Thursday, August 22, 2013

GST, Subsidy, Deficit & Inflation

Given the convolution that we are now seeing in public debate over policy, it may be appropriate for us to back track slightly and disentangle the knots in policy decision.

1. In the early 1990s with massive inflow sof FDIs as well as short-term foreign capital, the fear was that an increase the monetary base would be hugely inflationary situation. The call by economists was to maintain aggregate demand. The political response was to grow the economy at all costs, and suppressed the consumer price index through controlled prices of food items and subsidy. The thinking was, after all, the economic growth would be sufficient to pay for the subsidy.2. The financial crisis hit. All privatisation concessionairs were technically bankrupt. The government stepped in to bail out by printing money, by increasing its debt.
3. As the economy slowed down because of the loss of investment momentum through punitive measures against local investors, subsidy of foreign investments through generous tax holidays, the tax revenue of the government was found to be insufficient to pay for its increasing debt. More debts had to be issued.
4. The China impact hit. Instead of encouraging local economic activities through exports to China, China drew local investors from here. At the same time, commodity prices escalated in the world markets as speculators try to corner the China market for commodities. China, with its strong economic growth of 10% pa was undeterred, and inflation soared around the world.
5. Global inflation of commodity prices hit Malaysia. The price control of items in the CPI policy of Malaysia is found to be costly. As the Malaysia economy falters, the government finds it hard to maintain the artificial apparatus of the local economy of government-deficit funding of massive projects to prop up the economy while at the same time keeping the cost of living down for the general public. This is now the situation we now face in economic policy in Malaysia.

Proposed Policy Responses
1. There is a policy proposal to reduce the subsidy by letting retail petrol prices rise to market level. This will reduce the government burden as well as reduce private consumption.
2. There is a policy proposal to introduce a GST ostensibly to replace the SST. This will raise government revenue and reduce private consumption.
3. There is a policy proposal for the government to undertake massive projects funded by further debt. This may or may not raise the GDP growth nor create employment for the local people.

1. What is the policy to encourage private investments, other than the stock market and the property market? Where is the value-add in the whole new world of VAT, or will the VAT be just another round price fixing.
2. If inflation is a problem, why are deposit interest rates so low? Are depositors being forced to pay for the mistakes of bankers and borrowers?
3. If the economy is so great, why is the ringgit exchange rate so low? Is the exchange rate policy rationing the local consuming individuals in favour of rich exporting companies?
4. Is the politics killing the economy? Or, is the economy doldrums killing the political regime?
5. Is the degree of corruption an indication of the real cost of living?
6. Can we clean up the economic system painlessly? Or, must we go through political and social unrest.

Anybody, any ideas?


James said...

I am not an economist, but my opinion can be summarized in obvious answers these questions:

1. Has Malaysia implemented any economic planning to increase productivity and innovation in the industrial and plantation sector? How how much do they contribute GDP growth after adjustment or elimination of government financed ventures in both sectors - ie pure capitalistic invesment growth?
2. Are FELDA and FELCRA efficient vehicles to promote efficient investments and increase the profitability of the plantation sector. Or are these simply vehicles to achieve social economic and political changes?
3. Does the government involvement in Sime Darby (and other business entities) promotes efficiencies and increase sustainable profitability of such sectors?

I surmise that it is the Malaysian government mismanagement that have resulted in lack of innovation, and promotion of unprofitable entry into this sector that have resulted in lack of innovation and resulting in investors seeking returns from land speculation or diverting savings and focus from the plantation sector.

I surmise the same problems are found in every segment of the Malaysian economy, ie interfering with free markets have resulted in Malaysia not being able to achieve economic progress despite resource advantages versus countries such as Korea.

In fact, all Malaysians know that if you want to get rich, the best way is to be involved or have insiders in UMNO, MCA or Barisan Nasional, or a VIP who inherited power in one form or another. Malaysia's model for economic prosperity is one dependent on bribery, and association with some form of heritage and beliefs. As such Malaysia is doomed and no real economic progress can eventuate because the economic sectors achievement of higher returns and growth is not based on demand, it is based on political affiliation.

And there is no value added in the economic model. Therefore the implementation of GST will only serve to arrest some form of tax leakage, but in a corrupt government, any net increase in tax revenues will simply be more money to fuel the corruption engine.

GST will bring no net benefit to consumers and Malaysians except those affiliated to the government.

Does my opinion makes any sense?

walla said...

One can't be too careful about giving ideas these days lest doing so attracts derision as management consultants.

But there is one. Duality or parallel universe.

Just observe how our society has balkanized itself.

Some live in gated communities because they don't feel secure. They send their children to non-mainstream schools because they don't trust the standards of the national schools. They watch cable tv because they can't stand the diets dished on mainstream channels. They seek out alternative media for critical analysis of current events, and they save up for the annual overseas holiday away from all the mess around them. They go about their daily lives, making bread, tending gardens, planning futures, saving dreams. They have given up on the present federal government which they do their best to avoid.

Others go about their innocent ways, hoping for the next handout or political fracas hinting another support-buying pay-rise non-commensurate with performance. They carefully avoid eye contact with those foreign workers who are the ones keeping things humming; these know hard enough if they don't work they don't get paid and because of their hunger they labor on without the benefit of patronage-propelled easy-street handouts. They therefore compete more successfully for the same jobs while the others only wonder how long they can milk the politics of favoritism.

The central challenge of our economic policies is how to synchronize with the world without sacrificing the status quo that economists are still asking to maintain despite knowing for as long as the challenge had existed all the success factors shown elsewhere. That work.

The political millstone sinks all before any economic policy, however well-meaning, can flower.

The difference between the first group and the second group above is plain. The first group builds and husbands to live and succeed in the world of pained reality; the second group lives and procreates to fail in the world of uneasy dreams. After all, there is no such thing as a free lunch. If there had been, there would be no problems or the need for policies today.

What happens when there is political interference? As a simple example, demurrage charges are incurred.

The big tanker is berthed at the harbour, ready to decant its ores. It has submitted all documents, paid all dues and taken its queue number. It moves in. And then gets a command to move in to make way for some other vehicle. It does this on and off for two weeks. Who would be paying the tab for all the demurrage charges incurred that runs at USD30,000 per day? If it complains, it is told to charter barges. Never a thought about costs that need to be avoided so as not to be passed as inflation onto the consumers most of whom are the second group awaiting release from their self-imposed economic plight.

Economics doesn't capture such messy curves which operate to throw a spanner into all the best policy-making machinery.

walla said...

That's also why in duality or parallel universe, the response rate is a crisp 2 seconds.

When asked how would GST costs be accommodated, a product dealer answered in two seconds that all will be passed to end-consumer.

As for the China factor, there are two questions. First, if China can make anything better and cheaper, why should it buy from anyone else? Second, is it conceivable that, as an emerging nation looking to claim pari passu ranking which it was preeminent at one time, it should deem it necessary to draw local investors from here who are after all not known for the technologies that it only needs?

There is of course a third question. Namely, why were these two obvious questions not asked beforehand?

Furthermore, commodity-propelled inflation is a funny term. Would we say when oil price is up and we reap the rewards we can blame it for the inflation it brings?

Commodities like cooking oil, tin and rubber are like petroleum. Essentials. One would think looking at some of the retail prices of cooking oil in China, namely rm160/10-kg, the inflation is there, not here. But for their taking 12 percent of our exports, perhaps the rm13.35/10-kg we pay under subsidy here would have been much higher. Because the subsidy would have had to be removed since the revenue would have shrunk beyond reprieve.

All the proposed policy responses and questions can be answered in one way:

we can't have the cake and eat it.

Knee-jerk cavalier actions of the past cannot yield the grace of olympic runners of today. Otherwise even the lame can fly.

And that is why duality or parallel universe is the only recourse.

Unless there is will, intellectual honesty for that matter, to make real changes.

Is there?