Thursday, June 3, 2010

Slashing Subsidies 2: walla perspectives

I will post here 3 interesting sequential comments by the inverterate commentator walla first. As always, walla gives some context and texture to the firmament that has enveloped us. walla's curling observations is a welcome relief that allows me to make a steaming cup of Java and just read before I get back to stroking the keyboard:


Part 1
Unfortunately for Idris Jala, sugar might be one of the subsidies to be removed so he can't be the Mary Poppins with her spoonful of sugar to help the medicine go down.


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Idris is just the messenger and deliverer of bad tidings not of his doing.

In the first place, he must have had nerves of steel and a sense of corporate nationalism to have accepted the MAS job when he could have been cushier living on his reputation at Shell, knowing full well that the only way to improve the airline's bottomline was to liquidate some assets in order to sweeten the outlook to shore investor confidence and so save the rating for future financing without having to depend on government support which would not have been forthcoming under present circumstances.

And other airlines have floundered in the maelstrom of the roller-coaster rides of fuel prices. Thus, hard lesson learned notwithstanding, no one should be expected to score perfect hits on fuel hedging in the first round.

After all, if someone can, he would only need to do it once and be set for life, considering aviation fuel contributes thirty percent to the cost of running an airline.
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Since it is a notable fact that decision-makers and eminences read this blog, one should therefore add more confusion in order to supersaturate the matter and thus crystallize the situation.

So it remains to say what one should be concerned going forward are these points:

one, the assumptions qualifying the assertion of bankruptcy are doable. Cough:

the economy can achieve three percent year-on-year;

the deficit will continue to balloon, and,

government debt will continue to rise at twelve percent a year.

Why do we say these assumptions are achievable?

The whole purpose of the exercise is to remove subsidies. Once subsidies are removed, cost of living will rise about forty percent by the incantation of sticky price multipliers.

This negative effect will only be nullified if the people can live on less or make more to cover the loss. If they have to live on less, the government will have to be very brave to continue maintaining the same tax rate. If the government reduces tax, it will reduce its own revenue, not that this government having lots of money has been entirely without grievances to the people.

And if the people make more, why haven't they by now?

So they can't make more or live on less. Both motivation and ability will be missing, and more importantly - simultaneously. That's the real crux of the matter. If one were to precede the other, there's elbow room to nudge the problems one way or the other. But since both stand side by side, they magnify each other instead.

In the words of Voltaire's Candide's Dr Pangloss, we are exactly where we are in this best of all possible worlds.

Continuing the confusion, the government may decide not to remove subsidies because it calculates that the savings from removing the subsidies cannot be parlayed fast enough by new taxable income from a workforce that will be down and out completely. And that's not because we are not in the Caribbeans.

Therefore and unless new revenue comes its way quickly, its deficit will balloon and its debt will continue at the current rate.
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Part 2

So we have cunningly reduced everything away from the rakyat and private sector, and towards the government sector.

Which is immediately presented with two options: reduce fat and/or increase income-generating activities.

If we look at the performance of one of its major holdings, that going by the name of Sime, we will have to be reticent with our confidence the others in the same stable will be doing spectacularly better. If it can bleed in oil even while having plantations, what will the other holdings in infrastructure, gaming and so forth be capable of?

And since the government is the biggest employer in the country without whom the economy may nosedive further if its employees as customers of the private sector be out of jobs, the same problem will have to be retained.

The only way around this continuing confusion is to reengineer and transform both.

Given that Cuepacs have just said forty one percent are suspect of being on the take, that will take some doing. Given that the government have had to borrow an executive from a petroleum company to shape-charge its transformation program, the other aspect about re-enginnering government-held semi-private management will also present insuperable challenges.

After fifty three years of nation-building, we find ourselves without adequate quality management for critical positions across the land while the country remains mired in a financial situation whose alarm bell has been sounded so loudly it would probably explain the twenty percent drop in crime rate.

Except that a certain group of MPs have thicker tympanic membranes. They are adamant the government will not be bankrupt.

If that be the case, why the need for the four strategic pillars then, one asks timidly?

Why the need for labs, even?
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That crux mentioned above points to the matter of competitiveness. We are said to have risen by eight notches to be last year's tenth most competitive nation. But how can that be when we are one of the most subsidized economies on earth? One therefore suspects if we remove the subsidy element from the Swiss equation, the ranking will fall. Would the same group of MPs be then saying the same thing?

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It takes years to become an innovative economy. First, first-class brains are needed extensively. Second, the environment in which they thrive must already be present and thriving. Third, the soft factor of policies and how farsighted, pro-industry and globally-encompassing their implementation has taken root must be routinely actuated without the slightest shred of counter-productive moves that will cause a fall in confidence. Fourth, the governmental, business and physical ecosystem must be clean, green and efficient. And fifthly, there must already exist a globally-tested genius factor in the market. In other words, killer applications and blue-ocean products already well-accepted and earning good dough from the rest of the world.
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Part 3

These are the challenges for the government sector to address in its moves to trigger higher value output from the private sector.

And it has less than ten years to do so.
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Meanwhile there is an NGO movement going around. It is moving ahead of the NEM-10MP formulation to position itself strategically so as to have better bargaining power with the government vis-a-vis retention of status quo.

There are some nettlesome points.

One, the dilemma might have been a fact but its solution has been a fiction the size of the financial abyss that is the stark reality before us.

Two, forty percent of the government's revenue comes from oil. No new oilfields within sovereign waters have been announced. Ergo, the government will have to depend on Petronas striking deals with other oil-rich countries. Unless some oil-strikes are already in place, the prospects are only so-so. If not, why the whole rigmarolly exercise?

Three, the government has not delivered a single record of financial prudence. A short stretch of highway has a three hundred percent price overrun. Tolls whose rates should have been diminished permanently by twenty percent by now are still collected at blasting rates with the specter of another increase. The Auditor-General's report has been a nightmare of leakages and siphoning galore, and those are just the ones caught in its radar by its small-staffed teams. The public sector remuneration bill is ballooning even as its levels will soon not be even adequate for the livelihood of the public servants. Meanwhile money is thrown into all manners of projects whose returns are suspect. Take F1. Take the annual billion for KLIA. In fact take any damn project that one can recall. Any. All. Which can be said to be a model of financial prudence and eclectic success?

So, if there is going to be a trillion ringgit debt in nine years time, what is there to bargain about now? If the assumptions turn true, the government will be in a corner where it cannot even afford to pay salaries let alone run services. Under such a circumstance, it would be foolhardy to load the private sector because if it falls, the country falls.

A high sovereign debt debilitates everything. We may have some savings. Subject to the absence of a distortive W-shape from the Eurozone, our recent ten percent quarterly growth may be signaling a recovery - but - do.we.have.fundamentals.on.hand in the first place to be confident enough to negate the arrival of such a high sovereign debt that will cause financing costs to spin all into a vicious cycle, so that all future effort will be just to pay the interest charges and not the principal sums of a loan? If our ratings fall, things will cost more because sellers will insert a risk cost into the prices and buyers will see opportunity to press for discounts. Our foundation for competitiveness will then erode before it can even be laid.

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This post, for that little baby in the crib just now, such a cherubic innocent smile. Whither its future?

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Summary

Subsidies removed, government restructured, industry and business supported to the zenith, globalization assimilated completely, brain-cultivation the primary target, procurements rationalized completely, market completely opened up, and bloggers given fiscal incentives to carry on.

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Postscript

We are in this dilemma because things that should have been done long ago weren't and things that must not be done were and people whose mindsets should have been recultivated weren't and those who should have been supported more didn't get the support and denials which should have been nipped weren't and.....

The end.

8 comments:

Pat said...

Minta izin, ye, CT....

Sigh, I should have scrolled down and read the damn postscript first, Walla!

Instead, I read from the first line, and descended into the depths of despair with you, nodding my head and agreeing - cos what else is there to do but agree?

Yup, 'should have beens' and 'hindsight' seem to be what we're best at, eh?!

p.s.

Glad to find you alive and kicking ;)

semuanya OK kot said...

I'm open to suggestions, provided I get my 30% reservation and 10% cut. Now, you ingrates, sovle my problem or I'll make it your problem.

walla said...

for Pat:

http://is.gd/cC2Wj
http://is.gd/cC239
http://is.gd/cC2zm
http://is.gd/cC2Kj
and
http://is.gd/cC3Ol

Baharudin said...

Tuan,
In my opinion Idris Jala has taken a rather simplistic view about this topic. I'm sure being economist yourself, you'd agree that the topic has been well researched in the past several decades and there is no clear cut verdict on it? I've included below a perspctive on this subsidy topic among the so-called developed nations...

SO MALAYSIA WANTS TO SET THE TRAIL BLAZER?
Samples of subsidies in developed countries
Close to $US15 billion of taxpayers' money has been used every year since 1990 to prop up the fossil fuel and nuclear industries in subsidies from the EU and Western European governments.
Annual direct subsidies paid by the EU and European governments to energy production - in $US Billion: Fossil Fuels: US$10.2 Billion; Nuclear Energy: US$4.7 Billion; Renewables: US$1.5 Billion.
EU agriculture subsidies worth billions of pounds under the CAP are being paid out to businesses and multinational corporations with little connection to traditional farming.
The subsidies have included payments to Haribo, the sweet manufacturer, and Coca-Cola.
New information gathered by the researchers Farmsubsidy.org since May this year has shown that over 13 billion euros (£11 billion) - about a quarter of the £47.5 billion spent under the EU's Common Agriculture Policy (CAP), is paid to big business and industry, not farmers.
Agricultural subsidies to European farmers and fisheries make up more than 40 percent of the EU budget[1]. As the EU budget is around 120 billion, this means that 48 billion is spent on agricultural subsidies alone; or about 0,321% of the EU's GDP.[2] Since 1992, the EU's Common Agricultural Policy has undergone significant change as subsidies have been decoupled from production. About € 30 billion are now spend as direct income support for farmers (the so-called Single Farm Payment). The next major reform of the CAP (scheduled for 2013) is currently being negotiated. The main issue is to target subsidies at public goods, such as biodiversity and clean water.
The United States currently pays around $20 billion per year to farmers in direct subsidies as "farm income stabilization via U.S. farm bills. These bills date back to the economic turmoil of the Great Depression with 1922 Grain Futures Act, the 1929 Agricultural Marketing Act and the 1933 Agricultural Adjustment Act creating a tradition of government support.
During the fiscal years of 2002-2008 the United States handed out subsidies to fossil fuel industries to a tune of 72 billion dollars, while renewable energy subsidies, during the same period, reached 29 billion dollars. Conducted by the Environmental Law Institute (ELI) in partnership with the Woodrow Wilson International Center for Scholars, the research shows that the US government has heavily subsidized 'dirty fuels' that emit high levels of greenhouse gases.
In 2005 The EU's agricultural support amounted to about $133 billion, Japan's to $49 billion, America's to $47 billion, South Korea's to $20 billion and Canada's and Switzerland's to $6 billion each.

semuanya OK kot said...

To add to Baharuddin's post,
-- WTO floundered in its machinations mainly because the big 3 gangsters each wanted the other 2 to drop their agricultural subsidies while manintaining their own.
-- The main reason for the mysterious lack of progress in turning the truly vast paper, plant and sewage wastes into fuel - and the continued existence of nuclear - is the huge subsidies, vested interest and government income, especially from private cars, petroleum and roads.
-- The US government (which proclaims the anti-socialist faith) is the largest largest venture capitalist by far. - Prof. Dani Rodrik

The moral of the story would be: don't take economics too seriously. It has proven to be an idol with feet of clay, and those who preach the faith are very selective in their own adherence.

None of which absolves a lot of rabble-rousing, blood-sucking criminals who should be locked up for the good of society.

Pat said...

Thank you, Walla :)

And since we're into old-is-gold mode, why don't you and CT check this one out - one of my all-time favourites:

http://www.youtube.com/watch?v=1xZeNueckzg

Cheers!

walla said...

Subsidies in the west, and in Japan, are subsidies by governments of advanced high-income economies. They have high innovative powers to create new wealth and the working environment and resources to do so. They define global markets.

We don't.

granddaddy said...

Excellent analysis, Wall and CT. You don't mind if I took the liberty to post it in tindakmalaysia - http://tindakmalaysia.com/tm_forums2008/index.php/topic,1564.msg6582.html#msg6582

pywong