Wednesday, May 26, 2010

Subsidies, Deficit & Competitiveness

The current talk is that the money from subsidies can be used for development spending. This thinking is flawed.

The original intention of the subsidies in Malaysia was to contain consumer inflation.

When it was argued that government policies were expansionary, such as through reckless government spending on mega projects and when the money supply was growing at 20 to 30 per cent per annum, and therefore leading to inflation, the political wisdom of the day was simply to control consumer prices. Once held in check, everyone was happy. The consumers were happy and the elite of the day made hay while the sun shone.

Now, the problem is a blossoming of the amount spent on subsidies of all kinds across the board in the economy, and the amount spent on all kinds of government projects. There is now a problem in the economic system that we have inherited.

The natural instinct is to remove the subsidies. My immediate response is "Learn from Suharto" who had to resign when the people revolted at the subsidy removal insisted by the IMF.

If the purpose of removing the subsidies is to fund the deficit spending of the government, then my answer is not to do it. If the government spending is supposed to be good for the people, the subsidies are good for the common people.

The only valid reason for removing the subsidies is to enhance the competitiveness of the economy. This means that no sector of the economy is given undue advantage with the benefit of government money. In this case, the biggest subsidy is in the motor car industry where the duties on imported cars are so exhorbitant so as to drastically reduce the purchasing power of the common people. By removing the import tariff on imported cars, the transport system in Malaysia may improve dramatically. There will be no poorly made cars on the road. But there will also be a loss of revenue to the government.

The removal of food subsidies, as I have said above, is a dicey thing to do. Sure there will be an increase in retail food prices, but one off. It will reduce the quantity consumed but for a while. If the food items are produced locally, production may be stimulated and the competition reduce the price eventually. If the food items are imported, there is a need to remove the import quota so that competition will reduce the price eventually as well. On the whole, a good thing to do but gradually.

In removing subsidies to remove distortions in the economy and enhance competitiveness, the ultimate trick is to provide a level playing field with minimal or no monopolistic elements (no tariff, no quota) so that our best may compete with the best in the world.

The concept of competitiveness is derived from the concept of individual freedom and individual hard work, and against the concept of toll collection and rent seeking. Only that there should be rules so that all have equal access to opportunities in the economy and out.

Tuesday, May 25, 2010

Malaysia-Singapore Deal

Malaysia and Singapore moved foward on its Points of Agreement with "enhanced features" to the 1990 draft. The POA to be finalised in a month's time.

Malaysia to move its KTMB railway station from Tanjong Pagar to Woodlands by 1 July 2011, together with the CIQ.

Six parcels of KTMB land to be jointly developed by a company to be called M-S Pte Ltd and set up by 31 December 2010 between Khazanah Nasional Berhad (60%) and Temasek Holdings Limited (40%). One each at Tanjong Pagar, Kranji and Woodlands and three at Bukit Timah. The developed land could be swapped for land in Marina South and Ophir Rochor.

A rapid transit system could be developed between Tanjung Puteri in Johor Bahru and Singapore by 2018.

Malaysia and Singapore to consider reduction of toll rates at the Second Link.

There could be a Think Link in the distant future.

Singapore will hand over the Skudai waterworks to Malaysia fre of charge and in good working order on 1 July 2011 after the expiration of the 50-year agreement of 1961.

Other deals at the Malaysia Singapore retreat.

Kahzanah and Temasek to set up a 50-50 joint venture to develop a 202.3 hectare township in Iskandar Malaysia to be launched within a year.

An integration of Johor with Singapore.

Monday, May 17, 2010

Goh Keng Swee

Dr Goh Keng Swee died last Friday morning at the age of 91 after a long illness.

Dr Goh was the person behind the Singapore economic miracle, while Lee Kwan Yew helms the politics.

With a PhD from the London School of Economics, Dr Goh was able to present his thinking on economic development in a very clear and simple way. Using the simplest of economic growth models, he told students of Singapore University one day that you needed to save in order to invest.

If your savings are too low, then you need to invite foreign savings.

In order to attract investment, you must built the necessary infrastructure: port, education, national security, social security, public housing, public transport. Dr Goh practically created the present institutional establishments that have stand Singapore in good stead till today.

Singapore's excellence, not doubt, comes fundamentally from the training of its young people in the armed forces during national service as well as the use of advanced technology in national security.

In addition to the retention of English as the medium of education, despite Malay being the national language of Singapore, the national service forges the spirit of Singapore children into responsible men and women with the resolve to do their best.

In public transport and public housing, Dr Goh's objective was to build an environment that is conducive to pleasant living and working. Singapore city, being a concrete jungle as a result of its built-up density, still manages to exude a greenish impression the first you arrive in the city.

Dr Goh was also responsible for building the zoo, the bird park, sentosa, the Singapore Symphony. While most would think that he had a cultural and arty bend, I see these projects also as economic projects which will also attract visitors to Singapore, in addition to providing the needed natural retreat for tired city dwellers.

I heard he was a good drinker, and I reckon this could be an important constituent in contributing to the greatness of a brillant thinker and action man.

Wednesday, May 12, 2010

Innovation, Investment & Indigenousness

Most of the time, many big words together can mean a very simple thing - encourage our sons and daughters to think for themselves and put their own ideas to work, and hopefully make some money out of their efforts but importantly that their efforts be of services to society and themselves.


Do our children think for themselves? They do learn from the internet but not from schools. From schools, they learn the worst examples of sloth and cheating and lying from teachers, the role models they see and have to face everyday. There are good teachers but there are bad teachers, but the average impact is unfortunately not strongly positive. It is probably by a combination of resolved communual determination of parents and the community of elders that we currently have some form of defence against the infestation of rigidity and lack of effort in formal education institutions.

However, I won't argue that there is no space for creativity. Children nowadays have plenty of room for creativity in the classrooms thanks to the constant absence of teachers during teaching periods and the boredom and dullness that they manage to induce in their students. Creativity is the easiest form of escape for bored students to think out of the classroom and into the world of fantasy - and I am not at all surprised that the first career choice of my daughter is to be cartoonist or comic artist - how can I discourage her from a path that she has been talking during most of her formative years. (This is not to suggest that she failed her examinations; she got excellent grades, thanks to the superb tuition teachers that she had.)

So if a minister or an ex-minister wants to talk about home-grown investments, I think we have to fix the educational system by doing an overhaul on the quality and qualifications of the teachers, as well as their pay and the school curriculum - which means fixing the Ministry of Education. We have to put forward-looking and non-insular officials at the top.


Investment is not only about brick and mortar - this is the first lesson for all ministers, especially finance ministers and the people who are in charge of the dispensing of monies from the public purse.

Investment is about putting real time and money in a project in which real human efforts are applied. A lot of time, a lot of money is put in, but the actual effort is that of a foreign worker because the local worker involved does not have to put in effort (after he or she has taken a lot of the project money for his or her own pocket) or that the aforementioned local worker is so poorly trained as to be incompetent or so lazy as to be useless or so well taken care of by the system that social benefits can accrue to him or her by sheer display of non-effort.

Local investment is not about the government pouring in billions into the economy or selected pockets of the economy. Why? Our government has already done that for many years involving many billions, and all that we have to show is some good projects and some bad projects but lots of inflation until the inflation hits not just the ordinary folks who go straight into poverty land but also the not-so-ordinary folks who can only make money by importing and employing the real destitutes of our neighbours near and far. In this way, we can pretend to have local investments by spending local tax money and local savings to create jobs for poor foreign workers and make good profits for local project proponents who then quickly reinvest their profits from the local investments into foreign consumer-type products chiefly real estate.

Our government has done this before by giving billions of money to so-called local investment projects and creating local billionaires who then think that they are too big to be in Little Malaysia.


What is indigenousness when the government encourages the cannibalisation of the assets of one part of the local community with the view of using public money obtained through decree in the form of taxation to transfer those same assets to another part of the local community.

In economics, this is called transfer payment where a monetary transaction is made without any accompanying flow of goods or services the other way.

The immediate effect of such an effort is the flow of cash out of the system and putting downward pressues on the local currency. This impact happens because the action itself shows to the selling party that all their past efforts in saving their money and looking for ideas to preserve and enhance their capital is worthless because there is this big brother called the government who is supposed to protect them also as a government is no more doing that and that the earnest money they have paid in the form of tax is now being used to bring about their demise. This being clear, then the only logical thing is to negotiate price and get the hell out of here, therby driving out perfectly good indigenous investments. This is killing the goose that lays the olden egg, because there is an implicit rejection of the goose for some strange reason.

The only correct definition of indigenousness, in an economic context, is any person who is putting all that he or she has into the land that he or she is standing on and residing in. It is only through life-long sacrifices and devotion that the society is improved in terms of the ordinary provisions that the local communities can enjoy and through continuous efforts that the incomes of the communities can improve consistently. A person should be considered indigenous by his or her service to the nation, not by any other exterior characteristics.

Monday, May 3, 2010

Australia's Innovative Resource Tax

Australia's proposed resource tax is a real innovation in public finance. It allows the rest of society to share the boom from the export of natural resources, rather than allowing the wealth generated to be concentrated in the hands of those who are in the mining industry.

AWSJ, 2 May 2010: "From July 1, 2012, resource companies such as BHP Billiton Ltd. and Rio Tinto Ltd. will be liable for a 40% tax on profits made from the exploitation of nonrenewable resources. Combined with company taxes and after allowing for extraction costs and recouping capital investment, companies will pay a statutory rate of around 58%. Currently, mining companies are taxed on their production, through royalties of between 2% and 10% imposed by state governments. Those royalties will remain, but companies will be refunded those payments by the federal government."

The extra revenue will be used to cut corporate taxes to a more globally competitive level and offer more-generous tax concessions for smaller companies. The mandatory pension-fund contribution will be raised to 12% of workers' salaries in stages, from 9% now.

Many natural resources are non-renewable and the resource tax will impose an extra cost and slow down their usage.

At the same time, the increase in mineral exports raises domestic inflationary pressures and there is a need for some form of a compensation to those not in the mining or resource industry for the higher cost of living.

This resource tax is interesting now that China is unloading its US dollar reserves onto developing countries with natural resources, and there should be a wider spread of the liquid to the society at large.

The use of the resource tax should be compensatory for higher prices rather than a windfall gain, as the latter could trigger the much to be avoided Dutch disease.

Innovation & Mediocrity

Since we are talking innovation, I cannot help but be a bit polemical.

We all have this grand idea about innovation - the genius, the special case, the one that nobody else has. In this world of the mass media, mass marketing and mass production, what uniqueness and orignality are we talking about?

My favourite example is education, because most of us (I presume) have children and we spend too much time and resources worrying about them. We imagine we want them to be geniuses, but in reality, in our heart of hearts, we only want them to be average, to be mediocre, to be the same as everybody else - except only to be the first in line. That could just be the best of mediocrity. I do not imagine decent parents to want their beloved children to be eccentric, to be in a sphere of existence where nobody understand him or her. We want our children to be in the mainstream, if possible, in the upperstream.

In true originally and innovation, it must be out of this world and not be understood by the present and maybe by the future after considerable time, by human standard, say 100 years or two. This is where all the grand sages make their marks.

In day to day living, we are merely contented with marginal improvement because we cannot handle drastic changes without trauma. We want one foot in our comfort zone and the other testing the water. This is called risk management.

Most of us want to live a long and boring life, fearing dead and taxes. We want things to be the same as before, if possible, slightly better but not too much.