BNM Watch: OPR Maintained At 3%

Not exactly an anti-climax, but pretty close (excerpt; emphasis added):

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.

BNM Watch: Liberalisation Measures

Announced yesterday, among the first moves under the new Financial Sector Blueprint:

Liberalisation measures to develop the domestic financial markets

As part of continuous efforts by Bank Negara Malaysia to enhance competitiveness in the economy and to develop the domestic financial markets, Bank Negara Malaysia wishes to announce the following liberalisation measures, with effect from 31 January 2012:

• To further spur the domestic foreign exchange market through greater product innovation, licensed onshore banks are permitted to trade foreign currency against another foreign currency with a resident.
• To further deepen the domestic interest rate derivatives market, a licensed onshore bank is allowed to offer ringgit-denominated interest rate derivatives to a non-bank non-resident.
• Towards enhancing the asset liability management of residents, flexibility is permitted for a resident to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency.

The above measures which are in line with the broad thrust of the Financial Sector Blueprint will contribute towards increasing the liquidity, depth and participation of wider range of players in the domestic financial markets.

The Public Health Crisis Called S-U-G-A-R

Can you tell a rock to roll uphill? Unlike Canute, can you order the tide to turn back to sea? Will porcine meat animals suddenly develop wings and take to an aerial mode of travel?

People respond to incentives, not exhortations (excerpt, emphasis added):

Cut down sugar intake, public urged

PETALING JAYA: Malaysians need to cut down on their sugar intake as it would not only be beneficial to their health, but also save on the Government's spending on subsidies.

Last year, the Government spent RM262.41mil in subsidies and it would be spending RM567mil this year due to the increased price of the commodity, the Domestic Trade, Cooperative and Consumerism Ministry said.

“If we can reduce our intake of sugar, the money spent on this subsidy could be extended to subsidise other commodities,” said its minister Datuk Seri Ismail Sabri Yaakob yesterday…

BNM Watch: MPC Meeting Today

The first meeting of 2012 is scheduled for today, and I honestly don’t expect any change in the policy stance. The new data coming in isn’t bad enough to justify a rate cut, even with the continuing uncertainty in Europe. Even if we’re looking forward, the impact of a global downturn is also uncertain – we’re not seeing the same dynamics as we were in 2008-2009.

So my vote is for status quo ante. But then, BNM has been voted the most unpredictable central bank in the region, and they might pull a fast one on us yet.

Getting More Women To Work

Malaysia’s female labour participation rate is quite frankly a disgrace. But getting more women into the workforce comes up against a host of factors, not least of which are cultural and religious. The effort however is well worth making – consider that more than half the women of working age are not in the work force. You could potentially increase the work force size by 25%, just by getting all the women into formal jobs, with the obvious impact on GDP/GNI. That’s a pipedream of course, but you can’t deny the potential impact involved.

And one effective way to do that is…paternity leave!

Sweet Nothings

YB Tony Pua wants some questions answered (excerpt):

Sweet Subsidies for Who?

The Star published on its front page news yesterday with the headline “Sweet Subsidies”. It reported that the Domestic Trade, Cooperatives and Consumerism Minister, Dato’ Seri lsmail Sabri Yaakob said that the government has increased subsidies from 20 sen to 54 sen per kilogramme of sugar in order to maintain the price of sugar at RM2.30 because the “global price of sugar is skyrocketing”…

…What is extremely intriguing however, was that global sugar prices over the past 6 months since the last price hike in May 2011 had in fact declined significantly, and not the purported “skyrocket”.

Critiquing The Critique; Or This Is NOT How You Calculate Inflation Part II

I got tipped off about an analysis of the ETP last week, which makes some of the same points I made two years ago (excerpt):

A Critique of the ETP (Part 2)
We won’t really be twice as rich in 2020

RM48,000 in 2020 is not real income.
The ETP promises to double gross national income GNI) per capita to RM48,000 by 2020 from RM23,700 in 2009. However, RM48,000 in 2020 will be worth a lot less than RM48,000 today, just like RM100 today buys a lot less than RM100 eight years ago, thanks to ever-rising prices. If Malaysians are really to be twice better off, nominal income must be RM64,000 by then, to compensate for the 2.8% per year inflation that PEMANDU expects.

Nothing transformational in the RM48,000 target.
This target is for nominal$ income, which includes inflation, and not real income, which strips out inflation. Because of inflation, nominal GNI per capita growth averaged 8.2% from 2001-2010, whereas real GNI grew only 3.2%. At the historical average 8.2% per year growth rate, nominal incomes will exceed RM48,000 by 2018 anyway, with or without the ETP or PEMANDU.

PEMANDU and its expensive consultants cannot even get basic mathematics correct.
If the income target is RM48,000, PEMANDU’s 6% real GNI growth rate and 2.8% inflation forecasts are wrong. If its growth and inflation forecasts are right, then the RM48,000 target is wrong - it should be RM54,145 in 2020, not RM48,000. Furthermore, key metrics of some EPPs – the investment value, GNI contribution and jobs created – are unavailable.

Grade ‘D’ for data transparency.
In this series, we evaluate the ETP on its own terms based on the goals and plans outlined in the ETP Roadmap. PEMANDU scores a ‘D’ for data transparency. Like us, Malaysia’s top research house finds it impossible to get the numbers to add up.

November 2011 Employment

I’m settling in and having fun at my new workplace, so I should begin blogging a bit more regularly soon. To be honest though, I might not have as much time to do that as I might wish. It’s been a pretty hectic couple of days, even without dealing with the (non-existent) city traffic – which by the way means that January economic numbers aren’t going to look good, as very few people are actually working this last week and more.

But back to business - quite unexpectedly (at least by me), the economy cut 250k jobs in November (’000):

December 2011 Consumer Prices

I’ll be quite busy until the end of next week – as much as taking as break as adjusting to a new working environment (moving jobs!). So postings will be a bit sporadic until I settle down, hopefully before the end of January.

On to last month’s CPI numbers, released yesterday: inflation slowed in December 2011 as core prices actually dropped while increases in food and transport costs slowed (log annual and monthly changes; 2000=100):

More On Dropping The Petrol Subsidy

There is, as one commentator put it, more than one way to kill [sic] a cat. I’ve been open about my support for dropping petrol subsidies in favour of taxes which cover the overall costs to society imposed by fossil fuel use i.e. a Pigovian tax.

There’s actually some method to my madness.

Labour Bargaining Power: Its Different At The Top

Last month I highlighted a working paper on calculating the optimal tax rate, especially with reference to top income earners.

One of the channels identified by the authors in which top income earners have increased their share of the income pie over the past few decades is through their stronger wage bargaining power – when marginal tax rates are low, it pays for CEOs and senior managers to supress income gains in lower pay grades. This maximises “shareholder value” by boosting profits, and earns them nice bonuses for being “aligned with shareholders’ interests”.

And here we can see this channel in action (excerpt):

Wall Street Said to Weigh Freezing Pay Bumps for Junior Bankers

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Do Teachers Matter?

According to this new paper at the NBER, yes they do (abstract):

The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood
Raj Chetty, John N. Friedman, Jonah E. Rockoff

Are teachers’ impacts on students’ test scores (“value-added”) a good measure of their quality? This question has sparked debate largely because of disagreement about (1) whether value-added (VA) provides unbiased estimates of teachers’ impacts on student achievement and (2) whether high-VA teachers improve students’ long-term outcomes. We address these two issues by analyzing school district data from grades 3-8 for 2.5 million children linked to tax records on parent characteristics and adult outcomes. We find no evidence of bias in VA estimates using previously unobserved parent characteristics and a quasi-experimental research design based on changes in teaching staff. Students assigned to high-VA teachers are more likely to attend college, attend higher- ranked colleges, earn higher salaries, live in higher SES neighborhoods, and save more for retirement. They are also less likely to have children as teenagers. Teachers have large impacts in all grades from 4 to 8. On average, a one standard deviation improvment in teacher VA in a single grade raises earnings by about 1% at age 28. Replacing a teacher whose VA is in the bottom 5% with an average teacher would increase students’ lifetime income by more than $250,000 for the average classroom in our sample. We conclude that good teachers create substantial economic value and that test score impacts are helpful in identifying such teachers.

Petrol Subsidies: Time To Go

I read this last night, and I wholeheartedly agree (excerpts):

For Global Gasaholics, Ending Subsidies Is the First Step: View

Jan. 10 (Bloomberg) -- Fuel subsidies are the crack cocaine of global economic development: easy to get hooked on, hard to give up. And as every addict knows, there are good and bad ways to try to kick the habit.

Consider Nigeria and Iran. In Nigeria, the government’s recent decision to remove fuel subsidies and more than double the price of gasoline has led to riots and now a nationwide strike. Two years ago in Iran, an initiative to cut subsidies and almost quadruple the price of gas (as well as boost the price of food and water) provoked little unrest, lowered oil consumption and bolstered the economy and the government.

The differences between the two efforts offer valuable lessons about the best ways to eliminate fossil-fuel subsidies - - a staggering global misallocation of resources that does little to help the poor, distorts markets and pumps more greenhouse gases into our atmosphere.

Markets In Everything: What Determines The Supply Of Politicians?

And now for something completely different…fresh from the NBER is this seriously scholarly paper, but which I had to read with my tongue firmly in my cheek (abstract):

Labor Supply of Politicians
Raymond Fisman, Nikolaj A. Harmon, Emir Kamenica, Inger Munk

We examine the labor supply of politicians using data on Members of the European Parliament (MEPs). We exploit the introduction of a law that equalized MEPs' salaries, which had previously differed by as much as a factor of ten. Doubling an MEP's salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.

Oh my, what fun…most of it conforms to intuition (raising salaries increases supply; politicians from more corrupt countries tend to put in less effort), but that last bit is priceless. Raising salaries, all things equal, reduces the quality of electoral candidates.

Singapore must be on the right track then, as they’ve just proposed cutting ministerial salaries by more than a third. Malaysia’s Budget 2012 on the other hand has offered to raise parliamentarians’ pay (*cough*).

Does this mean politicians are a type of inferior good?

Remember, I didn’t say anything.

Technical Notes

Fisman, Raymond and Nikolaj A. Harmon, Emir Kamenica & Inger Munk, "Labor Supply of Politicians", NBER Working Paper No. 17726, January 2012

November 2011 External Trade: Within Expectations

Mean reversion, here we come. As expected, November export numbers tripped up a bit (log annual and monthly changes; seasonally adjusted):

Horror Stories In Education: A Cautionary Tale

From the World bank blogs (excerpts; emphasis added):

Seeing a child like a state: Holding the poor accountable for bad schools
Guest post by Lant Pritchett

In the early 20th century Helen Todd, a factory inspector in Chicago, interviewed 500 children working in factories, often in dangerous and unpleasant conditions. She asked children the question: “If your father had a good job and you didn’t have to work, which would you rather do—go to school or work in a factory?” 412 said they would choose factory work. One fourteen year old girl, who was interviewed lacquering canes in an attic working with both intense heat and the constant smell of turpentine, said “School is the fiercest thing you can come up against. Factories ain’t no cinch, but schools is worst.”

November 2011 IPI: A Setback

The November industrial production numbers provides some ammunition for pessimists regarding Malaysia’s economic prospects (log annual and monthly changes; seasonally adjusted; 2000=100):

The Costs of Inequality

If you can spare just 16 minutes of your time, watching this video will be worth your trouble:

Spare me from all those who think we need to be like Singapore.

What’s interesting to me from a policy perspective is that Wilkinson mentions that societies have approached achieving greater equality by either having incomes not too different, or through welfare-state-style tax and transfer.

That’s a fundamental question we have to answer – we kind of economic organisation do we want to have? An Anglo-Saxon style free market based one, or something along the lines of a Euro-style welfare state? And that’s something we need to work out, if we are at all to make any headway against inequality. That and what price we’re willing to pay to get there – because there will be costs.

(H/T Din Merican)

Demographics And Development

World Bank Chief Economist Justin Lifu Yin writes a concise article on the demographic transition and development policy (excerpt; emphasis added):

Youth Bulge: A Demographic Dividend or a Demographic Bomb in Developing Countries?

The youth bulge is a common phenomenon in many developing countries, and in particular, in the least developed countries. It is often due to a stage of development where a country achieves success in reducing infant mortality but mothers still have a high fertility rate. The result is that a large share of the population is comprised of children and young adults, and today’s children are tomorrow’s young adults...

“More Schooling, But Too Little Learning”

From the World Bank’s Education for Global Development blog (excerpt, emphasis added):

When an exclamation point is warranted

At the High-Level Forum on aid effectiveness (known as HLF4) a few weeks ago in Busan, South Korea, I had the pleasure of participating in a panel on education and aid...what we saw in our panel on aid for education, and in the one-day pre-conference that informed it, was very encouraging: it showed how Korea’s lessons about student learning are influencing international education policy.

LTV and DTI: Taming Housing Speculation

Now that BNM’s revised guidelines on consumer lending are now in force, the question arises as to how effective they will be. The reduced loan to value (LTV) ratio of 70% for a third housing loan (implemented in 2011) appears to have had some effect on housing speculation, if house prices are any indicator – price increases have moderated across the board in 3Q 2011.

In KL for instance, house prices increased 7.9% in 3Q 2011, compared to 12.7% in 2Q 2011. The problem is 7.9% is still a fairly fast pace of appreciation – the average for the past decade (2001-2010) is just 3.5%.

So based on the new guidelines, credit decisions will take into account net income as against gross income, as well as limits on the debt to income (DTI) ratio. Will that work?

November 2011 Monetary Conditions

Quite unlike October, money supply in November rose largely based on higher FD’s but saw currency in circulation and current deposits fall (log annual and monthly growth; seasonally adjusted):