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.


walla said...

Life is made of tradeoffs. In the case of the so-called urban-rural divide, it's the tradeoff between pay and pace in a competitive market setting.

The urban person has to ramp faster pace to make bigger pay to make the difference in a market made competitive by more choices. The rural person has a slower pace which tends to mean a smaller pay in a market where competition is not so apparent.

Furthermore, the three waves of life cycle changes, namely job loss, family change and health decline, are more likely to hit the urban person first although the second wave of family change has already hit the rural person because of migration to the cities.

walla said...

The downside is the rural places tag higher prices more often than not because of transport costs and a smaller and slower customer base which discourages supply competition and so makes prices less elastic downwards.

The rural dwellers are thus forced to remain simple in their taste or trade-off between need and want.

In being simple in their needs, they run less risk of being saddled by large debts or credit crunches faced by the urban dwellers whose household debts these days are alarming in size for the lack of a solution.

If this situation persist, we may one day have as many urban poor as rural poor although the lifestyle of the former may be considered more sophisticated than the latter.

walla said...

Therefore, any national policy formulation must look at the possible convergence of these two trends for what is called the urban-rural divide today may well turn around to be the rural-urban divide in the future, especially when rural dwellers can afford a bigger home than their urban cousins.

(i'm typing while half asleep).

Which comes to two triggers in mind that may be common to both the urban and rural dwellers.

Those who have yet to write a comment will hopefully join this almost monologue party by offering their ideas as well.

By the two triggers, i mean critical mass and velocity.

walla said...

I choose to ignore wealth completely for strategic reasons for it connotes some historical gap which if unduly focused upon will attract exactly those basal human emotions that will ultimately impede the accumulation of critical mass and propulsion of velocity in income growth.

In fact, most of those who are honestly wealthy today came about their wealth by growing their income fast through focus on increasing critical mass of demand for their goods and/or services.

So the focus should be on means and not what is in hand, although part of the latter can be the starting point. But it shouldn't be the only platform because those who have made it honestly had nothing in the first place.


walla said...

In looking around the scene, i wonder about some things. Things like what's the point of keeping property as leasehold when as freehold it can raise mortgage capital besides attracting investments and turning on wealth.

Or things like why can't rural places be duty-free so that they can trade upscale. Of course, carried to its limit, i am all for a laissez-faire duty-free economy but one realizes there are monetary and fiscal considerations.

That great minds like hishamh will indubitably be addressing....

And then there are operational issues. One of the main constraints of rural places is distance. It takes more time, effort and fuel to execute even simple transactions.

Online is the only way to cut short, streamline and coordinate the processes. In addition, one must have some mechanism for small-size payments and tie in an effective micro-financing scheme that is personal and recognizes the individual's effort without proxy benefit.

Because of cable costs and rural QOS concerns, it is better from the outset to think harder about mobile payments and connectivity.

walla said...

Of course, we do think when we can about things like services. Inter alia, tourism.

So you see the backpacker walking around the town with a travelogue. He is asking strangers for directions to certain places mentioned in that publication. A publication produced in another country.

If we want to work our tourism well, we should know all that has been published on the place and then work to close the gap between what is described and what is really out there.

In doing so, putting up proper signs in the right places should help. If we can put up botanical names of plants in public gardens, putting up some good description of touristy places should also be easy to do. After all, it's extra income.

All this and other simple details focus will also help us audit our own performances in nation building.

With only three neurons left awake, one can be excused for the unusual generous tone.

Actually, if you look around, we are basically still jurassic in most regards.

walla said...

Just a last short note here. I think economic planners and investment coordinators should tour the country themselves and record their own observations. Don't just depend on inputs and reports from the local authorities but see, listen and analyze for yourselves.

Distribution of income and wealth is a misnomer. Who has the authority or qualification to do so in a way all can accept so that interdependence and thus sustainable progress can take place without tradeoff in other areas like future cooperation towards true nation building?

It should be income generation for insitu wealth creation ON THE SITE.

That may well depend on the two triggers of critical mass and velocity.

Otherwise it may be hard for the next-door neighbour to sustain his rescaled and resized lot just because the urban investor has built a three-star hotel next to his lot. That neighbour still has to cater to local market size and features when the new hotel's occupancy seasonally falls to say forty percent.

Just a blank-company example quickly plugged from the air to close these lines of thought.