Tuesday, February 22, 2005

Minimum Wage and a Safety Net

Title: Minimum Wage and a Safety Net
Azimah (not her real name) works as a cleaner at a local Telekom branch office, she commutes to work 8 miles from home on an old motorbike given by her brother, 6 days a week. She takes home RM300 a month, and after 15 years working there, she is still a temporary worker, under contract, renewed every month or so. She has 8 children, 5 of them go to school, secondary and primary.
Her husband died 3 months ago, during the first week of Ramadan, of asthma and after a few years of illness. When I met her 6 month ago, her husband was still around to keep an eye on their children while she was at work. She told me how difficult it was back then trying to feed her children and sending them to school. She was active with her local UMNO branch, because only UMNO provides some help in the form of school books and uniforms for her children as well as monetary help.
She complained that in the previous 5 years under the opposition Member of Parliament from PAS, there was no development at the village level, no monetary help like school books and uniforms for poor people like her. Her house is just an old rundown shack, rusted iron roof and walls made of weaved nipah leaves. She should qualify for government housing under PPRT scheme. She enquired with her local UMNO branch and MP about housing grant under PPRT scheme, but as we all know, things takes time and a couple of officials have to mark their signatures first. Signatures are difficult to get, first of all, you will have to explain your predicament, and they have limited time to listen.
Azimah’s story is not uncommon. In a country with no social welfare safety net, the poor and those who are unable to fend for themselves have great difficulty surviving.
I told her that in Western societies, the government has heart and help the poor – in the form of income support, housing and basic necessities like medical treatment if needed. She listened with wide eyed incredulity.
Malaysia is a rich country by Western standard, a net lender to the world, Western countries included. Not many Western countries can boast USD69billion in foreign reserve, and among the lowest income tax rate in the world. Government should do more to redistribute income in the society. Malaysia has a huge foreign reserve, yet the poor in the country are neglected and left to fend for themselves on pittance. For people like Azimah, a 10 month reserve for foreign import has neither meaning nor material benefit at all. She could not afford imported Thai rice, much less ‘beras wangi’. Her staple fare is normally ‘beras Malaysia gred B’ eaten with ikan bilis or ikan masin. Her ayam kampungs are reserved for rainy days, to be sold for cash to buy school clothing and books at the beginning of the year. Don’t ask her where her fridge or furniture, lest you might embarrass yourself, and her. Now that Government policy is to continue pegging ringgit at the current below equilibrium rate, inflation is a major concern and basic food price would continue to increase, soon Azimah won’t be able to afford much.
When I was young, my Uztadz told us a story of how Umar al Khattab, the second Caliph went around at night listening to people’s conversations in their homes. He listened to a widow with young children who cooked stones instead of food. You know the rest of the story, how he carried the sack of wheat on his shoulder et al.
As a country, we should provide ‘safety net’ for people at the bottom level of income – this could be in the form of social welfare payment, not extravagant amount, but just enough for food, housing and basic necessities.
The issue of minimum wage has to be addressed too. Is it fair to let firms make obscene profits while their workers surviving on pittance and not getting fair share? Having workers unions would have helped in bargaining for fair wage rates, but Malaysia has a history of suppressing collective and umbrella unions. In house unions are simply too weak to exert any influence. Employers could simply promote aspiring union organisers to executive positions within the company.
Contrary to the Riccardian argument that setting minimum wage would reduce employment in the short term, the French experience (the French Government sets minimum wage and 30-hour working week) suggests that minimum wage fuels consumption and growth in employment through Laffey effect. Riccardian argument still holds for the long term under fixed exchange rate, but if the ringgit is free floating, this would be negated as the ringgit adjusts to a lower level.
Laffey effect in this case – after a certain level of income, workers trade income for more leisure time. More leisure time for existing workers contributes to growth in employment by letting more unemployed workers enter the labour force, fuelling consumption and growth.
Let us remember, that having a fair equitable society, where everyone can live with dignity benefits all. It is a form of social insurance against political unrest – that is if you all remember Haiti last year and Iran in 1979 or Russia 95 years ago.

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Tuesday, February 15, 2005

Title: Malaysia; a car driven economy.

Title: Malaysia; a car driven economy.
The plane landed at Changi Airport just after 9pm. I changed some money into Sing dollar, just enough for the taxi ride across the causeway to JB. It wasn’t that expensive from the airport to Eunos, where the causeway bus and taxi stand was, but it was already late, just after 10pm and no bus to JB. So I took a taxi to catch up with the midnight bus from JB to KL. It was Sing $40 for the taxi ride from Eunos to the (what its name) bus stand a few miles outside JB. My first impression is that it’s beyond reason to build a bus stand miles outside the city centre, unless it is connected to the city centre with a commuter train or shuttle bus service. From JB to KL only took me 4½ hours and RM15 by bus.
KL in the early hours was a jumble of unfinished highways and viaducts. It gets worse as the day progresses – bumper to bumper traffic jam and honking irate drivers from morning till night. Obviously the new highways and viaducts are to cope with the numbers of cars on the road. It becomes obvious later that the Malaysian economy is driven by cars – fuelled by subsidised cheap petrol and no-deposit 7 to 9-year financing. Car ownership is at all time high, so great is the nation’s love affair with car that the other alternative – public transport, is stifled and fighting for survival. The evidence is all over the country – Intrakota and Park May, bus companies have been bleeding losses for a number of years and on the verge of bankruptcy. A few month ago, a finance company seized Intrakota’s buses for non-payment of loans.
Bus companies in this country has always been controlled and kept at a low rate. Bus companies have been subsidizing the commuters on behalf of the government for aeons. Just look around the city and countryside. Buses in the city are at least 10 years old; the situation gets worse in the countryside, where 20 year old buses are common. In financial terms, money is not being ploughed back into the business to replace depreciated capital, debt servicing and dividend payment to shareholders take precedence.
The number of cars on the road fuel economic growth in several areas from highway building to component manufacturing and car servicing. Every six month Malaysian Car Industry Association would release the latest car sales figures. The number of cars sold reflects the state of economy for the past six month. Financing car is cheap and does not make sense; you can buy a small compact hatch for no-deposit and monthly repayment of RM300 or less stretched over 7 to 9 years, using the car as collateral. So in a few years time, the value of the car is worth much less than what you owe the finance company. If you are smart enough to ditch the car (give it back to the finance company, after all the ownership paper says it is still theirs), the finance company would face losses.
Left to its own devices, this car driven economy could present problem in the future. Fuel subsidy cost is gobbling significant amount of cash, RM4.9 billions at the last press statement by Datuk Mustapha Mohamed. That RM4.9 billions in fuel subsidy could go a long way to pay for the country’s development expenditure, instead of subsidizing rich, middle class, 3-4 car family. Well intentioned but missed the target by a wide margin.
Worse, some of the subsidy goes to Singaporeans who crossed the Causeway every chance they get to fill up their tanks. How we love to poke at Singaporeans, yet we subsidize them with cheap fuel, rice, sugar, chicken etc.
More Malaysians thought that car is a form of investment which holds its value, when in reality it diminishes its value with time (depreciate). Traffic congestion in the cities started to waste everyone’s time, a major stumbling block to increase productivity. In fact it probably started to reduce productivity and increasing the cost of doing business.
How I would handle it differently?
Remove fuel subsidy to start with, then use some of the savings to subsidize public transport companies and individuals – train, bus, and taxi on passenger-mile basis, e.g. one passenger for 1 km RM1 subsidy, so short distance travel by public transport could be free. This will simultaneously reduce congestion in the city, (higher fuel cost is a disincentive to drive to work) and improving public transport by attracting more investments.

Wednesday, February 09, 2005

A letter to the Minister of Finance; Unpegging, when and how.

We loath those people who profits from our predicaments; the currency speculators. After all, the reason that we pegged the ringgit in the first place was to frustrate the currency speculators and give the ringgit its fair value. We don’t want to give away the profits of our hard work of the past 7 years, the savings and reserves that we salted away to the currency speculators by unpegging and appreciating the ringgit. The currency speculators made at least a hundred billion ringgit bet ( the difference between our total current account surplus for the past 7 years or so and our total foreign reserves) that the ringgit will be unpegged one day and they stand to make a windfall.
How come, you might ask? For every dollar, euro or yen of foreign currency that flows in, whether as foreign direct investment, export earnings or mere speculative hot money to park in a local bank to earn interest, Bank Negara has to print ringgit to an equivalent amount and lock away that foreign currency in a vault as reserve – because one day the foreigner will eventually want to sell back his/her ringgit for dollar, euro or yen.
This is the problem with pegged currency, theoretically, for every ringgit in circulation there must be an equivalent amount of reserve. Sounds like my late grandmother salting away her money under the pillow – even though it is safe and secure, it doesn’t earn interest or income, no benefit to anyone and worse has a contracting effect on the rest of the world economy. In reality, most central banks would put their reserves in gold, and other currencies – usually USD and euros. While reserves in USD and euros may earn interest if they are in deposit form (T-Bills and bonds), gold reserve doesn’t earn interest.
My suggestion is: instead of hoarding away the reserves against imagined future attack by currency speculators, we should invest the money for future productivity and well being of our citizens, meaning fiscal expansion. Fiscal expansion increase income, hence increase our future tax base. Mankiw explained it better that in small open economy with fixed exchange rate like ours, only fiscal expansion would be effective to increase income. We could invest in infrastructure, housing, education and skill upgrade for our people, not to mention the necessary spending on welfare for our less fortunate citizens and retirees. While fiscal expansion might eat away our reserves and reduce current account surplus (through increase import), it has much greater benefits to our citizens than ‘the security of knowing bountiful reserves’. The fiscal expansion will channel the benefits of reserves to our citizens.
Of course, if we suddenly unpeg tomorrow, the ringgit will almost certainly appreciate because of continued current account surplus, this will transfer benefits of reserves to those who hold ringgit – including speculators. For our citizens, the benefits tend to be minimal in the short term, asset prices tend to be sticky and stay high, and some of us might even lose jobs through export industries relocating to lower cost countries.
When and how to unpeg? Set a target date well in advance – say 6 month to one year from date of announcement. Let everyone get ready and prepared. In the meantime continue the program of fiscal expansion. Use the fiscal measure to achieve internal targets; unemployment, income, higher savings rate that match investment rate and better living condition. Knowing that the ringgit will appreciate upon free float will dampen inflationary expectations – provided there is no barrier to import.
Meet any speculative large inflow of capital by printing more ringgit; monetary expansion. This will lower interest rate and increase investment. More benefit to our citizens.
Aim for the ringgit reaching equilibrium exchange rate upon free float.
What if the ringgit depreciates upon free float? This will make us even more competitive in the world market, and Bank Negara could always mop up excess liquidity using open market operation.