Friday, April 2, 2010

NEM: The Real Issue

How do we get ourselves out of the current economic quagmire?

The real issue is clear: Rights and privileges have been equated with monopolies and rent collecting - and this has led to an uncompetitive economy, exactly as propounded by the textbooks.

The change we require is simple: Reduce monopolies and distortions, and encourage multiple players in order to promote competition.

But the major counter argument is this: Why do we need a more competitive economy? With monopolies and economic distortions, we have managed to obtain for ourselves a fairly good standard of living. We are happy with things as they are and we should continue with the status quo.

The problem with this argument is that is that it is predicated on the proposition that there are some people who are willing to work very hard because they will get no government support as they are not indigenous and therefore they must fend for themselves. Thanks to their circumstance, they are forced to get out of the hole they find themselves in.

As these old slaves leave their hole, other unskilled immigrants will have to come in to take over their labours. Our economy therefore gets stuck in the agriculture that we have been fortunate to have inherited from the British colonials as a strategic position in the global economy.

The major hinderance to change in this country is the anachronistic poltical system that propagates sectarianism. There should be an overhaul of our political system. The alternative front based on justice and religion is also a tough alternative for the people to choose.

I hope that the political line could one day be drawn between the liberals and the conservatives - those that want globalisation and those that want a bit more of local control.

But no sectarianism, please. We are Malaysians!

Sometimes, I wonder whether our national problems are really a problem of the positions we take, or are they a reflection of our inability to communicate properly among ourselves, as a result of stereotyping and fear and suspicion. For everybody claims to be reasonable - which I would like to think they are and see things through their eyes.


walla said...

An NEAC Blind Spot?

I hope to be proven wrong in thinking that the economic quagmire is in fact deeper than we are imagining.

The underlying assumption of the NEM seems to say that so long as we hit 6.5% pa growth rate every year for the next ten years, we will be able to reach high-income status.

And it is felt that this is achievable because in the past thirty years or so we had averaged about that, give or take some kinks.

My bugbear is that the growth in those past thirty years or so was shored up by subsidies which reduced prices which expanded incomes.

But in the next ten years, the NEM is mandating the reduction of subsidies. The whole justification of the NEM is to cut off subsidies except for minor bits.

So my thinking is that we cannot use past growth performance to bolster our confidence that future growth performance is achievable and this is because past had subsidies but future will not have subsidies.

I do not know whether the NEAC had factored in growth distortion by subsidies.

If it has not included the subsidy factor in its computations, then we may say the challenge ahead is not just about maintaining a steady and relatively high growth rate each year of six point five percent for a period of ten consecutive years, for if the subsidy factor is taken into account and removed from the growth rate in the past, then the past growth rate on the average may actually have been lower, perhaps 2% pa. Which means in the next ten years, we will have two targets to achieve instead of one: first to jump-start our economy so that the growth rate increases by say 4.5% pa from say 2% pa (without subsidy/past years) to 6.5% pa (with reducing subsidy/next two years) and then keep the engine running at 6.5%pa (without subsidy/remaining eight years).

How does one jump-start our economy to double its rate of growth for the next two years when the present world market is still so dicey?

The Middle Path
If the NEM removes affirmative policies immediately, it has to erect with equal speed a social net. Otherwise a segment of the population may fall off the circuit. But a social net for many who will no longer enjoy affirmative policy support is no different from an affirmative policy in all but name. So it is still status quo.

In other words, to pay for a social net, one must have affirmative policy revenue. As all along till today, much that has come from those who work their guts out on their own, what more against the tide of disincentives and malfeasance. This quiet, productive and law-abiding group is leaving. It is getting smaller by the day. It is also a sizable proportion of the talent pool that the NEAC has identified as critical for the programs of the next ten years.

So the social net will also be difficult to maintain, and its source codes will also be relocating.

Add the jump-start challenge of above, and the quagmire has actually gone done deeper than we think.

Next, there is going to be an extra energy bill coming up within the next two years, if supply-demand projection for oil is still valid. But it is not supposed to be valid if the NEM is to be applied - because the NEM will need us to use more oil than we can produce or buy. Which means we will be hit by a new energy bill sooner than we expect. Perhaps at the very moment we are supposed to double our growth rate.

So we have three hidden factors working against us to even achieve the first of two stages of trying to reach that target growth rate.

What then to do? Try to cut down the size of this problem. Equals grill the red herring that is this post, and then find the Middle Path.

That, i leave to brighter minds.

Anonymous said...

I would be interested in reading your views on the planned reductions in the petrol subsidy, which is part of the NEM.

We know trimming the subisidy so is sound economic policy. However in the unique case of Msia, there is a quid pro quo arrangement where the consumers ' benefit of government's subsidy of petrol costs is counterbalanced by the huge excise taxes that Msian drivers have to pay for their cars.

(Of course, this quid pro quo is not valid if we include Proton as one of the car choices, but tell me, which higher middle class citizen will opt to drive a Proton compared to Toyota/Honda/etc?)

To get an idea of the costs and benefits, we should compute the excessive premium (70-120% excise and import duties) we pay for foreign cars e.g. a 2 litre passenger car and discount it over the average working life, assuming we replace our cars every five years. Compare that number to the petrol subsidy we enjoy based on the average petroluem consumption per capita over the same period.

My conclusion: the government can go ahead and carry out the GST. But to be fair to all motoring citizens, they have to liberalise the auto sector and reduce import taxes if they plan to reduce the petrol subsidy.

Go to Spore, Indonesia, Thai or Australia and find out how much similar cars cost dollar for dollar (i.e. do not convert the currencies as salaries are different). Better still, divide the cost of a foreign car to the average wage level.

So instead of talking about having higher wages, the government can raise our standard of living by lowering car prices and at the same time raising petrol prices to ensure that we bear the real the cost of driving.