Thursday, August 29, 2013

Idealism: Adjustment & Assistance

In an ideal world, according to pure economic theory, the world should be left to operate on its own so that it will find its natural equilibrium - a condition under which it can continue to reflect its true self on a sustainable basis. Everybody is perfectly capable of looking after himself or herself, all within the natural abilities endowed by nature. There is no inadequacy in the person nor the environment, and everyone is perfectly happy to an exact duplicate of the other, with only the difference of preference and personal choice.

This is the world of pure democracy, where everybody has a say and everybody can come to an agreement that is consistent with the views and opinions of everybody. There will be no dissension because everybody is understanding and is willing to compromise; all strong views can be boiled down to the happy medium.

The happy medium of exchange is money which is a worthless piece of plastic or blip of light intricately linked and maintained that is hard to reproduce but of no intrinsic value in itself. When accumulated irrationally due to a coding error in the system, there will be an undue build-up in some particular corner or node, and when the world is overcrowded with plastics or the room is full of bright lights, everything can be zeroised. Money can vanish into thin air, in a strange act of self-destruct. The money system can be restarted when another defect is found with the system biased towards one particular element which everyone accepts to be money.

But in an ideal world of compassion, the strong helps the weak, the rich helps the poor, and all human beings hold nature to be sacred. There reality is now, and now is always sufficient. The senses are spent in peaceful balance, timed by the natural breathing process of being alive. All that is required is made available by providence, and the only effort required is in the stretching out of the limbs and the gesticulating of the jaws, one against the other. Everything is natural, including the evacuation of waste.

An ideal man struggles against himself, in his fight against the demons which is also himself so that the good will prevail. The stabilisation of the system is that there should be no flair ups, and the human being is allowed to wear its mechanical self out to its ultimate physical limit. It is accepted self-aware obsolescence without warranty.

The reality is of course far removed from this ideal, and real men and women arise to try to make good the defects of the natural environment. As ideal men and women arise to fight the harsh reality, they impute the source of the harshness on other men and women, and justice is therefore demanded of nature by inflicting injustice on others. As the good slays the bad, in doing so, the good is transformed into bad, and a do-loop is created. Ordinary men and women find solace in this nasty world by the hardening of their resolution to rid this world of its evils.

Everybody is clever, and everybody else is wrong. This identity of human beings may be the final reduction of us to be exactly to each other while at the same time thinking that we are different in everywhere from others except by the one or two distinguishing features which we choose to identify with each other in order to create a fellowship.

p/s: My apologies for this flight to idealism as I try to rationalise the disconcerting world.

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?

Tuesday, August 20, 2013

GST For Malaysia, Malaysia for GST?

The textbook case for the GST is clear - it is in lieu of the direct income taxes. (1) Would the implementation of the GST means a corresponding reduction in the income tax, both personal incomes and corporate incomes? If it is not, and if it is not tax neutral and if it is to increase tax revenue, then there will be a net withdrawal from the system. If consumption is going to be the growth driver as investment falters, then you ain't got an economic strategy for growth.

(2) The counter-argument is that the GST is a replacement for the current SST the Sales and Services Tax. GST is argued to be more efficient than the SST. The SST is imposed at the manufacturing stage and its cost impact escalated through the supply chain. We all know that. The SST was preferred because it is easier to implement, especially the sales tax. The services tax is a bit messy as businesses start charging customers the services tax even when they do not have to, which means they are pocketing the receipts. The simple services tax cannot be properly implemented. Now, the preference is for a wide-ranging tax net on goods and services at every level of the supply chain, with GST being collected and GST refunded. Every firm now needs an HR section to sieve through every bill and make sure they are properly accounted for and submitted. This army is also required for the customs which is responsible for implementing the GST. All these are fine, because they have to be done and other countries are doing it - although I now hate shopping in London and then have to queue up at Heathrow (in fact, the agency sent me a cheque and my banker says it'll cost me more to cash it!). All these may create a minor surge of economic activity. But my major concern is that surely this adds cost to firms and the argument is that GST is better than SST because the GST has no escalation costs in the supply chain. Concept without reality.

(3) To complicate the implementation, there is also zero-rated items and sectors which I am surely everybody will try to get into, with or without the approval of whoever is the approving authority. This will create the same problem with subsidy which the government trying to abolish in the midst of selective handouts. This is clearly selling to the general public. Now the problem is this: if the majority of the voters are poor, and the government is concerned about it, then the government is presiding over a failing economy. Are we seeing an economic strategy of how to fail an economy?

I think we are in great danger of mistaking management consultants for economists, and if they are so clever, they should all be taking a proper job rather than hopping from one to another the success of which cannot be traced. The reason for the dire of proper investments in this country is that there is a lack of clarity in economic policy, except for the consistency in punishing the locals who save, invest and work hard.