Monday, September 30, 2013

Certainty, Uncertainty

I wish to examine the impact of a sense of uncertainty on the need to save for the unknown future.

Uncertainty, in the sense I am trying to use the term, is a situation where the likelihood of the future is simply unknown. I would think it to be a zero or one probability situation - either it happens or it does not happen - binary - digital - I Ching - zen. Uncertainty is the stark situation faced by each and every individual as he or she confronts the world. You do not know what will happen. So, what do you do when you are faced with uncertainty?

To reduce the uncertainty, you train yourself up to maximum your opportunity. This in fact is the only thing that a person can do, seriously for himself. This is making the best use of the talents that God has given you, in religious parlance. This is to know what you are, to know what you can do. In Greek philosophy, "know thyself" is the most well-known saying of Delphi. In philosophy, the most basic question is you do not know when you are going to die, and this determines how you are going to live. If you know exacting when you are going to live, you can very specific plans about what you are going to do. (Same as contemplating whether to tell a cancer patient the "truth" or to pretend that everything is going to be OK.) If you leave the future indeterminate, then you will have to make plentiful of preparations which are likely to be overdone, more than sufficient, because you do not want to be caught short. A person caught with an uncertain future but with the greatest confidence in himself or herself will do the maximum by working ceaselessly so as not to waste time and be caught idling. If this uncertainty affects a whole society, then such behaviour will be exhibited as a social cultural trait. There is this constant struggle to do one's best and to continue to work and to do so that there will be no let up in efforts. Life because one of the amassing of natural energy and to dispense that energy to its most fruitful or effective impact. Kung fu, Shaolin, Bruce Lee. In the same way that life force is seen to be the most fundamental element of life, so some (or rather many) will see, in modern society, that money and wealth is the most fundamental element of living in the material world. The accumulation of capital and the store of value become the sole quest in life for those who are psyched to vow never to be poor again, like how their immediate forebears were.

But for a community where the recent history or social culture is one which has established a certain amount of stability, the tendency of such a community is to maintain the status quo. A hierarchy is set so that no one upsets the apple cart and everybody has their proper station in life according to recent history. The political power structure takes over to control the situation. There is nothing much an individual person can do except to fight to get on top of the heap, as Frank Sinatra would say. Once on top, all favours drips down to the very bottom so that everyone in society can benefit. Such benefits will dispensed onto to those who are obedient or in the terms of that ideology, loyalty. Loyalty is a term that is used to reinforce the strengthen of the status quo and the prevailing hierarchy. Once that power structure is established, everything else can be accommodated within that structure, including the hiring of talents and skills. In such a community, there is readiness to sacrifice growth for distribution in order that the apple cart is not upset. But when that power structure, or any power structure, breaks down, the aftermath can be very messy, as we seen on TV. But because the emphasis here is less on maximising talents but in strengthening the political power, there is a tendency to take from the output of the productive or talented to share with the rest of the entourage or retinue of advisers, bodyguards, foot soldiers and servants. This gives rise to a disincentive to work and there will be a tendency to downplay signs of prosperity by the likely victims.

It is interesting to realise that the flavour of the type of community or social we try to create has a profound impact on our daily behaviour as we are tend to act in such a way as to make ourself comfortable or justifiable or at peace with ourselves. In realising our sense of being, as broadly dictated by the general environment we find ourselves which of course are all in turn influenced by public policies and private treaties and communal habits, we find ourselves living particular lives according to our immediate circumstances. We are not really our self-determined selves as we wish to imagine, but justified selves in the face of the circumstance.

This is a obtuse a piece I can muster to write.

Thursday, September 19, 2013

Value & Market Price

This is the age-old problem in economic theory - the difference between the value of an item and its market value.

The famous example is that air and water are precious for human life but they are practically free (not wholly true for fresh air and mineral water). Diamonds are practically useless but they fetch high market prices. As Adam Smith concluded (I think), the market price of an item does not reflect its use-value but rather the interplay between supply and demand. Air and water have little market value because it is ubiquitous whereas diamonds are expensive because of there limited supply and insanely huge demand.

When we look at the issue of the distribution of income and wealth, we have to be careful to realise that we are talking about market prices or market values.

Land in the urban centres cost more than land in the rural areas because there is a limited supply of land in town and there is a huge supply of land ready to be offloaded onto the market from the vast hinterland as we go into the rural areas. If all the rural folks try to flock to the urban areas in search for high paying jobs, then there will be an escalation in the cost of urban properties - which is another way of saying that the real incomes in the urban centres will fall, and hence the problem of the rising cost of living.

If urbanites want to live a decent life, they must try to raise their incomes which means they have to work much much harder in order to produce services for which there is demand. Urbanites cannot be arrogant about things for they are mere slaves to the way of life that they have chosen to live, although they must be arrogant when they have made it because of the immense suffering - physically and emotionally - that they must go through to struggle and fight and then to be able to emerge out and land on the shore of financial independence.

Rural folks generally have great assets of land - which if valued at the nearby urban prices would amount to a lot - and their major concern is only income for their daily needs and possibly the education of their children if they do not intend to work on the land. The great wealth of rural families can be passed on to the next generation which, I am sure, as development expands, will mean great wealth for their future generations. It is precisely because of the likelihood or the desire to hold onto the land and to keep that wealth within the community and to pass it on within the community that land-rich families eschew unnecessary consumption in order to save for the long-term wealth of the family.

I know there is a great desire by many Bumiputera families (or some family members) to sell their land immediately so that they "do not have to work so hard anymore and have money to spend." This is the story of the Malay reserve land and that of Kampong Baru in KL. Of course, if you are not putting the property into the market or if you are restricting the market to a smaller section of society, then you should not expect the full market price as can be got elsewhere there is a scarcity of supply and ample demand (fueled by generous bank loans).

As a way of reducing the income and wealth gap between the urban centres and the rural areas, I like the strategy of developing economic corridors in the various states so that more new urban centres can be created in existing rural areas, thereby raising the market price of the land and labour in remote areas. This is now not a popular view. The World Bank thinks that the fastest way for a nation to climb the income ladder is for developing nations to concentrate their scarce resources on the existing urban centres and intensify economic activities there, on the argument of creating more value from synergy. This is true, but this only means that the gaps in income and wealth distribution will widen. While greater inequalities may be argued to be an inevitable evil of development, it does not have to be the case. I prefer a more spread-out and dispersed development strategy geography so that there will be less depletion of human resources from the rural areas and faster development of the rural areas.

We all know that rapid economic development is pursued at great social and cultural costs, for this is real transformation of society and the economy. In developing nations like Malaysia, we obviously have a very strong cultural sense of ourselves for each of different communities - and it is this great cohesion that is at once a strength and a weakness. Closely knit families with strong parental guidance tend to create also material success and sustain it, whereas families with weak cultural and social sense will have to struggle to find alternate new pathways to rise above their respective situations. However, strong traditional families are at best good at maintain the status quo, and may not lend themselves to be the agents of change and high incomes. The cultural and communal pull is too strong. This is where enlightened education sets the society free, not that education is needed for entrepreneurship (although literacy is definitely needed for communication) but the courage to explore new frontiers with courage and confidence. The ability to think and the ability to think for oneself are assets to anyone who have them and to those who are fortunate to be their neighbours.

Future success can only be assured when it is properly nurtured. Affirmative actions are desirable, but these are double-edged swords especially when they are used to change the dynamics of the game. We are talking about changing the game for one group to compete with another group. Adaptation will come in to ensure continued success and that adaptation creates a new game which the old affirmative actions may be inadequate to deal with. The affirmative actions themselves, if badly designed, may probably accentuate the discrepancy by weakening the affirmed group and toughening up the unhelped group. My point is that one cannot be too careful in designing policy instruments. Numbers are not facts, and they need careful analysis and understanding or they can become dangerous.

There is a need to be clear about real value and market prices. I believe our policies tend to focus on market values rather than creating real values that will last.

Wednesday, September 18, 2013

Urban Rural Divide

Unfortunately, in the world today, we measure everything by nominal value. You live in a RM5 million bungalow and I live in a RM50,000 attap hut. You have more money than I have. I should also have a RM5 million bungalow. Well, you will have to move from the village to the prime real estate and buy my neighbour's house or even my house. Where do you get that RM5 million. That RM5 million represents the full income or savings that you will make in your lifetime. Or, do you think that the price of the house will escalate and you can make RM5 million out of it in 10 years' time.

Conversely, you could build a similar house (that's is simple English for a "bungalow") next to your attap hut. It may cost you RM200,000 - RM300, 000 to build the house using similar materials, if it is not too far away from the city. (If you live in a very ulu place, the cost of transportation may quadruple the cost of materials.) Would you be as happy as living in the house in the countryside or the RM5 million bungalow in the expensive city. It depends entirely on you, on your background, your upbringing, your social support system, your expectations.

In the end, the value of your house depends on your earning power or rather your saving power over your lifetime. (Some lucky ones can buy two or three houses over a lifetime, and that do not come from their salaries I can assure you of that.) Some people will starve themselves to buy a big house and some people will consume well and live in a small house.

The type of house we live in is mostly the result of an accident, not a free choice of their own as most people would like to believe in. Ex-post, after the fact, we may justify how we made our decisions but that is reconstruction. (I don't read autobiographies with titles like "My Success Story" - pure fiction.)

We live where we can get a job - this is a fact. If you can't get a job there, you try to get a job here. Whether you live in a bungalow or an attap is the result of your endowments, natural or otherwise. But some people do have a choice - they have the skills to work in town, but they choose to be in the countryside. But most people just simply put their skills envelope to the extreme limit at the frontier line (some may even bluff to have skills which they do not have). First preference for most people is to work in a big city, because the pay is the best. The pay drops from CEO to senior management to officer and clerk and driver. But you start from the bottom, the highest of the bottom that you can get.

Traditionally, for companies that are struggling to survive, they try to hire the best skills at the market price. For companies where profit is not important, there is leeway to hire the people you like, and those who are the best. But the world is a fluid place. Even if you hire who you like, it is only natural that the best will be able to get a job elsewhere - and most probably produce better result. Unless, of course, the rules of the game are peculiar and the better outcomes are bestowed upon those who are likeable. But in the larger, the best will produce better results, and in our case, earn the highest incomes.

If the best is not a natural endowment, and can be nurtured, which it must be, I believe, then we must be able to recreate those preconditions for success - for everyone, and not just a select many - so that the whole society that progress and move forward and upward. I believe that the economic conditions in Malaysia has improved dramatically in the material sense - we are all consuming far more than is good for us; we are now worrying about our own happiness and don't know whether our happiness is endogenous or externally triggered. Nonetheless, I believe the whole society has progressed tremendously. We are now talking about relative sense of well being. I believe the poor today have more material thing when I was young living in what is now called a squatters' hut with gaps in the wooden panels for natural wind-flows, and newspaper for wallpaper to create some privacy.

Now, there are people who are stuck in towns because they have no land anywhere. They struggle to keep a shelter, and they eat so that they are not hungry. But education is the way forward. I believe very strongly that education must be for free, and free should not mean lousy. It is the bad education policy or poor staffing of the education department is kills good education.

People and communities live in the rural areas because they have land - probably mostly inherited. Inter-generational wealth is not very easy to transmit, as traditional culture and ways of living does not contain sufficient productivity gains (because expanding sideways rather than up) to bring about an improvement in the standard of living. Agriculture has this problem of the lowest productivity gain among the economic sectors, especially among family agriculture. To improve productivity, policy enter to introduce plantations and families are driven to towns with great unhappiness.

If people with the same skills are paid the same amount per hour (wage rate), labourers for example, those in the towns will earn more as they have to work more hours, while those in the country side work fewer hours because there is less requirement for their labour and hence earn less. This urban-rural divide in incomes is a technical factor that is hard to get rid of.

Of course, the urban poor has a very hard life because there is no leeway for them. There are no chicken coops for them to hide in, or banana trees to pluck from. There is the relentless rent to pay, the electricity bills to pay, and the petrol to buy to go to work. Unlike the country side where there may be territorial rights and natural endowments to benefit from, the town is an entirely artificial construction, built on the loans of banks and the circulation of money. The town is a matrix which is not real, unlike the country side where squarely grounded on mud and shit, literally.

The distribution of income and wealth is the result of our own mental makeup, how we envision life. The indigenous people are land-dependent whose shopping mall is the jungle. The immigrants have left their agro-based poverty and enter the towns to work hard and save and accumulate because they do not want to be poor anymore. These traits are passed on by their cultures and the stories they hear from their elders. The schools teach literacy while the homes teach values. The fundamental societal unit is the nuclear family where there is specialisation in domestic homemaking and saving and external income generating. I pity those from broken homes, for they are the lost ones. Will society provide the love for the unfortunate?

Tuesday, September 17, 2013

Distribution of Income and Wealth

This is probably the hardest subject in the entire field of economics - the distribution of income and wealth. (Unless of course you are studying the theory of uncertainty which is a deterministic system trying to describe the indescribable - you know what is uncertainty when you think about it - that's why you pray.)

For one thing, it is very easy to get tripped right from the first step the difference between income and wealth. In economic jargon, income is a flow and wealth is a stock. One does not lead to the other. A person can have a large income, but may not have any surplus at the end of the day - for he overspends, by buying a car, a house and a watch that are far more expensive than he is actually warranted (although he may have imagined to be of a superior grade). A person may have huge wealth - usually inherited - and he may have little or no income if he is poorly invested - many stories of this from actors and actresses and those who won lotteries. A windfall gain - another favourite economic jargon for "money from the sky" or "manna from heaven" - is a one-off and the theory says, if unexpected, will be quickly spent because more than imagined - and once frittered away will not have neutral impact but the creation of a spending lifestyle that is far exceeded the person's ability to generate future incomes.

There is a tendency for discussions of income distribution to be confused with wealth distribution - the classic economic example of wealth (natural resources) not being able to create high incomes (value-added activities). There should be no difficulties in seeing the difference. Wealth is god-given and therefore is made available without much effort or even expectation. Value-add is the explicit provision of a service that is needed by society and other people and it engenders a mental orientation of serving and be of use to other people and society. Wealth you can just consume one your own in silence; income you can only create by serving others - and there is an immediate positive social impact. We can juxtapose wealth and service by thinking about how a rich person or family treat their poor maids. There is a saying in some community that some unenlightened people can use their wealth to weigh down on a person.

If we look at the distribution of income, we will see that its distribution is the result of the return on some capital or wealth. For those who do not have rich grandparents - and to be fair, most Malaysians at the start of independent Malaya or Malaysia - have nothing in their pockets, except for the famous one dollar in the pockets of immigrant Chinese (I do not know the oral tradition of other communities). This is the start of entrepreneurship. It does not matter where you start. You start with blood, sweat and tears to earn the daily wage of the day, starve yourself and save to build up capital. With a little spit of working capital, you have dreams of being a towkay (the old version of a Bill Gates) and you begin to deal with others (network). You borrow, you lend, you buy, you sell - in other words, you trade. In the days of zero current accounts nor credit cards, if you are lucky, you can have trade credit - the big towkay who give you the goods on credit (30 days, 60 days) or the small community banks that lend you on some small credit (the early version of micro-credit). The only collateral of those who wear loose blue pants are their words - their honesty and integrity. It is the promise to deliver and the ability to deliver as promised that is source of profit and income of the entrepreneurs - those who rely on some equity or even non-financial assets. Like farmers, the small towkays try not to eat their seed capital away - the teochews are famous for being able to survive on one salted egg a week, with porridge (rice with water). If you are lucky, you may own a little shop which is also your house (hence, shophouse) and this may be all that the small towkay has at the end of his life; he may have educated his children in the interim (tales of severe rationing in education; for boys only, when daughters of towkays were of maid quality only) and probably a big debt with the bank. When telling stories, we must tell the story to the end - like the tales of the three kingdoms. After the old man dies, the poor children may be still poor and unable to repay the loan and have to sell that property to some wannabes who have dreams of owning properties as a sign of wealth. The lucky ones, who do not have to sell their inherited property, want just use it as a house, not as a shop because the business has grown tough or the trade has died or the children has got a job in the bank as a clerk. The whole family is stuck in this old rundown shophouse, quarreling over cashflow and inheritance.

There are of course who do very well by any standard - and they are not you and me. They get big contracts to build public works. They connect with the big suppliers in town, and they wine and dine to seal deals. This makes the more flamboyant part of life in the city. The big shots and their dolled up mistresses, their big cars and fancy talk. They are the ones with the big assets and the big debts, borrowed from the banks that take our deposits at low interest rates. If the bankers are good (meaning prudent), the town will grow slowly and steadily. If the town is going very quickly, it means that the bank is an employee who has no responsibility except to lose his job when things go back, by which time, he would have made big bucks (last time, no big bonuses) with the big contractors and probably the giver of contractors (we have to be careful here about smearing the reputations of important people). This is the real battle field of business, high finance and politics. Gangs are formed. You fight me, I fight you. Intrigues are played in corporate news. This is the battle for the distribution of wealth.

Now, if the party you are fighting against is the government, then you better be prepared to lose. The government takes the taxes of all the people in the nation and use it for the betterment of a section of the community. This is the real distribution of wealth - or, to put in fancifully, the inter-generational distribution of income. Those who lose out leave. As the winners grow in numbers, the endgame is that all wealth belongs to the majority - and this is when the real war of intra-racial battle starts. Because the nation has been built on one group cannabalising the other, there will be no peace in such a nation for many generations to come, no matter how justifying the intervention of the government may be. The government does it because the people want it. Be careful of what you wish for.

There is only one just intervention for any government - to help the poor to rise above the daily drudgery of life. Provide a solid platform for everybody to stand. When the government is just, people will help each other and the government will play a support role. The people must be given sound ground rules that everybody can play to clear goals. This is an ideal, one that can be liberating.

The Malaysia today is proudly 50 years old and many of the immigrant families are probably in the third or fourth generations - at least. Their families were born here and they have died here. In the natural distribution of talents and abilities, they too are poor as well as rich. It would be fair to say that most many of the Malaysia families are probably be of about the same lower middle class groups. The battle for wealth are among the politicians and the big elephants. The poor man and woman on the street struggle to make ends meet, and to have a vision of the future of their own. The values that are now attributable to jammed congested housing in urban setting - they are urban for an economic reason - must be very much higher than broad and sparse farm land in the countryside - they are broad and sparse for an economic reason as well. The supply and demand factors set in. It is well know that the terms of trade between the rural and urban centres are no good - and the natural consequence must be rural-urban migration to equalise value - (but the World Bank in its recent wisdom prefer big conurbations for high income as opposed to more geographically distributed spread out of wealth).

Talent is rare, and we need all the talent we can get to build this nation further. You cannot suppress talent. You can build capacity. When we are all brilliant, we should all have high incomes equally.

Bumiputera Economic Agenda

Note: This is a social service. I have merely cut and paste a few news reports in order to collate the few statements available. Many readers could be interested in this.

Shah Alam, Saturday, 14th September 2013. Two days before Malaysia Day, Najib launched the new Bumputera Economic Empowerment Council (BEEC), a transformation of an erstwhile entity called the Bumiputera Agenda Action Council (BAAC) presumably to carry out what used to be whispered as the Malay Agenda.

He said the government is the government responsible for all Malaysians of all levels regardless of background, whether they are Bumiputeras or non-Bumiputeras, Muslims or non-Muslims. But since the Bumiputera form the majority of the nation, the agenda to empower the Bumiputera (the Bumiputera Agenda) should be considered the national agenda (National Agenda?).

He announced that the strategy to enhance the Bumiputera economic power is through five areas: human capital, equity ownership, non-finance assets, entrepreneurship and delivery system.

1. Human Capital

A RM1 billion MARA Education Fund in the form of a "matching fund" to meet financial requirements for training programmes, education, entrepreneurship, research and development and innovation.

The government will increase skills upgrading programmes for youths with low academic and skills qualifications to offer them a second chance so that they would have more opportunities to get a job.

Re-skilling programmes for Bumiputera youths will also be increased. Additional allocation will be given to MARA Activity Centres to buy latest technology to conduct the taining programmes. 
The number of programmes conducted by the national youth skills training institutes will also be increased by adopting the two-shift training session approach.
The government has significantly increased the positions of Bumiputera students in local and foreign tertiary learning institutions."The next phase is to empower the Bumiputera human capital to match manpower and skills requirements to suit market needs." On jobless Bumiputera graduates, the government will intensify training programmes to address the employability problem so that training programmes were compatible to industrial needs.Programmes such as 1Malaysia Training Scheme, Graduate Employability Management Scheme and Skills Steering Programme will be expanded to increase the number of beneficiaries.
To increase the number of highly-qualified Bumiputeras, related agencies such as the Public Service Department and MARA will expand their post-graduate education programmes to meet market requirements particularly in critical and high technology disciplines. The Professional Steering Programme under the Bumiputera Education Steering Foundation and similar programmes will be intensified in efforts to create more Bumiputera professionals.This will help them gain recognition as qualified professionals especially in critical fields such as to become accountants, specialist doctors, architects, engineers and actuaries. The government plans to increase UiTM's student enrolment to 250,000 by 2020 from 180,000 currently. More UiTM branch campuses will be opened nationwide.

2. Equity Ownership

To enhance bumiputera equity ownership in the corporate sector, the Skim Amanah Saham Bumiputera 2 will be launched by Permodalan Nasional Bhd with 10 billion units, while Ekuiti Nasional Bhd will take over the role of steering the Skim Jejak Jaya Bumiputera to assist bumiputera-owned companies to be listed on Bursa Malaysia.

3. Entreprenuership

Targets for all chief executive officers of government-linked companies (GLCs), including for projects awarded to vendors. All ministries to create a Bumiputera Development Unit, responsible for formulating proposals and implementing bumiputera agenda initiatives.

4. Delivery System

To ensure the bumiputera socio-economic development agenda is effectively implemented, the delivery system will also be strengthened to create an efficient, comprehensive and constructive ecosystem.

5. Non-Financial Assets

Various measures have also been outlined to help bumiputeras, who still lag behind in the ownership of non-finance assets such as houses, industrial premises and commercial complexes. Syarikat Perumahan Rakyat 1Malaysia (PR1MA) and Syarikat Perumahan Negara bhd in cooperation with state governments will build more affordable houses for bumiputeras nationwide.

UDA Corporation will help to develop properties including houses, business complexes and spaces, as well as industrial and commercial buildings in urban areas, said Najib.

GLCs and government-linked investment companies involved in property will also give emphasis to bumiputera property development especially of housing, shophouses and commercial premises.

To optimise the value and benefit of non-finance assets such as property for Muslim bumiputeras, the Yayasan Wakaf Malaysia will be turned into a corporate wakaf entity.

Property institutions such as Pelaburan Hartanah Bhd, Majlis Amanah Rakyat and Perbadanan Usahawan Nasional Bhd will be strengthened in order to develop or acquire commercial and industrial properties, especially in strategic locations nationwide.

Friday, September 13, 2013

High Incomes, High Prices, Growth & Distribution

Studying how the economy works is unfortunately not an easy task, as many factors enter to influence it and its impacts surfaces in almost all aspects of human and non-human life.

Economists learn to think in terms of trade-offs, as a simplifying mental tool to assess impacts. The pivot is the limiting factor - there must surely be one resource that is limited. Some think the resource is the natural environment (fresh air, clean water, tall trees), or knowledge (know what and know how), or simply human mortality (time). The basic economic purpose of a human being on earth is to accumulate sufficient "value" for use during one's lifetime, and for "greedy" ones, the lifetimes of one's entire family or clan or even dynasty. It is the extent or ferocity in the accumulation of value or wealth that drives the underlying economy and its impact on the rest of society or social life.

Growth for the economy is therefore the accumulation of capital and wealth from profits. With traditionally, wealth is held in the form of metals (gold or silver pieces), in the modern world of paper and electronic money, wealth is held in equities and real estate. So, those with money play the stock market and the property market - the rest of us work.

The rest of us work because we do not have the surplus to accumulate. We earn enough to buy shelter and transportation and probably some distractions in remove the drudgery of life (erhu, camera, guitar). We may even save very hard to pay for our children's education - because we want them to have a proper foundation to earn high incomes. The path to high incomes is the ability to solve problems or anticipate them, so that we can reach our objective in life by overcoming the obstacles along the way - and that objective is to earn enough money not having to work for the rest of our lives.

How much we need depends on the level of prices that we will face in the near and distant future. If we think that prices tomorrow will be higher than today, then we will not let up in our work because we feel our savings are insufficient. In the face of uncertainty, we rather suffer type I error (make a mistake in saving too much) than type II error (make a mistake in not saving enough). We are on a treadmill.

In the world of high incomes for everyone, we must accept high prices. Everyone will be us, earning the same pay - or we will be like them, earning the same pay. It is relative. Our maid will earn as much as us, and we will not be able to afford them, by definition. Everybody will be well paid, or paid almost similarly - possibly with a few minor discrepancy just to show some differentiation in order to encourage the capable and hard working to work even harder - just like in the civil service (or is it the other way round - to create an illusion that the gap there can be closed).

This situation will happen when there is equal opportunity to education, and education is the same everywhere. Education does not mean cleverness. Education means the ability to communicate our ideas to others clearly, and to understand others well, so that we can live in peaceful coexistence. Education means that we know how to give and take, and we see each other as equal, as mortal human beings who will die and become nothing. Education means we can identify a common area of interest and work together to solve that problem. Education means we can think.

Of course, in any society, there are the underprivileged. Those with handicaps - physically or mentally. They should be given assistance in order to reduce their sufferings or to encourage them to overcome their shortcomings. There are also the able bodied who are poor and they need education and the discipline to work hard to achieve a result, without stealing. Stealing is a concept derived from property rights. Property rights is a concept that comes from the fact that property is normally acquired after years of hard work or success in playing the game in town, and not consuming the whole fruit of the effort. It is that part that is saved that is held as one's rightful property and society will protect that right. Only then will efforts be sustained in society to the accumulation of wealth and the growth of that society - mostly in terms of concrete structures in a cluster and ample display of things which are not fit to be eaten but enjoyed in other senses.

Wednesday, September 4, 2013

The Meaning of a Price Increase

A price increase is nothing less than a rationing device. You are likely to spend more if you consume the same quantity as before. Or, if you have a fixed budget (all budgets are limited in this sense), then you will consume less at a higher price. A higher price therefore means that there is a reallocation of resources - through the agency of money - from consumers to producers or the government.

In the current scenario of an increase in the fuel price, the objective is for the government to cut its subsidy by cutting the subsidy to those who are not intended to enjoy the subsidy. In other words, the government wants to give the subsidy to the poor (we can argue who is poor). By giving the subsidy across the board, the government also gives the subsidy to the unintended groups, as such the local rich (who can argue about who is rich) and all foreigners who drive their foreign cars here to fill up (what about foreigners driving local cars to fill up). The official argument goes on to say that the only way to give subsidy to a well-defined group is to give cash to this well-defined group.

But, of course, the price increases affects everybody even those who receive the  cash subsidy (the latter have to make sure that they do not spend on fuel more than the subsidy; the counter-argument is that, at least, you have got "some" subsidy). In an evolved supply chain with lots of linkages, there will be multiple impacts from a simple increase to the end of the line - the so-called "butterfly effect" where the flutter of the butterfly in the tropics eventually causes a typhoon in the ocean. The official solution to this butterfly effect is to disallow this effect to multiply - a 10.5% increase in the price of petrol by 20 sen from RM1.90 per litre is now allowed to have an impact of 0.1% on food prices nationwide.

Simple arithmetic tells you that fuel enters only as 0.01% of a supplier in the supply chain and if the supply chain has 20 linkages and each product has say another 20 inputs with price increases (think of the transportation), the net impact is 4% - by this very crude method of calculation.

It would be foolhardy to imagine that the price increase will have little or no impact on the welfare of the general population. This is rationing, as the price increase will reduce consumption - and probably domestici production (bad) or imports (good?). If not, then the price increase will force people to dissave or to borrow and get into debt - and this will be a transfer of the government deficit to the household deficit or the corporate deficit.

In any case, do not argue that the price increase will have no impact on the domestic economy or the domestic consumers except an arrest in the deterioration of the government balance sheet because we are only reducing our subsidy to (unwarranted) foreign beneficiaries. There will be collateral damage, all right, over and above the direct impact.