Tuesday, November 4, 2014

Creating Expectations

I wish to suggest that this government has finally managed to do what most economists feared most in realty - the creation of inflationary expectations and following close by expectations of handouts in the face of the policy of reducing or cutting subsidies.

It is a sign of poor policy formulation and implementation (in lieu of a more accurate single word which I think is not so polite to use in public disclose) that a simple idea that requires a clear decisive action is being dragged out along a long series of half-baked pronouncements which nobody in the world understands what they are all about.

At the root of the whole debacle is politics mixed up with bad economics.

The fundamental issue is that the oil money is running out, but how much and how fast is a question that needs to be properly answered. The days of roses are over. The old prime minister has resigned and is smiling. The fundamental economic policy is government mega projects to stimulate the economy (which is a junk idea) funded by borrowings which are now hitting their limits. The proposed solution is that there should be more mega projects, but the government deficit to be reduced by increased government revenue sourced from the GST and the reduction of subsidies. This is pure static analysis.

The dynamics of the reality is that increase fuel prices is working through the economy like wild fire. The transportation industry is the first hit, which quickly translated into all goods and services that have to be transported - which is everything. The Ministry of Domestic Trade, like a poor midwife as the baby's head is showing, tries to hold the head and all prices as long as possible, with danger being put on the life of the baby and the economy. The formal pricing system does not work and everybody tries to work around the formal system through the black market. Smuggling becomes rife, and the customs are now into the game to catch the smugglers, but not the culprits.

While all these are happening, the big announcement came that the 6% GST will be implemented on April Fool's Day in 2015. This is the straw that breaks the camel's back. There are now no holds barred. Everybody now comes out to say that they cannot hold on to the old prices any more. Price adjustments are proposed to be as large as 40%. These proposed price adjustments are what we read in the papers. In realty, these are price increases already happening on the ground. There is no way that any one government agency can supervise every nook and cranny of the country, unless we transform ourselves into an authoritarian state. The reality is that price adjustments have already taken place on the ground as a result of the multiple sequential announcements of price increases on inputs. It just requires so much time for the government to accept formally that these price increases have in fact taken place.

Against this series of announcements of price increases for inputs, the politics says that the poor must not be unduly affected. This brings forth a series of announcements on livelihood support entitlements for the poor. Everybody is poor if they are in the right constituents. The poor wake up every morning asking where is my next entitlement coming from. It is a full time job receiving entitlements, for you have to register yourself and your family, and you have to queue up to receive. You now cannot concentrate on working hard to survive. There is a greater certainty in receiving the handouts, as they are a steady flow. The creation of expectations of entitlement is always dangerous for it creates dependence.

I would suggest that the third force that is going to take this country out of the quagmire is for this government to create the expectations among the private sector that there are opportunities in this country for making money. The quality of the management of our financial system is debatable. We have no special qualities, and we justify everything here by saying that we are a small open economy which we cannot possibly insulate. So, as with the rest of the world, we enjoy asset inflation in real estate, we welcome foreigners to buy up properties and push up and hold property prices at high levels - thanks no doubt to our weak currency.

The property market now is at a stalemate. This is the clincher. Of course, local interest rates will rise, "in line with the rest of the world." The US and Europe are hesitant. But the US economy seems to be doing better, thanks to fracking. We are at the inflection point of the QE. How strong are our banks? As strong as their reserves. How much reserves. As much as their exposure to real estate.

The management of the loan books of the banks, no manner how big or small, depends on their ability to diversify them out of real estate and into entrepreneur activities. Where these entrepreneurial prospects lie is the problem and challenge for everyone, not just the ordinary citizens looking to a future at home, not just the bankers hoping to diversify their loan books, but also the government policymakers who are being entrusted with the responsibility of charting out the future of this country, "from middle income to high income."

The excessive focus of policy, and the media, on politics and religion and everything that is unhealthy and unsavory is detrimental to the future of this nation. There is simply too much politics in public life. There should be greater focus on economic and business opportunities in this country, and how these are being promoted for the general public. Instead, with very nice announcements, we are subjected to minions in government agencies acting big because their non-attention can be detrimental to you, and there is reward for doing bad jobs. You get bribed or you get promoted out.

The current focus of the government on its mega projects to get the economy out of its hole is only self-serving, with no benefit whatsoever to the general public on how to earn a living.

It should not be surprising that, in this tough environment, the desperate are reacting badly to their daily conditions in order just to survive the day.

There is much that the government must do for this great country of ours. But, first and foremost, the government must manage the expectations of society so that we can begin to invest in our future knowing that after all the hard work, there will be light at the end of the day. We have to contain our inflationary expectations, kill expectations of handouts and entitlements, and improve our expectations that there is a future for us through hard work, not playing politics and stealing from others.

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