The Economics of Sangkran/Khmer New Year

*Note that I have added a bit more content about why I think "uneven inflation is less harmful to an economy as a whole" to the second paragraph from the bottom*

I was about to, once again, write an article related to inflation, or to be specific, the plus of having low and steady rate of inflation. Let me be blunt. It is not happening today. I was trying to come up with a fun topic, both to write and to read, and since Khmer New Year (or Sangkran) is almost over, I decided to write an article that fits with the occasion.

Note that this is not an empirical research or analysis. Our discussion here is purely qualitative and is based on theory and logic, and a bit of observation from a view of a certain individual (me), which is not even close to adequate comparing to those that follows rigorous research procedure that involves quantitative analysis and reasoning. So do not be too serious about it, and let us just indulge ourselves in this brief moment of joy derived from economic thinking.

Economizing Khmer New Year is nothing of a new concept. Some of us just did not realize that economics is embedded within our talk about Khmer New Year. To put simply, I have been told that Khmer New Year is held in April mainly because since the ancient time, April is the month of celebration, not for the gods and goddesses, but mostly for the people as it is the end of the harvesting season allowing people to stock up plenty of resources, enough to reward themselves with something exciting and festive, and what can be more festive than a new year celebration in April? It is the timing that shows that people do not just allot the new year time based on religious reason (No, they never even thought of doing it in January, though we actually used different calendar system in the past, so I cannot make any comment on this), but they also factor in social and economic reasons. 

Is that it? Certainly not. We can do a whole lot more with economics. Of course, this is just for fun. What we are doing is putting the basic economic concepts we have learnt so far to the test, apply it in reality, and see how theoretical or practical the simple, yet fundamental, economics written on this blog can achieve. So let us rejoice and engage in the first baby step to economic thinking. The first thing we learnt from this blog is basically about income and spending, that spending = income, and thereby, an increase in aggregate spending will also increase the aggregate income because as we spend a dollar, someone else on the other side receives a dollar. So in a nutshell, our expense is another's earning. And do not forget about what we have learnt about multiplier effect. If you have yet to read it, then do so now. It is on this blog... somewhere. Anyway, when you think of it like that, a simple economic analysis of an event is not that difficult. Now, it is good that the new year time compels everyone to spend their hard-earned cash on all the necessities and enjoyment during the festival, but what we should focus our attention on is not the spending itself, but who and where it goes to. This means that the new year creates what I would like to call "seasonal income redistribution". I just made this term up for the sake of brevity. The mass amount of ornaments, offerings, beers, and many other products and services purchased will allow certain sectors within the economy to thrive, especially small and medium enterprises (SMEs).

First, to analyze Khmer New Year, we have to understand all the elements revolving around it including its beginning (input), process(how it progresses), and last but not least, its ending (outputs and outcomes). I will not cover everything, but only a small portion of the fun. I will let you do the rest. So first, we must understand that one of the sectors that is most closely tied to Khmer New Year is none other than Tourism sector. The vast amount of outflow in spending from the city to various tourism sites in Cambodia, to those businesses operated by low- or middle-income individuals will greatly enhance employment, standard of living, closing the income inequality gap, and strengthening the local resiliency and revenue generation potential as the income spurt will likely increase saving, and thus, investment. Furthermore, the excess supply of money will turn into loanable fund, help reduce the local interest rate, allowing more financial accessibility for new entrants into the market. However, whether the effect is visible or not, that really depends on how much is spent and saved. Also, remember opportunity cost? Yes, as price is expected to rise during the new year days, those stores and restaurants that close really face a huge opportunity cost. Not operating would mean having more free time to enjoy the new year, but the potential profit forgone is just too big to ignore for some people. So those who are a bit more hard-working that the rest might decide to seize the opportunity and take advantage of the rising price by simply paying higher wages and passing those cost to consumer. No wonder price increases so much.

Of course, despite it being a new year, people often complain about sharply rising price, blaming it on intentional causation such as greed and exploitation. I have heard a lot of it, whether it is in Cambodia, or elsewhere. First of all, you must understand the difference between intentional cause and systematic cause. Economics is complex, and most of the results are driven by incentives and innumerable activities, interactions and transactions, so the means does not justify the end. What do I mean? Remember, we did talk about individual rationality and collective irrationality. What everyone is doing is pursuing their own self-interest, and because of that, whatever they want to happen might not happen, and what happens as a result of the aggregate actions might be of nobody's will. So due to the dramatic increase in demand during Sangkran, we end up with competition from the consumer side, and those who have more resources (in term of money $$$) will be able to make a better deal for the sellers (thus, the price is settled at that certain level), and that is how business is done. That is free market. Sellers raise price according to the upward pressure on price by the market force because there are more buyers, but they only have limited supply at their disposal. Remember, limited supply implies limited raw materials. The suppliers have to purchase various inputs to be converted into outputs for sale, and with only so much resource available, but with huge demand, the suppliers will need to get as much inputs as possible to produce the demanded products or services. However, there is a catch. Unless, they can be sure that the profit is worth the extra effort and price to be paid to obtain the inputs, they are not going to bother doing it. So this is why price rises. Rising price is an incentive. The profitability seen from the increase in price (due to increase in demand) attracts more people to become the producers to be able to match with the vast quantity of products and services demanded. Imagining the price of shrimp is capped at $3 a dish. Well, what a disaster! Good luck trying to get your hands on one. People would flock to buy a piece of that sexy dish, and you would have a hard time lining up in a long long queue. Furthermore, with inflexible price (i.e. fixed price at $3), it would be hard to supply more as people would be less willingly to allocate their valuable time and energy (on top of being lazy) and risk their life to go out to the sea and catch more shrimps for you.

Well, I guess rising price, from the consumer perspective, is never a good thing to begin with. That might be one of the negatives about Sangkran or any other huge festivals. When demand starts to rise out of proportion in relative to supply, what might happen is inflation, an uneven short-term inflation. In other words, as demand for consumption and stocking outstrips supply, supply runs short. Price starts to spike up, but unevenly across different goods. To put simply, in a basket of goods purchased, apple's price might increase by 50%, while bike (which is certainly not in high demand during the new year days) might increase in price by about 5% due to the increase in gasoline price. However, the initial demand spike for apple would exhaust so much supply (and since producers/farmers are less likely to plant more apple trees as they are aware that the increase in demand is only temporary), what we can observe here is a short-term sticky rise in price which might normally last for about a month or two. This is just a short-term side-effect which does little harm to the economy. If anything at all, it only acts as a signal for the buyers to halt their consumption for apple, allowing the price to spring back to its original and equilibrium position. I would like to go a bit further. When price rises for one product (ex: CocaCola), people often resort to buying its substitute, which can be Pepsi. This is how positive and negative offset each other, and this is how equilibrium happens when you allow price to adjust and control the market (i.e. free market). At the same time, however, complementary products to CocaCola, like fries or chips might be less demanded (because assuming people like eating chips and drink CocaCola, so if CocaCola price spikes, they would be less willingly to consume chips). Also, if, say, prices of meat and veggies go up, instant noodle might be sold quicker (more demanded), as it is considered inferior goods (something people buy when they have little money to spend). So you see, in an economy, a minus for a firm or industry might be tagged along by a plus for another firm or industry. It helps buffer the negative effect. This is why uneven inflation is, to an extent, much less harmful comparing to the "total" inflation across all goods and services. That is why, I think, "New Year Inflation" ain't such a bad thing after all. It allows opportunity for some products that, under normal circumstance, are less popular among the consumers.

In hindsight, I do not think it would be appropriate to call this post an analysis, but it merely is a reflection on the effect of Sangkran/New year on an economy based on what we have learnt so far reading off this blog. There are many other facets of the economy to be considered (namely, social, environmental, religious, psychological...stuffs), but for godsake, this is already too long. So let's end it here.

Happy New Year! To everyone who is celebrating it in April. This is not April fool by the way.

Why can't a country just print more money to be rich? (PART 2)

Previously, we have discussed about how any attempt to raise a nation's wealth by printing money (or in fancy term, Quantitative Easing) would be futile without prior growth in production, both goods and services. The demand-pull inflation, the depreciation of currency value due to the delusion people hold (they feel richer) when having more money printed out of thin air, renders this approach ineffective. Is that all though? Nope. The repercussion does not stop here. I dare say that any reckless decision based on personal whim, rather than on well-studied reasons or systems, can incapacitate the whole economy, or at least, some sectors within it.

First, you must know that though an economy heavily depends on production of goods and services, the role of money as a medium of exchange is indispensable. We work to earn money. We then use it to purchase various goods and services as needed and desired. So what will happen if the $100 bill we hold suddenly depreciates in value? You know it, I know it, She knows it, Everyone knows it. When our money depreciates, we can purchase less goods and services just as mentioned in Part 1 of this article. In other words, inflation erodes our purchasing power. If our wage is not pegged to the CPI (Consumer Price Index, a metric measuring inflation about which I will probably explain more in my later article ), then we are in big trouble. Wage that is adjusted following the change in inflation rate can, to a certain degree, cushion the adverse effect of inflation. However, those living with fixed wage, ex: retirees depending on pension, will surely suffer as the real value of the pension paid to them is becoming lower and lower. This, in a way, is a means of stealing people's money by the central bank or the government. By printing more money, making you feel richer, they are making your hard-earned cash worth less, turning you into a poorer being in real term.

That is not all. When inflation increases, the real interest rate you obtain from whatever amount of the loan you made will fall. Think of it this way. I will make it simple. Imagine you lend me $1000 with 10% interest. So with no inflation at all, the money you would get back is exactly $1100 in real term, a $100 profit. What if there is 50% inflation? Simply put, that means you are still getting $1100, but its real value is 50% less (because price of goods rise by 50%). So the actual amount you get from making this loan is actually ($1000+$100)*0.5 = $550. Well, you are losing $450 of the initial principal, the original sum lent of $1000.

Inflation can also affects people's perception of the economy. When there is high inflation, people tend to save less (because the value of their money, if saved, will just get lower and lower) unless the bank offers high interest rate, at least, as much as the inflation rate. That means if the money is losing 20% of its value annually, the bank must be willing to offer 20% return (interest) of the amount deposited in order to attract customers. Plus, if the interest rate is fixed by the central bank, rising inflation will increase demand for loan accompanying with much lower supply of it. The problem is, just as in the previous example, people know for sure that if they borrow $1000 now and spend it, they can just pay back much less in real term in the future because inflation eats away the value of the $1000 and the interest they are obliged to return. However, people with surplus of money (saving) are not stupid. They know they will get less if they lend their money out to those opportunists. So the most rational decision is to spend the money now, buying as much goods as they can, investing in assets and commodities, which in turn, will worsen the effect of inflation, and shake the very foundation of the market. You might end up seeing precious metals price such as gold price jumping through the roof, but at the same time, there might be much less saving, thus less investment, a vital component of a country's GDP.

While saving (which constitutes the supply of loan for new investments) shrinks, Inflation greatly discourages investors (the demand side of investment) as the expected return from their investment in existing or start-up business becomes less and less. For instance, if the expected return of the investment is 40%, but the current inflation rate is 50%, that means you will lose 10% if you decide to invest. So high inflation rates can significantly lower the propensity to invest within a country.

If we look at the foreign trade sector, we will know for sure that inflation is bad. Inflation will pose 2 major challenges for the global competitiveness of a country. First, inflation increases the price of goods and services within a country, and that means, at the start, domestically produced goods and services cost higher than the imported ones. People, consumers in general, will normally choose lower price products, so local businesses now have a hard time competing with those of the foreign ones who are not suffering from the inflation pressure (to raise price). This holds true to both the local and the global markets. Thus, domestic producers will be susceptible to bankruptcy, threatening higher unemployment rate and many other problems within that particular economy. When the demand for foreign goods increases and the demand for domestic goods decreases, what will happen is the depreciation of the domestic currency (i.e. the domestic money declines in value). Why? Think about the demand and supply. More demand for foreign products is equivalent to more demand in exchanging domestic currency to foreign currency to purchase those foreign goods. You know where this is going, right? More demand for foreign currency and less demand for domestic currency will eventually increase the value of foreign currency and lower the value of domestic currency. As the domestic currency depreciates, foreign investors will face a huge loss. It is almost as if they are getting ripped off. For example, you are a US investor. You invest in the Japanese market, and you earn 1,000,000 yens. At that time, 1 yen = $1 (of course, it is just an example). Since Yen has depreciated, now 1 yen = $0.5 (yes, just an example). So before the inflation took off, you can convert your return of 1,000,000 yens to dollars, and you would get exactly $1,000,000. Not bad. But now, since 1 yen = $0.5, your 1,000,000 JPY is reduced to only $500,000. You know what? You have just lost half of your return. As a result, it will certainly discourage you or any other investors to consider Japan as a potential target. Worst case scenario, Japan will be labelled as a country with high risk lower return for investment.

High inflation effect can be seen everywhere. Just for the fun of it, I will give you another example of how inflation might affect your business. If you own a restaurant, with high inflation, you must change your prices often to keep up with the rising prices in the economy. This is costly because you need to spend your time and energy doing it, and not to forget, you also need to probably print new menus!

Well, inflation seems to hurt, but economics is not a straight-forward social science. Economics confuses a lot of people because they tend to think of it from only a corner of view. Inflation, though seems hazardous, also have its positives. However, when we are talking about inflation, note in mind that there are different levels of inflation. Economists tend to favor a low and steady rate of inflation because they (and I) think that it is good for the health of an economy. In the next article, we will look beyond our pessimism, and explore the positive space of inflation.

Because when a cup is half empty, it is also half full.