INFLATION: WHAT PROBLEM(S) ARE WE TRYING TO SOLVE???

Many announcements made by many people in positions of power. Unfortunately, many are not positions of authority to do so. By authority, I mean, knowledge of the subject matter itself. Subject matter knowledge is first about identifying WHAT PROBLEM, FOR ANY POLICY(IES) IS TRYING TO SOLVE.

Most discussions or the so called proposed solutions on inflation centered around “supply” and “demand”; lacking of supply in particular. Is supply the main culprit, therefore we need a JIHAD on the price escalation?

Another set of discussion is about increasing our own domestic production, of food in particular, as the way to address price/cost escalations. The solution proposed is to increase domestic food production, which allow us to control the price escalation.

Both sets of discussions centered on the assumption that inflation is caused by imbalance of supply versus demand. That is the identified PROBLEM.

My problem with such approach is summarized in one term: “causality”. Supply, demand and prices are directly visible and felt by the people, therefore it is the “effects” or results of the “causes”.

What is the real cause? The answer is in the “Consumers Purchasing Power”, which greatly eroded recently and will continue so for a while more. Simply put, one ringgit cannot purchase as much as before. Why?

The answer is in money and monetary effects due to the increase in money supply which is much faster than the increment in productivity.

Increasing productivity is a “deep structural issue”. It’s hard to explain and extremely unpopular moves, as people hate to change.

Economist, as we think that we have the “magical recipe” to deal with this issue has only one tool: namely Quantitative Tightening (QT), as opposed to Quantitative Easing (QE), by raising interest rates and few other tools to reduce money supply. This is what’s going on everywhere nowadays.

The problem is, the feedback effects from these monetary policies. Nobody (I am talking about economic experts) can tell whether it will work or not. It is just like applying the brake on a fast moving train to slow it down. We can’t tell for sure whether it will work as intended or not.

Post Covid, all countries need to push the economic train to restart. Now, we need to apply the brake on the same train. I am not sure what will the result be.

But I am sure that this is the PROBLEM which need to be solved. It is the root CAUSE of inflation. Supply and demand are just the EFFECTS.

The problem with monetary exercise of QT is glaring to the most vulnerable income group: the so called B40 and also the M40. With almost little savings or depleted savings, they have survived so far due to the supplied money. If this starts to dry up, at the back of increasing prices – they will be double whacked, instead of double whammy.

I have only one advise: BRACE FOR IMPACT; and GOOD LUCK.

INFLASI, KAWALAN HARGA, SUBSIDI – PENGAJARAN DARIPADA PANDEMIK COVID19

1. Inflasi yang kita hadapi dan bakal hadapi dalam masa setahun atau lebih mendatang, adalah suatu yang besifat satu abad. We don’t see these events happened in recent past. Ia nya bukan bersifat tempatan, tetapi global, seperti juga pandemik COVID19. Kemungkinan besar inflasi dan kenaikan harga barang yang kita hadapai sekarang ini juga akan bersifat “pandemik” seperti COVID19 yang akan “menular” dan sukar dikawal. 

Pengajaran 1: Langkah yang perlu diambil juga sedikit sebanyak harus dipelajari daripada pandemik COVID, iaitu mengunakan sains data dan sains (i.e. knowledge and facts as opposed to speculation). 

2. Kawalan harga yang dibuat oleh mana-mana kerajaan, sebagaimana dijelaskan dalam buku teks ekonomi 101, hanyalah bersifat sementara (short term measures). Untuk jangka panjang, kawalan harga akan membawa impak yang negatif kepada pasaran. “Short term measures” adalah beberapa minggu atau bulan sahaja. Bukan untuk jangka waktu yang lebih dari itu. Kawalan harga adalah “market distortions”, ianya hanya berkesan untuk menyelesaikan kesenjangangan sementara “supply” dan “demand” dan bukan nya untuk menyelesaikan masalah harga. 

Pengajaran 2: Parallel daripada COVID ialah “lockdown”. Kawalan harga sama seperti lockdown, iaitu bersifat sementara sahaja dan sukar untuk dikawal. Kesan negatif jangka panjang daripada lockdown adalah kepada ekonomi dan pendapatan. Samalah juga dengan kawalan harga.

3. Subsidi yang bersifat “indirect”, adalah untuk membantu pengeluar dan pembekal, bukan nya pengguna. Segala pengumuman yang dibuat kerajaan setakat ini adalah “indirect subsidy” (kecuali bantuan BRIM).

Pengajaran 3: Penyelasaian jangka panjang pandemik COVID ialah imunisasi kelompok melalui vaksinasi dan “behaviorial changes” dalam masyarakat. Vaksinasi adalah “direct to every individuals”, maka demikianlah juga subsidi – direct cash injection. Vaksinasi mengambil kira “pre-existing conditions of a person” – samalah juga dengan subsidi. Vaksinasi tanpa perubahan behavior, samalah juga dengan subsidi tanpa perubahan behavior (contoh nya: pemakanan dan kepengunaan yang tidak berubah) – kesan nya adalah terhad.

Kalau kita tidak belajar daripada kesilapan yang lepas, mengulangi cara yang sama yang sudah tahu tidak mendatangkan hasil, bahkan menambah pembaziran, ataupun menambahkan masalah – itulah yang dikatakan sebagai “insanity”.

Wan Hasni

Ayam-Jagung-Baja?

“Jawapan untuk harga ayam bergantung kepada jawapan harga dedak ayam, jawapan kepada harga dedak ayam bergantung kepada harga jagung dan makanan soya, dan jawapan kepada harga jagung terletak kepada kos penanaman, terutama nya kos baja.”

Semenjak beberapa hari yang lalu setelah gempar dengan keluhan terhadap kenaikan tinggi harga ayam di seluruh negara, saya lihat ada tiga bentuk reaksi yang boleh kita rumuskan:

1. Kawalan harga oleh KPDNHEP
2. Pemastian bekalan ayam dalam negara mencukupi dengan “export ban”
3. Pembekalan makanan ayam dengan menambah penanaman jagung dalam negara.

Pada pandangan saya, kawalan harga atau “price controls” secara umum nya hanyalah bersifat sementara. To solve temporal supply and demand mis-matches. Demikian juga lah kesan pemansuhan ekspot.

Sebagaimana yang saya jelaskan terlebih dahulu, masalah harga ayam berpunca terutama nya (causally speaking) adalah daripada harga bekalan makanan ayam (dedak ayam), yang mana bahan utama nya adalah jagung (maize) dan makanan soya (soymeal). Kedua-dua nya di impot daripada luar negara perpandukan harga US Dollar (pegged to USD).

Sebagai reaksi nya ramai mula bercakap tentang usaha untuk memperkembangkan penanaman jagung di pergiatkan di Malaysia. Sebagai contoh “FGV Holdings Bhd (FGV) bakal memulakan penanaman jagung berskala besar di ladang seluas 100 hektar di Chuping, Perlis dalam masa terdekat.” (Harian Metro) Demikian juga ramai yang menyuarakan keperluan kita memulakan agro industri ke arah yang sama.

Persoalan nya adakah kita dapat menjawab persoalan asal saya iaitu “harga ayam adalah bergantung kepada harga dedak, yang mana tergantung kepada harga jagung dan soya” (supply and value chain problems)? Adakah dengan hanya “menanam jagung secara berskala besar” boleh menyelesaikan masalah harga ayam?

Pertanian berskala besar, samada penanaman kelapa sawit atau padi, kesemuanya memerlukan tiga aset besar, iaitu lapangan (land), baja (fertilizers) dan tenaga kerja (labor) sebagai input utama.

Adakah kita mempunyai kelebihan persaingan (competitive advantages) didalam ketiga-tiga aspek? Pada pandangan saya, ketiga-tiga nya penuh dengan kemusykilan besar. Malaysia tiada mempunyai tanah lapangan yang luas serta rata (for corn planting), sektor pertanian sekarang sudah pun menghadapi masalah besar dalam aspek tenaga kerja ladang, dan akhir nya kita tidak mempunyai kedudukan yang jelas dalam rantai bekalan baja (fertilizer).

Kenaikan harga jagung dan makanan soya dunia sebenarnya mempunyai keberkaitan (causality) dengan harga baja (fertilizer) yang melambung tinggi.

Harga baja pula berkait dengan harga bahan pembuatan baja iaitu gas asli (natural gas), amonia dan sulfur.

Sebagai akhir kata – jawapan untuk harga ayam bergantung kepada jawapan harga dedak ayam, jawapan kepada harga dedak ayam bergantung kepada harga jagung dan makanan soya, dan jawapan kepada harga jagung terletak kepada kos penanaman, terutama nya kos baja.

Aspek ini lah yang saya cuba ketengahkan – iaitu pemahaman terhadap “economics of complexity” berkaitan dengan “supply and value chain problems”. Kepada ahli perniagaan, ianya sudah menjadi lumrah harian (at functional levels), tetapi kepada pembuat dasar (policy makers) kelihatan daripada repons yang ada, ianya masih amat jauh ketinggalan.

Masalah pertanian negara adalah kos; dan kos yang utama adalah pemakanan ternakan dan kos penanaman dalam bentuk pembajaan dan pekerja. Kesemuanya tidak akan selesai dalam jangka waktu yang singkat tanpa perubahan struktur (structural changes) pasaran yang jelas. Sebagai pembuat dasar, hal ini sepatutnya menjadi tumpuan utama, bukan nya kepada populariti sementara.

Post Covid Economics and Data Science

Wan M Hasni

5/19/2022

“All happy families are alike, but every unhappy family is unhappy in its own way” (Leo Tolstoy, Anna Karenina, 1878)

In good times, when the economy is growing, it seems that every country and its population will enjoy the outcome of growth. However, when a bad time comes, every country inhibit its problems and the various sector and segments of its population will feel the pinch in different ways. This is the essence of the Tolstoy quote above.

This essence is the same hundred years ago and today.

During Covid, the lockdowns or shutdowns as the main measures of fighting the disease, effectively make us all not working, and yet we still need to consume. About two years of consumption without effective work means that either we consume out of our past savings or out of our future works (i.e. consume now, work later). Unfortunately, it seems that there were no savings available to most people, hence the main effect was to consume today, based on future earnings. When the pandemic is over, now it’s time to work to repay the consumption in the past few years.

The effect of this is one way: we will drive up the prices of goods and services (i.e. inflation). Yet at the same time, wages or incomes are sticky, which will not rise in tandem with increases in prices. Purchasing power is diminished.

This effect will show up in two forms: for the workers and common people – a dramatic increase in the cost of living, in the form of not having enough money to maintain the same level of consumption. For those who had been living on the margins, the effects will be hard felt. For the companies and businesses – lower profit margins, through higher cost of operations. For those who are highly indebted, the cost includes financial or borrowing cost, which escalates as the events unfolded.

In terms of currencies, such as the Ringgit, the effect will be on the exchange rates with other major global currencies – such as the US Dollar and the Euro. Ringgit will devalue. The devaluation results from actions by these other nations’ fights against their domestic rises in prices (inflation) by increasing their rates of interest (monetary policies). Inadvertently, these nations export their inflation to Malaysia, via the Ringgit devaluation. Malaysia, on the other hand, does not have many choices except to receive these effects as an exogenous factor.

Economists and pundits alike, are giving out explanations as to why we have a large increase in inflation, globally and locally. Many pointed out the geopolitical crisis, such as the war in Ukraine, which causes shocks to the world energy supplies; and many others also pointed out the disruption of the global supply chains. Both causes are true. However, many times in the past, the impacts of these types of disruptions are shorter in duration. This time around, things might be different. Why?

The main underlying situation due to the Covid pandemic as described earlier – long hiatus of “no work”, “consumptions based on future incomes”, and “low level of savings versus the high level of debts” – causes the current surge of inflation. Furthermore, these root causes came when pre-existing conditions were present well before the pandemic – the geopolitical risks and global trade wars. Combinations of all these causes together is a potent mixture of highly destructive forces. This is what we are observing now, and this is the first time, we as modern humans face it. How we react to all of this is going to be very challenging.

The other important questions to answer are: how large the disruptions will be and how long it will last? And how large the (negative) impacts will be on the nation and the common people? Finally, what the leadership of a nation should do in the face of these challenges?

Many intelligent people agreed that what help us from the Covid pandemic is: science and assisted greatly by data science (i.e. scientific evidence via data). My personal view is, that the greater problem that humanity is facing now requires the same tools. However, the applications of both are a bit convoluted. Disease caused by a virus is a bit rooted in scientific knowledge, but human economics is not. Data science on the disease can be modeled and understood better despite a high level of randomness, but data science on economics is a very tough subject because it is a highly complicated and complex subject.

If the Covid pandemic requires lots of work and coordination to overcome; overcoming economic challenges post Covid requires even more effort and coordination. If the pandemic shows us that no single view is the “only” correct view, then in economics, a singular view by some faction is far from being the only correct view. We need to reach some consensus very fast, to be timely in our action.

How to reach some level of consensus in imploding views and opinions environment? The only rational answer is to use data as evidence, and analyzing data must be based on methodology. The methodology is data science. If we cannot agree with this approach – then everything will be just based on your opinion and my opinion. Opinions are at best will be guess works. Guess works on matters which are highly volatile is successful only based on luck. As we all know, reliance solely on luck is futile.

So far we have been lucky for the Covid pandemic to pass us relatively well. Can we be much luckier when comes to the economics post-pandemic? This is a tough proposition for us to stand by as a country.

So far, my observations show that the country’s leadership is still oblivious to the issues I have raised here. The only thing that seems to matter to most, especially the politicians – are politicking and power grab. The past has shown us that many who got into power from the power grab realize only when they got the power that the problems in front of them are much larger than what they can handle. Worst still, many who got into power don’t even realize the problems even after they got into the position of power.

This trend needs to change for us to have real chances of getting out of the imploding problems that we are facing and for the country to navigate through tough times ahead.

Geopolitical Risk 2022

Geopolitical risk post Covid-19

Let us use the definition by [Caldara and Iacoviello (2022)] which states that: “geopolitical risk as the threat, realization, and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course of international relations.”.

Increased geopolitical risk implies higher uncertainties which will effect decisions by countries, companies and investors in determining investment decisions, financial market dynamics, and domestic policies as well as international trade policies.

We also know that higher geopolitical risk threaten global supplies of key trade items such as energy based products (such as oil, gas, and coal) which relates to energy security, or food based products (such as rice, vegetable oils, etc.) which relates to food security, or even basic materials (such as mining products), or strategic products (such as electronics, machinery, etc), and finally technological based products and services (such as telecommunications, internet, data, and others).

Furthermore, the impact of geopolitical risk may not have the same level of impact across industries and economic activities. The nature of the risk dictates which factors are more impacted or less. However, it had been observed from the past that items which relates to energy and food security are most sensitive compared to others.

How to measure geopolitical risk

Risk need to be measured for it to have any objective meaning, as opposed to subjective measures. Geopolitical risk is a much harder subject to measure, since there are too much subjectivities involved. There are many organization which specializes in calculating and providing such measures. The most cited and quoted one is developed by [Caldara and Iacoviello (2022)], which is accepted by the US Federal Reserve and the American Economic Association.

The method used is to use Big Data and data analytics, where they used feeds from various major newspaper articles as “text mining” to produce the scores based on words used, frequency of use, contexts of use, and other related tools of “word” analysis. The only weakness is that the data feed is based mainly on English language, which has its own language bias.

Furthermore they constructed scoring models based on the feed and learning from the data collected over period of time. From this process they produced GPR Index which stood for GeoPoliticalRisk index.

In the absence of any other reliable and well documented measures of GRP, we will use the works mentioned as our basis of analysis and discussions.

Global situation

Let us start with the global situation.

Source: [Caldara and Iacoviello (2022)]

It is obvious that the current Ukrainian invasion spike the GPR index; the question is how large is the risk? Based on the index, it is as high as the previous recent wars – the Gulf War post September 11, 2001 event.

What are the impacts on the industries?

Source: [Caldara and Iacoviello (2022)]

For the European, the industries which are affected the most is in “automobile”, “banks” and “transportation”; followed by food and utility (energy and telecommunication). However, for Asia, we can see that “food” has the highest exposure.

The most apparent and obvious impact to the economies is inflation. Based on historical records, inflation will inch up by a few percentage points (from 2% to 6%) depending on actual exposure of a country.

Situation in Asia

First let us look at the chart for Malaysia:

The period of July 2014 was the date for the MH17 disaster, when it was shot over the Ukrainian airspace and before that the dissapearance of MH370 flight from Kuala Lumpur to Beijing.

Covid pandemic risk was high during 2020 to 2021, however it did not translate into incresaed GPR risk for Malaysia.

Then lets look at the chart for Malaysia together with China, Indonesia and Thailand.

Here we can see that since 2018 there had been massive increase in GPR for China relative to the other countries.

And then lets look at the chart for Malaysia and Indonesia:

Malaysia and Indonesia shared almost similar patterns for the period since 2010.

Current situation

Based on the recent news, we saw that post Covid pandemics, most countries suffers serious threats of inflation, namely from rising energy prices and food prices.

Enclosed here is the spot price of coal and natural gas over the years and the dramatic increase over the last few months.

Prices of coal and natural gas has shown major increase mainly due to increase Geopolitical risk of the world; which affected all regions and countries including Malaysia.

Since many countries source of power production are based on coal and natural gas, it is clear that the cost of energy will spike up and it will show up in prices of foods and other items which has shown in the past to be sensitive to the cost of energy. Food prices will also continue to rise. This is evident in all food prices index of Malaysia and other countries.

Recent events

Over the last few months, we have seen actions by some countries in prohibiting exports or imports from other countries:

1. Ban of coal exports from Indonesia; In January 2022, Indonesia announced a one month of ban of coal exports in order to ensure that its own stock of fuels for power generation remains sufficient. The ban was lifted a month later.

2. The United States are taking various actions on limiting of imports from Malaysia which it claimed to be related to “illegal labor practices”. (First was the ban on rubber glove in 2020, and recently on Palm Oil from Sime Darby).

3. Latest news is Indonesian ban of Palm Oil exports in order to reduce shortage inside the country which caused spikes in domestic cooking oil price.

All these events are signs and signal for the increased GPR in the region. All these events are trade related rather than political conflict related issues, which is another subject of interest by itself.

Events in Sri Lanka (financial crisis) and Pakistan (political crisis) in the Indian sub-continent are also worthy of mention.

Conclusions

All the indicators that we see (by way of GPR indices) or by events point out a clear danger – namely heightened risk scenario – which may impact economic recoveries of countries post pandemic. Malaysia is not excluded from this risk, and hence precautionary measures are important.

Reference

• [Caldara and Iacoviello (2022)] Caldara, Dario and Matteo Iacoviello (2022), Measuring Geopolitical Risk, American Economic Review, April, 112(4), pp.1194-1225.

• [https://www.matteoiacoviello.com/gpr.htm]

• Data for various GPR plots is obtained from https://www.matteoiacoviello.com/gpr.htm, accessed: 25 April 2022.

• Data for coal and natural gas prices is compiled by the author.