Monday, 6 February 2012
Wednesday, 16 July 2008
This is a very short respond to oyster cove, whom asked about the problem of inflation in Malaysia two posts ago. As with other general concerns on inflation in Malaysia, it is often masked implicitly, and sometimes explicitly, with an accusatory tone towards the government. Understandable I guess, but it is useful to know the limit of what the State could and could not do when it comes to the current scenario.
Inflation - Supply Shocks
The problem of inflation currently is global, not local. It is not due to the doings of the State, say like in Zimbabwe. If anything, Malaysians have been shielded too long from these pressures, particularly on fuel prices due to populist measures. The inflationary pressures are external, and in some sense, transient (I am referring to inflation, not the prices - i.e., the increase in prices, and not the levels of price), and does not come from within.
Conventional monetary tools to handle supply-shocks are mostly ineffective, and the appropriateness of using monetary means to overcome supply-origin inflationary pressures is often questioned. Interest rate is a very blunt tool. We currently have a delicate problem, careless wielding of the tool might result in more damage than actually solving the problem.
So what can the State do? I can think of two things:
1) Do not make the matter worse - by succumbing to populist policies such as fiscally unsustainable subsidies, price and wage controls and other measures which are popular but economically disastrous.
2) Prevent secondary inflationary pressure - there is little the central bank can do for supply shock inflation, but there is a potential problem of spiralling prices due to the first round impact of the supply shock. Firms might increase prices irresponsibly beyond the first round increase in cost, leading to further increase in prices and wages and so on. The classic price-wage spiral situation, plus the embedding of inflation expectation which would be much worse than the current problem now. I talked about this from a different angle not too long ago. Interest rate can help to stop this demand-induced pressure, if executed appropriately.
Exchange Rate - Appreciation?
There is of course, the issue of why don't we just allow the exchange rate to appreciate to control the inflation problem? Well, the problem is a little more subtle. I can think of two issues:
1) Allowing exchange rate to appreciate implies that the ringgit is undervalued to begin with. Which could be or could not be true - which is difficult to assess. For example, undervalued relative to? Vis-a-vis major currencies? Major trading partners? Major trading competitors? Propensity of more short-term inflows than outflows?
Anyway, the thing is, the ringgit has been appreciating over the past few years - not in a straight line manner, but appreciating nonetheless. Very recently however, as in since the beginning of this year, the ringgit is not appreciating as fast as other relevant currencies. And I do not think it is due to constant interventions from the central bank - the evidence doesn't corroborate this view. I believe the current relative weakness of the ringgit has got to do with the relatively bad economic prospects of the country compared to other economies (on top of the already bad overall global situations). And I am talking about political uncertainties. Definitely not inviting money into the country, and investments being driven on hold. This naturally limits the upward tendency of the ringgit.
So, if the ringgit is not held down artificially, then you can't really 'allow' it to appreciate. And to artifically appreciate the ringgit is not entirely sustainable or cheap too.
2) Exchange rate movements have many repercussions, many conflicting in nature. For one, it affects trade and external sector-oriented investments. Malaysia's exports and imports are about 250% of GDP, and exchange rate is the 'price' of our trade. Overvalued exchange rate can be bad for our exports, as well as investments in the sector. This adverse impact is significantly more damaging than the relatively transient inflation problem, as the impact is long-term in nature. When the country's dominant sector is affected, it will drag the economy down. There is a whole lot more to say on this, but I will stop here - the point is, manipulating the exchange rate can be wrought with many unintended consequences.
So there goes - my short say on the issue. I guess the main point is that it is not something policy-makers can handle easily, and I can't see how they are intentionally making the situation worse than it is.
The politicians, on the other hand, are making things worse, with power struggle and petty controversies. I wish some of them would just grow up and govern. Really do not want to tell my kids that we are the generation that messed up the country.
What’s Left of Confucianism?... Thus, left Confucians favor institutional reform, arguing that the long-term stability and legitimacy of political institutions requires that they be founded on Chinese traditions. Jiang Qing advocates a tri-cameral legislature – a democratically elected People’s House representing the common people’s interests, a House of Exemplary Persons to secure the good of all those affected by government policies, including foreigners and minority groups, and a House of Cultural Continuity that would maintain China’s various religions and traditions ...
Saturday, 5 July 2008
Tuesday, 17 June 2008
But Nat, economics IS humane. As humane as any discipline could get. Some argue it is a soulful science. One even wrote a book with that title. What it could do is to have better public intellectuals to do some good PR job for some of the explanations and reasonings.
In the context of your post, I think a true economist (ie, not the talking heads on Bloomberg, or your local financial analysts) would be deeply misguided if 'efficiency' is regarded as an ultimate goal. In all reasonable considerations, efficiency is at most a proximate goal, with the ultimate goal being the wellbeing everyone. No one should really argue for efficiency just for efficiency sake. For eg, if you truly embrace and understand the purpose of central banks, the ultimate goal of all central bankers is to maintain and improve a sustainable level of living standard - inflation stability and economic growth are proximate objectives.
So when a clear headed economist argue that the fuel price increase is good, it is not because she is making a case of efficiency is more important than the rakyat. On the contrary, it is because the fuel increase is good for the rakyat ultimately. The problem is that the reason why this is good is so against intuition and conventional wisdom, that most economists making a non-apologetic case for it sound like bitches.
And now moving on to be even more specific, I disagree with phased increase in fuel price. If we agree that removal of fuel subsidy is inevitable, and that the main problem with removal of subsidy is hardship for the people due to inflation, then phased increase in price will ultimately hurt the people more, not less. And no, it is not hoarding and the sorts, but through the main determinant of inflation - inflation expectation. A one time increase limits the expectation of future inflation, but a staggered increase embeds the expectation. A phased increase in fuel price will most probably lead to much higher overall inflation than a one time increase. And when that happens, the hardship of the rakyat will be greater, not less. One can take a corollary of this argument in central banks raising interest rates, either one time or in a staggered manner. If the central bank is worried about inflation expectation (as compared to being worried about a financial market meltdown), you would expect it to raise rates over a period of time, multiple times in a staggered manner. This embeds expectation. In the reverse, if you do not want to embed expectation as in the case of raising fuel price, you should want to do it in one go. I am doing a bad job in explaning this, but Paul Krugman wrote briefly on this matter not so long ago - google "Krugman + embedded inflation".
This doesn't mean we should ignore those who are badly hit by this one time increase. It is just that there would be more badly hit people if it is phased. One way to alleviate the hardship of the poor is to have direct transfer to them, and the road-tax rebate does this. It is imperfect yes; no tool is perfect, but it is important that it reaches the intended target most of the time (for eg, a blanket fuel subsidy for everyone is NOT a good tool to help the poor). Yes, you can argue that it is unfair that some Beemer and Merc owners get the rebate too, but how many of these cases are there anyway, compared to the rest of the population? 5% to 95%?
But of course, more could be done. Income-based, mean tested transfer perhaps. If the Government is wise, this should be in the planning process for the next Budget.
Man, I post the longest comments on your blog, haha.
Noticed the alliterating title?
Thursday, 5 June 2008
Malaysians need to accept the reality of this and regard this as a positive change, for the nation and for all of us - we have been dulled by protectionism for far too long. And I hope Malaysians will accept this change graciously, as responsible citizens.
But make no mistake; now that the citizens are expected to be responsible, there will be very little tolerance for irresponsibilities from the Government. Tit for tat. More display of public wastage, and you can expect Malaysians to be more brutal than 8 March.