Sunday, March 20, 2011

A Saudi Prince’s Plea for Reform - NYT

Source: http://www.nytimes.com/2011/02/25/opinion/25alsaud.html?ref=middleeast

Friday, March 11, 2011

Inflation & System Change: No?

Source: http://epolicy.blogspot.com/2011/03/inflation-system-change-no.html

Inflation & System Change: No?


Regimes in the Middle East change because people are fed up with the same old politicians with their same old ideas of stability and making themselves rich while the rest of the people cannot find jobs or are in jobs with steady but low pay while food prices have skyrocketed.

Of course, the chief cause of very high food prices is the natural disasters and crop failures. There is a shortfall in the supply of food and prices rise to ration the supply to those who have the purchasing power to access the food. In other words, the supply of food in the world is now distributed more among the rich and away from the poor. (The poor even with their pooled resources would have have a limited access while the rest falls on the tables of the well-to-do.)

Does it help to restrain demand growth? If slower demand growth will create less jobs or less to higher unemployment, then the poor with continue to suffer. So long as there is a shorter of food supply, the rich will bid up the prices until they get the quantity they need. By slowing demand growth, if the slowdown is marginal, its impact will be much more severe on the poor (who have no cushion) than on the rich (who do not have a cushion problem).

The only way that prices can really adjust downwards is through a severe depression whereby not only the poor will be jobless with no cash but the so-called rich will be in trouble with their cashflows and their investments. Banks will also be in trouble again. This is a shock scenario which is unwarranted. The problem is a shortage in food supply and the solution is to replant the acres lost to the floods or weather. Time is the cure.

How ironic then that it is the weather and the floods that bring about the downfall of old regimes, as if it is the straw that broke the camel's back. It is as if the almighty has decided that the old regimes have stayed too long and decided to give the poor masses a helping hand. Would there be a new regime or an old regime in a new bag.

But didn't sustained rapid growth in the money supply of the reserve currency awakened the sleeping dragon which had slept for half a century, and decided that it will not go hungry any more. Surely China is big enough to absorb all the money that Greenspan could print at high speed for a decade or so - and China grew just as fast and as long. Along the way, short-term money flowed through all the financial markets around the world, awaking stockbrokers and the real estate markets, and everybody suddenly became rich and corrupt without much effort. No, of course, the growth of asset prices are consistent with so much percentage point growth per annum, while wages among manufacturers remained low thanks to the newcomers from China. Global wages threatened to adjust downward to Chinese levels - at least this was what MNCs threatened their workers outside China while Chinese workers apparently gladly suffered in silence of their newfound economic opportunities.

So much water had flowed under the bridge. The global economic depression that promised to surface didn't happen as Bernanke cleverly staved off the threat with extra cash. All nominal values stayed about the same, except for some unfortunate real estate but temporary. The world is saved from a horrible adjustment which had been sorely needed to readjust global and local economic power. Everything stayed the same more or less, except for the food prices, housing rentals, transport charges - all the things that a poor man and his family needs everyday.

The Great Subsidy Debate

Source: http://anwaribrahimblog.com/2011/03/09/the-great-subsidy-debate/#more-14869

By Rafizi Ramli

Lately, subsidy has become somewhat a swear sword along the nation’s corridors of power. Subsidy is primarily blamed for the nation’s ballooning fiscal deficit that threatens to march Malaysia down the same path that Greece and Ireland had taken recently. The removal of subsidy thus has become a great national mission.

It is good that Malaysians are becoming more aware of the pros and cons of a social system that relies heavily on subsidy. A continuing reliance on subsidy to keep fuel prices down; or an expectation that our fuel prices will remain at today’s prices for a foreseeable future is of course unrealistic for the simple reason that hydrocarbon resources are finite. Even if we have much larger oil and gas reserves that can last another 100 years, it is imprudent to waste it as cheap fuel given that it will become more costly to produce a barrel of oil twenty years from now. Any right thinking Malaysians understand that gradually we will live without fuel subsidy.

Where we differ is the manner the great national debate on subsidy is being selectively approached by the government, especially vis-a-vis the huge gas subsidy given to the energy sector and the amount of debt servicing charges the public has to absorb each year. Both feature prominently in any solution to reduce fiscal deficits.

For the record, the national budget for 2011 allocates 8.7% out of the total RM212 billion operational budget for debt servicing charges for all the loans taken and guaranteed by the Federal Government. This works out to be RM18.4 billion of interest and principal payments annually. The number should strike a chord instantly for those who are familiar with the mathematics of subsidy in Malaysia, because it is a lot higher than the fuel and food subsidy that the Federal Government bears each year.

When the crude oil price shot through the roof in 2008, the total fuel subsidy borne by the government was RM15 billion (based on data released by Pemandu). In normal circumstances when crude oil price hovers in between US$65 to US$85 per barrel, the estimated fuel subsidy is in between RM9 billion to RM11 billion annually.

Therefore, this is a fact – even when the crude oil price repeats the dramatic increase of 2008 (which we have not seen so far), the total fuel subsidy borne by the government is still lower than the debt servicing charges. In normal circumstances, Malaysia spends double the amount of public money servicing the debts that the Federal Government has accumulated over the years; which has reached RM407 billion by the end of 2010.

Thus, while it is right to focus on subsidy removal as a means to reduce the national fiscal deficit, the public must be bolder to press for a concrete plan to reduce our debt servicing charges over the years. Debt servicing is a bigger culprit and it is about time that the public calls a spade a spade, especially in light of the government’s mad rush to issue bonds to fund for the billions worth of mega projects announced under ETP. A pre-occupation with subsidy removal to the point that we lose sight of the imprudent debt raised annually by the Federal Government is a mistake we cannot afford as a nation.

Is there a necessity for austerity measures to trim down the national budget, so that we scale down the annual borrowing to fund the budget deficit? Can we live with a period of modest economic growth while we tackle the problem of high debt level? I do not have the answer to this but eventually we will arrive at a junction when we cannot avoid the questions anymore, so it is best to start the public discourse now. Either way, every Malaysia will agree that eliminating corruption and shoddy government procurement practices will go a long way to manage the reliance on debt.

The other economic question that should be weighed heavily in any national debate on subsidy is the RM19 billion-question on gas subsidy provided to the energy sector each year. It is a sore point to PETRONAS which complains annually on this as it is akin to burning RM19 billion of good money for the sake of keeping the electricity tariff artificially low. Even if we have an abundance of gas reserves (which we don’t), burning that amount of natural gas each year is environmentally harmful and economically wasteful when it can fetch a much higher price if utilised differently (either as LNG or feedstock for processed chemicals).

The proponent of the RM19 billion gas subsidy to the energy sector will argue that it is necessary to help the rakyat, as the cheaper tariff benefits the rakyat directly. That is a political argument that goes along the same breath as the economic argument that an energy subsidy is necessary to make Malaysia competitive as a manufacturing hub.

Personally, there are loopholes in both arguments.

A research by Jeff Rector of Stanford University discovered that the rakyat (non-business and non-industry users) consumes only 19% of the total electricity generation in Malaysia in 2005. TNB has also made a few changes to the public tariff structure since then that in all probability there will not be a sudden tariff hike for low capacity users such as the public if the gas subsidy is phased out.

The industrial and commercial sectors have the right to be jittery when any proposal to phase out the gas subsidy to the energy sector is made, because they stand to bear the full brunt having consumed 81% of the total electricity generation. But this is where the practical and philosophical questions on gas subsidy require an in-depth discussion(which has been conveniently ignored by the government):

Firstly – there is a big disconnect between the drive towards a high income economy driven by higher innovation and creative capital; with the insistence that our industrial sector will continue to be protected in the form of cheap electricity tariff paid for by the state. An economy that can still benefit greatly from state give-outs(either in the form of bloated state contracts or state subsidies)will resist any attempts at structural reforms, as it is only natural that human beings will choose an easier option. Why go through the pains of economic reforms to change the structure of the economy, when our industry can still make tonnes of money producing products with lower technology and creative contents because the state subsidy distorts the manufacturing costs?

Secondly – even if in the end, there is a consensus that our industry still requires some form of subsidy to maintain its competitiveness, the economic and tariff data clearly show that the RM19 billion gas subsidy does not translate to cheaper tariff. There is a huge leakage and this leakage must be plugged immediately.

Thailand is a good example of how cheaper tariff can be achieved without spending too much on “corporate subsidies” in the form of massive gas subsidy to the energy sector annually. Gas price sold to the energy sector in Thailand is tightly pegged to the market price of gas sourced domestically and from long term supply contracts of neighbouring suppliers (such as Myanmar). On top of the raw gas price,the formula also includes charges for pipeline tariff, marketing margin and indexed to consumer price index, foreign exchange movement and producer price index. The long and short of it is the power producers in Thailand pay a market price for the gas – almost at RM31per mmbtu when the crude oil reaches US$100 per barrel mark (compare that with the RM10.70 per mmbtu sold to the energy sector in Malaysia).

Interestingly (and unfortunately), Thailand’s electricity tariff is a lot cheaper than Malaysia’s in spite of Malaysia’s heavy subsidy system in place to supposedly keep the electricity tariff low. A residential consumer in Thailand only pays 18 sen per kWh for the first 150 kWh used; compared to Malaysia’s tariff for equivalent usage of 22 sen per kWh. That is a difference of 22% higher tariff in Malaysia.

Similarly, retail customers under the category of “low voltage commercial tariff” also pay higher tariff in Malaysia compared to the equivalent electricity consumption in Thailand. The tariff is 37 sen per kWh in Malaysia, 48% higher than Thailand’s tariff of 25 sen per kWh for the same category of consumption.

The list of comparison can go on and on.

It is good that Malaysians are more aware of how our economy is run or where the taxpayers’ money is being spent. It is encouraging that people begin to think long term and question the viability of a social system that hinges heavily on subsidy.

But any discussion on subsidy removal must be honest and fair to everyone. For the time being, the deafening silence on the RM19 billion gas subsidy that seems to benefit only a minor section of the society, or the complete black out on the worrying level of public debt; is entirely unfair to the country and future generation.