Food prices in Malaysia was/is going down.

This is a reply to an article few days ago regarding food prices went down by 30-50%. It is true that food prices are going down, but this has nothing to do with the government zero-rising the GST.

The truth is, food prices have been moderating all over the world. Looking at the graph below, we can see that food prices in few developed and developing countries including the US, the UK, China and India are moderating since the beginning of the year.

Food Inflation

There is a explanation to all of these. Let me show you the trend of world food prices. (You can find the data compiled by Food and Agriculture Organization, United Nations).

World Food Price.png

From the graph above, we could see that world food prices have been growing around less than 1%. This is much lower compare to last year with 8.1%. The explanation is, there are some food products the world is overproducing, such as oil and sugar. Some food products can’t meet the current demand, such as rice, and meat.

Simple supply and demand tells us, that if you are producing an item too much, you will push down its prices, ceteris paribus.

Let me explain each one of these.

Rice (or Cereal)

Rice - Production and Consumption

First of all, we are producing less rice compare to few decades ago. Looking back at the latest data, growth in production was only 0.2%.

I had a look at the data from USDA, and only production in the US and Thailand had a slight improvement. But overall global production was declining by -0.4% compare to last year.

This is why, rice (or cereal in general) prices is increasing at a certain extent. Demand exceeds supply.

Oil

Oil - Production and Consumption

Oil - Production and Consumption - By Level

Growth in oil production is slowing down too if we compare to the past 10 years trend. But if we look this by level, production is actually exceeds consumption since 2015.

This explains why prices for oil is declining; Supply exceeds demand.

Sugar

Sugar - Production and Consumption

Production of sugar is cyclical. Every 3 years, there is a jump in production. And at this moment, we are at its peak.

But also pay attention to the red line (human consumption). This tells that we are consuming less sugar comparing to few decades ago. Again, supply exceeds demand; pushing down the price.

You might ask, what does world food prices have to do with Malaysia’s food prices?

First, this graph below tells us that we import more than we export our food.

Malaysia _ Volume Index - Imports_Exports

Looking into details, these are the top 5 food items we are importing. (Source: Trade Map)

Oil – 12.7% of overall food imports.
Cereal (also rice) – 11.3%
Sugar – 8.4%
Meat – 7.4%
Vegetables – 7.4%

Now, if I break down each food components, almost all of food prices are moderating since late last year.

The only exception was price of vegetables, which is declining since Apr-18.

Malaysia Inflation - Food.png
The conclusion is, world food prices in general had been moderating since the beginning of the year, because there are few food items, such as sugar and oil are being overproduced.

This has nothing to do with zero-rising the GST.

Sources:

  • Department of Statistics Malaysia
  • Food and Agriculture Organization of the United Nations
  • Trade Map
  • United States Department of Agriculture
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World Cup Related – Brazil Won’t Win the World Cup

Ok, so this will be slightly outside of economics. Found few articles predicting the possible World Cup winners. Two common names came out; Brazil and Germany. You can refer the articles under the appendix below.

To be honest, I do not think Brazil is going that far this year because of their ageing defence. Looking at the current roster, their average age of their defenders is 29.4. FYI, Thiago Silva, the most experienced defender in the team, is already 33 years old.

Here’s my reasoning why I think Brazil (and possibly Germany) will not win the World Cup. Since 1930, the average age of the winning team was 26.4. The youngest team ever won the World Cup was Brazil 1958, with the average age of 24.4. The oldest was Italy 2006, with 28.2 (outlier reasons since Peruzzi was 36, Inzaghi, Materazzi, and Cannavaro were 32).

Screen Shot 2018-06-11 at 12.20.41 AM

So, if that is the case, who do I think is going to win the World Cup?

I would put my money either between France, England (not going to happen if Gareth Southgate keeps changing the formation), Tunisia, or Serbia. To be fair, I won’t rule out Germany since they are still within the range.

Screen Shot 2018-06-10 at 11.39.35 PM

Source: The Telegraph

But hey, this is football we are talking about. If Paul the Octopus is still alive, I rather seeing him predicting the possible winner.

Appendix

World Cup Forecast Battle Heats Up With Danske Defying Commerzbank

Germany Will Win the World Cup, UBS Says After 10,000 Simulations

World Cup 2018 Special: Forecasting the Russian economy and 2018 World Cup

Malaysia, it is time to talk about Universal Basic Income

This is a response to Tun Daim’s comment on basic income. I have been waiting for a year for a Malaysian politician to publicly voice this one out, and it is about damn time we should discuss about this seriously.

I am going to take this to a broader perspective. Let’s expand this to a more ‘universal’ point of view. So this post is about Universal Basic Income, or UBI.

What is UBI?
The idea of UBI is the government (or in few case studies, private entity) hands you a certain amount of cash each month, and you are allowed to do anything you want with the money.

Yes, whatever you want.

The idea of UBI is not new. As matter of fact, it was introduced way back in the 17th century by Thomas Paine’s Agrarian Justice, where he proposed a system where everyone would receive an equal capital grant (or basic income) given by the government.

Former US President Richard Nixon was so close getting the UBI program going. But the plan was killed down by the Senate.

In 2016, Hillary Clinton was thinking about including UBI into her agenda as well.

So, here is my argument why UBI might be necessary? Automation and poverty.

The increasing interest on UBI was due to jobs being automated. In an article written by Straubhaar, he wrote:

“Jobs will be lost and it remains uncertain how many new jobs will be created to replace them. Thus, concerns are rising about the future of employment, the viability of social welfare and the financial stability of social security systems.”

When Finland ran its UBI program, their youth unemployment was 19% (Malaysia’s was around 10%). Decent jobs now are limited. This means, if could provide some cash for these group, it will encourage entrepreneurship. This explains why Mark Zuckerberg, Elon Muck, and Richard Branson are supporting this program. This is because if the work they are trying to do does not work out, at least UBI will be able to provide a safety net for the person.

Another reason why UBI will be necessary is that it will reduce poverty. When cash is given to an individual, he or she will be able to escape from living under poverty. You can study the outcome of every cash transfer program in this world, and more people were able to leave poverty thanks to the program.

Why choose UBI?
These are the pros of UBI. First, it provides a better social economic welfare. When Namibia ran a pilot test between 2008 and 2009, they found there was a drop in the number of malnourished children, a decreased poverty rate, increased income, and a lower crime rate.

Second reason, UBI could substitute or at least complement the existing welfare programs. The idea of UBI is to give out cash to everyone. Other program such as food stamps or targeted cash transfers will not work in my opinion. This is because targeted cash transfer will cost more (efficiency reason, you have to ask the person if he is eligible or not), and food stamps will not be effective to push down poverty (because food stamps ain’t paying the bills).

The case of “against” UBI.
The question arises when free money is given out, that the person who receives it might have less incentive to work. But every basic income programs that were held up until today, studies found that people who receive it work more than they were supposed to.

I understand that those who oppose UBI argue that UBI will be very expensive, and raise the question of how a UBI will be funded. This was the main reason why the Swiss voted against a proposed UBI back in 2016.

Many calculations out there were focusing on the UBI’s price tag itself (even OECD made this mistake), not on its net transfer.

The math behind UBI
Let me explain how UBI works (using Scott Santens’ calculation, since it is simpler to understand)

Screen Shot 2018-06-11 at 8.38.25 PM

Let’s say in Malaysia, there are 5 income groups, ranging between RM0 to RM2,000, RM2,001 to RM4,000, as shown above.

Assuming each group contributes 8% of their income, that means the RM2,000 income group will contribute RM160. The RM4,000 income group will contribute RM320, and the list goes on. That means, in the end of this process, the money collected will be RM2,400.

If we want to equally distribute to all of these group, that means each and every single of them will get RM480. Sounds fair right?

That means, the net gain for the RM2,000 group is RM320. This is because initially, he had contribute RM160 into the pool. So, when he gets the RM480 basic income, his final amount will be:

RM2,000 (initial money in pocket) – RM160 (contribution) + RM480 (basic income) = RM2,320.

Confused? Let’s take the RM8,000 group as another example. So initially, he has RM8,000 in his pocket. Now he will contribute 8% (or RM640) of his income into the pool.

In this example, everyone gets a RM480 basic income. That means, in the end of the day, his final amount will be:

RM8,000 (initial money in pocket) – RM640 (contribution) + RM480 (basic income) = RM7,840.

Hold on. He actually lost RM160! Yes that is correct. That is the whole point of this program. A progressive income tax will work efficient in this case, and it is more socially fair for those in the higher income tier to contribute more.

How this will work for Malaysia?
If you are paying attention to my calculation, you must have realized that the income distributed was RM480. This is because Malaysia’s poverty line is RM800. The rule of thumb of UBI is 60% of the poverty line. So that explains how I got RM480 in the first place.

So, if we calculate this using Malaysia Household Expenditure Survey 2016 provided by DOS. Using the same methodology like what I had calculated above, here are my findings:

  1. If we would like to distribute RM480 to everyone, that means everyone needs to contribute 10.7% of their monthly income.
  2. The breakeven point (the midpoint between net gain versus net loss) is between those who received between RM4,135.25 to RM4532.19. This is reasonable since the median income for the whole income group is around RM4,000.

Screen Shot 2018-06-11 at 10.49.14 PM

In the case of Malaysia, I personally think that we are not ready for a full scale basic income program (yet). This means a smaller program will work better at this moment. If I have to choose, I prefer to give it out to the poorer states first such as Kedah, Kelantan, or Sabah.

These are some evidence of successful UBI experiments

Screen Shot 2018-06-11 at 7.50.35 PM

These are few cities/countries are implementing the UBI program

Screen Shot 2018-06-11 at 7.53.51 PMScreen Shot 2018-06-11 at 7.54.03 PM

And these are the few still considering UBI in the future

Screen Shot 2018-06-11 at 7.52.29 PM

Replying to what the MoF said last week

Here’s what the Ministry of Finance said last week that made me ponder:

Zero-rating GST on the 1 June 2018 and re-introducing the Sales and Services Tax (SST) on 1 September 2018. This will“return” approximately RM17 billion back to ordinary Malaysians for the rest of the year.

The stabilization of the price of RON95 at RM2.20 per litre and diesel at RM2.18 per liter. This will save Malaysians RM3 billion

A RM700 million Hari Raya special assistance to civil servants (Grade 41 and below) and pensioners.

These 3 measures amounting to RM20.7 billion will provide a significant boost to consumer spending in Malaysia and lead to improved consumer optimism and business profits.

Question 1: Can giving back cash to the people push purchasing power/growth?

All of those numbers provided by the MoF looks huge. But that is just the headline. The reality is, not all of those RM20.7 will be pumped in into the economy. This is because our marginal propensity to consume.

Marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption. In the case of Malaysia, our MPC is 0.47. This means that if you get another RM1 as your income, you will only spend RM0.47.

For Malaysia, the MPC for those in the B40 group is much higher compare to M40 and T20. There is no surprise on this, since those in the B40 group usually has limited access to credit. Which is why when they get additional cash, they will spend more.

Let’s do some mathematics here. So if RM20.7 billion is being returned back to the people, multiply that to 0.47.

RM20.7 billion * 0.47 = RM9.4 billion.

This means, only RM9.4bn will be spent.

And how big is RM9.4 billion?

Not that much, it is only 0.72% of our overall GDP, and 1.06% of overall expenditure.

There is still a question on how the SST will be implemented. My view is, price could go higher if they set it back at 10%. This is because manufacturer will push the cost to retailers, and retailers will push the cost to consumers. Unlike GST, both manufacturer and retailer can claim them back. If this happens, it could erode purchasing power.

Question 2: Can RON95 really stay at RM2.20 per litre for the whole year?

Probably no.

First thing first, this “giving cash back to the people” will not sustain in the future.

If the exchange rate stays RM3.96 per US Dollar, and the Brent price stays around $70 per barrel, that means the actual RON95 price should be at RM2.40 per litre. Which means the government is subsidizing 20 cents, or a total of RM540 million of subsidized petrol for the next 6 months.

The government’s fiscal will be under pressure if RON95 stays at RM2.20 throughout the year (because they have to keep subsidizing it).