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.

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.

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.

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.

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.

Questions
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?

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.