Apples, Oranges and A Whole Fruit Orchard

On Bloomberg last week (excerpt):

Bloated Malaysia Civil Service Presents Headache for Najib

...Malaysia’s civil service employs 1.6 million people, or about 11 percent of the labor force. The jobs provide stability and security, including for ethnic Malays who are the majority of the population. Now the bloated bureaucracy presents a challenge to Prime Minister Najib Razak.

Najib, whose ruling coalition Barisan Nasional has been in power for nearly 60 years with the help of the Malay vote, has pledged to gradually narrow a budget deficit the country has been running since the Asian financial crisis. The commodity-driven $296-billion economy is expected to grow at the slowest pace in seven years in 2016, with lower oil prices eating into revenue.

But trimming the public workforce to improve the government’s coffers is difficult. While Najib has survived a year of political turmoil over funding scandals, he needs the support of Malays to win the next election due by 2018. His party, the United Malays National Organisation, has for decades propagated policies that provide favorable access to education, jobs and housing for Malays and indigenous people, known collectively as Bumiputeras....

I’ve written about this before – the statistics on civil servic headcounts across the world are fraught with measurement errors. Malaysia’s civil service looks “bloated” because we include many categories of workers under the civil service (such as the armed forces, state and local government workers) which other countries do not. In Japan for instance, the “official” civil service is only a quarter of all government workers.

Not exactly apples to apples.

The Power of Narrative

I remember getting into a forum argument on this issue more than a decade back (excerpt):

Opinion: Think nothing is made in America? Output has doubled in three decades

The U.S. manufacturing sector doesn’t get any respect.

Ask a random sample of people on the street and you’re likely to hear that America doesn’t make anything anymore, that China, Mexico and Vietnam took all of our factories, and that the only jobs left in America are flipping burgers and cleaning hotel rooms.

“Throughout history, at the center of any thriving country has been a thriving manufacturing sector,” says presidential candidate Donald Trump. “But under decades of failed leadership, the United States has gone from being the globe’s manufacturing powerhouse — the envy of the world — through a rapid deindustrialization.”

As with all myths, there’s some element of truth in what everyone says.

5 Thoughts on the OPR Cut

At the risk of getting a phone call from across the road, here’s what I think of last week’s 25bp OPR cut:

1. Surprise!

One of the reasons the move came as a surprise to the markets and everyone else was that it was not telegraphed beforehand. Nobody got a hint of any change in policy, right up to the announcement. On the one hand, this breaks with recent practice around the world, where guidance is given so that markets adjust in a relatively orderly fashion. On the other hand, if you believe in the neutrality of money and rational expectations, surprise changes in monetary policy are the only changes that work. More on this in a bit (see point 5).

BNM Watch: Surprise, Surprise!

In a move that caught nearly everyone looking the other way, the MPC cu the OPR by 25bp yesterday (as if you could have missed this bit of news) (excerpt):

Monetary Policy Statement

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

…Looking ahead, there are increasing signs of moderating growth momentum in the major economies. Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom….

…For Malaysia, domestic demand continues to be the main driver of growth. Private consumption will be supported by growth in income and employment, and measures implemented by the Government. While investment in the oil and gas sector is moderating, overall investment is expected to be supported by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. Exports are projected to remain weak following more subdued demand from Malaysia’s key trading partners. Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects….

Borrowing GDP

First of all, Selamat Hari Raya, Maaf Zahir dan Batin to all. I’m back from my annual Ramadhan break, and fully determined to blog more regularly from now on.

An interesting data release yesterday has the economics profession completely bemused – Ireland has just restated their 2015 GDP growth to 26.3% (!) from an initial estimate of 7.8% (excerpt):

Ireland’s Economists Left Speechless by 26% Growth Figure

In three days, Jim Power is due in London to brief the British-Irish Trade Association on the state of the Irish economy. Now, he has no idea what he is going to say.

The economy grew 26 percent in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8 percent.

Ramadhan Ruminations

Throwing this out there because this is a narrative that really ought to change:

In the runup to BNM’s latest MPC, there was a lot of market speculation that BNM should cut the OPR, because the numbers appear to justify it (lower credit growth, poor business and consumer sentiment, slowing GDP growth etc). In fact, even as the MPC stayed on hold, there continues to be opinions out there that a rate cut is and should be in the offing, with some thinking that the weakness in the MYR vis-a-vis the USD is what’s holding the central bank back from easing monetary policy.

Under different circumstances, I’d fully agree that monetary policy should be loosened. But I think in the present case, the narrative should be turned on its head, as I think the causality runs the other way.

Social Mobility Across The Centuries

This has been one of the most widely read recent columns on VoxEU – over 65,000 hits in barely two weeks (excerpt):

What’s your (sur)name? Intergenerational mobility over six centuries
Guglielmo Barone, Sauro Mocetti

Societies characterised by a high transmission of socioeconomic status across generations are not only more likely to be perceived as ‘unfair’, they may also be less efficient as they waste the skills of those coming from disadvantaged backgrounds. Existing evidence suggests that the related earnings advantages disappear after several generations. This column challenges this view by comparing tax records for family dynasties (identified by surname) in Florence, Italy in 1427 and 2011. The top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago. This persistence is identified despite the huge political, demographic, and economic upheavals that occurred between the two dates.

I'm not as confident as the authors that one can generalise these results to other countries and cities, but they do emphasise the point that the social/wealth structure of societies left to themselves tend to ossify. Literature on more recent times (discussed in the article) suggest intergenerational advantages tend to dissipate after a number of generations, but this is in an environment of government intervention and redistribution (such as mass education). Nevertheless, the fact that income generation and wealth remains concentrated in the same families after close to 700 years is staggering.

Technical Notes

Link to original paper:

Barone, G and Mocetti, S (2016) “Intergenerational mobility in the very long run: Florence 1427-2011”, Bank of Italy working papers, 1060

The REAL Origin of Money

WARNING: Gold bugs beware. Existential crisis ahead:

Close But No Cigar

You’re nearly there Tan Sri, just a little bit further (excerpt; emphasis mine):

The alchemy of money
BY ANDREW SHENG

…When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

When Investment Isn’t Investment

From VoxEU (excerpt):

The ‘real’ explanation of the Feldstein-Horioka puzzle – and what it means
Nicholas Ford, Charles Yuji Horioka

…The nature of the Feldstein-Horioka puzzle concerns the mobility of the world’s supply of capital. There is a presumption amongst economists that financial markets can rapidly, and nearly without cost, divert ‘financial capital’ from one country to another. This being the case, it would be expected that savings should be diverted from wherever they occur to where the best investment opportunities are by agents seeking to maximise returns. There is no reason the best investment opportunities should be in a savers’ home country; as a consequence, according to this reasoning, the levels of investment and saving should not be correlated across countries. However, Feldstein and Horioka (1980) found that this is not the case and that most incremental saving is in fact invested in the country in which it occurs. The puzzle is to try to understand why this should be the case….

To GDP Or Not To GDP

Quick one, highlighting a few articles on whether GDP remains an appropriate measure for human welfare.

First from Sir Charles Bean (excerpt):

Measuring the Value of Free

...One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. As a result, our measurements may not be capturing a growing share of economic activity....

Effective Exchange Rate Indexes: April 2016 Update

The NEER and REER page has been updated.

Summary

The bounce up from January lows continued in April, with the nominal broad index gaining 2.74 points to 90.77 (p) and the real broad index gaining 3.1 points to 93.33 (p) in April. The Ringgit advanced against the currencies of all of Malaysia’s major trading partners, but in particular the US Dollar bloc (USD, CNY, HKD, PHP and VND) by around 3.8%-4.2% during the month. Also of note is the gain against the GBP of around 3.8%, largely due to uncertainty over the June referendum.

Changelog:

1. Indexes have been updated to April 2016, with revisions for January to March 2016
2. CPI deflators have been updated for March/April 2016