Thursday, October 27, 2011

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...

Tuesday, October 25, 2011

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.

Monday, October 24, 2011

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.

Saturday, October 22, 2011

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):


Friday, October 21, 2011

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...

Thursday, October 20, 2011

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


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...

Wednesday, October 19, 2011

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...

Tuesday, October 18, 2011

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.

Monday, October 17, 2011

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.

Friday, October 14, 2011

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.

Wednesday, October 12, 2011

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.

Tuesday, October 11, 2011

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


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):


Monday, October 10, 2011

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.

Friday, October 7, 2011

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
  • 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.

Civil Service Pay Rise? MBSB Shares Jump

I don’t usually comment on stocks but this one’s actually relevant (excerpt):

MBSB shares jump on possible wage increase for civil servants

PETALING JAYA: The rally in Malaysia Building Society Bhd (MBSB) shares could be due to its potential to be the beneficiary of a possible increase in civil servant salaries and an anticipation of mortgage tightening measures.

MBSB's share price jumped 18 sen or 14% to RM1.47 while its warrants soared 15.5 sen or 33% to 62.5 sen yesterday.

A source familiar with the matter told StarBiz that MBSB could benefit from the possible increase in civil servant pay rise anticipated in the upcoming Budget 2012.

Thursday, October 6, 2011

Reading List: Something For MOHE

If we want to start producing Nobel Prize winners, we’d better start moving:

The Road to Academic Excellence: Lessons of Experience

When I published my first book on World Class Universities two years ago, I certainly did not anticipate the world-wide exposure it received. Now, I sometimes worry about having contributed to raising expectations about the importance of world-class universities.

When I visited Nigeria last year, I was told that the country wanted to have 20 World Class Universities by 2020. Recently, Sri Lanka announced that it would increase its higher education budget in the hope of having at least one world-class university. Today we launched The Road to Academic Excellence, a new book I edited with Professor Phil Altbach, and already, the burden of guilt regarding the possible consequences of the new book haunt me.

This new book brings together nine case-studies, telling the story of 11 institutions undergoing a complex transformational process as they strive to become world-class research universities, either by following the “upgrading” or the “starting anew” path to academic excellence.

The sample of institutions reviewed is too small to be conclusive, but the case studies suggest that establishing a new institution is a relatively faster and more effective approach to becoming a world-class research university. Still, new research universities face special challenges. They need to sufficiently innovative and represent a convincing alternative to existing institutions to attract top academics and good students. Indeed, the book identifies global talent search strategies among the most powerful accelerating factors for establishing world-class research universities.

The book’s available here.

Fiscal Revenue: Something’s Not Right

From the Business Times (excerpt):

Govt revenue comes under the spotlight

Kuala Lumpur: The government's revenue has not kept pace with the growth of the economy, which is a worrying trend if another economic crisis comes around, said a leading economist.

Prof Datuk Dr Mohamed Ariff, a professor of international economics at the INCEIF (International Centre for Education in Islamic Finance), said revenue has shrunk to 22 per cent of the gross domestic product (GDP) compared with previous years when it stood at 34 per cent.

"There was also only a marginal increase in revenue by RM1.1 billion in 2010 compared to the previous year although the economy expanded by more than five per cent. Clearly something is wrong with the level of taxes," he said in an interview with the Business Times yesterday…

Rape: What You’re Wearing Doesn’t Matter

From the Mole yesterday (excerpt):

Activists riled with Nik Aziz's remarks

KUALA LUMPUR: A human rights activist today described Datuk Nik Abdul Aziz Nik Mat's remarks that women who did not cover their aurat should blame themselves if they were raped, as "an old man’s way of blaming the women when it’s the man who has the problem of controlling themselves.

Irene Fernandez was responding to a three-year-old video clip of the Kelantan Menteri Besar who during a campaign on the virtues of covering the aurat had said: “Dah dia buka aurat. Dirogol. Padanlah muka dirogol. Dia jual murah-murah. (She did not cover herself. She got raped. Serves her right. She made herself cheap).”

Impressions Of Pakatan Rakyat’s Alternative Budget

Pakatan Rakyat announced their alternative budget proposals yesterday but I haven’t had the chance to read it until just now. My first thought on reading through is that the Opposition are trying to out-populist the government – quite a few measures look like out and out vote buying. But I do have to have to admit that at least this tendency is consistent with their previous platforms.

Wednesday, October 5, 2011

The Triffin Dilemma Revisited

Lorenzo Bini Smaghi of the Executive Board of the ECB explains the Triffin Dilemma (excerpt):

The Triffin dilemma revisited

The intellectual heritage of Robert Triffin begins with the relevance of his “dilemma” to our days. We still have a situation in which one national currency – the US dollar – serves as the main international currency. It remains at the heart of the international monetary and financial system (or IMS). And we still have a fundamental tension between the currency demands of rapidly growing economies, the domestic policy incentives of reserve issuing/holding countries, and global economic and financial stability: in Triffin’s words, the system remains “highly dependent on individual countries’ decisions”.

Minimum Wage: Indian High Commission Moves First

Starting next month, Indian nationals working in Malaysia must be paid a minimum RM800 per month (excerpt):

New minimum wages for Indian labourers in Malaysia next month

PETALING JAYA: The Indian High Commission has formulated a new minimum wage for its citizens working here.

Effective Nov 1, the minimum monthly wage for Indian maid is RM1,400 and RM850 for plantation workers.

It also set the minimum wage of RM800 for restaurant, construction and general workers.

In a statement, the High Commission stated that it is mandatory for all Malaysian employers to fill up the Employment Contract according to the revised guideline.

While the IHC rules only apply to Indian nationals, this move essentially places a floor on wages for all workers in Malaysia. After all, if Indians must be paid a minimum of RM800, can Malaysians be paid any less in our own country? More to the point, being just above the official poverty line of RM720, there’s hardly any reason to put the forthcoming national minimum wage at anything less. As for the higher rates for the other categories, these will have less of an impact – the likely response would depend on the elasticity of the demand for labour in each of these areas. Insofar as there are alternative sources of foreign labour, at a guess I’d say it would reduce Malaysian demand for Indian labour (more for the maids than for plantation workers).

If You Thought Consumer Inflation Was Painful…

…you might want to look at these:



Average producer price increases over the last five years are at least double that of consumer price inflation.

Fiscal Stimulus Vs Fiscal Consolidation: Not Relevant For Malaysia

What’s going on in the US is dumb, what’s going on in Europe even dumber. In the presence of an outsize public debt, fiscal consolidation works – but only if you have economic growth. If you don’t, then cutting expenditure and raising taxes makes things worse, not better.

Greece and the other PIGS are in a bind primarily because of the straitjacket imposed by the necessity of keeping a nominal high exchange rate relative to what their economies need. The US is in a bind because signs of economic uncertainty boost the US dollar, which is the exact opposite of what should happen to a “normal” economy, as Ryan Avent points out (excerpt):

Has Jeffrey Sachs Changed His Stripes?

They must be having snowball fights in hell (excerpt):

Paul Ryan, American Values and Corporatocracy

My new book, The Price of Civilization, describes why America needs a "mixed economy," one where a more effective federal government regulates business and invests alongside the business sector. In his review of my book, Congressman Paul Ryan, an avowed libertarian, describes my book as anti-American in its values. ...

Ryan ignores the extensive evidence in the book showing that Americans support the values of a mixed economy, not of Ryan's free-market libertarianism. Americans today by large majorities support public education, Medicare, Social Security, help for the indigent, stronger regulation of the banks, and higher taxation of the rich. ...

On issue after issue, Washington is presently bucking the public's values, rather than respecting them. A majority of the public wants to preserve social programs, but they are being cut anyway. A majority wants higher taxes on the rich, but they are being cut rather than raised. A majority wants to end the wars, but they continue anyway.

The reason is the following. America is losing its democracy as our politicians trade their votes for campaign contributions from the corporate lobbies. We have a corporatocracy rather than a democracy, and Ryan stands at the center of it. The Wall Street Journal, which commissioned Ryan's review of my book, is the leading print mouthpiece for the corporatocracy.

I don’t know enough of Prof Sachs and his work to be too judgemental, and I’m probably guilty of slandering the man. But this is the very same Jeffery Sachs who helped preside over the free market “shock therapy” in port-communist Eastern Europe that resulted in a decade of de facto corporate kleptocracy and massive welfare loss for common citizens. The fact that he’s now advocating a mixed economy strategy a’la Dani Rodrik seems incredibly ironic, to put it mildly.

(via Mark Thoma)

Tuesday, October 4, 2011

Brad DeLong Explains IS-LM

No much commentary on this one, just a good read for anyone interested in the subject (excerpt):

The Tribal Dislike of John Hicks and IS-LM: History of Economic Thought Edition

When you do economics and apply it to the real world, you start with the simplest possible model. Does that help you understand enough of the real world to satisfy you? If not, you complicate it by adding the most important thing that you had left out. Does that help you understand enough of the real world to satisfy you? If so, you use that model--and then when you want to go further you complicate it in its turn.

But at each stage in the process, you absorb the valid insights from your current model before you go on to complicate things further.

If you’re not familiar with the subject, or didn’t take macroeconomics at university, then the IS-LM model is Sir John Hicks attempt at explaining Keynes. Unfortunately, the underlying basis that he used for constructing the model was partially faulty (Keynes rejected the notion of a unique equilibrium), and Hick’s in fact repudiated IS-LM later in his career. By then it was too late, as a full generation of American economists had taken it up and hijacked the intellectual leadership of Keynesian economics, even if what they actually practiced was actually a bastardised amalgam of Keynes and neo-classical thought, commonly called the neo-classical synthesis.

Nevertheless, as DeLong points out, it doesn’t invalidate the potential usefulness of the model to examine policy issues, as long as it isn’t that badly wrong.

Uncertainty, Complexity, And The Problem With Economic Models

Nick Rowe has a headache (excerpt):

The Lucasian map is not the Hayekian territory

In defence of Lucas '72.

Take any macroeconomic model of a market economy with inefficient aggregate fluctuations. In fact, take any economic model where something bad might happen.

Assume that model is literally true.

The people in that model are idiots.

This conclusion follows immediately. If they weren't idiots, the people in the model would appoint the economist modelling the economy as central planner, who would tell them all what to do, and make them all better off.

The people in Lucas' '72 model are complete idiots for producing less because they don't realise there's a recession on.

The people in New Keynesian models are complete idiots for waiting for the Calvo fairy to give them permission to cut prices in a recession.

All models suffer this same problem. If the world really were as simple as the economic model of that world, people would figure it out, and wouldn't let bad things happen.

Of course, the discussion doesn’t go so far as to say that all economic analysis is useless – we know more about how people interact individually and in aggregate than we did before. But it’s always useful to keep in mind the inherent tension between a highly complex real world teeming with sometimes irrational individuals, and the oversimplified world of economic modelling. And you should always also take into account the biases of the modeller.

But, to quote George Box, “Essentially, all models are wrong, but some are useful."

Different Perspectives Of Inflation

The World Bank blog on the impact of inflation on the poor (excerpt; emphasis added):

Taxing the poor… through inflation

Imagine you are spending half of your income on something whose price suddenly increases by a quarter. Seems impossible? This is how in fact inflation has hit the poor in many developing countries, especially Kenya.

This September, overall inflation reached a record high of 17.3 percent. One year ago it was just above 3 percent. Why has it increased so sharply even though Kenya has followed prudent macro policies? The short answer is: food and fuel. In Kenya, food accounts for 36 percent of the average person’s expenditures; energy and transport another 27 percent. The urban poor spend more than 43 percent on food. Since January, food prices have increased by almost 25 percent (see figure), partly as a result of international trends but also due to Kenya’s- agriculture policies. Maize prices tripled between January and June until they retreated a little once the government waived import duties and the 2011 harvest started trickling in.

Capital Vs Labour: The Share Of Wages

Bill Mitchell takes dead aim:

Redistribution of national income to wages is essential

...I have noted that a defining characteristic of the neo-liberal period has been the fall in the wage share in national income in most nations. This has come about because real wages growth has dragged behind productivity growth. The gap between the two represents profits and shows that during the neo-liberal years there was a dramatic redistribution of national income towards capital.

This has been aided and abetted by governments in a number of ways: privatisation; outsourcing; pernicious welfare-to-work and industrial relations legislation (designed to reduce the capacity of trade unions); etc to name just a few of the ways. These ways vary by country.

The problem that arises is if the output per unit of labour input (labour productivity) is rising so strongly yet the capacity to purchase (the real wage) is lagging badly behind – how does economic growth which relies on growth in spending sustain itself?

RPGT: A Solution Looking For A Problem

The market’s has already softened since the first quarter of the year. If the idea is to curb speculation, this is way too late:

Real property gains tax expected to rise
Experts divided on quantum of increase

PETALING JAYA: Real property gains tax (RPGT) would probably increase after Budget 2012 but experts are divided over the quantum or the new form the tax on property sales would take.

Few are hoping for the rate to be maintained but others felt the RPGT would increase by another 5%. The current RPGT, imposed after Budget 2010, is 5% for all properties sold within the first five years of purchase.

Previously, from April 2007 until it was reintroduced in January 2010, all gains from property transactions have been exempted from the tax.

If the Government decides to reintroduce the RPGT in its entirety, property speculators will feel the heat as gains from property sales within the first five years of purchase will be subject to a tax ranging from 5% to 30%.

If however the goal is to raise revenue, then this makes better sense even if we’re not exactly talking about gobs of money.

August 2011 Monetary Conditions

This is kinda an omnibus edition because I missed this post update the last two months. Not that the news gets any better with time…vinegar instead of wine so to speak (log annual and monthly changes; seasonally adjusted):


Growth of both M1 and M2 aggregates have been below the norm the last few months. If it weren’t for the spike in new cash issued for Ramadhan, the numbers might look even worse.

Monday, October 3, 2011

A Layman’s Guide To The History of Economic Thought

This shouldn’t be taken as definitive or even remotely accurate, and I’m probably going to ruffle a few feathers with this. It’s just me having some fun (over the next few days you’ll see why), and who knows, this post might be useful to somebody. There’s not a few in-jokes here, which I hope my fellow economists might enjoy…I’ve probably missed a few, so feel free to add to my list in the comments, or suggest any changes.

With that, here’s my extremely concise history of economic thought:

Imagine an economy is a bucket of water…

MBSB: Salary Deduction Is Low Risk

You’ve got to be kidding me:

MBSB adopts best industry practices: CEO

PETALING JAYA: Malaysia Building Society Bhd (MBSB) adopts the best industry practices when evaluating the creditworthy of a government servant and does not “simply disburse personal loans based solely on salary deductions,” according to chief executive officer Datuk Ahmad Zaini Othman…

…In a statement he said: “MBSB made an impact in the industry in mid-2009 when it re-entered the market and provided Personal Financing-i to government servants at the lowest rate of 4.90% per annum.

“This was markedly lower than most rates then which were above 7.50%. It was also significantly lower than another source of financing which is credit card at between 13.5% and 17.5% per annum or its cash advance withdrawals at the maximum of 18%.”

“MBSB believes that the rate offered is the true reflection of the level of risks undertaken by MBSB as repayment is collected via salary deduction.”