crime, and the opposite happens when the economy turns northward.

Juxtapose this reasoning against the drop in crime that has been registered for the first quarter of 2010 relative to last year. Since 1Q 2009 was the bottom of the recession and we’ve seen considerable improvement in economic activity since then, it shouldn’t be all too surprising to find crime rates dropping in the past year.

The trick is to disentangle the various influences on crime rates, from the change in deployment (possible), to the change in economic conditions (definite), to changes in income and wealth inequality (no relationship apparently), to the growth in the supply of potential criminals via population growth (I’d argue for this one). As a modelling approach, I’d treat the latter three as explanatory variables, while the change of deployment would be represented by a dummy variable (i.e. as a potential structural break), either within a Vector Error Correction Model (VECM) or an ARDL framework.

Since I don’t have the time series on crime rates or their breakdown, this is all sheer conjecture on my part, but I would say the structural break would test as significant, but so would economic growth and population growth. But that’s just a guess.

On the other hand, I don’t see why there’s any particular reason to ascribe all the credit to changes in crime rates to government policy or police deployment – just as there is no reason to assign them all the blame when things go wrong.

Technical Notes:

1. Habibullah, M.S. and Baharom, A.H. (2008): “Crime and economic conditions in Malaysia: An ARDL Bounds Testing Approach”. Unpublished.
2. Baharom, A.H. and Habibullah, M.S. (2008): “Crime and Income Inequality: The Case of Malaysia”. Unpublished.

And some further reading on crime economics from the same source:

1. Baharom, A.H. and Habibullah, M.S. (2008): “Is crime cointegrated with income and unemployment?: A panel data analysis on selected European countries”. Unpublished.
2. Habibullah, M.S. and Law, Siong-Hook (2008): “Property crime and macroeconomic variables in Malaysia: Some empirical evidence from a vector error-correction model”. Unpublished.
3. Puah, Chin-Hong, Voon, Sze-Ling and Entebang, Harry (2008): “Factors stimulating corporate crime in Malaysia”. Unpublished.

The China Factor

If as in my last post, fiscal stimulus is contraindicated as a way to full recovery for Malaysia, then we need to look at external demand.

The Asian Development Bank has just published research that looks into the impact of China on the rest of the region (Warning, pdf link). Specifically, the research asks the question: Can China pull East Asia out of recession on its own:

Abstract
"Developing Asia has traditionally relied on exports to the United States (US) and other industrialized countries for demand and growth. As a result, the collapse of exports to the US and other industrialized countries during the global financial and economic crisis has sharply curtailed gross domestic product (GDP) growth across the region. The emergence of the People’s Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the US as an additional source of demand and growth. The central objective of this paper is to use vector autoregression (VAR) models to empirically investigate whether exports to the PRC have a significant and positive effect on the GDP of nine developing Asian countries. The study’s results from a three-variable VAR model indicate that PRC’s imports have a significant positive effect on the GDP of regional countries. However, the study’s results from a four-variable VAR model indicate that the PRC’s apparently positive impact reflects the US’ demand for Asian goods, rather than independent demand from the PRC. Therefore, overall, the study’s evidence suggests that the PRC is not yet an engine of growth for the rest of the region."

The answer is taken as a unit, China does exercise considerable influence over the economies of the region. However, once you add external factors, then we are still looking at final demand from the US underlying even China's import demand.

So looking at current events, I would say that China's stimulus spending has helped support the region during the past year, but full recovery (if it will occur at all) depends on recovery in US consumer demand. With global rebalancing in full swing, that's by no means a given.

I suspect what we'll see going forward is a permanently lower path of global growth, which I referred to here. In other words, there will be no full closure of the global output gap but rather destruction of over-capacity instead, which suggests a slow, hesitant recovery path.

On a side note: as with all VAR studies, we're looking at historical data and the framework used is agnostic of structure. Nothing says that a secular shift towards consumer consumption in China won't change future interrelationships. A global crisis like the one we're experiencing is a natural structural break.

Technical Notes:
D. Park and K. Shin, "The People's Republic of China as an Engine of Growth for Developing Asia?: Evidence from Vector Autoregression Models", ADB Economics Working Paper Series No. 175