Not buying the trade diversion story

Both the US and China at this moment are imposing tariffs on each other’s exported goods. For the past couple of months, I have been seeing many people saying that this will give a great opportunity for developing countries like Malaysia, Vietnam, and Pakistan, since China could relocate their production into those countries.

Here are some articles on how Malaysia could “benefit” from the trade war between those countries.

The Star: Malaysia key beneficiary in US-China trade war

Malay Mail: EIU report: Malaysia a winner in US-China trade war

There are countless reports on this topic. Just google “Malaysia benefit from trade war.”

Let me illustrate something that is very easy to understand. Let’s assume that Mr. Roberto has a bakery business which is located in Kepong. For simplicity, let’s assume that every month, he needs to ship a few of his products from Kepong to a local supermarket in Sungai Buloh. The route between these two places at this moment do not have any tolls whatsoever.

Then suddenly, the government announced that they will be building a toll between those two cities. Mr. Roberto now has a problem: He has to pay for the toll every single month when he ships his products from Kepong to Sungai Buloh.

However, there are a few ways that Mr. Roberto could avoid paying that toll. Either (i) push the cost (the toll fee) into the final price of the product (economists call this cost-pushing), (ii) or relocate his factory somewhere where he doesn’t have to pay for the toll when he is shipping his products to Sungai Buloh.

The problem with option (i), if cost is being pushed into the final product, the local supermarket in Sungai Buloh might reduce their purchases of his products, since they have become more expensive (less demand).

The problem with option (ii) is on the other hand, is it not that easy to relocate his factory from one place to another, since it involves relocating all of the labour and capital.

This is just a simple explanation of why trade diversion is not as easy as it looks. If you argue that trade war could lead companies in China will relocate their production, my question is; what if the toll that has been built, will be demolished 2 years from now?

My point is, production relocation is a long-term commitment. And my belief is the trade war between the US and China will not be carried into the next 5 or 10 years, since both countries know that this will not bring any benefit to the people in those countries. But hey, I might be wrong on this.


Budget 2019 – Let’s talk about that RON95 subsidy scheme for a second.

What’s not to like about the RON95 subsidy right? I drive a 1,500cc car, and will be eligible for the subsidy.

Plot twist: I live in a T20 household, and technically, I should not be benefitting from that (although, I will). Now that is the problem.

Let’s relook what Finance Minister actually said last Friday:

The Pakatan Harapan Manifesto has promised to provide targeted fuel subsidy to individual car owners with engine capacity of 1,300cc or less and motorcycle owners of 125cc or less. However, the Government has decided to improve on our promise by expanding the scheme to vehicle owners of 1,500cc and below. Owners with multiple cars will not receive this benefit. The Government has decided that each car and motorcycle owner will enjoy up to 100 litres and 40 litres of RON95 petrol per month with a subsidy of at least RM0.30 per litre, depending on the market price of petrol. As many as 4 million car owners and 2.6 million motorcycle owners will benefit from this targeted subsidy which will cost the Government the sum of RM2 billion for 2019. Non- subsidised vehicles will have to pay pump prices for fuel determined on a weekly basis based on the Automatic Price Mechanism (APM). This scheme is expected to commence in the second quarter of next year. This new scheme will also ensure that leakages arising from fuel price arbitrage and cross-border smuggling will be stopped.

In my opinion, this whole idea of subsidizing RON95 is outdated. Let me give you another example:

Let’s say Mr.X makes RM7,000 per month, drives a BMW on daily basis to get himself to work.

His wife, Ms.J also works and earns RM6,000 per month, and uses the MRT to get herself to work. This means both Mr.X and Mr.J are in the Top-20 income group (Department of Statistics Malaysia’s definition of T20 is a  household income of RM13k per month).

Plot twist: Ms. J actually owns a MyVi. This means she is eligible for the RON95 subsidy scheme. This means from this point, Mr. X will be using his wife’s car to go to work on daily basis.

See the problem now?

To make this program successful, it will require few things. First, it will require the government to establish a new branch, where both Lembaga Hasil Dalam Negeri (LHDN), and Jabatan Pengangkutan Jalan (JPJ) to share information with each other.

Second, if the Government is to issue some kind of a fleet card, it will too costly to monitor. This means every single petrol station in the country needs to have someone (the petrol attendant has to go to each car and check whether that is you and your car are in place), or a technology capability to track each transaction.

Third, it is prone to abuse, and possibly encourage smuggling, since our fuel price is so damn cheap.

Fourth, it might affect people’s decision on selecting car models. Since this is the case, I bet majority of Malaysians now will be choosing car models below 1,500cc to benefit the subsidy

A few years ago, Bank Negara Malaysia came out with a research that fuel subsidy benefits the upper-middle and high-income group. Put it this way, as you get richer, you will buy yourself a bigger car with a bigger fuel tank, and you will benefit more from the subsidy.

Screen Shot 2018-11-04 at 11.21.22 AM.png
Source: Bank Negara Malaysia

See, subsidies are not necessarily a good thing.

UPDATE: According to Domestic Trade and Consumer Affairs Minister Datuk Saifuddin Nasution Ismail, the government will relook at the eligibility criteria. Hopefully, he reads my blog.

The Giving-Free-Cash-To-The-Poor-Will-Make-Them-Lazy Myth

I would like to clarify one thing here since my previous-previous entry was about Universal Basic Income (UBI). Giving cash to the poor will not make them lazy, or use the money for leisure purposes. As of today, there is no single study is able to prove that giving free cash will discourage people from generating additional economic returns (fancy word for working).

Based from my experience in this subject, when people get free cash, they will do two things. First, they will buy food. Second, they reinvest on themselves such as buying fertilizer for their crop, start a new business, and make sure their children stay in school.

There are numerous of studies here. These are few examples:

Uganda, Kahn Et al, 2015. Cash Transfers to Increase Antenatal Care Utilization in Kisoro, Uganda: A Pilot Study. 

“Cash transfers have been used to incentivize participation in health services. We examined whether modest cash transfers for participation in antenatal care would increase antenatal care attendance and delivery in a health facility.”

Latin America, Ham, 2014. The Impact of Conditional Cash Transfers on Educational Inequality of Opportunity.

“The main results indicate that groups considered vulnerable gain more in terms of access to education and that these interventions help level the playing field. They do not eliminate inequality of opportunity but are certainly a useful complement to equity-enhancing policies.”

Kenya, Kilburn et al, 2016. Effects of a Large-Scale Unconditional Cash Transfer Program on Mental Health Outcomes of Young People in Kenya.

“This study provides evidence that poverty-targeted unconditional cash transfer programs, can improve the mental health of young people in low-income countries.”

Brazil, Glewwe & Lucia Kassouf, 2012. The impact of the Bolsa Escola/Familia conditional cash transfer program on enrollment, dropout rates and grade promotion in Brazil

We examine the impact of Brazil’s Bolsa Escola/Familia program on Brazilian children’s education outcomes. Bolsa provides cash payments to poor households if their children (ages 6 to 15) are enrolled in school. Using school census data to compare changes in enrollment, dropping out and grade promotion across schools that adopted Bolsa at different times, we estimate that the program has: increased enrollment by about 5.5% (6.5%) in grades 1–4 (grades 5–8); lowered dropout rates by 0.5%.

It is the same for Malaysia as well. According to a study made by Kamaruddin et al, 2013, half of the money given from BR1M (Malaysia’s cash transfer program) was spent on basic necessities such as food, transportation and clothing.

In nominal terms, if the person is given RM500, I would say around RM340 will be spent on these items. Also based on their findings, around RM55 is spent on education, investment, and starting a business, and only RM20 is spent on “recreation”.

HH Expenditure 2016

Source: Department of Statistics Malaysia

If we look this from a bigger context, their findings correlate with the latest Household Expenditure Survey released last year. As we can see from the graph, those in the B40 (RM3,000 and less) group spend around 30% of its whole expenditure on food. You could also see that as income group goes higher, the proportion of expenditure on food decreases, while “restaurants and hotels” goes up. One explanation is, as your income goes higher, you substitute food from home to buying food from restaurants instead.

So, the argument of giving cash to the poor will make them lazy so far hasn’t been proven (yet).

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 distribution 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 6.7% of their monthly income.
  2. The breakeven point (the midpoint between net gain versus net loss) is between those who earn RM7,000 and above. This is reasonable since the median income for the whole income group is around RM4,000.

Screen Shot 2018-10-07 at 9.36.22 PM.png

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 Perak.

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

Note: Update on Oct 7, due to some calculation error.

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).

Government Debt – Of Surplus and Deficit

Somehow, the debate regarding government debt is heating up since last week. No surprise there.

The best part of this whole story is, there is a petition, asking for people to ‘crowdfunding’, in order to pay off government debt. The intention is nice. But in reality, it is similar to asking some money from your father to buy a present for his father’s day.

First, let me introduce by how government financing works. For the government to spend, there are few ways:

  1. Through revenue collection – This is straight forward. The government collects money through income taxes, consumption taxes (such as GST), petroleum taxes, and etc. With the money collected, they will use it to spend.
  2. Through debt financing – So the government issues bonds, and banks/corporations/retirement agencies buy those bonds.
  3. Through loans – Similar to how you apply for a housing loans. You go the bank, and apply for that loans. In the end of the day, you will pay the loans, plus interest.

Now. Logically speaking, you would say “we should only spend when you have the money.” I would agree on that statement on certain extent. The reality is, the government financing doesn’t really work that way. The government should keep spending to make sure the economy is functioning. (Read Keynesian Economics).

The next question is, should the government run a fiscal surplus (where they save more than they spend), or fiscal deficit (where they spend more than they save). That goes back to my previous point where the government ‘should keep spending’ to keep the economy running.

In the case of Malaysia, the only time when we had a fiscal surplus was back in the 1994-1998. This was because the country’s economic growth was booming at 9% per annum in the early 1990s. So the need to save more than you consume at this moment is fine, in order to cool down the economy.

Malaysia Government Surplus_DeficitScreen Shot 2018-05-27 at 11.14.13 PM

Theoretically speaking, having a fiscal surplus means the government is holding on to their money, instead of pumping them in into the economy. There are other macro effects on this:

  1. For the government to reach to a fiscal surplus, there are two ways: (i) Higher taxes, or/and (ii) lower spending.
  2. Lower spending – When the government decided to run a fiscal surplus, this could mean the government will hold on to investing in the public segment (trains, highways).
  3. This could dampen growth numbers. If the government doesn’t spend, the economy will slow down.

Having a fiscal surplus is not really a bad situation to be in. Singapore’s fiscal management is good example, where they accumulate surpluses for few years, and then spend it later. This is why I think Singapore’s fiscal spending policy is probably the best system to practice, but I doubt we will use that framework in the future.

One common mistake is that, people feel it is a bad idea for government to borrow. To be frank, government debt is not the same as household debt. Government borrow to fund its investments (which will benefit the economy in the future). Households borrow to fund mortgages, car loans. These are two separate concepts.

GST was not a bad idea. It was a “bad timing”.

It looks like Suadara Lim Guan Eng is ramping up his work, and try to push the SST implementation agenda as soon as possible. Quoting him:

“We want to replace the GST with SST as soon as possible. It will definitely be this year but let us work it out before we give a date.”

I have this feeling that I will be under a lot of heat for saying that GST was not a bad idea. Quite frankly, I kinda like the GST mechanism (ok, let’s admit it, we all hate paying taxes).

Everytime the “Council of Eminent Persons” and the new administration say that they are committed to switch back from GST to SST, this is my initial reaction:


Here is my view on taxation. In my opinion, we (I mean the government) should tax the people based on its efficiency, not productivity. So my theory is, if we draw the tax spectrum, it should look something like this:

Screen Shot 2018-05-21 at 6.30.57 PM

The argument is, if you tax on productivity (corporate income tax, personal income tax), too high, you will discourage companies/person to innovate/work harder to generate more income.

Taxing efficiency means, your tax contributes back to the economy. For example, the land value tax encourages an efficient housing development. (You can YouTube that and understand it yourself).

For consumption tax (like the GST), I would put it in the middle, since it depends on how high the tax rate is implemented.

So, why I like the GST?

Well the idea of GST is, first, to reduce our reliance on oil & gas. Going back to earlier estimates, the current (and the previous) government assumes that oil price this year to be at $52 per barrel, and expected revenue to be RM11bn. Now that oil price has been hovering around at $70-80 per barrel this year, my calculation estimate that we might collect an additional RM5bn.

Second, is to make sure everyone is paying its fair share for the economy. In Malaysia, our working age population is around 21 million of overall 31 million population. And within that 21 million, only 12.5 million are in the formal sector. This means only 40% of the whole population are paying their taxes.

Bare in mind that if you are within those 12.5 million formal workers, and you make RM5,000 and below, you don’t have to pay any tax. On a side note, do remember that basic food items were zero-rated, including onions, rice, few types of sugar, and flour. You can check the list here.

So, if GST was not a bad idea? Then what was wrong with it?

Two words – Bad timing

Malaysia Inflation _ USDMYR

The graph above shows our Ringgit vs the USD. When the implementation of GST took place back in Apr-2015, our Ringgit went up from RM3.67/dollar, to RM4.29/dollar in the end of the year.

This means our imported goods became more expensive.

Malaysia Inflation _ World Food Price

Between late 2016 to early 2017, world food inflation also increased by double digit, averaging at 10.3%

So, where do we go from here?

I propose three solutions:

  1. Keep the GST. Even cutting down the current GST rate from 6% to 3% would be ideal, and the government will still make around RM20bn to RM25bn per year.
  2. Be transparent. I admit, the problem with the GST right now is lack of transparency and there were too many leakages.
  3. Read point number 1. Because we’re going to need it anyway in the future. Our neighbor down South, Singapore, is a perfect example. As their country is ageing and they need more revenue to fund its healthcare and infrastructure, I could understand why they have decided to increase GST up to 9% in 2 years time.

The GDP is rigged?

Someone earlier asked me about the latest comment made by the Prime Minister.

Yesterday when the PM was asked about the growth numbers and financial positions, he replied:

“Regarding the numbers indicating our financial position, I realize many of these figures are false.”

I am sure Department of Statistics Malaysia (DOSM) and Bank Negara Malaysia (BNM) are losing their my mind now. As matter of fact, I think the central bank’s communication department is writing their reply at this moment (They are quite active lately).

Here is what I disagree with Tun M: No I do not think the numbers are rigged, since the methodology DOSM and BNM are compliance with international standards.

Here is what I “kinda” agree with Tun M: The national account is never a good proxy to measure the well being of a country.

Let’s have an overview of Malaysia’s growth last year. Our country’s economy grew to 5.9% on annual basis. Not only us, our neighboring countries including Singapore, Thailand and Indonesia were experiencing the same high growth as well. Thanks to exports.

Because it was driven by exports, you have the right to ask “Well, what does export have anything to do with me?”

The answer is: Depends, if you work for a manufacturing company that exports a lot of its products, there is a big chance you have a big bonus in the end of the year.

The national account (GDP) in my opinion, is never a good measurement, since it only calculates consumption, investment, government spending, and exports.

Did you know, that our spending on weapon system is also calculated into our national account? The best part is, it is calculated as asset. (Read part 3.3.2).

That is Malaysia. If you go to other countries, the UK included prostitution into their account, Italy included drug activity, and our neighbor Singapore included gambling into their national account as well.

I remember a couple of years ago, Ireland growth was up to 20%. Tax haven reasons.

So the debate is, why are we using GDP to calculate growth? If you are an economist, that goes back to your school of thought. John Maynard Keynes that every activities, legal or illegal should be calculated, to get the idea how demand works. My view is, the national account is just a report card that tells us what or how the country is doing. It is never a good proxy to measure the well being of a country.