Tuesday, 6 February 2007

Lies, Damned Lies and (silly usage of) Statistics

The front page of one of our English newspaper today demonstrated how much they do not know about economics. Jeff Ooi blogged about it here. I am less suspicious of their intention – sentiment of the current state of the economy is currently going through a sort of reversal (check out our sentiment indices), at least in the mind of international portfolio investors. No harm in running an article on this issue I guess.

However, the usage of statistics is just so wrong. Way wrong. Not the cunning spinning kind of wrong, but just silly unprofessional kind of wrong. It reflects really badly on our level of maturity in economics and financial matters.


Per capita Income?

Discussing all the statistics will take the whole day, so let me just talk about per capita income. It was stated –


  • Per capita income: RM12,079 (1998) >> RM18,039 (2005)


The appropriate reaction that you should have now is “so”? It doesn’t really tell you anything besides that our nominal income increased after 7 years, which is really what you should expect anyway. If it remains constant, with rising cost of living, you should really really be worried.

More meaningful statistics will attempt to convey how much income has increased. Contrasting income levels in 1996 (which is a better year to use, since 1998 is what we would label a shock, an outlier, i.e. bad comparator) and 2005:


  • From RM 11,400 (1996) >> RM18,000 (2005), that is, an average yearly growth of 5.2%, which is respectable.


Now, does this remain if we convert the value into US dollar?


  • From USD 4,500 (1996) >> RM 4,800 (2005), that is, an average yearly growth of 0.5%. This means that our income grew by less than 1% a year when calculated in US dollar.


The next question we should ask is how we compare with other countries in the region. Did our income grow faster than, say, Singapore or China (incidentally, for the same period, the answer is a marginal yes, and a huge no)?

Anyway, the bottom line is that the statistics printed are basically meaningless.


EPF Dividend

Then there is that EPF dividend of 5.15%, from 4.5% last year. Is this good or bad? Too subjective to say, but it is certainly not bad per se in terms of returns in my personal opinion. There are again many ways to look at this but from the households’ point of view, there are two useful considerations.

Firstly, what is the real return in 2006 compared to 2005? That is, what is the actual dividend that you get after adjusting for inflation that eroded the value of money? Inflation rate was 3.1% in 2005 and 3.6% in 2006. This means that real dividend was 1.4% in 2005 and 1.6% in 2006 – marginally better.

Secondly, what were the alternative interest rates available? I choose the most common one available for normal wage earning citizens – the 12 month FD rates. For both years, it was at 3.7%. So in 2005, the EPF dividend was 0.8% higher, but in 2006, it was 1.5% more. Again, 2006 was better.

It is important to have an awareness of the overall interest rates condition when considering any form of return on investment. Currently, interest rates are low everywhere in the world as a result of excess global liquidity and price effect of globalisation, including domestic ones. This however, is a relatively recent phenomenon. For example, in the period between 1983 and 1987, the average FD rate was at 8.6%. Thus relative to this rate, the 8.5% EPF dividend then was not really that attractive, in contrast to what you might believe in.


Seriously though

Truth is, the way the statistics was presented on the main page, it does no justice to the real economic strengths of Malaysia. It does not even really mislead discerning readers away from weaknesses of Malaysia. Silly, shallow and unsophisticated, it does very little but to tell informed readers how tabloid-like our mainstream newspapers have become.

I am in no position to comment professionally and competently on some of the current conditions of the country in many areas (judiciary, personal and press freedom, socio-ethnic coherence, education and so on), but when it comes to the current state of the overall economy, honestly, Malaysia is really not in a bad shape, despite what most of you might want to believe in. If you look at almost all macroeconomic indicators, Malaysia is what IMF would label as having strong and stable fundamentals. In fact, Malaysia emerged from the financial crisis of 1998 well, with balanced growth driven mainly by robust private sector activities, and weathered numerous external shocks (terrorism, internet bubble, SARs, tsunami etc) without excessive recessionary and inflationary pressures. Cost of living has definitely increased in recent years in urban areas like KL, but wages have not been stagnating, private expenditure is still growing, and one often overlook the positive effect of high commodity (rubber, palm oil etc) prices on the incomes of Malaysia's many rural households. Also, the external balance sheet position (indebtedness) of Malaysia is considerably healthier now compared to the 1980s or 1990s and banking sector resilience has also improved much (refer to this paper by Andrew Sheng for a good account on the evolution of the external wealth of Malaysia).

The current state of the Malaysian economy is not bad – in fact, we are better positioned now to achieve greater heights in the future global economy. Unfortunately, herein also lies the greatest concern. Leadership with imperatives other than economics (which translates to sustainable development and standard of living for all) is increasingly poised to squander this opportunity away, leaving Malaysia critically marginalised.

The real concern in not the present, but the future.

And that is ultimately more worrisome. The real weaknesses of Malaysia do not lie with its statistics. We are in dire need of a consistent and coherent set of economic policies that is motivated by genuine economic considerations and not an insular preoccupation of obsolete ideology to address our real urgent weaknesses, namely an inefficient public sector, non-market friendly regulations that obstruct economic/business activities, as well as a severe deficiency of high quality human capital, extraordinary entrepreneurial spirit, world class companies, and pragmatic industrial and investment policies.

Sigh.

Elanor

(Note: all statistics quoted in this entry are sourced from various free national and international public databases available over the internet)

6 comments:

nat said...

wow. not sure why, but this perspective seems objective and trustworthy :P just a gut thing i guess... it's rare, and i'm glad it's there (rhymes!)

keep it up, and you may end up our local economic blog guru :P :)

Elanor said...

thanks nat, for the vote of confidence :)

i do really hope some economists with greater calibre will start blogging too.

Dr Lim Teck Ghee anyone?

feliz said...

regular listener, first time caller..

hi elanor,

"Bravo".. reading your posts is exciting. i think you write about our Malaysian economics affairs & general economics concepts rather stylishly..

Anonymous said...

Another good one. Most people (or maybe I'm speaking for myself here?) just lament the fact that prices are going up, salary's not high enough, but you've given me another perspective :)

Nutmeg

Hi&Lo said...

Elanor,

Am touched by your concern and passion of the goings-on in Malaysia.

Pls continue with what you are doing.

Trashed said...

Echoing the other comments, please continue what you are doing as it helps me from getting a headache trying to unravel the numbers myself.